IFC Review 2011

The definitive guide to global wealth management and international financial centres

2011

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IFC Review • 2011

S E C T I O N 1 : G LO B A L OV E RV I E W The definitive guide to global wealth management and international financial centres

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2011

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EDITOR

Ciara Fitzpatrick ciara@ifcreview.com COMMISSIONING EDITOR

Dan Toner editorial@ifcreview.com

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DESIGN AND PRODUCTION

Colin Halliday Francesca Hammond production@ifcreview.com BUSINESS DEVELOPMENT

Luke Quinn ads@ifcreview.com

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ADMINISTRATION

Kellie Simpson admin@ifcreview.com

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ACCOUNTS

Fiona Brennan accounts@ifcreview.com WEBMASTER

Michael McMeekin mike@ifcreview.com PUBLISHER & CHIEF EXECUTIVE

Robert Ayres rob@ifcreview.com IFC Review 78 York Street London, W1H 1DP Tel: +44 (0) 20 7692 0932 Fax: +44 (0) 20 7692 0933 Email: info@ifcreview.com Website: www.ifcreview.com SUBSCRIPTION RATE

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© 2011 IFC Review. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of the Publishers. Whilst every effort has been made to ensure the accuracy of the information contained within the publication, the IFC Review cannot accept responsibility for any mistakes or omissions or the content of advertisements published in this review. The opinions expressed are strictly those of the authors.

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Editor’s Note………………………......……….…......Ciara Fitzpatrick Emerging World Governance: What Does it Mean for International Financial Centres?………………………......…...….…......Richard Hay Ill-Founded Criticism and the Future of the Offshore Centre ………………………......……….…............................Anthony Travers Improved Cooperation to Counter Offshore Non Compliance............. ..........................................................................................Jeffrey Owens Modern Culture................................................................Marcus Killick In Search of HIRE Ground: FATCA Provisions of the HIRE Act Create Extensive Compliance Burden.................Jay Krause and Chris McLemore Dogs and Taxes in Latin America....................................Derek Sambrook Assessing Shanghai’s Offshore Finance Potential........................................ ..............................................................Yongjun Peter Ni and Hao Jiang An Update on the AIFMD – A Lot Done, More To Do.......Peter O’Dwyer Philanthropy – Disinheriting Children, or Building Dynasties.................... ..............................................................................................Blake Bromley The Trust as a Valuable Planning Tool.........................Shân Warnock-Smith What We Talk About When We Talk About Estate Planning ..Odd Haavik Due Diligence - Or Should We Say ‘Do Diligence’.................L Burke Files Tax Information Exchange Agreements and Data Protection: Conflict and Balance....................................................................................Leo EC Neve Is Privacy the Major Casualty of the Information Age?..............Chris Evans

Contents

Contents

SECTION 2: THE JURISDICTIONS 44

Antigua..........................................................................Brian Stuart Young Fact File supplied by Global Bank of Commerce Ltd

48

Austria.......................................................................................Erich Baier Fact File supplied by Erich Baier, Tax Advisor

52

Bahamas..............................................................................Wendy Warren Fact File supplied by Offshore Incorporations Limited

56

Barbados................................................................Dr Trevor A Carmichael Fact File supplied by Chancery Chambers, Barbados

59

Belize..................................................................................Gian C Gandhi Fact File supplied by International Financial Services Commission of Belize

63 64

Bermuda...............................................................................Laura Hershey Bermuda......................................................................Greg Wojciechowski Fact File supplied by Ministry of Finance, Bermuda

67

British Virgin Islands.......................................................Raymond Davern Fact File supplied by Conyers Dill & Pearman

71

Cayman Islands..............................................Mark Lewis & Heidi de Vries Fact File supplied by Walkers

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IFC Review • 2011

Contents

74 Cyprus............................................................................Christos Mavrellis 76 Cyprus..............................................................Christodoulos G Vassiliades

Fact File supplied by Chrysses Demetriades & Co, LLC

79 Gibraltar....................................................................................Chris White

Fact File supplied by Hassans

83 Guernsey............................................................................Paul Christopher

Fact File supplied by Mourant Ozannes

86 Hong Kong.......................................................................Martin Crawford

Fact File supplied by Offshore Incorporations Limited

89 Ireland...............................................................................Cormac Brennan

Fact File supplied by McCann FitzGerald Solicitors

92 Isle of Man...............................................................................Nick Verardi

Fact File supplied by Appleby

95 Jersey.................................................................................Wendy Benjamin

Fact File supplied by Appleby

98 Labuan..................................................................................David Kinloch

Fact File supplied by Labuan International Business & Finance Centre

101 Liechtenstein.............................................................Dr Markus H Wanger

Fact File supplied by Wanger Law &Trust

104 Luxembourg...................................................................Francis Hoogewerf

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107 Madeira.....................................................................................Sara Teixeira

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110 Malta.................................................................................Antonia Zammit

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113 Marshall Islands.....................................................................Michael Wyler

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116 Mauritius.........................................................................Ludovic C Verbist

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120 Netherlands............................................................................Leo E C Neve

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123 Nevis........................................................................................L Burke Files

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126 New Zealand................................................................................................

Fact File supplied by NZ Securities Limited

128 Seychelles.............................................................................Simon Mitchell 130 Seychelles...................................................................................Steve Fanny

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133 Singapore....................................................................................Keon Chee

Fact File supplied by Asiaciti Trust

136 Switzerland......................................................................Walter Stresemann

Fact File supplied by Vistra SA

S E C T I O N 3 : P RO F E S S I O N A L PAG E S 139 Professional Pages

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IFC Review • 2011

Editor’s Note

W

HAT A FASCINATING 12 MONTHS it has been in

the world of international wealth management. Few could feign a disinterest in what has been taking place in the financial industry in the last year.

All the pieces of the financial landscape that were thrown into the air during the 2008 credit meltdown are now beginning to settle leaving an entirely new vista.

In the West the drama of the preceeding years has not calmed just yet – we have had austerity measures and tax hikes, financial bailouts and information exchange, not to mention information wikileaked! Regulators have been busy bringing together incredibly far reaching legislation as financial professionals are left reeling at how to comply. We have seen a steady flow of governments and governing bodies put in place legislation, sign treaties, change fundamental principals in a bid to put measures in place that will prevent the credit crisis happening again – locking the stable door if you will, after the horse has bolted.

In the East, meanwhile, we have seen nations rising to take their place centre stage in the world of global finance.

As the US scrabbles around in a bid to protect its wealth and any other potential wealth its citizens around the world may have, China is opening its doors to the influx of wealth fleeing the West and embracing the East. Hong Kong, Shanghai, Singapore, all riding high on the popularity of all things Eastern.

2010 has been a year of recoiling from the notion of offshore, of privacy or secrecy, a year of committing to transparency, information exchange, stress tests, regulation. In short it has proved to be a year of moving onshore, mainstream. It has been all about dressing up in a perceived respectability.

Investors are looking for alternatives: alternative markets – the world’s wealth is flowing East; alternative investments – art, gold; alternative

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financial principals – there has been a significant growth in Islamic finance – the antithesis to the perceived hendonistic and risk taking approach of ‘conventional’ financial transactions.

And as usual the IFC Review has been keeping you up to date with developments in the world of global wealth management as and when they happen and the IFC Review 2011 brings together the top professionals in this field to analysis and assess how the industry has, is and will cope with the ongoing changes in the financial landscape. Our contributors include lawyers and tax professionals, regulators and commentators to provide a broad spectrum of opinion on the everchanging world of international finance.

In his inimitable style, Richard Hay comments on what he calls ‘the new guardian of the world financial system’ – the G20, and how it is the place to ‘watch for action’ on international financial centres.

Meanwhile, chairman of Cayman Finance, Anthony Travers, assesses the ‘misconceived’ regulation of the US and Europe and its impact on jurisdictions like Cayman. He considers how IFCs are looking to Asia to escape the strangle hold of over-regulation.

In stark contrast, Jeffrey Owens, Director of the OECD’s Centre for Tax Policy explains why Peer Review is necessary for IFCs. While Marcus Killick examines the role of the modern day regulator.

Examining the regulation being put in place by the US, Jay Krause and Chris McLemore assess the compliance burden that will accompany the FATCA provisions of the HIRE Act. Derek Sambrook takes us back to Latin America for a review of fiscal progress there, while in Asia, Yongjun Ni and Hao Jiang consider Shanghai’s progress towards IFC status.

Blake Bromley looks at philanthropy

and dynasty building, while Shan Warnock Smith explains why rumours of the demise of the trust as a tax planning tool have been greatly exaggerated. Odd Haavik examines long term estate planning and the level of risk investors face. Regular contributor L Burke Files gives us an interesting commentary on due diligence and the theory behind the necessary practice.

Leo Neve provides a detailed analysis of tax information exchange and how it can conflict with date protection legislation, and in a similar vein, Chris Evans examines technology and how it is one of the most important methods of ensuring that corporate information that is meant to be private is kept that way.

In addition we examine the key developments in 25 of the world’s international financial centres, with essential and practical information on doing business in each jurisdiction.

As Asian financial centres begin to move centre stage in this drama we have included in this year’s Review a specialised supplement examining developments in the East.

Our contributors, drawn from the top legal and financial firms in Asian centres, examine the future for the East in our inaugural Asia Review. They consider regulation in Asia as it compares to the West, private equity trends, intellectual property rights and the notion of Hong Kong and Singapore being ‘mid-shore’ as opposed of off- or on-shore. And finally we have included a consideration of the growth of Islamic Finance in the region.

Certainly an interesting and eventful year for global finance, as the centre of power shifts and the currents of money flow eastwards.

Once again the IFC Review 2011 with its impressive stable of contributors provides a comprehensive and definitive guide to global wealth management and international financial centres.

Ciara Fitzpatrick Editor

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IFC Review • 2011

Emerging World Governance: What Does it Mean for International Financial Centres?

By Richard Hay, Principal, Stikeman Elliott LLP, London

P

OLITICAL CONTROL OF THE GLOBAL economic agenda has

accelerated as governments collaborate following the recent financial crisis. The G8 and the G20 are the key fora for cooperation. France chairs both organisations in 2011.

Small international financial centres (IFCs) were on the agenda at the April 2009 G20 Summit, hosted in London by the UK as chair. Seeking domestic political advantage PM Gordon Brown, with firm support from France, proposed harsh action against ‘tax havens’. China kiboshed the Anglo-French plan at the 11th hour, providing a cliff-hanger reprieve for the offshore world.

In 2010 G20 summits were hosted

by Canada and South Korea. Neither displayed much interest in challenging small IFCs. France is back. Will it renew and succeed with its call for tough action against IFCs? This piece reviews the structures and tensions in the nascent world governance process, considers France’s domestic agenda for world’s IFCs and concludes by examining French leverage to secure support within these organisations for its agenda.

Both G8 and G20 had births catalysed by economic emergency.

G8 had its origins in an informal meeting of US, Japanese and European leaders convened during the recession which followed the 1973 oil shock. The original group

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of six countries (France, Germany, Italy, Japan, the United Kingdom, and the United States) were joined

by Canada (in 1976) and Russia (in 1998), forming the G8. The G8 heads of state meet at ‘summits’ held annually in June, while G-7 finance Ministers and central bank governors continue to meet without Russia three times a year. The presidency rotates annually. Canada held the G8 presidency in 2010.

France is the 2011 chair, followed by the US in 2012.

G20 was formed at finance minister and bank governor level in September 1999 during the Asian financial crisis.

G20 is comprised of 19 “systemically important” countries plus the EU. Spain and the Netherlands have attended as invitees, though the Netherlands was not invited to the Seoul summit (in November 2010) as Europe was perceived as overrepresented in the forum. The IMF Managing Director and the World Bank President also attend as ex-officio members.

Membership of G20 is fixed and exclusive without any organisational aspiration to universal membership.

The G20 claim to legitimacy in making rules for which it seeks universal application rests on members’ representation of two thirds of the world’s population and 90 per cent per cent of global GDP (75 per cent per cent if one excludes the countries represented indirectly through the EU). Small financial centres are not represented, despite controlling 8.5 per cent per cent of the world’s cross-border assets (according to recent IMF figures).

The G20 represents a laudably expanded membership, though it

is careful to consult widely to limit perceptions that it has created a “new exclusion” for those unrepresented around the table.

G8’s claim to exclusive control over the global agenda diminished when G20 met (for the first time) at head of state level, in a summit convened in Washington in November 2008 during the recent financial crisis. A second G20 summit followed in London in April 2009 and a third was convened in Pittsburgh in September 2009. The Pittsburgh meeting concluded with a declaration from the heads of state proclaiming G20 “the premier forum for our international economic cooperation”.

With this assertion, control over the world economic agenda moved from G8 to G20.

G20 reflects a shift of growth and power from advanced to emerging economies. BRIC leaders had been invited to meet G8 heads of state informally on previous occasions after G8 sessions concluded. By 2008 their voice was central to global decision making; the four BRICs were on target to deliver 61 per cent per cent of world economic growth over the next eight years (as against a forecasted 13 per cent per cent from G-7).

G20 is much less homogeneous than G8. As the risk of the world economy capsizing recedes, so does the “fellowship of the lifeboat” within G20.

Tensions between mature dominant countries and energetic new entrants are manifest in many areas. France finds itself steering organisations where members are increasingly conscious of disparate national interests and less inclined to engage in common enterprise without

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IFC Review • 2011

clear domestic benefit.

The leaders’ declaration following the November 2010 Seoul Summit was moderate on IFC issues. The communiqué did not link “noncooperative jurisdictions and tax havens”, a phrase which routinely popped up in previous summit declarations. Seoul spoke only of “non-cooperative” jurisdictions, reflecting IMF conclusions that the leading small tax neutral platforms in the world are highly regulated. The phrase “noncooperative jurisdictions and tax havens” confuses lax standards with tax neutrality. These are two very different concepts, sensibly decoupled at Seoul.

President Sarkozy spoke at the press conference marking the start of the French year at the end of the Seoul summit. He included “the moralisation of capitalism, strict surveillance of trade profits, and stringent surveillance of tax havens” on his agenda.

France inherited a clear mandate from Seoul “to prevent non-cooperative jurisdictions from posing risks to the global financial system”. To this end, three tasks were given to France: (i) Review Financial Stability Board work identifying countries that have not cooperated or that “show insufficient progress in addressing weak compliance with internationally agreed information exchange and cooperation standards”. (ii) Monitor progress on OECD’s Global Forum peer review process, and place pressure on “jurisdictions identified as not having the elements in place to achieve an effective exchange of information”. (iii) Consider action against the Financial Action Task Force list of highrisk non-cooperative jurisdictions, due to be updated in February 2011.

French political pressures prompting pursuit of an anti-tax haven agenda includes the following: Budget deficit: forecasted at eight per cent of French GDP in 2010, with public debt at 84 per cent of GDP. The government has resisted growing pressure to spell out a fiscal austerity plan, perhaps due to given concerns over further downward pressure on popularity ratings.

Wealth tax repeal: wealth taxes are due for repeal in spring 2011, with no compensating increase in general taxation.

French banks assets in IFCs: French

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banks’ total assets in ‘tax havens’ amounted to US$532.6 billion at June 2008, representing a threefold increase over the prior five years.

French banks are under pressure to reduce IFC operations, particularly in ‘non-cooperative’ jurisdictions.

French leadership in G20: Consensus within G20 is fraying.

Success on the issue of “tax havens” could boost perceptions of G20’s ability to deliver while it is under French leadership.

NGO action: France’s determination to combat ‘tax havens’ will be cheered

by NGOs. These organisations experienced frustration with the benign treatment of ‘tax havens’ at the Seoul Summit, prompting a reinvigorated campaign during France’s G20 chairmanship.

Despite considerable momentum in advance of the April 2009 G20 Summit, UK PM Gordon Brown did not succeed in his agenda to thrash tax havens. President Sarkozy will want to carefully weigh prospects within G20 for successful pursuit of an anti-tax haven agenda before expending significant political capital in a similar exercise, however appealing this may be from a domestic political perspective.

G20 hostility towards ‘tax havens’ has receded markedly since April 2009. Three key points are tempering G20 aggression on IFCs: increasing recognition of the high standards already extant in IFCs, tacit G20 recognition of the benefits for its member economies arising from the activities of IFCs, and a need to preserve credibility of G20 as a forum designing rules for universal application.

Extensive FATF and IMF reviews show regulatory standards for successful small IFCs at the top of the global league. Similarly, World Bank data shows top quartile governance standards in international financial centres. This is not surprising; financial intermediation business does not thrive in poorly controlled places.

Economists generally recognise competition (including tax competition) as having salutary effects. The larger countries have complex tax systems geared to domestic revenue collection. Interface with other countries is not a design priority, and is left to skimpy double tax treaties which address only the

most egregious gaps. Small IFCs conduct mundane tasks lubricating the financial interface between the larger economies, facilitating trade, job creation and growth.

As the immediate crisis recedes, the debate over the role of IFCs has become more reasoned and pragmatic, taking these views into account. A private sector group with broad-based professional backing, IFC Forum (www.ifcforum.org), is now active in producing and collating data and liaising with policy makers to ensure that the contribution of IFCs to the global economy is better understood. G20 is, understandably, increasingly cautious about rash moves to rip out the plumbing which connects their fragile member economies.

G20 credibility to make universally applicable rules would be fundamentally undermined by overt discrimination against small well-controlled states excluded from membership in the forum. Visibly harsher enforcement of standards on non-member jurisdictions embarrassed the OECD through the early part of its program on tax information exchange; G20 is sensibly avoiding this trap.

What are the individual interests of three key constituencies in G20 (beyond the EU) which France would need to have on side to pursue their agenda: China, the other BRICs and the US? China rejected the attack on tax havens mounted by Brown and Sarkozy at the April 2009 G20.

Beijing was no doubt motivated by pique that their territories (Hong Kong and Macau) would be named (and shamed) in the exercise.

Pragmatic economic considerations no doubt also played a part.

China lifted 500 million residents out of poverty in the period from 1970 to 2000 as it emancipated economically.

A recent paper by Australian academic, Jason Sharman, International Financial Centres and Developing Countries: Providing Institutions for Growth and Poverty Alleviation, shows that predictable and stable legal systems in small IFCs, like BVI and Cayman, played a crucial role in intermediating the international capital to China which facilitated this extraordinary reduction in poverty.

Despite a dirigiste communist

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IFC Review • 2011

London are maligned simply because they are on the periphery of power. At the moment Brazil and India are awash with capital, but if flows decline they may relish the prospect of attracting global pension and other investment funds routed through offshore centres into their economies, particularly if that comes in the form of foreign direct investment or funding for small and medium enterprises.

As for United States’ support for an anti-tax haven agenda, the US may be pulling the rug out from under the OECD’s efforts to build a bilateral (or multilateral) environment for tax information exchange by enacting their own rules (the Foreign Account Tax Compliance Act). This legislation will operate unilaterally by 2013 to give the US the tax information it wants without the inconvenience of reciprocating to the rest of the world. This progress is likely to reduce US interest in an OECD project premised on bilateral exchange. The US remains interested in ‘cooperation’ by IFCs of course, but high regulatory standards in

those jurisdictions have substantially ameliorated US concerns on that issue.

G20, the new guardian of the world financial system, is the place to watch for action on IFCs. Global Forum’s peer review process has proceeded with admirable dispatch under OECD’s administration and G20 directions. France (and President Sarkozy in particular) has considerable domestic reason to pursue an anti-tax haven agenda, but the G20 mandate extends to dealing with non-cooperative jurisdictions, not to battles over tax neutrality (or tax competition) posed by IFCs. G20 makes decisions by consensus and France will find it increasingly difficult to orchestrate concerted action in a world which is fragile but no longer leaning over the abyss. However, given the history, the offshore world should strap their seat belts on for a year where France holds the levers for emerging world governance. Will the empirical evidence of the IFCs’ contribution to world prosperity win the day?

International Financial Centres

domestic culture, China carefully avoided damaging the freewheeling capitalist centre it acquired in Hong Kong in 1998. (The UK sought guarantees for this at the time of the handover. Paradoxically, the UK is now damaging its own proximate financial centres, while China defends Hong Kong against threats organised by the UK!) China appears favourably disposed to international financial centres, but it is hard to predict how much political capital it would expend to defend them if France crafted a challenge narrowed to smaller centres.

Russia favours challenging noncooperative jurisdictions but otherwise remains largely undeclared on the issue of ‘tax havens’. As to the other BRICs, Brazil and India engage in hostile public rhetoric towards tax havens, though their policies are tempered by pragmatism. A multipolar world suits the emerging countries, and they will not want to be confined to a global economic environment where regional finance centres doing similar work to that undertaken in New York and

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IFC Review • 2011

Ill-Founded Criticism and the Future of the Offshore Centre

By Anthony Travers, Chairman, Cayman Finance, Cayman Islands

T

HE CRITICISM to which the offshore centre is routinely subjected has now reached a crescendo in the wake of the regulatory response to the financial crisis and the hunt by domestic Treasuries for tax revenues to meet the burgeoning deficits of many G20 countries. This then, is a trying time, but do the criticisms amplified by the formidable public relations machines of the EU and US governments withstand scrutiny or are they simply a transparent exercise in blame deflection? Even the briefest analysis does not suggest a level playing field.

Surely if protection and a desire to prevent a repetition were the real objectives, the US regulatory response to the financial crisis would have established some passing reference to two of its fundamental causes. Yet the framers of the Dodd/Frank Act did not see fit to restrict Fannie Mae and Freddie Mac’s ability to guarantee mortgages to un-creditworthy borrowers, nor to restrict the rating agencies in granting

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AAA ratings to the repackaged toxic waste that resulted. In the political world therefore, it follows that the cause of the crisis must have been elsewhere.

Michel Barnier, Europe’s Single Market Commissioner, in converting plans for regulating Europe’s financial markets, proposes Brussels is given new powers to end “abusive speculation” and “impose order” on Europe, including the City of London. “We want to know”, he states with imperious disregard for the regulatory time lag, “who is doing what”. Very possibly he has in mind placing an EU regulator at the screen of every trader. The EU authorities are going to “look at every product”. [They] “can restrict leverage, or in exceptional circumstances even ban a product temporarily”, Barnier told the Daily Telegraph in early September. But, if we apply the Euro-regulatory double-speak translator, what Mr Barnier no doubt said was: “We cannot possibly prop up a totally bankrupt European fiscal Union if hedge funds are allowed to trade in the market place and price European sovereign debt at its true market value rather than the value we attribute”.

Thus we see hedge funds, and indirectly offshore jurisdictions like Cayman and the BVI, which are the domiciles of the majority of them, now targeted in Europe and subject apparently in the UK to a regulatory response that will restrict leverage and require UK-based fund managers to receive 50 per cent of their remuneration after a deferred three year period, as if hedge funds or their bonuses had been instrumental in the European financial meltdown. Even the FSA has concluded that hedge funds

were not responsible for crisis. So is the real threat here that which hedge funds pose to the political aspirations of those driving a totalitarian federalist agenda?

Mr Barnier speaks also of the creation of yet another EU regulatory regime – a triad system covering markets, banks and insurance. And, due to the questionable strategy of the recent UK government in pandering to EU regulatory aspiration over and above its obligations to the City, the UK will have no veto power over this body’s regulatory determinations for whatever reason they are arrived at, despite the fact that the City is the only globally recognised financial services centre in the EU. The UK will as a result, carry the same weighted vote in these matters as Latvia.

In the face of this regulatory tsunami, many industry commentators have been forecasting the demise of any offshore jurisdiction which does not fall immediately into line with the new world regulatory order. But in determining the course for the offshore jurisdictions, we need to be somewhat more analytical. So let us start with two undeniable truths. First, what is proposed is not, in the main, global, and second, no financial institution failed in Cayman during the financial crisis.

An appropriate regulatory regime in Cayman worked exactly as it was supposed to. It is hard to see in these circumstances why there should be a rush to apply the regulatory notions of jurisdictions with less than enviable records and whose regulatory responses avoid recognition of the real causes of the financial crisis.

But, the whole truth is a good deal

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IFC Review • 2011

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cent. Thus, the much-lauded Basel III would not have saved any of them. It may have assisted the regulators in their deliberations, if before failing to define adequately what constitutes “too big to fail” they had accurately analysed what is meant by “small enough to succeed”.

In all of this we do not take the words of the regulators as gospel. It is becoming increasingly evident that the market has a very distinct voice and so far as EU regulation is concerned is voting with its feet. The excellent and objective KPMG report ‘The Future of Alternative Investments’”1 investigates the opinions of over 200 investment managers, administrators, institutional investors and service providers on the effect of the suggested increased regulation. It states in categoric terms: “Anticipated regulation, driven by external forces that continue to blame alternative investments for the meltdown of the global financial system, is not wanted by the majority of investors, managers or service providers. The widely held view is that the industry did not cause or contribute to the credit crisis. Furthermore, investors believe more regulation will not produce any tangible benefits”.

In the offshore centres we conclude that the new regulation will ultimately stifle ingenuity and entrepreneurial opportunities. The survival of only larger operators will impede potential growth at the peril of UK and the US economies, which are regulating themselves out of a productive industry and the capital flows that are essential to the recovery of their failing economies. The report makes clear that the effect of this regulation paradoxically will be to create a marketplace dominated by fewer larger institutions, but none of which, can be “too big to fail”?

But the effect of localised or regional regulation rather than global regulation is equally perverse given the financial marketplace is not static. The exodus of fund managers and banks from London is now occurring as alternative offices are established in Switzerland, (the most unlikely of unintended beneficiaries), Hong Kong and Singapore. The offshore jurisdictions, too, would be an excellent choice to relocate an investment management company. Further we must not lose sight of the fact that a Cayman hedge fund trading with a Swiss, Dubai, Hong Kong, Singaporean or Cayman fund manager does so free of the restrictions

International Financial Centres

more troubling than that. In his book Engineering the Perfect Storm, Jeffrey Friedman points out that ill-considered onshore regulation fuelled the financial crisis. The risk weightings applied under the Basel Convention encouraged heavy investment in the mortgage backed securities market because in 2001 US banking regulators (the very same bastions of public protection) assigned US$2000 of capital for every US$1m of MBS as against US$10,000 for every US$1m of commercial loans. The result was that banks owned 45 per cent of all subprime backed mortgages by 2005, secure in the knowledge that 95 per cent of these were AAA rated and accepted as such by the banking regulators. Thus does ill-considered regulation distort the marketplace and in the current example assumed a direct causal relationship with the catastrophe that followed.

So we are assured that Basel III makes no such similar mistakes. Or are we?

Commentators have already pointed out that none of Bear Stearns, Washington Mutual, Lehman Brothers, Wachovia and Merrill Lynch would have failed the increased Basel III capital adequacy ratios, each having regulatory capital ranging from 12.3 per cent to 16.1 per

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International Financial Centres

14

IFC Review • 2011

of the new Euro-regulatory regime. This means in turn that the Cayman hedge fund, as BlueCrest recently concluded, may continue to trade traditional hedge fund strategies and with traditional rates of return – with which the Euro-based UCITS model will struggle to compete, starved as it will be of the oxygen of leverage, a more liberal risk profile and the best-remunerated talent.

As misguided as the regulatory response may be and as unintended as its outcome, it pales by comparison to the mischaracterisation of the offshore centre suggested by certain US Senators and indeed, the President. In the light of the readily verifiable and standardsetting advances made by the Cayman Islands, Bermuda, the BVI and the Crown Dependencies with respect to all crimes, anti-money laundering and tax transparency, the most recent outburst from Senator Dorgan on the floor of the Senate, erroneously describing the Cayman Islands as a “tax secrecy” jurisdiction, is politically and factually out of touch. Is this then an isolated error explained away by inadequate briefing or is it indicative of something more sinister? Can we connect the dots between this ill-founded outburst and the recent comments of Jeffrey Owens, Head of the OECD Tax Division, who says he fully supports the use of illegally obtained or stolen financial information from financial firms in order to track down tax cheats. “What we don’t condone”, says Mr Owens with apparent moral authority, “is tax payers who do not comply with their obligations” but apparently oblivious to the wellestablished principle of tax law that renders a tax liability in one jurisdiction unenforceable in another and the illegality with which the OECD is tainted when an OECD member country pays a bribe to a bank officer to obtain the disclosure of protected information in violation of an individual’s right to privacy.

But tax evasion was off the table in the Cayman Islands nearly a decade ago and even the Swiss are a mere referendum away from the understanding that tax evasion is wrong. So what now are the ramifications of the new world order suggested by Mr Owens?

To find the truth of this continual criticism of the offshore centre we must look back to the 1998 OECD Report on Harmful Tax Competition.

Here is the genesis of belief in the one universal high rate of tax fixed by a globally omnipotent bureaucracy.

IFC_2011_Front_Section_Travers.indd 14

And so hamstrung is the OECD in the pursuit of that objective with the troublesome distinction between lawful tax avoidance and unlawful tax evasion that it seeks to evade the point altogether by introducing the principle of “escaping taxation”. This nebulous concept is apparently of application any time any otherwise lawful arrangement does not meet with the philosophy of the relevant Government with respect to the redistribution of wealth. But the problem with this thinking is that it replaces a code or set of rules with entirely subjective thinking. The essence of legal tax structuring is that the rules are certain and enforced by the courts. This blurring of the rule of law involves an erosion of fundamental rights that should concern law-abiding people not just in the offshore centres, but everywhere.

The OECD notion that tax competition is harmful is itself entirely subjective and is based on the belief that individuals or corporations must pay the highest rate of tax without the right to lawfully mitigate or reduce taxes even though legitimate provisions of domestic law are available. Thus too, decent laws in decent places establish the rules whereby a competitor in the market place can, provided he does not induce a breach of contract, obtain market share at the expense of an existing supplier. But according to the OECD, tax revenues “lost” by mobile capital and labour being attracted to more tax competitive jurisdictions, consequent upon the sovereign right of an independent nation to fix its own tax laws and rates, is a ‘harm’ against which any high tax jurisdiction is entitled to be protected. So the OECD claims “that it is therefore worth exploring the possibility of addressing harmful tax competition using a wide range of ‘non tax’ measures”.

And we see the same approach underlying the OECD’s suggestion in that report that any jurisdiction which conducts financial activities with a lack of “substantial presence” should be regarded as a “tax haven” and “harmful” regardless of the tax transparency in effect in the jurisdiction and the absence of tax evasion. But this too is no more than a blatant attack on the rule of law. If the structuring of offshore hedge funds, private equity or structured finance vehicles complies with the laws of the various jurisdictions through which

they invariably operate then they are necessarily lawfully conducting business.

The fact that they do not resemble in form or function, a car manufacturing plant in Detroit with 5,000 people under one roof should not be regarded as an appropriate basis of criticism.

It goes without saying that you cannot structure over US$3 trillion of hedge fund investment from vehicles in the Cayman Islands for the benefit of institutional investors and to their satisfaction on the basis of full transparency, with fully audited accounts and reporting function without the activities from subscription to investment to audit to regulation being substantial. The marketplace considers these vehicles to be real and to justify the fees paid. What we are left with from the OECD and indeed President Obama is the suggestion that the laws and accounting principles which apply to these vehicles should count for nothing, that these financial arrangements amount to a “tax scam” simply because the economic activity does not conform to a highly subjective view of what the OECD and, apparently, the President and Senators Dorgan and Levin think economic activity should look like.

In the light of the evident advances with respect to tax and regulatory transparency, verifiably established by the offshore financial centres and confirmed routinely by the IMF, the FATF and the GAO, the risks for organisations like the OECD and indeed for politicians who continue to mischaracterise the position is that it is they who will be seen as out of touch and irrelevant. Increasingly the offshore financial centres are looking to Asia and the emerging markets generally to cement relationships. The expertise available in jurisdictions like the Cayman Islands is undeniable. It is the continued misperceptions of the EU and US politicians which leads to protectionist legislation and the risk that they cut themselves off from the international capital that flows through the financial centre. The future for the transparent offshore centre seems assured. It is the EU and the US that increasingly, through misconceived regulation, prejudice their own long term financial well-being.

1. The Future of Alternative Investments, KPMG and International Fund Investment, 2010

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15

Improved Cooperation to Counter Offshore Non Compliance

by Jeffrey Owens, Director of the OECD’s Centre for Tax Policy Administration1

I

N APRIL 2009, G20 LEADERS DECLARED that the ‘era of bank

secrecy’ had ended. A more exact description would have been that we are coming to an end of bank secrecy being used as a barrier to the effective exchange of information for tax purposes. All countries have some form of bank secrecy, however, this does not normally prevent tax authorities getting access to the information they need to implement effectively and fairly the tax legislation.

The London G20 Summit was a staging point on a long journey towards better cooperation between tax authorities to counter offshore non compliance. This

IFC_2011_Front_Section_Owens_rev.indd 15

journey started way back in 1977 when the OECD created its Working Party on Tax Avoidance and Evasion, which over three decades worked intensively to refine Article 26 of the OECD Model Convention (the article that deals with exchange of information) and to remove the practical barriers to achieving a better exchange of information.

In 1988 this Group, working with the Council of Europe, initiated the first Multilateral Convention for Mutual Administrative Assistance in Tax Matters. In 2000, the Group provided its report on improving access to bank information, which represented the start of a serious assault on bank secrecy for tax purposes. And in 2002, a Model Agreement on Information Exchange on Tax Matters was agreed between OECD and offshore centres which now forms the basis for over 600 Tax Information Exchange Agreements around the world.

All of this work culminated in 2004 in the first major revision of the Article 26, which made it clear that bank secrecy should not act as a barrier to effective exchange of information.

In parallel to this work the OECD launched

work on harmful tax practices. It was a two part project. The first part addressed harmful preferential regimes in OECD countries; the second so called ‘tax havens’.

What all of this meant was that by the time the G20 took up the question of tax havens and bank secrecy, all of the preparatory work was done: we had the standards; we had a review mechanism; we had a Global Forum; we had identified potential defensive measures.

The political support from the G20 convinced jurisdictions that the ‘era of bank secrecy’ was coming to an end and that they needed not just to commit to new transparency and exchange of information standards but that they also needed to implement the standards.

To achieve this, the Global Forum on Transparency and Exchange of Information for Tax Purposes, which was created in 2001, was restructured and made more inclusive; a peer review process was put in place and a methodology and a timetable for the reviews agreed upon.

Today, the Global Forum encompasses 95 countries and is set to continue its expansion. The Forum is chaired by Australia and has a Steering Group and a

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Regulation

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IFC Review • 2011

Peer Review Group, which is responsible for assessing whether jurisdictions are implementing the standards.

The peer reviews are carried out in two phases. Phase I examines the legal and regulatory framework; Phase II the practical implementation. In some cases, there are combined Phase I and Phase II reviews. In September 2010, the Global Forum met in Singapore to examine the first eight Phase I peer reviews2. Each review made recommendations for improvement – 64 recommendations in total. In the cases of Botswana and Panama, the deficiencies were considered sufficiently serious that they were not allowed to go on to the Phase II (there is little point in examining practical implementation issues if the required legal framework is not in place). Both jurisdictions now have 12 months to address the Forum’s recommendations and this process has begun.

Another 20 Phase I reviews were expected to be completed by the end of 2010 and a further 40 by the end of 2011. Phase II reviews will begin in 2011 and the hope is that by the end of 2014, all 90 plus members of the Global Forum would have undergone a Phase I and Phase II review. Before the end of 2012, the Forum will issue overall evaluations – on a scale of noncompliant to fully compliant – for those jurisdictions for which a Phase I and Phase II review has been completed.

The current state of play on the OECD Progress Report, which was first issued in April 2009, is shown in the table.

What Singapore showed is that the peer review process is working. The reviews are in-depth and consistent as between jurisdictions. Recommendations for improvements are being identified.

Jurisdictions under review are cooperating.

Big and small, OECD and non-OECD jurisdictions are being subjected to the same procedures. Difficult issues are being openly addressed – access to information and beneficial ownership; trusts; the need for good access to accounting information.

Over 30 jurisdictions have moved from the so called ‘black’ and ‘grey’ sections to the so called ‘white’ section. We expect that as the results of the peer reviews become available, so this ‘list’ will decline in relevance.

The Forum continues to identify emerging financial centres – the latest are the Former Yugoslav Republic of Macedonia (FYROM) and Lebanon – since it is important that such new financial centres are not allowed to gain a competitive advantage by failing to meet the standards.

IFC_2011_Front_Section_Owens_rev.indd 16

A PROGRESS REPORT ON THE JURISDICTIONS SURVEYED BY THE OECD GLOBAL FORUM IN IMPLEMENTING THE INTERNATIONALLY AGREED TAX STANDARD*1

Progress made as at 10 December, 2010 (Original Progress Report 2nd April 2009) Jurisdictions that have substantially implemented the internationally agreed tax standard Andorra Anguilla Antigua and Barbuda Argentina Aruba Australia Austria The Bahamas Bahrain Barbados Belgium Belize Bermuda Brazil British Virgin Islands Brunei

Iceland India Indonesia Ireland Isle of Man Israel Italy Japan Jersey Korea Liechtenstein Luxembourg Malaysia Malta Marshall Islands Mauritius Mexico Monaco

Canada Cayman Islands Chile China2 Cook Islands Cyprus Czech Republic Denmark Dominica Estonia Finland France Germany Gibraltar Greece Grenada Guernsey Hungary

Netherlands Netherlands Antilles New Zealand Norway Philippines Poland Portugal Qatar Russian Federation St Kitts and Nevis St Lucia St Vincent and the Grenadines Samoa San Marino

Seychelles Singapore Slovak Republic Slovenia South Africa Spain Sweden Switzerland Turkey Turks and Caicos Islands United Arab Emirates United Kingdom United States US Virgin Islands

Jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented Jurisdiction

Year of Commitment

Liberia Montserrat Nauru

2007 2002 2003

Costa Rica Guatemala2009

2009 2009

Number of Agreements

Jurisdiction

Tax Havens3 (9) Niue (11) Panama (0) Vanuatu Other Financial Centres (1) (0)

Uruguay

Year of Commitment

Number of Agreements

2002 2002 2003

(0) (10) (10)

2009

(7)

Jurisdictions that have not committed to the internationally agreed tax standard Number of Agreements

Jurisdiction

Number of Agreements

All jurisdictions surveyed by the Global Forum have now committed to the internationally agreed tax standard * Readers are referred to the outcomes from the Global Forum peer reviews for an in-depth assessment of a jurisdiction’s (a) legal and regulatory framework (Phase 1 reviews) and (b) implementation of the standard in practice (Phase 2 reviews). [http://www.oecd.org/tax/transparency].

1. The internationally agreed tax standard, which was developed by the OECD in co-operation with non-OECD countries and which was endorsed by G20 Finance Ministers at their Berlin Meeting in 2004 and by the UN Committee of Experts on International Cooperation in Tax Matters at its October 2008 Meeting, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes. It also provides for extensive safeguards to protect the confidentiality of the information exchanged.

2. Excluding the Special Administrative Regions, which have committed to implement the internationally agreed tax standard.

3. These jurisdictions were identified in 2000 as meeting the tax haven criteria as described in the 1998 OECD report.

The next 12 months?

We will continue to work hard at completing the reviews. The reviews will help us to identify cross cutting issues for which jurisdictions may require clarifications. A report will be sent to the G20 Leaders in November 2011. Governments will continue to take advantage of this new climate to launch voluntary compliance initiatives3. Potential tax evaders will find that they have fewer and fewer places to conceal their assets. And

all of this will not just increase the revenues of governments but will also improve the fairness of the tax system.

1. The views expressed should not be taken to represent those of the OECD or its Member countries.

2. Bermuda, Botswana, Cayman Islands, India, Jamaica, Monaco, Panama and Qatar.

3. See www.oecd.org/tax/transparency.

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IFC Review • 2011

Modern Culture

By Marcus Killick, Chief Executive Officer, Gibraltar Financial Services Commission, Gibraltar

IFC_2011_Front_Section_Killick.indd 17

N

EW LEGISLATION IMPOSING CONTROLS and regulations is

never popular on those it affects.

The Mines Act of 1842, which prohibited all females and boys under 10-years-old from working underground in mines, was unpopular both with the mine owners and with many of the women who had previously got employment underground.

One Member of Parliament who was against the adoption of the Bill stated “be careful, the Bill will deprive many children from work”.

The House of Lords amended the Bill to reduce the minimum age from 13 to 10.

Similarly, the legislation we now see being or shortly to be imposed upon the finance sector would not have been achieved voluntarily by the industry itself.

It stems, in part from outrage at the abuses the general public perceives that have occurred and need to be curtailed. Bankers’ bonuses and proprietary trading have now become a cause célèbre to politicians and

pundits alike. Solve these and we remove the problem, they seem to argue.

In this article I will seek to argue that, whilst outrage at abuse is justifiable, it cannot be allowed to become a thoughtless knee jerk reaction against those regarded as causing the recent economic crisis.

However, nor can necessary changes be allowed to wither on the vine as political appetite wanes in the face of concerted industry opposition and threats. I will also argue that legislative and regulatory change is fruitless without a change in culture in significant parts of the finance sector.

Finally I will argue that it is vital that action is taken on a truly international front. Single states, even multiple states, such as the EU, working together, will find enforcement difficult unless the international community as a whole is carried along.

So has there been a knee jerk reaction?

Clearly the media remain fixated with the bonuses continued to be offered

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Regulation

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IFC Review • 2011

in the finance industry. National and international regulators are now seeking to impose controls on their payment. Yet the two are not the same. Some in the press and public simply oppose paying more to those they consider are already overpaid for what they do. This should never be the role of a regulator. We are not empowered to make political or moral decisions on whether a trader or bank CEO is paid too much or too little. That power is in the hands of the shareholders and the board.

So what is a regulator’s role in the bonus issue? Our role is to ensure that the bonus structure does not create additional risk. Does the bonus structure encourage short termism? Does the size of it weaken the capital position of the firm? Will it focus on certain measures (such as sales) which may encourage behaviour which is not in the consumers’ interest (eg, miselling)? In many ways the bonus debate is similar to the commission v fees debate which has gone on for decades.

The next problem is the economic need for the banks to return to lending. This appears to be one of the preconditions for the bailouts many banks received. On the face of it this seems sensible. Small businesses are suffering from the lack of available credit to expand or indeed operate their firms.

The housing market is inhibited by the lack of available mortgages.

Hang on; surely the availability of easy credit was one of the causes of the crisis in the first place. It funded the bubble which vastly overpriced houses and allowed consumers to spend on a persistent basis more than they could afford. Businesses grew or were acquired on the back of massive debt. Do we seriously want to return to this?

Similarly, at the same time as we are requiring banks to lend more, we are increasing the level and type of capital they must keep. Inevitably this will impact their ability to lend. We cannot both lend and capitalise to the level that are being demanded. A third way needs to be found.

Surely what is needed is a cultural change, in both the industry and the consumer. The consumer has to realise that there is a price to pay for a spend today, earn tomorrow approach.

The industry is realising that their business did not give them the right to unaccountabilty and that they have social responsibility in how they lend.

The issue of the ‘casino banks’ has also proved popular - banks ‘betting’ their

IFC_2011_Front_Section_Killick.indd 18

own capital in the market to improve their profitability. Arguments have been put to split banks up. Again, it is not clear how much of this is good risk management going forward and how much is punishment. We actually do not know if splitting banks will create more or less systemic risk. Many large banks survived without state intervention.

Many jurisdictions used to feel more comfortable with licensing the largest banks than their smaller brethren. Was size really that important or did the culture of the bank, once again, have more of an impact.

Again we cannot simply legislate or regulate our way to a solution. Requiring boards of a bank to all have banking qualifications (an early, now dropped, suggestion) misunderstands the issue.

It did not matter if they were qualified bankers, lawyers or accountants, if a board does not exercise proper corporate governance, it will fail.

By proper corporate governance, I do not simply mean correctly constituted board sub committees and separating the role of Chairman and Chief Executive. I mean that the board collectively understands the business it is in and the risks it faces. It has become palpably clear that highly respected, experienced and qualified boards had simply no understanding of the products their firms were selling or investing in.

Credit derivatives were simply one manifestation of this.

Of course regulations can be made requiring a board to have risk committees etc, but many of the failed institutions had just such committees.

The problem, again is not regulatory, it is cultural. Risk cannot be mitigated unless it is understood and a board cannot understand risk unless they are willing to spend time doing so.

Similarly, those that create an aggressive culture of infighting between individuals and divisions in some belief it will create a stronger organisation have proved to be somewhat deluded - ‘The Apprentice’ may make for good television but it makes for lousy risk management.

So how do we change the culture in many of our financial firms? Well, there are large numbers of highly successful firms which do have a true risk management culture. Indeed, it wass these who seemed to best weather the crisis. Banking associations, qualifications and shareholder pressure can all help towards this, but can regulators themselves impose cultural

change simply by regulation?

The answer is no, but regulators do have an important role, as supervisors. It was not the 1842 Mines Act by itself that changed things; it was the inspectors being given the power to see that it was being enforced (although their power was originally very restricted) and the cultural change in society which made sending children down the pits unacceptable. In the financial field, some regulators have tended to shy back over recent years from onsite inspections of firms. Others still tend to conduct old style “tick and bash” checking of compliance with individual regulations. The latter may work for assessing adherence to conduct of business regulations and indeed are important in protecting the public from poor advice and other misselling, but they will not work as effectively when it comes to assessing senior management culture towards risk.

To ensure a board has an understanding of risk, regulators themselves must be properly trained and understand the business the firm is in. This is not easy but it can be achieved. Similarly making a firm accept that there is a cultural deficiency in their risk management is not as simple as pointing to a breach of a regulation. It is often a judgement call, but the better trained the regulator the better that judgement call is likely to be.

Finally, but linked, is the issue of multilateral rather than unilateral or bilateral action by regulators. Without this there is always the risk of regulatory arbitrage and a race to the bottom by some jurisdictions to encourage businesses to relocate there. On this the history post the crisis has been generally positive. Supervisory colleges for key banks and insurers have or are being established, the international standard setting bodies have reacted promptly and far more effort is being put into ensuring effective cooperation between regulators.

There is much still to be done, but at least the prognosis to date is good.

Cultural change is never easy. It takes time, consistency and commitment.

Some will not change and therefore it will need to be enforced upon them. Some will disapprove, seeing it as further state interference on the financial community. Surely however, it is preferable to the other alternative of still more expensive and bureaucratic regulation of questionable benefit. If the finance industry embraces the former, it may avoid the worst of the latter.

08/02/2011 17:56

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IFC Review • 2011

In Search of HIRE Ground: FATCA Provisions of the HIRE Act Create Extensive Compliance Burden

By Jay Krause, Partner, Withers LLP, London Chris McLemore, Associate, Withers LLP, London

IFC_2011_Front_Section_Krause.indd 19

T

HE

UNITED

STATES

HAS

enacted what may be the broadest piece of tax and information reporting legislation ever drafted.

Ostensibly aimed at creating domestic jobs, the Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act) has a sting in its tail. In order to offset the cost of new jobs, the HIRE Act incorporated a bill known as FATCA, the Foreign Account Tax Compliance Act. This piece of legislation will affect almost every investor who invests into the US or invests through any intermediary that has other clients who invest into the US. FATCA was designed to reduce US tax fraud by obtaining account information of US citizens, green card holders and US tax residents investing through nonUS entities. Conveniently for US tax authorities that are already spread thin, the burden of identifying and reporting such individuals has been placed on the so-called ‘foreign financial institutions’ (FFIs), an expansive term covering entities from banks to hedge funds, trusts to family offices.

It is not surprising that such broad legislation would leave its print on nonUS banks, investment houses, brokerages, mutual funds and hedge funds. What is surprising is that the IRS appears ready to extend the reach of FATCA to cover life insurance providers, trusts, family offices and privately owned investment vehicles. Some non-US service providers are reacting by cutting ties with those

clients and others are segregating them into specialised divisions.

However, FFIs cannot escape the reach of FATCA simply by avoiding US investors. Any FFI that wishes to invest in the US or via the US will need to comply. Those who do seek to exclude US individuals will be faced with the ongoing duty of monitoring whether any of their clients become resident in the US or obtain a so-called green card.

Implications for the private client industry will be immense. The relevant provisions of the legislation will take effect from 1 January 2013 and all affected organisations will need to have their compliance procedures implemented prior to that date.

Requirements for FFIs

Under the new rules, unless an FFI enters into an agreement with the IRS to report information about its US account holders each year, a 30 per cent withholding tax will be applied to all US investments. The withholding tax would apply to virtually all investments by the FFI into the US, whether made on its own behalf or on behalf of its ‘account holders’, regardless of whether or not they are US persons. Clients who themselves have no connection with the US will nevertheless be affected if they invest via any FFI entering into one of these agreements.

FFIs wishing to avoid this new 30 per cent withholding tax will therefore have to review their client base annually

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IFC Review • 2011

to identify to the IRS any US persons amongst its clients and report the names and addresses of each US account holder, as well as the account number, the account balance and any gross payments or withdrawals through the account. The FFI will also be required to comply with any due diligence or verification procedures imposed by the US Department of Treasury and comply with any requests for additional information from the Treasury.

Which Institutions and Entities are

Caught by Fatca?

FATCA effectively creates a blacklist of non-US institutions comprised of those that sign up to the new client identification and disclosure requirements and those that do not. For those institutions signing up to FATCA, they will effectively be undertaking the burden of identifying US citizens, residents and green card holders and reporting those individuals to the IRS. The primary targets are extremely broadly defined as ‘foreign financial institutions’, which includes not only banks and financial institutions themselves but also hedge funds, private equity funds, mutual funds – in fact virtually any non-US collective investment structure of any kind, unless the IRS issues regulations to narrow the definition. Also squarely included within the definition of FFIs are custodians.

This necessarily includes entities such as trusts and family offices, who would not themselves fall under the definition of financial institutions, but who will nevertheless be required to determine whether US persons are deemed to be ‘account holders’ for the purposes of the legislation.

The IRS took a crack at putting flesh on the bones of FATCA by releasing Notice 2010-60 at the end August. The Notice has provided some guidance on the mechanics of how financial institutions will need to identify their clients and that is discussed below. However, the IRS left open the question as to how FATCA will specifically apply to trusts, family offices, trustees and funds.

Remarkably, the Notice implies that individual trusts themselves will be classified as FFIs, although some ‘small’ family trusts may be exempted. This will mean that each individual trust for which a trust company serves as trustee will have to enter into a special agreement with the IRS.

IFC_2011_Front_Section_Krause.indd 20

Uncovering ‘US Accounts’

As part of the agreement with the IRS, FFIs will generally be required to disclose information relating to ‘United States accounts’ (defined broadly) held by: (i) a ‘specified United States person’ (this term includes most US persons other than publicly traded corporations, certain tax-favoured entities and US governmental entities); or (ii) a ‘USowned foreign entity’.

As detailed by the Notice, such disclosure will require extensive due diligence. For pre-existing accounts held by individuals, FFIs will need to search their electronic databases for ‘indicia of US status’ (including citizenship, address, place of birth, instructions to transfer to US accounts, etc).

For new accounts opened by individuals, FFIs must obtain ‘documentary evidence’ establishing the status of the individual.

For individuals claiming non-US status, the FFI must then cross-check this against ‘all other information collected in connection with’ the new account holder.

Where there are indicia that an individual claiming non-US status has a US connection, further documentation must be obtained to establish non-US status.

Identifying US Individuals

Assuming that FFIs wish to continue to invest into the US either for any of their clients or on their own behalf without suffering withholding, they will need to understand the composition of not only their direct customers but also the beneficial ownership of those accounts held via trusts, companies and other entities. Related compliance and reporting costs will therefore increase dramatically prompting suggestions that many would opt to refuse services to US clients, rather than handle the added compliance burden.

Identifying those US clients will, however, likely prove challenging. With respect to individual account holders, anyone who is US tax resident will have to be identified. With respect to any individual living outside of the US, every individual account holder who is either a US citizen and or green card holder also will have to be identified.

While most US citizens living outside of the US do hold US passports, thereby easing identification to some degree, anyone born in the US is by definition a US citizen regardless of whether or not they hold a US passport. Further, many US citizens hold dual citizenship such that it is unlikely that institutions will

be allowed to rely on the fact that they may have another country’s passport on record for an account holder. In other words, it is likely that all account holders will need to be asked if they might have dual citizenship!

With respect to accounts held by trusts and other entities, the compliance requirements will become even more challenging. All such trusts and entities with accounts at FFIs complying with the HIRE Act will need to determine the deemed individual ‘beneficial owners’ of such accounts under look through rules expected to be issued in the coming months. Thus in the case of trusts, every trustee will need to understand how each of their trusts are classified for US tax purposes and will then need to look to either the identity of the settler or the trust beneficiaries in determining which of them, if any, may be US clients for these purposes and then reporting those individuals to the FFI obligated to turn that information over to the IRS. Conclusion

Many institutions are beginning to accept that FATCA cannot be ignored. In addition to assembling teams to implement the new compliance requirements, some institutions have already begun to implement ‘best practices’ before taking on additional US clients to avoid undertaking a ‘needle in a haystack’ search for lurking US individuals at a later date. Further, some US investors are looking to eliminate ongoing US tax and reporting obligations by terminating US residence, handing in a US green card or even expatriating from the US. Handing in green cards or passports are significant steps, raising their own tax and reporting considerations, and underscore the far reaching implications of the FATCA legislation.

As long as US investments are seen as an important piece of a global investment portfolio, non-US investors and institutions will need to play by the US rules. Non-US banks and financial institutions will need to accept the high costs of compliance with the HIRE Act or consider limiting involvement with US customers and US markets. Eliminating their US client base may, however, prove more challenging and less practical than first anticipated given the reach of the rules not only to all US residents but also all US citizens and green card holders wherever they live and regardless of what other passports they may hold and whatever trusts and entities through which they might invest.

08/02/2011 17:57

21

IFC Review • 2011

Dogs and Taxes in Latin America

By Derek R Sambrook FIB (SA), TEP, Managing Director, Trust Services, SA, Panama

IFC_2011_Front_Section_Sambrook.indd 21

A

CCORDING TO JORGE G CASTAÑEDA, a former Foreign

Minister of Mexico, and Stephen Haber, a professor of political science at Stanford University in the US, Latin America (despite pockets of resistance) is entering a phase of unprecedented political and economic stability, which is amply illustrated by the degree of progress being made in countries such as Brazil, Chile, Costa Rica, El Salvador, Mexico, Panama, Peru and Uruguay.

In varying but nonetheless positive degrees these countries have pursued good macroeconomic policies that have effectively fought inflation; they have opened their markets and encouraged investments. The result is a significant shift towards more economic opportunity, social mobility and political democracy.

Meanwhile, developed countries are frantically trying to plug holes in a desperate attempt, following the Great Recession, to recover the maximum amount of tax from individuals and others to compensate, in part, for their own mismanagement of their economies.

Although Latin American governments, in the main, have relatively healthy economies, the collection of taxes is a major problem - in many cases taxes are high for individuals and corporations, the regimes are complex for taxpayers to comply with and there are insufficient tax collectors with the necessary expertise to enforce them.

Latin Business Chronicle’s Latin Tax

Index reports that Brazil has the worst tax environment in Latin America while Chile has the best. (The index measures a country’s overall tax climate by considering these factors: corporate tax rates, tax rates as a percentage of profits, and the number of payments and hours spent to pay taxes yearly.)

Those Latins lax with their taxes feel no real pressure because of the creaking tax systems most of which still need a complete overhaul. This, however, is changing as governments start shifting more towards direct rather than indirect taxes. As economic progress is made, more sophisticated tax regimes are being created, which will encourage sensible tax planning. It will include international structuring to mitigate taxes for sophisticated businessmen.

Tax rates, excise taxes and contributions have increased and whilst a few countries in the Americas have territorial tax regimes, the majority now have a worldwide taxation policy. The quality of the tax departments across Latin America today is like the curate’s egg: good in parts. Argentina, Brazil, Bolivia, Chile, Colombia, Guatemala and Panama stand out as having officials with a reasonable level of tax competency and technical knowledge. Collecting the taxes is another matter.

Let me mention some of the problems the tax systems face. The level of tax evasion in Latin America is high.

Evasion is part of the business culture; sadly, in addition to this many citizens

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IFC Review • 2011

simply don’t trust their governments to use the taxes for the common good. It must, however, be understood that evasion can be part of a survival strategy for those firms that would fail because of onerous and cumbersome regulations. And do remember that evasion, like corruption, is an international issue. It is estimated that €100 billion a year is lost in taxes in Italy, about six per cent of GDP. Complexity compounds the problem and it seems to be a vicious circle that can only be broken if governments start to simplify the tax regulations. Until this is addressed, tax revenues in Latin America will remain low by international standards. And while firms in high-income countries spend an average of 177 hours a year in tax-related transactions (such as preparing, filing and paying taxes) Latin American businessmen on average spend 320 hours doing the same thing. In Bolivia that figure is 1,080 hours and in Brazil, the region’s economic powerhouse, an incredible 2,600 hours.

In Latin America the largest percentage of tax revenue comes from corporations so corporate tax income is crucial to the region’s tax collection system. That said, the majority of the firms are small enterprises and perhaps over 80 per cent of manufacturing establishments employ fewer than 10 workers (often referred to as micro-enterprises). In the services sector this percentage is even higher and in Mexico, for example, 97 per cent of retail establishments fall into the category. Collecting taxes is a nightmare, even before addressing evasion, and I am reminded of Dr Johnson’s dog that walks on its hind legs rather badly, but even so one is surprised that it can do it at all. And introducing special tax regimes for such micro-enterprises has not really eased the problem. In one study of 17 countries, 13 of them have at least one special tax regime for smaller companies. But if the regime is simple, applying to qualify for it, by going through bureaucratic hoops, is not.

There are so many small firms in Latin America that it is very difficult for the tax authorities to track them down; because of this, efforts are concentrated on the easy prey. This means that the main targets are the largest and most productive firms in Latin America. But if large firms are targets they are also sometimes guilty of tax evasion too.

What is for sure is that tax authorities need to spread the burden more evenly and ratchet up the efforts to increase the amount of taxes paid by individuals.

Even so, low levels of personal income limit the scope for income taxes in Latin

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America and the region continues to lead the world in income inequality according to the OECD. This inversion of the personal tax pyramid, with the pinnacle supporting the system (including social security contributions) and too few contributing to it remains a key issue, whereas in Japan and much of Europe, unlike Latin America, this is unavoidable due to ageing populations.

It seems, therefore, that most revenues in Latin America are derived from imports and state-owned enterprises.

In some countries the large, small and micro-enterprises under-report as much as 40 per cent of sales. Take Mexico, for example, where McKinsey and Company claim nearly 70 per cent of micro-enterprises are not registered and so pay no taxes. Sixty-three per cent of registered small and medium size firms report not paying taxes at all and 48 per cent of large firms don’t pay any taxes either. Just a couple of years ago the Mexican government received 40 per cent of its revenues from petroleum.

A study by the Inter-American Development Bank on the various tax regimes says: “At the end, these regimes create incentives for firms not to grow beyond a certain point. If they invest and grow, they will not be entitled for such special treatment and their taxes will increase dramatically. The additional taxes they will have to pay will, many times, not pay for the investments they make. So they simply don’t invest”.

As I say, governments need to streamline and simplify their systems. It is estimated that only one in three Latin Americans is subject to income taxation and more than half of all Latin American workers are not entitled to pension rights through their jobs.

Brazil is leading the way on the matter of tax collection from rich individuals with assets offshore. Legislation published in June named 65 jurisdictions that the government considered as tax havens in addition to those classified as having tax privileges that work against the spirit of Brazilian tax laws so will be subject to special tax requirements. Those named include four Latin American countries: Costa Rica (the only one that is not a finance centre of some description), Belize, Panama and Uruguay. In the classic sense Panama is not a tax haven with, at the time of writing, seven per cent VAT, corporate tax rates of 27.5 per cent and individuals subject to 25 per cent.

One casualty of Brazil’s tax changes is the US Limited Liability Company through which many foreign individuals

and multinationals invest. A new blacklist has been created, split between low tax jurisdictions and tax privileged regimes. When the LLC is composed of non-residents not subject to federal income taxation it will be classified as a tax privileged regime. At this stage it is not clear whether just one non-resident member would trigger the classification.

For now this and several other practical issues have still to be ironed out, and bear in mind that the classifications are subject to changes in the future. It is also known that the Brazilian authorities have been very critical of the US state of Delaware, especially concerning corporate secrecy.

Being a blacklisted LLC means: • Transfer pricing and thin capitalisation rules.

• Capital gains of at least 15 per cent.

• Withholding taxes of at least 15 per cent.

For non-resident investment funds which have enjoyed exemption from capital gains on the disposition of shares in publicly-traded Brazilian companies using a US LLC, this will be a harsh blow, and for most large and mediumsized multinational companies investing in Brazil through US LLCs, preferential tax withholding rates on interest and royalties is important. These changes therefore might see a flight of LLC business in favour of, for example, a US or Canadian limited partnership or a UK LLP, but like the rhythm of the beat in Rio de Janeiro’s Carnival, things can change suddenly with Brazil’s tax system.

Whatever the tussles over taxes might be, it is important that as Latin America moves out from the economic darkness of the past it must avoid stumbling in the sunlight. Failure will just feed that existing body of prejudice, which is now, I suspect, also tinged with envy.

That said, no amount of evidence will convince some, however, because of the ‘Worm Syndrome’. Let me explain. In an effort to warn a meeting of Alcoholics Anonymous about the dangers of drink a religious minister dropped a worm into a jar of pure alcohol. It disintegrated almost upon impact and the minister, with furrowed brow and stern gaze, asked: “What does that tell you about alcohol?”

A voice from the back of the room replied: “that you’ll never get worms”.

Worms or otherwise, if, as predicted, Panama does achieve the highest regional growth in GDP in 2015, it, like several other rising stars in Latin America, must be careful not to become intoxicated by success and be incautious. www.trustservices.net

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IFC Review • 2011

Assessing Shanghai’s Offshore Finance Potential

By Yongjun Peter Ni, Zhong Lun Law Firm, Shanghai Hao Jiang, Zhong Lun Law Firm, Shanghai

O

FFSHORE FINANCE generally

refers to the provision of financial services by banks and other financial institutions to non-residents.

Typical offshore financial services include banking, fund management, insurance, trust business, tax planning, and business structuring. Given the needs of non-residents, offshore finance could really take a variety of forms, in either inward or outward direction.

There is no geographic limitation on conducting offshore finance.

Shanghai has been quite late in coming to offer offshore financial services.

Two Chinese domestic banks, Bank of Communications and Shanghai Pudong Development Bank (SPD Bank) only started to be engaged in offshore finance in Shanghai in June 2002 after receiving the approval of the then regulator, the People’s Bank of China. While Shanghai’s progress has been impressive, it can hardly be characterised as a success. Since Shanghai is keen on building up a world class financial centre, offshore finance is again high on the agenda of the policy makers as a part of the overall strategy.

Background

Globalisation has been a key driving force behind the rapid proliferation of offshore financial centres (OFCs). Any

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financial centre could be engaged in offshore finance activities and thus be considered an OFC. Under this broad definition, OFCs would include all the major financial centres and tax havens in the world. To distinguish between OFCs, the International Monetary Fund (IMF) specified certain criteria, including: (i) whether a jurisdiction has relatively large numbers of financial institutions engaged primarily in business with non-residents, and (ii) whether a jurisdiction has a financial system with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economy. If at least one of these criteria is met, such a jurisdiction is considered an OFC. The IMF even came up with a list of official OFCs. Based on the IMF’s criteria, OFCs could be classified into three categories, including: (i) the major global financial centres, such as New York, London and Tokyo, (ii) the major regional financial centres, such as Hong Kong, Singapore and Luxembourg, and (iii) tax havens, such as Bermuda and the Cayman Islands.

The major global financial centres all have considerable full-service financial activities, onshore and offshore. The major regional financial centres serve as regional financial hubs with well-developed financial markets and infrastructure.

Tax havens tend to have small-size real economies and aim to attract foreign capital inflows through a race-to-thebottom strategy and limited specialist services. Despite those differences, OFCs share some common features, such as capital freedom from foreign exchange control, low or zero taxation, moderate or light financial regulatory framework, independent and functional legal system, bank secrecy protection and so on.

Shanghai has never been on the IMF list

of official OFCs. Despite its prominent economic status in China, Shanghai has only made limited inroads into the offshore finance arena thus far. In June 2002, Bank of Communications and SPD Bank started to offer offshore banking services to non-resident customers in Shanghai. By 2008, Shanghai’s offshore banking services had total assets of US$2 billion, deposit amounts of US$1.8 billion, outstanding loan amounts of US$850 million, and operating profits of US$25 million. Those numbers presented

by Shanghai were simply a drop in the offshore finance ocean.

To use SPD Bank as an example. It was one of the first two banks to receive go-ahead to kick off offshore banking services in Shanghai back in June 2002.

Within six months, SPD Bank had opened 96 offshore banking accounts for non-residents. In 2005, SPD Bank, along with two other Chinese domestic banks, was allowed to conduct offshore guarantee services. By 2008, SPD Bank had 6,773 offshore banking accounts for non-residents, largely consisting of small to medium-size non-resident customers.

Despite its good efforts, however, SPD Bank is still struggling in this area and is representative of Shanghai in this regard.

Understandably, Shanghai is largely limited to providing offshore banking services for the time being.

Development Model

Shanghai clearly has the ambition to become an international financial centre with significant offshore financial undertakings. So what will be Shanghai’s development model with respect to offshore finance?

The IMF has provided three different categories which define an OFC. It is extremely unlikely that Shanghai will go

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IFC Review • 2011

down the route of a typical tax haven such as Bermuda. Thus, it appears that Shanghai’s real objective is to become either a major global financial centre or a major regional financial centre. Perhaps the two close rivals of Shanghai within these categories are Tokyo and Hong Kong. Since China has overtaken Japan as the second largest economy in the world, there could be some motivation to compare Shanghai to Tokyo with respect to offshore finance. In reality, however, it is Shanghai has set itself to compete against Hong Kong, especially in Greater China area.

The battle between Shanghai and Hong Kong is subtle yet fierce. In the long-term, few expect China to have more than one international financial centre with both strong onshore and offshore financial capabilities. The question is how Shanghai will gain an edge over Hong Kong over time.

Despite the competition, Shanghai is different from Hong Kong in a number of ways. Unlike Hong Kong, Shanghai is not interested in becoming merely a major regional financial centre. Given the size of China’s economy, Shanghai

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has no other choice but to aim higher. In addition, Shanghai’s policy makers will probably never view offshore finance as comparable to onshore finance in its financial strategy. The development of Shanghai’s onshore finance is expected to drive the growth of its offshore finance, while Hong Kong has apparently gone in an opposite direction.

Major Barriers

The objectives Shanghai has set could take years or even decades to materialise. In boosting its offshore financial capabilities, Shanghai has to clear out formidable barriers. First, the biggest barrier is arguably the onerous foreign exchange control regime. While the current account has free convertibility, China allows only restricted convertibility on the capital account. As long as the Chinese currency RMB is not freely tradable, it is difficult to see Shanghai’s future as an OFC having meaningful impact. The capital account restrictions essentially frustrate the capital movements needed for the offshore financial services. The tight grip China holds on the exchange rate indicates that China will not lift the capital account

restrictions any time soon.

Second, the lack of access to domestic capital markets remains a significant barrier to non-residents. In particular, non-residents are generally prohibited from participating in China’s A-share stock markets but for few exceptions available to limited institutional investors. It is reported that the Chinese regulators are considering the listing of foreign companies in the A-share stock markets. Such baby steps would not be enough to make the Shanghai index an internationally recognised benchmark.

Since Shanghai has virtually no direct link with foreign stock markets, nonresidents do not seem to have convincing business or investment needs for an offshore financial account in Shanghai.

Third, the unfavourable regulatory and legal environment hampers the development of offshore finance in Shanghai. The central government has a firm control over the offshore finance policies and rules under its own agenda. It appears that the policy space for offshore finance is quite limited at the best. The Chinese regulators are generally not considered independent, transparent,

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Recent Steps

Although Shanghai has little or no power over the offshore finance policies and rules, it can certainly lobby the central government to widen the permissible use of offshore financial activities. As long as China is continuously opening up the financial market, Shanghai’s offshore finance status will certainly be strengthened. Supporting Shanghai’s offshore finance role is consistent with national and local interests. On the other hand, Shanghai should review its options to expand offshore financial services under current policies and rules. As a regional headquarter for many giant multinational companies, Shanghai is in a strong position to leverage its existing economic and financial clouds. The growing crossborder trade and investment through Shanghai will continue to demand the

availability of offshore financial services in specialised areas.

Shanghai is currently undertaking well-planned steps to boost its offshore financial capabilities further. First, it specifically designated Yangshan Bonded Zone (Yangshan) as a hub for the offshore financial services after consolidating various local bonded zones. While Yangshan is not exclusively reserved for offshore finance, it will enable Shanghai to coordinate with various regulatory agencies for a unified and simplified regulatory environment.

Second, Shanghai is in the process of developing strategies to expand the scope of its offshore financial services. The scope will certainly go beyond the traditional offshore banking area and expand to future transaction services, reinsurance, asset management and so on. There are some encouraging examples in the development.

In July 2010, the Shanghai Pudong District Government issued a notice to support financing lease business.

The notice will provide some financial incentives for entities (including non-resident companies) engaged in financing leases with respect to aircraft or ships. The financial incentives include allowances to the entities as well as tax benefits to executives.

Presumably, non-resident companies engaged in

this business would need some offshore financial services from banks in Shanghai. In October 2010, the General Administration of Customs approved an application for bonded future settlement trial services in Yangshan with respect to imported copper and aluminum.

The trial period is one year upon the approval. This will allow the Shanghai Customs to process imports more easily and tax-favourably. Such a trial is expected to broaden the offshore future transaction services in Shanghai.

Asia

clean, and capable. The Chinese legal regime is often scorned and avoided by non-residents out of distrust over the rule of law status. It is unclear when there will be a sound and effective regulatory and legal system in place to address the frauds, disputes, or liabilities incurred in offshore finance activities. Until then, the risk exposure for non-residents will be too great to be swallowed.

Conclusion

Shanghai’s offshore finance potential is closely tied with China’s fortunes in the international financial market. Presented with both challenges and opportunities, Shanghai bears some resemblances to both Tokyo and Hong Kong. In the foreseeable future, however, Hong Kong will still be Shanghai’s biggest rival with respect to offshore finance. Shanghai’s OFC status will be ultimately determined by various factors, including the future of RMB, the openness of domestic stock markets, and China’s regulatory and legal environments. Despite some barriers, Shanghai is forging ahead with its ambitious strategies and is expected to bear decent fruits in the near future.

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IFC Review • 2011

An Update on the AIFMD – A Lot Done, More To Do

By Peter O’Dwyer, Managing Director, Hainault Capital, Dublin, Ireland

I

N THE GREAT CRASH 1929, John

Kenneth Galbraith astutely observed: “It requires neither courage nor prescience to predict disaster. Historians rejoice in crucifying the false prophet of the millennium. They never dwell on the mistake of the man who wrongly predicted Armageddon”. It’s like the old definition of an economist, as someone who has predicted nine out the last five recessions.

Writing from Ireland, where we have recently, rather unfortunately, achieved our own worldwide 20 minutes of CNBC “doom and gloom” fame, it’s nice to see the naysayers vanquished from time to time. In January, Intel announced a spanking new US$500 million investment in Ireland. This follows a highly successful 2010, which was the best year for inward investment into Ireland since 2003. Many of the world’s brightest and most successful new industry players from Google to LinkedIn to Facebook have established significant presences here in the past 24 months.

What has this to do with the

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Alternative Investment Fund Managers’ Directive, (AIFMD)? I suppose the relevance derives from a comparison with where we found ourselves this time last year. Readers of IFC Review 2010, some 12 months ago, will recall that the AIFMD was then still winding its tortuous way through the EU Council and Parliament and had been tossed back and forth as the Swedish, the Spanish, or the Belgian Presidencies had given it their mark, prior to facing the bull pit of a hostile European Parliament.

At the beginning of 2011 a lot has happened and in hedge fund land (at least from an Irish perspective) we can definitely look at the cloud that seems to have delivered more than a little sliver of silver lining. Recent statistics from Hedge Fund Research show that the proportion of the world’s 9,000 hedge funds domiciled in Ireland has doubled over the past year to 7.4 per cent. Assets held in Irish domiciled funds in total also hit a fresh high at €950 billion, surpassing the previous record from 2007 of €808 billion. Ireland is the domicile of choice for 63 per cent of all European domiciled hedge funds, according to the Irish Funds Industry Association (IFIA).

There is no doubt that the drift of some promoters from traditional offshore locations to Ireland has been accelerated by the passage of the AIFMD. In the case of those who choose to leave their hedge funds domiciled in the more traditional centres such as Cayman, it seems as if the

Irish administrators, who provide back office, transfer agency and NAV services to an estimated 40 per cent of the world’s hedge funds will also continue to prosper.

Approval of the AIFMD

As readers of IFC Review 2010 will recall, where we left the AIFMD was in a ‘trilogue’ process between the EU Council, the Commission and the Parliament. This process, which was intended to be finished by July 2010, dragged on a little longer. A compromise directive, which resulted from the trilogues was approved by the Parliament on 11 November and the EU Council of Ministers on 17 November 2010. This text will become the official version of the Directive, which is due to be published in the Official Journal of the European Union later in January 2011.

From publication date, Member States will have two years in which to transpose the Directive into national law. The preparation by the Commission of so called ‘implementing measures’, which will contain the detailed provisions and rules of the Directive will be critical.

The AIFMD is one of the newer Lamfalussy directives, whereby the nitty gritty detail is applied at a higher EU level through ‘implementing measures’, thereby severely limiting the scope, that local Member State regulators previously had for some earlier investment management directives to apply some national tweaking.

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The two main stated aims of the directive are: • to establish a secure and harmonised EU framework for monitoring and supervising the risks that alternative investment fund managers, (AIFM), pose to their investors, counterparts, other financial market participants and to financial stability; and • to permit, subject to compliance with strict requirements, AIFMs to provide services and market their funds across the EU’s internal market under a socalled ‘passport’.

From 2013 the AIFMD will require all EU based AIFM to obtain an authorisation to manage alternative investment funds (AIF), which are defined as any funds that are not UCITS. The authorisation will involve, inter alia: • capital adequacy rules; • ongoing operating conditions regarding risk management, liquidity management, remuneration of employees, conduct of business rules and the management of conflicts of interest; • organisational rules in relation to valuation, delegation of AIFM functions and depository requirements and rules; • requirements regarding transparency to investors and reporting obligations to the competent authorities; • specific rules for companies that acquire a controlling interest in non-listed companies.

An EU passport to market to professional investors will be available for EU AIFM and EU AIF immediately on implementation of the Directive in 2013. For non-EU managers and AIF a passport should be available from 2015. National private placement regimes will continue in parallel to the passporting regime at least until 2018, at which time a review of the effectiveness of the AIFMD passport regime is planned by the Commission.

The scope of the AIFMD is confined to entities managing AIF as a regular business, regardless of whether the AIF is open-ended, or closed-ended, of the legal form of the AIF, or of whether or not the AIF is listed. As explained above, the AIF is defined as any fund which is not a UCITS. There are certain exemptions and funds which are out of the scope of the AIFMD. Investment undertakings, such as family office vehicles, which do not raise external capital, are not considered to be AIF.

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The AIFMD does not apply to holding companies (as defined in Article 4 of the Directive), nor does not apply to, amongst other entities, securitisation special purpose vehicles.

There is also an important exemption from the Directive for certain managers, who manage “either directly or indirectly through a company with which the AIFM is linked by common management or control” funds with assets of: • less than €100 million (including assets acquired through leverage); or • less than €500 million that are not leveraged and with no redemption rights for the first five years.

This exemption may be of assistance for some smaller hedge funds, or private equity funds. However, it is not clear what happens when a fund meets one of these criteria on launch, but, as a result of positive returns subsequently breaks through the upper limit. The Commission is mandated to adopt measures to deal with occasional breaches of this limit.

Article 5(1) of the AIFMD provides that where the legal form of the AIF permits internal management and where the AIF’s governing body chooses not to appoint an external AIFM, the AIF may, itself, be authorised as an AIFM. This may open up the possibility of establishing self-managed AIFs in the same manner in which self-managed UCITS are established to comply with the requirements of the UCITS management company directive. If an AIF is self-managed and where the functions such as portfolio management are delegated, the delegate does not need to be an AIFM. Article 19 – Valuation

The Directive aims to address certain fundamental issues which arose from the financial crisis. In particular, the AIFMD looks at the critical concept of ‘valuation independence’ from parties which are potentially conflicted. In addressing this issue, it should be recalled that most of the occasions where such problems have arisen in the past are not within the EU, which has a long established business tradition of third party independent valuation, but rather in the US, where ‘own valued’ hedge funds were the predominant model.

The Directive makes clear that it is the AIFM who is responsible for the proper valuation of the AIF. All fund assets must be valued at least yearly, but more frequently when this is appropriate to the

dealing frequency and asset type of the fund. If the fund is closed-ended, such valuation must be carried out in the case of an increase or decrease of the capital of the AIF. Valuations of the AIFM itself, as opposed to those conducted by an external valuer, must be conducted in a way that is ‘functionally independent’ of portfolio management and in a way that conflicts of interest are mitigated.

Notwithstanding that the Directive attempts to bring ‘industry best practice’ to valuation, much of the language of the Directive continues to be problematic. There is a general consensus that a lot of work remains to be done on valuation, not least as it pertains to the delegation of functions. In this regard problems will arise with the requirement that external valuers will be able to “furnish sufficient professional guarantees to be able to perform the relevant valuation function”. The negotiation of the implementing measures will be critical here.

Alternative Investments

What the Directive contains

Article 21 - Depositary

The AIFMD introduces certain requirements regarding a Depositary to an AIF managed by an AIFM. Some of these requirements are detailed below.

A Depositary shall be either: • a credit institution having its registered office in the EU; • a MiFID investment firm having its registered office in the EU and subject to capital adequacy requirements prescribed by EU law; or • other institutions, which are subject to prudential regulation and ongoing supervision and belong to categories determined by Member States to be eligible depositaries under the UCITS Directive The Directive requires that the AIFM ensures the appointment of a single Depositary for each AIF it manages. A prime broker acting as counterparty to the AIF will not be permitted to act as Depositary, unless it has separated its prime broker and Depositary functions and any associated conflicts of interest are addressed.

Where, as is common for global custody, custody tasks are delegated to a third party, if there is a loss of financial instruments held in custody by a third party, the Depositary can discharge itself of its liability if it can prove: • that all requirements for the delegation of custody tasks are met; and • that there is a written contract between

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IFC Review • 2011

the Depositary and the third party that explicitly transfers the liability of the Depositary to that third party and makes it possible for the AIF/AIFMD to make a claim against the third party in respect of the loss of the financial instrument, or for the Depositary to make such a claim on their behalf.

Articles 32 to 40 – Third Country

beyond 2018 will be considered by the new European Securities and Markets Authority (ESMA) in 2017 and it will recommend continuation, or a gradual phasing out.

See Table 1 below, which sets out broadly the provisions of the AIFMD under which AIFs may be marketed in the EU

Issues

Next Steps

These articles have become very pertinent to those offshore locations, such as the Channel Islands, BVI, Cayman and Bermuda, which would wish to continue to be able to have their funds available for professional and institutional investors in the EU. A delayed passport for non-EU funds and non-EU managers will come into effect two years after implementation of the AIFMD, around early 2015, in parallel with the retention of private placement regimes of Member States until 2018.

The continuance of private placement

Over the course of 2011, a period of secondary rule making will take place with ESMA, the successor to CESR, playing a key role in the drafting of legislation in many areas of the AIFMD. Work is also now commencing (see Ref. 4 below) on detailed Level 2 and Level 3 implementing measures on which extensive consultations are expected.

ESMA has identified and requested evidence and submissions on what it considers to be the key sub-headings of the Directive: • General provisions, authorisation and

EU AIFM

EU AIF

European passport May market to professional Investors from implementation of AIFMD, (early 2013)

National private placement regime Not applicable as passport has immediate effect

Non-EU AIF

Non-EU AIFM

European passport May market to professional investors from early 2015 provided in full compliance with AIFMD and each of the conditions of (a), (b) and (c) below and ESMA issues a positive opinion on passporting.

European passport May market to professional investors from early 2015 provided in full compliance with AIFMD, authorised by EU Member State and meets conditions including (a), (b) and (c)below.

National private placement regime May market to professional investors provided in full compliance with AIFMD (including requirements for depositary function) and conditions (a), (b) and (c) below.

European passport

May market to professional investors from early 2015 provided in full compliance with AIFMD authorised by a Member State and both AIFM and AIF meet conditions including (a), (b) and (c) below and ESMA issues a positive opinion on passporting.

National private placement regime May market to investors provided compliance with the annual report, disclosure to investors and reporting obligations to national regulators. Where relevant, AIFM will also have to comply with the disclosure of acquisition of control, contents of annual report and asset stripping requirements of AIFMD and conditions (a) and (b) below. It is intended that national private placement regime will be phased out in early 2018.

Conditions (a) An appropriate co-operation agreement is put in place between the competent authority of the AIFM’s home Member State or the Member State of reference (typically where the AIF is established) and the supervisory authority of the third country where the AIF/AIFM is established. (b) The third country where the non-EU AIF/AIFM is established is not listed as a Non-Cooperative Country or Territory by the Financial Action Task Force on anti-money laundering and terrorist financing. (c) The third country where the non-EU AIF/AIFM is established has signed a tax information sharing agreement with the competent authority of the AIFM’s home Member State or the Member State of reference and each competent authority where the AIF is proposed to be marketed.

Source, AIFMD Information Note, IFIA

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operating conditions • Depositary requirements • Transparency requirements and leverage • Supervision of AIFM, including third country AIFM Timeline

It is anticipated that the AIFMD will be transposed into national law and come into effect from early 2013. At this time, marketing passports are due to replace national private placement regimes for EU managers of EU funds.

From 2015, marketing passports are due to begin for third country non-EU AIFMs and non-EU AIFs. From this time, the third country passport will run in parallel to national private placement regimes until 2018, when national private placement regimes are to be phased out.

The introduction of a third country passport (and subsequent phasing out of the private placement regime) is conditional on a positive report by the new ESMA. To say that all the above is complicated is something of an understatement. A large part of the reason for its complexity is undoubtedly the fact that the Directive started as a political project, sloppily drafted and encouraged by people who hadn’t the remotest clue about the industry they were seeking to regulate.

That the industry itself has had to attempt, (largely successfully to date), to reverse engineer some class of a horse out of the camel thus initially created speaks volumes about the creativity, persistence and ingenuity of the hedge fund industry.

Unfortunately, we now have to gird out loins for the Level 2 and Level 3 consultations.

While, we are not even at half time, one remains cautiously optimistic that the worst is behind us.

Additional references, sources • Fund News, November and December 2010, KPMG • AIFMD Information Note, November 2010, IFIA • FTfm, 17 January 2011,FT • Implementing measures on the AIFMD, December 2010, CESR/ESMA • EU Directive on Alternative Investment Fund • Managers, impact on Cayman Islands and BVI, November 2010, Maples and Calder • Update on AIFM Directive Impact analysis for Jersey and Guernsey Investment funds, November 2010 • Ogier of AIFMD, (early 2011)

08/02/2011 18:02

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IFC Review • 2011

Philanthropy – Disinheriting Children, or Building Dynasties

T

By Blake Bromley, Principal, Benefic Lawyers, Vancouver, Canada

HERE HAS BEEN A LOT OF BUZZ in wealth management

circles lately on the ‘Giving Pledge’ promoted by Bill Gates and Warren Buffet. Gates and Buffett have been touring the globe encouraging wealthy individuals to donate half of their estate to charity when they die. While the greatest response and debate has been in the United States, they have travelled as far afield as China to convince billionaires in a communist country to divest the majority of their estate to philanthropy.

The debate in China surrounding their visit has interested me because for the last five years I have been working with the drafting committee of the Ministry of Civil Affairs on the proposed new Charities Law for China. China is also eager to encourage its new class of extremely wealthy citizens to donate generously to charitable causes. However, the range of charitable causes for which the Chinese government wants private sector support is much narrower than those advocated by Gates and Buffett.

China wants limitless funding for natural disasters and emergencies; but is worried about the political impact of private money supporting religious and human

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rights causes not favoured by the national government. Chinese billionaires are generally astute enough to understand that at this time in the economic and political evolution in China it is not wise to make massive spending commitments to social causes which are opposed by government.

One of the distinguishing features of philanthropy in the United States is the American assumption that it is both wise and virtuous to make the magnitude of one’s philanthropic commitments known to as many people as possible.

In China, as in other parts of the world, there is great risk in advertising one’s wealth, even if only by making large public donations. There are many in government, especially in tax offices, who will presume that any sophisticated tax planning involving philanthropic giving is actually an exercise in tax evasion.

Many people in the general population assume that accumulated wealth over a certain level must necessarily have been gained by illegal means. Many wealthy people have more to lose from publicising their philanthropy than they have to gain.

Another issue raised by the Gates/ Buffett Giving Pledge is whether such a testamentary divestiture of wealth is even legal in civil law jurisdictions. In common law countries like the United States and England, it is generally legally possible to give away one’s entire estate to charity.

However, civil law countries have forced

heirship laws which generally require that one third go to the spouse and one third to children, leaving only one third available for voluntary distribution by way of bequest. Given these rules, one must question both the feasibility and the wisdom of promoting a charitable giving formula created in common law jurisdictions in civil law countries.

The Giving Pledge is often promoted on the basis that it is harmful to give too large an estate to one’s children.

Philanthropy becomes the only reasonable option left to an entrepreneur with a philosophy that precludes giving too much wealth to family. Warren Buffett has given billions of dollars to charitable foundations controlled by his children. I do welcome this money flowing into the sector and believe good is coming from it. However, I want to add a cynical note of caution about the wisdom of ‘charitable’ billionaires who say their children can only be trusted with a small amount of money for their own use - but can be entrusted with billions of dollars to interfere in the lives of others. It is important to remember that imprudent philanthropy has the potential to do harm as well as good. Philanthropy, if implemented as misguided noblesse oblige can be a form of social zealotry.

Philanthropy is frequently optimised when it is approached as an important component of international wealth management rather than as a means

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IFC Review • 2011

by which to disinherit children.

Philanthropy can be a socially beneficial vehicle by which to maintain multigenerational dynastic wealth while shaping the legacy of the family.

The effective and tax-efficient use of foundations is a strategic way to maintain wealth through multiple generations. Once wealth has passed into the next generation there are fewer problems in advertising wealth by publicising philanthropy.

The first and most readily understood advantage of philanthropy from a wealth management perspective is the ability to reduce the amount of wealth paid to the domestic tax authorities because of charitable donation deductions. This is particularly true in reducing estate and other taxes at the time of death. While wealth given to a private foundation is no longer available for private benefit and expenses, it does remain under the control of the family. More importantly, it reduces the need for liquid funds to pay taxes and therefore enables the family to avoid selling strategic assets at fire-sale prices to generate cash for the tax authorities. It is possible to give illiquid assets to a private foundation and receive immediate tax benefits for the fair market value of the assets given. It is also possible to purchase those assets back from the foundation at a later time for fair market value at that time should those particular assets play a key strategic role in the family’s wealth management plan.

Most global wealth management programs encourage people to move large amounts of money to low tax jurisdictions. What is frequently not recognised is the extent to which a private foundation provides tax protection from the exit taxes resulting from moving assets or residence offshore. It is possible to calculate the optimum amount of donations and the most tax efficient assets to donate to a domestic foundation to reduce the tax payable when an entrepreneur is moving wealth offshore. Consider the example of a Canadian entrepreneur selling her business in exchange for $100 million of the purchasing company’s publicly traded shares. If she then sells the shares, she would pay $22 million in tax and have $78 million remaining to move offshore.

However, if she donated $27 million of the publicly traded shares to her private foundation and sold the remaining shares, her tax would be

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reduced to $4 million. While she would only have $69 million to take offshore, she would have an additional $27 million in a Canadian foundation.

The wealth in the private foundation remains under the control of the donor even if she moves offshore. The money is available for philanthropy back in the community and country in which she made her fortune. With a few extra legal hoops, it is possible to structure things so that the philanthropy is carried out internationally.

When contemplating inter-generational dynastic wealth, it is important to remember that much of the success of future generations will stem from their access to the innovative and powerful leaders in their communities. This access will not result from living an isolated existence on an island paradise with low taxes. The needed contacts will be in the high tax countries in which the original family wealth was made. Charitable donations flowing from private foundations funded when the family moved offshore will provide continued and ever improving access in those communities.

Having millions of dollars in a family foundation in these jurisdictions will enable future generations to acquire the social access which comes from being significant donors to leading academic, research and cultural institutions in a community. More importantly from a wealth management perspective, it enables this access to be “bought” without reducing the personal and investment wealth of the next generation. Having a foundation purchase a premium table at an opera gala and filling it with important leaders in the community who are at arm’s length from the family is one effective and inexpensive way of introducing the next generation to important business and community circles. The money which was set aside in a charitable foundation now returns to assist the family’s wealth creation prospects while at the same time doing good in the community.

At a much more mundane level, a private foundation releases the next generation from many of the informal, but real, costs of moving in the best circles in society and attending the best schools etc. Tuition is the starting cost of sending children to private schools and music academies. Once admitted, there is a constant pressure to donate funds for better equipment or a new building. While a private foundation will not be able to pay tuition, the

donations it makes will assist a child in getting accepted into such prestigious institutions and becoming prominently recognised with no additional outlays from personal funds.

When considering the dynastic wealth potential of strategic philanthropy, it is useful to bear in mind that countries which provide the most generous tax benefits for donating to charity usually have the most restrictive rules on investing assets and operating a foundation. For example, the United States has generous tax incentives to donate but then taxes unrelated business income of charities, restricts the percentage of a company that a private foundation can hold indefinitely and has stringent payout requirements to charitable causes as well as an excise tax. All of the rules of the country in which the foundation is located must be understood and complied with if foundations are to be used as part of a strategic plan for dynastic wealth management. The rules against owning companies may be the most problematic for this type of planning.

It is a deeply personal philosophic and even ideological question whether a person should give away the majority of their wealth upon death. The Giving Pledge debate is helpful in encouraging us to think about the issues. However, it seems contrary to the principles of wealth management to develop sophisticated strategies of reducing taxes and even moving assets to low tax jurisdictions if the endgame is to simply give your wealth away.

It seems prudent to assess philanthropic planning on the basis of how it facilitates and enhances multigenerational wealth management rather than just being a mechanism for disinheriting children. Teaching those children how to manage and improve philanthropic grant making and benevolent endeavours is an important goal. The funds in the private foundation cannot be squandered on the living expenses of the next generation but can be a useful means of transmitting values and creating a legacy which is simultaneously charitable and dynastic.

The Giving Pledge should focus less on the percentage of wealth given away and disinheriting children. Instead, it should find a convergence between philanthropy and dynastic wealth by helping future generations revitalise their sources of wealth while engaging in increasing intelligent charitable endeavours.

08/02/2011 18:04

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IFC Review • 2011

The Trust as a Valuable Planning Tool

By Shân WarnockSmith QC, 5 Stone Buildings, London; ICT Chambers, Cayman Islands

A

S BEFITS AN ARRANGEMENT

which, even if not quite as old as time, has long given the family succession and tax planner a valuable tool, the trust simply will not lie down. Rumours of its demise have probably been around since as long as the trust itself and it is not difficult to imagine some innovative 14th century planner regarding the trust as “so last century” and out of step with the times.

In the 21st century the international planner has many other possible structures at his disposal and an increasingly formidable array of obstacles to overcome in order to identify the best strategy for the client. Although not for everyone and all circumstances, the trust remains the valuable planning tool it always has been despite attacks on its use, in particular from onshore governments. Even if it is ultimately rejected as the solution in a particular case, it will almost always make the shortlist. I would go so far as to say that powerful reasons are needed to justify its rejection in favour of other wealthholding structures.

What’s Wrong With Trusts?

It may seem perverse to start with the negative but there are so many obvious things right with trusts and their use (flexibility, protection of the vulnerable and incapacitated, their enthusiastic adoption and promotion in very many jurisdictions and so on) that an analysis

IFC_2011_Front_Section_Warnock.indd 31

of the downsides may be more useful than a paean of praise to their attributes.

What’s wrong with trusts may be broadly placed in one of two categories: first is the welldocumented animosity with which certain onshore governments, notably the UK and the US, bear to their use and the steps those governments have taken to discourage them.

The second, a broad and more interesting category, concerns the problems thrown up by lack of care and foresight in planning the structure and (sometimes consequent on lack of care and sometimes not) the working of trusts in practice.

Although on analysis these latter problems are probably no more serious or intractable than those thrown up by any other series of human relationships, they tend to attract unfavourable headlines both in the law reports and the general press of the “Mega Rich X Family Rows Over Offshore Trust” variety. Recognising the truism that every unhappy (rich) family is unhappy in its own way, the challenge is always how best to structure so as to reduce the chances that the trust itself will become the medium through which that unhappiness finds expression.

Protectors

One example from recent experience will suffice to illustrate the need for care and potential for disaster in trust planning.

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When it became popular back in the 1970s to establish broad discretionary settlements in offshore jurisdictions, often far from the home and with unfamiliar institutional trustees, the eternal trust triangle of settlor, trustee and beneficiary was sometimes augmented by a fourth member: the protector. Usually regarded as the settlor’s man, he was there to ensure that the settlor’s wishes were carried out, to remove trustees if they proved resistant and generally to keep the beneficiaries in line.

I hasten to say that there are, of course, many excellent protectors who take their jobs very seriously, genuinely exercise their powers in the best interests of the beneficiaries and who are otherwise genuinely valuable additions to the team.

Equally, however, their presence can destabilise relationships in an unhelpful manner. A good example is the protector who has known the beneficiaries since they were small children and who has formed a particular view of their personalities, which never alters whatever changes maturity brings. Friction with the beneficiaries results as the protector declines to approve distributions for reasons which seem unreasonable to the beneficiaries.

In an extreme case in which I was involved the protector clung stubbornly to the settlor’s view, formed some 40 years before when his son was very young, that the son should never be given access to capital. Now in his 60s, the son had suffered unnecessarily for years from that policy (even coming near to bankruptcy) in circumstances where the trust could reasonably have helped. That protector was eventually removed by the court but fought, very expensively, to the bitter end to resist that result.

My advice? Think very carefully before concluding that a protector is desirable and will not simply be a financial and emotional drain on the trust structure.

If you decide you really do need one, be careful about drafting his powers and the way in which they are to be exercised.

Dispute Resolution

In the UK mediation of trust disputes has become an increasingly fashionable way of attempting to resolve problems without going to court. In practice an attempt at mediation in the course of proceedings has to be made – the English rules strongly encourage it without making it formally mandatory. The record of success in mediations is said to be excellent although data is necessarily anecdotal and unreliable. If it works, it is of course an excellent way of reducing

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cost, both financial and emotional, and (which is often extremely important to the family in question) of keeping sensitive matters confidential.

It also avoids the lottery element of a contested hearing in which one or more parties will inevitably be disappointed, a result which may not be conducive to future family harmony.

Mediation is less often encountered in the international arena – local rules may not encourage it in the same way as in the UK and practitioners may be less familiar with the process and its advantages. It is often necessary actively to promote the advantages of mediation to one’s client for which purpose it is helpful, if not strictly essential, to believe in the process oneself. It is not always an easy task to persuade a client who is bent on total victory to put down the sword and assume a compromising stance.

A recent development has been the emergence of clauses in trusts which seek to encourage the mediation or arbitration of disputes. Mediation is a consensual process to which parties need freely to agree but there are methods of drafting which may encourage that result. For example it may be possible to oblige the trustee to undertake a particular process involving mediation before it may exercise certain powers.

In relation to provisions which try to oblige parties to submit to arbitration, there is something of a difference of opinion. One view has it that a settlor may impose terms on his beneficiaries, unless they are contrary to public policy or otherwise void, and can force them to arbitrate as a result. The contrary view is that such a provision ousts the jurisdiction of the court and cannot be enforceable.

In general it is thought that legislation may be required to force an arbitration on the parties and I understand that the Bahamas has recently introduced such a provision in its Trustee Amendment Act 2010. Other jurisdictions have yet to follow suit.

For my own part I remain to be persuaded that arbitration, unlike mediation, offers a real advantage in trust disputes. One is simply substituting one forum for another in circumstances where the court may well offer a superior service. Confidentiality is often said to be a benefit of arbitration but I am not wholly convinced of that in practice.

Other Structures

In recent years other arrangements have come to offer serious opposition to the trust. Several trust jurisdictions,

notably Jersey, now offer foundations as an alternative to trusts which are likely to appeal, at least initially, to those from civil law backgrounds in which, for example, the Liechtenstein foundation has long been familiar.

One of the great advantages of the foundation is its potential for indefinite existence in circumstances in which the rule against perpetuities generally constrains the length of the trust. The size of some modern fortunes is far too large for single families to enjoy realistically during a relatively short period and a notable feature of the past few years has been the emergence of real dynastic intent among the wealthy: they want their structures to last literally in perpetuity. Some but by no means all of the trust jurisdictions have abandoned a perpetuity rule for trusts to allow these ambitions full rein and I suspect that we will see that tendency increase in jurisdictions which are unwilling to introduce the foundation.

The other exciting new development, at least in the UK, is the emergence of the family partnership as an alternative to the trust. Driven largely by the government’s dislike of the trust and the consequent tax disadvantages, which make the creation of new UK lifetime trusts so difficult, creative use can be made of these arrangements for tax and succession planning purposes in ways which to a large extent mimic the separation of management and beneficial ownership which we see with the classic trust.

Alive And Kicking

The lessons to be learned from alternative structures could perhaps be applied to trusts too but there is little that can be done through a foundation or a family partnership that cannot be done through careful and imaginative trust structuring.

The trust really shows off its muscles and flexibility offshore: the use of Cayman STAR trusts, for example, to mix private and charitable purposes, the emergence of purpose trusts of various kinds, trusts involving complicated arrangements for the reservation of powers to third parties have all emerged in response to the challenges posed by the need to structure family wealth and businesses in a creative and practical way.

There is no reason to suppose that the trust will not continue to play a major part in wealth structuring and every reason to suppose otherwise.

Long live the trust.

08/02/2011 18:06

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IFC Review • 2011

What We Talk About When We Talk About Estate Planning 1

By Odd Haavik, TEP, FICP, Charles Monat Associates Pte Ltd, Singapore

A

SCIENTIST SPENDS A LIFETIME of research to develop

a popular chronic illness drug and makes US$120 million off the patents. The sub-prime crisis promptly reduces that amount by almost 50 per cent and the client inevitably sues, claiming he was given bad advice and made investments he wouldn’t normally have made and that were not in line with his risk-taking profile2. A single person’s story, but one that was repeatedly seen during the tumults of 2007-9 when the ‘bottom fell out of the markets’ and there was seemingly no safe haven anywhere. Curious risk-decisions were made by clients who subsequently claimed the investments they had made were not in line with their risk profile or capacity, and fortunes were lost.

In Singapore, the financial markets authority, the Monetary Authority of Singapore (MAS) has acted decisively to investigate these claims by consumers and have issued strict guidelines for the sale of ‘structured’ financial products3.

Similar initiatives are making their way through most of the OECD markets’ approval process, ostensibly with a view to making investing a safer activity.

A full review of the financial markets regulatory changes that have been put in place or that are on the drawing board is beyond the scope of this article, but I would like to share some musings on

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what we, as estate planners, ought to think about when we discuss ‘planning’ with our clients; particularly with a view to what advice we should give when the clients are presenting us with investment ideas that carry significant risk to the principal of the investment.

Where Did All These ‘Structured’

Products Come From?

It is an old saying that investors tend to get more bullish at the top and bearish at the bottom but we can only know which end of the market we are at in hindsight. As the stock market faced a correction from the initial highs in 2000, private investors seemed to turn away from ‘plain’ stock market investments towards more innovative structures that offered higher returns, particularly from emerging markets. Hedge funds were already offered to more or less retail investors with low minimums and the HNW clients were seeking alpha4 elsewhere. We are all familiar with the so-called sub-prime mortgages as an example of bundled asset-backed securities and with investors seeking ever greater returns from supposedly less risky assets, the use of leverage increased exponentially. The story played out according to plan, as such schemes invariably seem to do at the beginning, before the ever-increasing flow of capital chasing the same returns became so top-

heavy that the market crumbled.

It could be suggested that the easy availability of credit towards financial investments caused its own demise by overwhelming the market and narrowing margins to a point where the amount of leverage needed to produce the returns needed to excite investors simply wasn’t available anymore. Leverage, in a sense, caused its own destruction…at least for a while. We’re now back in market-expansion mode and with historically low interest rates we are seeing a tremendous increase in the use of leverage as financial institutions regain confidence and open up the purse strings.

Low interest rates let companies borrow cheaper funds which sends bond yields (the traditional defensive asset class) lower which in turn causes investors to leverage these bond portfolios in order to achieve a semblance of ‘past’ returns.

Investors are rarely willing to accept zero as a target return, though they were willing to pay the US Treasury to lend them money during the worst of the crisis, as seen by the negative YTMs seen on some issues during 20085.

So, as clients became increasingly comfortable with leveraged investments, their use of leverage increased and spread to every corner of their portfolios.

Leverage can essentially take two forms; explicit and implicit. Explicit leverage is when a client takes out a loan,

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Estate Planning

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IFC Review • 2011

eg a mortgage or a margin account, and the terms of the loan are clearly stated and generally well understood by the client. Implicit leverage is when the leverage is built in to a packaged, or structured, product and the packaged solution is offered for sale on a term sheet basis. The latter category includes the previously mentioned mortgages but also more generally used solutions such as ELNs and so-called ‘accumulators’6 – structured products where the client commits to buying shares of a company at pre-determined price(s) if the stocks should decline…a relatively harmless activity in a bull market when stocks trade higher, but a decidedly harmful activity if stocks decline - as our scientist in the opening paragraph can attest to.

I urge the individual estate planner and fiduciary to do further research on the various products any given client may want to include in a structure and to have a conversation with the client as to the objectives behind each of these investments as they relate to the client’s long-term goals for the structure, be it a trust, foundation or simple PIC. “Our Powers Of Investments Are Being Curtailed”

We are often faced with clients who retain significant investment powers over assets in a structure and though this is not always a negative thing, it is clear that the investments should be made in accordance with the terms of the structure and that we have a responsibility to question decisions that we feel may not be in the beneficiaries interest long term.

Our scientist is only one of a number of cases where the client claims to have not fully understood the full ramifications of the investment agreement; though he perhaps understood that he’d be buying stocks if they traded lower, he was obviously not aware of the extent to which the market would decline. Neither was his adviser, I am sure, but a precommitment conversation might have been helpful, particularly if the client was shown a graphic representation of the potential gains vs. losses, particularly if the investment had a ‘double-down’ component which would have caused him to buy more and more shares as they dropped. These features are sometimes included in order to create a higher yield on the note – essentially by selling a ratio of puts. The premium received for the option represents the coupon on the note, the increasing amounts of shares the risk. If the note was set to

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yield, eg eight per cent per annum, and the downside was explained in terms of a reduction of the yield (quickly turning into a large negative), perhaps a smaller amount would have been invested.

Now, I am not suggesting that clients be kept from making any investment they wish, though our regulators are increasingly imposing limitations on what investment advisers can sell them. What I am suggesting is that the client needs to separate risk assets from ‘legacy assets’ and manage them separately – risk assets that can take a 50 per cent reduction without imperiling the estate plan we have so carefully crafted. In other words, if we have established an estate plan that is intended to ensure that part of the client’s assets are protected for the next generation, we should not immediately accept the inclusion of heavily leveraged, structured products that could have a negative effect on the whole.

Charles Monat Associates’

Experience During The Crisis

Being in the business of very long-term asset protection and legacy creation, CMA have 40 years of experience advising clients on strategies that can help preserve key ‘legacy’ assets over the generations. During this time we have experienced numerous shocks to the financial system, including several ‘boom and bust’ cycles in Asia (by my count at least six ‘crashes’ since 1985) and we have seen firsthand the impact of aggressive management of financial assets and the use of leverage which often has not panned out as intended.

In our practice we tend to focus on the most conservative of instruments in order to create a ‘ring-fence’ around other assets.

In my previous article for IFC Review7 I dealt with some of the risk-mitigating benefits of employing life insurance as a zero-correlated asset class and also gave some ideas of how properly structured life policies can add an amount of certainty to trust assets. I suggested then, and remain convinced today, that incorporating a life policy in a legacy plan will serve to preserve some of the assets the client intends to pass on down the generations; preserve not just against taxes and other liabilities, but against the ever present temptation to allocate long-term assets to short-term investment opportunities.

During the recent crisis, particularly in 2008 and 2009, a number of our clients found themselves with margin calls to meet on their short-term portfolios and were able to meet these through policy loans; essentially accessing the cash values

in their policies in order to overcome a short-term liquidity squeeze, without having to give up the coverage. Policy cash values were unaffected by the large drop in financial markets, contrary to what was happening in the markets at large.

A typical example would be a client who had funded a US$10,000,000 insurance policy with around US$2,500,000 premium and by early 2009 had about US$3,000,000 of ‘cash surrender value’.

At this point, 90 per cent of this value would be available as a policy loan and could be used to mitigate an external liquidity event. As 2009 drew to a close, most of these loans had already been repaid as markets recovered, but most clients have yet to see a similar recovery in their investment portfolios.

Conclusion

If we are in the business of long-term estate planning and legacy creation, we must have structures and processes in place to explain the ramification of the clients’ choices with respect to leverage in all its ‘structured’ forms. As estate planners we deal with the (hopefully) very long term and must guard against being put in a position where the assets can be subject to short-term mood swings on the part of the client. I have had conversations with many clients who run the estate plan on the premise of ‘no risk, no return’ and though this may ring true, I have often wondered how much pain they would be willing to put up with in return for a given amount of gain. As we saw in 2008, this decision was often taken for them by stop-outs on margin accounts.

We always explain to our clients that there is a difference between ‘legacy assets’ and ‘investable assets’. Though the client may feel they are interchangeable, they are not. A meaningful conversation about the long-term objectives is indispensable and will prevent that difficult conversation in the future.

1. With apologies to Raymond Carver

2. The Business Times, Singapore, November 2, 2010 3. http://www.mas.gov.sg/for_consumers.html 4. http://en.wikipedia.org/wiki/Alpha_ (investment) 5. http://seekingalpha.com/article/102901understanding-negative-bond-yields 6. http://moneywatch.bnet.com/investing/ blog/wise-investing/bad-investmentsaccumulators/584/ 7. http://www.ifcreview.com/restricted. aspx?articleId=1564&areaId=0

08/02/2011 18:07

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IFC Review • 2011

Due Diligence Or Should We Say ‘Do Diligence’

By L Burke Files, Tarsus Trust Co Ltd, Nevis

T

HE POINT OF DUE DILIGENCE

is the process of doing one’s homework to correctly identify and understand the risks of a choice.

It is not the process of eliminating risk, just identifying that risk.

The errors most people make with due diligence is in their knowledge foundations and their mental constructs behind a choice. Most of the errors made by, what are otherwise purported to be very smart people, are the result of cognitive thought errors and a key modelling error. The thought errors are, Heuristics and Biases, and the Ludic Fallacy is the modelling error.

Why Do We Make These Cognitive

Thought Errors?

Heuristics

Heuristics are cognitive strategies people use to make assessments or judgments of a given probability simpler. We use heuristics to filter out informational noise

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so we can come to a choice quickly. These are also called intuitive inferences. This process of choice-making is used when we lack sufficient, unbiased information, to judge the probability of choice making. It is a process of generalisation.

Note the emphasis – heuristics strategies are used when we lack sufficient unbiased information to judge the probability of different outcomes.

This is the heart of why due diligence is so important – it helps gather that independent information.

Biases

When useful heuristics can lead to systematic errors these are labelled ‘biases’.

These inferences, filters, opinions are preconceived notions that we all have are the biases. The problem with biases is that if left unchecked or more importantly, we remain unaware of them and their impact, the errors produced can be systematic and large.

Due diligence exists, especially independent due diligence, to check those biases and alter the choice maker to their biases.

Some examples of biases are: • Authority Bias is moving your perception of something based upon the perception of an authority figure, boss or an expert.

• Confirmation Bias is interpreting data on events in such a way as to confirm what you already believe.

• Conservative Bias is ignoring the impact of new information and evidence.

• Halo Effect Bias is where you allow one positive trait, such as fame or prior success in another discipline, to spill over in areas requiring a more dispassionate assessment.

It would take only a few minutes of a commercial to see that many of the biases we have are used to sell us goods and services - just think of Authority and Halo Effect biases. A celebrity uses a toothpaste so we should use the toothpaste, or a business leader is discussing international diplomacy – because he has had success in a separate unrelated field we need to acknowledge that this experience has no bearing on the area he now pertains knowledge of. It does not take much imagination to see the many choices we make, each and every day, based solely on these biases or many other we possess.

Understanding our biases is the key to understanding the process of how we can and are led by others. People and corporations can use a number of our biases to get us to make choices that help them, often against our better interests.

Just think of how many credentials a conman may purport to have that give him instant credibility, or how we often

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mistake excellent manners and the services of a good tailor for credibility trust.

Due diligence helps us to overcome our choice making events that are led by others who use the knowledge of our biases to direct our choices. Here the due diligence process only serves as a check to save us from ourselves and our biases when making a choice.

Ludic Fallacy

The last significant impairment we need to be aware of is the ‘ludic fallacy’, from the Latin ludus, meaning ‘play’. It is summarised as “the misuse of games to model real-life situations”.

The fallacy is mistaking the map (model) for the reality, an inductive side effect of human cognition.

These statistical models (games) only work in some domains like casinos in which the odds are visible and defined.

One example is the following thought experiment: There are two people: Dr. John, who is regarded as a man of science and logical thinking and Fat Tony, who is regarded as a man who lives by his wits.

A third party asks them, “assume a fair coin is flipped 99 times, and each time it comes up heads. What are the odds that the 100th flip would also come up heads?”

Dr John says that the odds are not affected by the previous outcomes. Just because a coin has a head does not mean it has any memory. The odds are still 50/50.

Fat Tony says that the odds of the coin coming up heads 99 times in a row are so low (less than 1 in 633 billion) that the initial assumption that the coin had a 50/50 chance of coming up heads is most likely incorrect. More likely da fix is in and he knows a guy who told him so.

The ludic fallacy here would be to assume that in real life the rules from the purely hypothetical model (where Dr John is correct) apply. Would a reasonable person bet on black on a roulette table that has come up red 99 times in a row (especially as the reward for a correct guess are so low when compared with the probable odds that the game is fixed)?

The problem we get from the ludic fallacy is our reliance upon models to predict outcomes and our failure to be able to understand the limits of the model and to ask the right questions of the model’s output.

There have been so many frauds that one finds behind them very reasonable mathematical models.

As financial professionals how many times have we seen many of these models tied to MTN trading,

IFC_2011_Front_Section_Burke_Files_rev.indd 36

CFX deals, commodities trading models etc? I have also seen many well-meaning investment disasters predicated on great mathematical models of a given market.

The most stunning disaster I have seen to date was a model for value predictions in the art market. It was used to raise money and take investors’ money to speculate in art.

Math models for markets have two basic assumptions underlying a given market model. They are so basic we often do not even think of them. The first is that the goods of exchange are uniform and second that there is a fair and open market. The prices of art are prices on unique items and the exchange is not an open and fair market but one that is engineered, contrived and has very high transactions fees.

If you cannot even grasp the basic requirement for a model to be relevant, all of the remaining assumptions are the fiscal equivalent of cleaning up spilled milk with a rake.

The Real Impact...

When we fail to recognise our cognitive errors, when we fail to understand our numbers or models, we are subject to ‘Black Swan’ events (thank you Taleb). In statistics it is called ‘fat tails’, which are deviations well outside the norms of a bell curve that can occur on either side of the bell curve. They are rare events with significant outcomes.

From a risk management publication: “Earthquakes, typhoons, cyclones and hurricanes continued to devastate populous regions, and their increasing frequency and severity have stimulated new studies on causes, effects, and prediction, all part of the evolution of risk management.”

One of the assumptive errors in that statement is that Magnitude seven earthquakes are more frequent - in actually they are not, there are just more people around to witness them or have moved into areas that have earthquakes.

Another error is to link frequency with amount of impact or potential damages as in a natural disaster.

For example a one in 20 year storm versus a one in 100 year storm does not mean the 100-year storm is only five times as destructive - it may be 1,000 times more destructive.

An example of a rare event with large impact was the financial crisis of 1986, where the banks lost more money than they had cumulatively made over history! I myself, when I was a trader in commodities, have also seen moves in a market of over 50σ in a day. This type of move is earth

shattering if you are on the wrong side.

Rare big changes can be more significant that than the sum of many small changes. The idea is not to position ourselves, or our clients, to be exposed to these rare events if negative, unprotected.

So what does this mean for us as financial professionals? We will need to be more rounded in our approach to due diligence. No one person or department can do it all. A holistic approach is the best fit for most financial professionals and their organisation. We now need to look for both the common events and also the rare negative events and to be able to make informed choices.

The risks in the future are going to be more dynamic and their impact of either a correct choice or a wrong choice will be swifter than ever before. Ideally, one would want to expose themselves to the upside of one of these events - if they can be foreseen.

The Internet is contributing to greater fluctuations and quicker fluctuations for example JK Rowling and Harry Potter - everyone around the world is reading the same book - which, to my limited knowledge has not happened before in the history of publishing. This type of instant worldwide communication, with the resulting rapidity of cumulative market choices is now common.

Club goers in Los Angles text a photo of cool new shoes to a friend in London and Moscow - now the fad from Sunday is worldwide by Monday. Fluctuations have already increased a great deal and will grow larger for the foreseeable future.

We all make errors, it is part of life and a real part of the life of making choices.

Ideally, if we have a better understanding of how we cognitively make choices we may be able to make more informed choices and ones with more solid foundations.

Often, we abdicate our choice making ability and responsibility to mathematical models and mysterious algorithms.

These can be an aid, but they too have their limits. One of their limits is they rarely understand the impact of rare dramatic movements that I argue are going to be more common because of our reliance on these mathematical models and mysterious algorithms since so few are building them with the correct assumptions and failing to ask the right questions of the output. Those dramatic swings in culture and thus the markets will be more common and we must prepare for them with a holistic approach to our due diligence and risk management.

The most important part of due diligence is do diligence.

08/02/2011 18:09

37

IFC Review • 2011

Tax Information Exchange Agreements and Data Protection: Conflict and Balance

By Leo E C Neve LLM, Tax Advisor, Neve Tax Consultants, Rotterdam, Netherlands

A

GLOBAL ECONOMY WITH PERSONAL TAXATION on a

world-wide basis can no longer accept territorial limitations to its taxing authority. Increased cross border flows of income and capital require states to coordinate their efforts.

Territorial and sovereignty based limitations can no longer hinder the fight for fiscal justice. But fiscal justice can only be achieved by legal means and with respect for the fundamental human rights of each and every citizen and taxpayer. Exchange of a subject’s tax information is an infringement of the human right to data protection and self determination and can only be accepted by respecting the rule of law of a transparent authority.

The OECD issued a report on “Harmful Tax Competition”1. in 1998. The report dealt with the adverse consequences of global tax competition (also known as the ‘race to the bottom’). The report identified tax havens on the basis of four criteria: no or minimal income tax, lack of

IFC_2011_Front_Section_Neve_rev.indd 37

effective information exchange for tax purposes, lack of transparency with respect to ownership companies, and no substantial activity.

The only surviving criterion has remained the lack of effective exchange of information for tax purposes.

The report therefore concluded with the recommendation to provide for cross border exchange of information for tax purposes. All OECD member states, with the exception of Switzerland, Belgium, Luxembourg and Austria, agreed to the report.

These non-cooperative member states justified their position basically with the argument that they did not wish to end the bank secrecy provisions in their countries.

A serious revision of article 26 of the OECD Model treaty in 2002 by the tax committee of the OECD and the draft of a model TIEA (Tax Information Exchange Agreement) 2. led to new developments and practises. The OECD member states have forced the non-member states to accept the new ‘standard’ under pressure of being labelled ‘noncommitted countries’. The revision of the OECD Model took place in 2005 with the adoption of paragraph 4 and 5 to article 26.

The major change brought in by paragraph 4 is that the treaty parties agree to provide the requested information even when this information is not necessary for their own tax purposes (in the requested country).

The same applies for paragraph 5 that

provides that a treaty partner cannot refuse to provide banking information on the reason that it is held by a bank or financial institution. This paragraph thus ends bank secrecy.

Austria, Luxembourg and Belgium filed reservations to paragraph 5, while Switzerland filed a reservation against the whole of article 26. The Swiss were prepared to provide assistance only when the information is necessary for the application of the tax treaty and in the case of tax fraud.

Many states which were invited to commit to the new standard did commit, but had by the end of 2008 not delivered any information.

In the autumn of 2008 new scandals on stolen banking information led to a more severe stance by the G20 member countries. In their meeting in Washington on 15 November 2008 the G20 member states announced severe repercussions for those countries that continued to refuse to enter into effective information exchange with at least 12 member states of the OECD. The OECD secretariat had prepared a list of countries that had not converted to the ‘standard’ (the ‘blacklist’) or had not converted sufficiently (the ‘grey list’). In the meeting in London on 2 April 2009 the G20 decided to take protective measures against the noncooperative states and it was because of these measures that the Swiss Government decided on 13 March 2009 to withdraw its reservations to article 26 OECD in all.

The other non-cooperating OECD

08/02/2011 18:22

TIEAs

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IFC Review • 2011

member states, Austria, Belgium and Luxembourg, have done the same regarding their reservation to paragraph 5 of article 26. It is interesting to note that Switzerland had not, until recently, signed any TIEAs. It did, however, make amendments to existing DTAs, for example, with France, Germany, United Kingdom, United States and the Netherlands.

The latest development has been the launch of the so-called ‘peer review’ process. In a first step 18 jurisdictions will be reviewed as part of a three-year process approved in February 2010 by the Global Forum on Transparency and Exchange of Information. (For terms of reference, methodology and assessment criteria see the website of the OECD.) The reviews will be carried out in two phases: assessment of the legislative and regulatory framework (phase 1) and assessment of effective implementation in practise (phase 2).

The Standard

The standard for ‘effective exchange of information’ has two prongs – it must be ‘specific’ and it must be ‘justified’. This standard is implemented in the TIEA and in article 26 OECD Model.

Specific

A request is ‘specific’ if it relates to the tax affairs of an identified tax payer, which prohibits so-called ‘fishing expeditions’, that is a request for information “that is unlikely to be relevant to the tax affairs of a given tax payer”3. Fishing can also be described “as a roving inquiry, by means of examination and cross-examination of witnesses, which is not designed to establish by means of evidence, allegations of fact, which have been raised bona fide with adequate particulars, but to obtain information which may lead to obtaining evidence in general support of the party’s case”4.

Article 5 of the standard TIEA deals with the conditions applicable to a request for information. Such a request can only be made when the requesting party has no other means of obtaining the information, with the exception in the situation that obtaining such information domestically would lead to incomparable difficulties.

The requesting party must deliver a statement that the request is in conformity with domestic law and that the information sought would be obtainable under domestic law.

The request must be specific with

IFC_2011_Front_Section_Neve_rev.indd 38

regard to: • The identity of the person under examination or investigation (sometimes the identity can be given by other means than name and address).

• The period for which the information is requested. (This is relevant in relation to the entry into force of the TIEA. A TIEA can not authorise request for information retroactively, dating back to periods before the entry into force of the TIEA, unless it is for criminal tax matters; always take article on entry into force in consideration).

• The nature of the information sought and the form in which the requesting party would like to receive it. (Sometimes requesting party needs the information in specific format).

• The tax purpose for which the information is sought (more or less must be established that the information relates to the assessment, recovery or investigation/ prosecution of criminal tax matters).

• Grounds for believing that the information requested is held in the requested contracting party or is in the possession of or obtainable by a person within the jurisdiction of the requested contracting party.

• The extent known, the name and address of any person believed to be in possession of the requested information, Justified

The element of ‘justified’ is carried wit in the scope of the Agreement.

The requested information must be ‘necessary’ or ‘foreseeably relevant’ for the administration and enforcement of the laws of the contracting parties concerning taxes covered by the agreement, including information that is “foreseeably relevant to the determination, assessment and collection of these taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of criminal tax matters.”

A request is not ‘justified’ if the information sought is merely ‘useful’.

The crucial element is ‘necessary’ in the meaning of ‘foreseeably relevant’. Data is foreseeably relevant if in the concrete case at hand there is the serious possibility that the other contracting party has a right to tax and there is nothing to indicate that the

data is already known to the competent authority of the other contracting party or that the competent authority of the other contracting party would learn of the taxable object without the information.

It means that data collected by the requested party that appears not to be relevant or appears to be already in possession of the requesting party, shall not be exchanged. Of course it is not so easy for the requested party to verify if the data collected is foreseeably of relevance, and therefore the element of justification of the request becomes important.

The requested party must make its own assessment, which can be motivated and defended against scrutiny. It requires a concrete link or clue.

The request must be justified with respect to the reasons for believing that the information requested is foreseeably relevant to the tax administration and enforcement of the tax law of the requesting contracting party, and with respect to the person identified in subparagraph a).

Obligations Of The Requested Party

A TIEA is an agreement by which the requested party undertakes to provide information to the requesting party.

In the case that the information is not readily available, the requested party undertakes/commits to use all its investigative powers for the collection of the data, even if the requested party does not need the data for its own tax assessment.

Treaty parties that do not levy an income tax in particular will face a problem when having to investigate a certain subject in order to obtain the requested information. It will require these parties to introduce substantive legislation that authorizes the authorities to collect the information.

The TIEA provides for the obligation to introduce prevailing legislation, but there will be limits to the undertakings by the contracting parties.

The choice of which investigative powers to use is at the discretion of the requested party. It has also discretion in the allocation of resources and material to this end. Although it is not said in so many words, the obligations of the requested party are thus qualified and depend on availability of resources. The law must provide for the possibility, but the party does not need to allocate more

08/02/2011 18:22

39

IFC Review • 2011

Investigations Abroad

One of the additional obligations deriving from the TIEA is the obligation to accept a foreign official in an investigation. The commitment is subject to national rules. It does not commit the requested state to include such a possibility in its domestic rules, but if it does, it cannot refuse to accept the foreign visitors. Visitors are authorised to be present at an investigation, but are not

allowed to ask questions or inspect documents without the approval of the person under investigation.

This rule stems from UK Taxes Management Act, which allows the subject of the investigation to permit or refuse such an investigation. It gives a direct power to the subject of the investigation to refuse to be questioned in the investigation or have their documents looked at.

Protection Of The Data-Subject

Is the data-subject protected under the TIEA? A TIEA does not make much reference to the data-subject. The agreement is between states and does not contain clear provisions that are directly applicable to the data-subject.

It is not in the power of the data subject to challenge the discretionary authority of the requested state or to challenge the questions. All that is in the hands of the competent authority.

In relation to data protection there are more options. Within the European Union there are strict data protection rules, which prohibit and prevent the exchange of data with third countries and non-EU member states.

We will come to that soon. On the issue of confidentiality the TIEA often contains, besides the basic provision in

article 8, additional provisions in the protocol to article 8.

The basic provision in this respect is that the information received will be held confidentially and can only be used for the specific purpose for which the request was made. The ‘purpose-specific’ information can also be used for other purposes with the consent of the requested party that has provided the information.

The information may in general be disclosed in public court hearings and juridical judgements.

Violation of this ‘speciality’ rule can give rise to damage and compensation. This is specifically the case with respect to items subject to legal privilege, or any trade, business, industrial, commercial or professional secret or trade process, provided that information described in paragraph 4 of Article 5 shall not by reason of that fact alone be treated as such a secret or trade process. These items do not need to be exchanged. Whether or not an item is a commercial or professional secret can only be said by the subject of the investigation. He should then be made aware of the fact that the information has been obtained and will be exchanged, unless he invokes an exclusion. In such situations the

TIEAs

than reasonable resources. Because certain treaty partners will always be on the requesting side, it is reasonable that these parties give benefits to those countries that will be on the requested side. The Netherlands, for example, has in the beginning given other treaty benefits to the contracting party. With Jersey and Guernsey additional treaties have been signed with respect to participation exemption applicable to companies resident in Jersey and Guernsey. Also an undertaking to enter into full double tax agreements is sometimes a good compensation. But since the pressure on non-OECD members to enter into TIEAs has mounted , the Netherlands has refrained from giving such additional undertakings.

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08/02/2011 18:22

TIEAs

40

IFC Review • 2011

information will only be exchanged after a notification procedure - that will be under his control. But it may be more difficult in situations of joint investigations or when no notification procedure is applied. These situations should be negotiated thoroughly before the information is passed on to the authorities.

Almost all TIEAs contain the provision that the involved person shall be informed about the nature of the information obtain and the use to which that information will be put.

The requirement can be passed if it is in the interest of the investigation.

It is the requesting state and not the information supplying state that has the obligation under the TIEA to inform the data subject 5. In all aspects the data protection rules that remain applicable are those of the requested state. The obligation to inform the data subject is (often) made conditional upon an application by the data subject to the requesting authority; which is off course difficult in case the data subject has not been informed of the data exchange. In the Liechtenstein procedure, the data subject will already be informed once the request has been received by the Liechtenstein authority, unless this jeopardises the investigation. But in many cases it will be a surprise to the data subject that information on him has been exchanged.

Conflict With Data-Protection

The rules that relate to informing the data subject must not conflict with EU data protection rules. Firstly, an exchange is possible if it is necessary for a given purpose. Secondly, the data exchanged should be proportionate with the purpose, which precludes automatic and spontaneous exchange. Further, data can only be exchanged with third countries if that third country has a data protection law which is adequate and offers the same protection as the European system. Unless there is a decision of the European Commission to that effect, cross border exchange of information is forbidden 6. So, European member states can receive information from outside the EU, but cannot provide information outside the EU, unless there are compatible systems.

Most TIEAs, either directly in article 8 or through the protocol, provide for data protection at a level equivalent to the ‘acquis européenne’. But that is

IFC_2011_Front_Section_Neve_rev.indd 40

not sufficient, because what matters is whether the requesting country has domestically a sufficient data protection system. Under the European system, the data controller is obliged to inform the data subject of the exchange of information relating to him. Almost all non EU countries, except for Liechtenstein and Switzerland, do not respect that strict legal obligation.

The data subject has a right to verify the accuracy of the information before it is exchanged, has a right of adjustment and has a right to compensation if it turns out that incorrect information has been exchanged. In most TIEAs the data subject has only recourse to his own government and not on the supplying agency. But based on the law of the supplying agency, he may have recourse to that agency. Therefore the TIEA provides that, between the states, the supplying agency will have recourse to the requesting agency in case it suffers damages because of the exchange.

The conflict between data protection and information exchange is far from being resolved. The OECD has stated that: “the rights and safeguards secured to persons by the laws or administrative practice of the Requested Party remain applicable to the extent that they do not unduly prevent or delay effective exchange of information”.

The problematic phrase is “to the extent”. The OECD wants to make domestic rights and safeguards subordinate to an effective exchange, which of course will not work. Germany has in most of its TIEAs deleted the sentence “to the extent etc”. In the conflict of norms, it is not said that ‘effective exchange of information’ is of a higher priority than complying with data protection rules.

Data-protection has increased since the promotion of article 286 TEC into article 16 TFEU (Principles of EU): “1.

Everyone has the right to the protection of personal data concerning to them”.

It has been promoted from article 8 in the Charter of Fundamental Rights of the European Union, which is made directly applicable under article 6 TEU (old art 6 TEU) to being equivalent to a treaty provision. Article 8 reads: “1. Everybody has the right to the protection of personal data concerning him or her.

2. Such data must be processed fairly for specified purposes and on the basis of the consent of the

person concerned or some other legitimate basis laid down by law.

Everyone has the rights of access to data which has been collected concerning him or her, and the right to have it ratified.

3. Compliance with these rules shall be subject to control by an independent authority.”

Data protection is a fundamental human right and cannot be made subordinate to effective exchange of information, even if treaty partners have an obligation to create effective procedures to secure exchange of information. In can only be done with respect for domestic rights.

Conclusion

The exchange of fiscal information is an infringement of a fundamental right, protected by the Charter of Fundamental Rights of the European Union and by article 16 of the Treaty on the Functioning of the European Union. It can be justified if it necessary for a given purpose, proportionate and subject to supervision and redress. Tax information exchange is not an exthird pillar area (police cooperation and judicial cooperation in criminal matters), but even it is was, full data protection would still apply.

A TIEA will establish a legal basis for a specific transfer of personal data, but it will not constitute a legal framework for data protection.

Such must be found in the domestic law of both the supplying and the receiving country. Without that framework there can be no exchange of information. There is no guarantee that individuals’ rights are actually respected. It is a right of every citizen to decide on the disclosure and use of his or her personal data.

1. OECD report, Harmful Tax Competition, an emerging global issue. See www.oecd.org.

2. OECD, see www.oecd.org/taxation/ 3. OECD commentary number 5, ad. art 26 paragraph 1.

4. Kerr LJ, in Re State of Norway’s Application (No 1), Court of Appeal, Civil Division, All England Law reports/1989/Volume1/ReState of Norway’s Application (no1)-[1989]1All ER 661, pag 23 Issue E: Fishing.

5. See for an example TIEA BRD-Gibraltar, protocol 1, sub e 6. Approved countries are: Argentina, Australia, Canada, Faroe islands, Guernsey, Isle of Man, Jersey and Switzerland.

08/02/2011 18:23

41

IFC Review • 2011

Is Privacy the Major Casualty of the Information Age?

By Chris Evans, CEO, Foreshore, Channel Islands1

“

PRIVACY IS DEAD; GET OVER IT”.

Whilst there’s some dispute over whether Scott McNealy, the founder of Sun Microsystems and a pioneer in computer networks, ever actually made this throwaway comment, it does rather succinctly sum up what many people feel in the age of Facebook and the ubiquitous surveillance camera.

The demise of privacy has been proclaimed on many occasions in the past, and it’s fair to say that it seems to be under a sustained attack from different quarters at present. The recent Wikileaks disclosures and the frequent stories in the media of banking or government records going astray certainly reinforce the view that the age of privacy is dead or dying.

Certainly, both the ‘means’ and the ‘ends’ are being challenged. Rapid developments in technology are most often blamed for undermining the

IFC_2011_Front_Section_Evans.indd 41

‘means’ as information today is recorded in a fashion that is easy and cheap to store, duplicate and disseminate. And despite the exponential growth in the volume of business information, these processes are getting even easier and cheaper to the point that copying and communicating data has become commonplace and is an unconscious activity for many people.

The drive to increase global transparency is ramping up the pressure on the ‘ends’ or objectives of privacy. Consider how in banking and financial services the term ‘privacy’ has become a dirty word with the inference that it’s synonymous with concealment. Many companies involved in wealth management and professional services now prefer to use the term ‘confidentiality’ to describe their duty of care relating to personal or corporate client data, to avoid the stigma associated with ‘privacy’.

I am of the view that whilst privacy is going through challenging times it’s alive and well and, in business and in our personal lives, there is still a real need for it. Despite the growing threats to privacy, a structured approach to information security is still the best way to ensure that corporate information that is meant to be private is kept that way.

In the media we really only hear about security when it fails. Politicians and the media unwittingly distort the issue because they both have an agenda of provoking an emotional response.

However, those in business have to evaluate the statistical risks and deal with them rationally. Failure to do so can lead to assumptions on risk that result in totally unnecessary precautions at one end of the spectrum to potentially reckless behaviour at the other.

However, to blame developments in

08/02/2011 18:24

Information Technology

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IFC Review • 2011

technology for the perceived continuous erosion of privacy really misses the point and is equivalent to shooting the messenger. This is because a lot of people wrongly concentrate on the tools and methods employed in protecting (or attacking) security rather than those who are employing them. Simply put, people not technology, represent the bigger security threat and that is where the attention for mitigating risk should be focused.

A principal of a business once said to me that he was relaxed about the intrinsic security of sending client confidential matters by email because he knew that all the text in an email was converted to electrical pulses when it was sent and was therefore (in his opinion) indecipherable to all but the intended recipient. He couldn’t have been more mistaken. In fact an email sent over the internet is akin to sending a post card that is photocopied by every single entity that handles it on its journey. Ignorance of the risks is a significant factor of poor security.

Not surprisingly many security breaches are down to humans and most generally - insiders. A survey undertaken in 2008 by PricewaterhouseCoopers on behalf of the UK government department of Business, Enterprise and Regulatory Reform (BERR) stated that “32 per cent of information security attacks originated from internal employees while 28 per cent came from ex-employees and partners…. similarly, law enforcement experts in Europe and the US estimate that over 50 per cent of breaches result from employees misusing access privileges, whether maliciously or unwittingly.”

Sometimes the human failings are intentional, such as whistle blowers and those who are operating to another paymaster’s agenda such as in the wellpublicised case of alleged tax evasion by a major Swiss bank. More often these failings are due to negligence, lack of understanding of the issues or the poor implementation (or absence) of a security policy. Effective policy remains the single most potent tool for the protection of privacy and this is unlikely to change in the near future.

New developments in technology will continue to shift the balance of power regarding the safekeeping of data.

For example easy data proliferation clearly increases the risk of inadvertent disclosure. It is not difficult to imagine an email with a highly confidential document attached being accidently sent to the wrong recipient, something that really couldn’t have happened very easily

IFC_2011_Front_Section_Evans.indd 42

when all correspondence was executed on paper. The technology makes it possible but someone has to make it happen.

Easy proliferation can in fact increase the security of information when combined with techniques that can virtually guarantee that vital digital information cannot be lost or destroyed, such as encryption or techniques designed to render the data anonymous. Both of these are much more easily achieved on electronic data than with physical paper records and can render the data meaningless in the event of unauthorised or inadvertent disclosure. Interestingly this technique appears to have been used

by Wikileaks, as a form of insurance, where an encrypted file has been distributed around the internet and exists in thousands of instances. Once the key to decrypt the file is in the public domain, any attempts to block the publishing of the contents will be futile.

The truly surprising, if not shocking, aspect of the Wikileaks revelations (if the press reports are accurate) regarding the US diplomatic cables wasn’t the content, much of which could have been reasonably assumed, but the sheer numbers of people to whom so much classified information seems to have been made available. Security and availability are at opposite ends of the scale. The more you want of one, the less you get of the other. It is the classic trade off as Bruce Schneier, a highly respected security expert, describes it: “Security is a trade-off … we get security by giving something up: money, time, convenience, capabilities, liberties, etc.

Sometimes we make these trade-offs consciously, and sometimes we make them unconsciously.”

As the disclosure of confidential information becomes a more common and potentially more profitable practice, businesses must enforce policy internally and scrutinise third party suppliers to ensure that the privacy of data is upheld. Data should be valued like money – in fact it should be more highly valued because permanently lost data cannot be as easily written off or earned again. Furthermore data, whilst valuable in the right hands, can be positively toxic in the wrong ones.

The need for responsible data handling is commonly addressed by the use of ‘best practice’ guidelines that are designed to ensure compliance with specific laws and regulations relating to data management. One downside of

this approach is that it is mechanistic and is often treated by those who are responsible for policy enforcement as a ‘box ticking’ exercise. A better approach is to get the best practices embedded within the culture of daily working procedures. As trite as it sounds, information security is often described as a journey not a destination. An even more innovative approach is to use effective information security as an actual business driver or even a competitive differentiator, which turns security from a compliance obligation into a core competency.

The future involves businesses having to handle ever-increasing volumes of sensitive data, stored in a greater variety of physical locations. The increasing trend of buying computing resources as a utility from a remote service provider, often referred to as ‘Cloud’ these days, is a boon to business as it brings many advantages, such as lower resource and infrastructure costs. However, many still feel that the security of private data can be less well guaranteed in the hands of a third party because that is the natural emotional response.

Ironically it is likely to be safer in the hands of a competent third party because, in order to generate the required level of trust, third party suppliers invite rigorous examination of their business, systems and procedures and inevitably provide a more formal relationship than anything that is likely to exist within an organisation where core business priorities often (wrongly) take precedence over the protection of data.

Businesses with effective security policies have well defined data protection objectives, they have moved away from IT systems protection because the boundaries have become less distinct and they concentrate on protecting sensitive data irrespective of its location or the type of system used to process or store it.

Reputations take decades to build and seconds to destroy. Savvy CEOs recognise that the security of data and the guarantee of client confidentiality have direct implications on the bottom line and therefore belong high on the business agenda, not just in the IT department.

1. Chris Evans is the CEO of Foreshore a Channel Islands based Internet services company that provides secure hosting, email and data storage solutions to financial services companies world wide.

08/02/2011 18:24

The Jurisdictions

IFC_2011_The_Jurisdictions.indd 43

08/02/2011 18:29

Antigua

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IFC Review • 2011

Antigua: A New Day Dawns

By Brian Stuart-Young, Chairman & CEO, Global Bank of Commerce, Antigua

A

NTIGUA AND BARBUDA IS BEST KNOWN for its 365

beaches but, having established its International Financial Centre in 1982, one year after its independence from the United Kingdom, it is now a favourite destination in the Eastern Caribbean for both tourism and international financial services.

Notwithstanding the economic challenges created by a difficult world environment, Antigua and Barbuda received the commitment of both its government and private sector to ensure a financial services infrastructure which can respond to the special business needs and financial services of not only Caribbean but also international client relationships. Learning from mistakes made in major money centres, the jurisdiction has successfully reshaped its regulatory and business operations to herald the dawn of a new day in paradise.

A Regulatory Environment for Investment

The jurisdiction has a robust mutual legal regime which facilitates a transparent process under which information may be exchanged. It was one of the first Caribbean jurisdictions to establish a Tax Information Exchange Agreement with the United States, and has held tax treaties with the United Kingdom and the Caribbean Commonwealth Community for many years. It successfully completed more than 20 tax information exchange agreements by the last quarter of 2010, which made it fully tax compliant with the OECD requirements and which placed it on the OECD’s ‘white list’.

Mutual legal assistance in anti-money laundering and financing of terrorism matters is also provided for under the Mutual Assistance in Criminal Matters Act (MACMA). The MACMA provides for mutual assistance for all countries

that are members of the British Commonwealth, the United States of America and for other countries for which Antigua and Barbuda has signed mutual legal assistance treaties (MLATs). There is no legal or practical impediment for rendering assistance where both countries criminalise the underlying offence.

The jurisdiction also benefits from being a member of the Egmont Group through Antigua’s supervisory authority, Office of National Drug and Money Laundering Control Policy (ONDCP), which assists communications between Financial Intelligence Units to prevent money laundering and the financing of terrorism. The governing legislation for the management of its international financial centre is regularly updated to ensure compliance with international standards.

An important feature of earlier legislation is the prohibition on Antigua’s banks, which provide international financial services, to accept cash deposits. This requirement has eliminated any threat posed by the anonymous nature of cash, making it necessary that all deposits must be made via a banking instrument, either a wire transfer or a bank cheque. In both cases the bank issuing the instrument will have been required to obtain customer information and practice due diligence on the remitting party. Therefore, if any suspicious circumstances should occur in respect of a deposit to an account in Antigua, the beneficiary bank will have a clear path on which it can direct an investigation. This regulatory innovation

by Antigua has been well accepted by its international service banks, and welcomed by their correspondent banks.

Banking Supervision

The regulatory environment of banks www.ifcreview.com/Antigua

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IFC Review • 2011

safe and ethical depository of foreign currencies and the delivery of wealth management solutions. The jurisdiction undergoes regular peer evaluation by the Caribbean Financial Action Task Force (CFATF) as well as reviews by the World Bank and the IMF, all of which give enhanced scrutiny to the operations of the financial centre.

The supervision of banks is divided between domestic commercial banks, under the Eastern Caribbean Central Bank, and international service banks as well as non-financial institutions such as insurance companies, credit unions and money service businesses, which are licensed and regulated by the Financial Services Regulatory Commission (FSRC) and must maintain internal policies to govern compliance with international standards. The requirements for banks include annual third-party audits of their anti-money laundering (AML) and antiterrorist financing (ATF) practices which must be submitted to the ONDCP and the FSRC for review.

The jurisdiction has been aggressively emulating the actions

financial systems. Annual financial audits are mandatory and are conducted by resident offices of well recognised auditing firms including PriceWaterhouseCoopers, PKF and KPMG. Correspondent Banking Relations

A key issue for indigenous banks in Antigua and the Caribbean is that these banks have no parent offices located in major financial centres, and therefore must obtain correspondent banking relationships. These Caribbean banks require relations with other banks located in the major money centres, through which they can conduct international cash clearing and transfer services, and are entirely reliant on such correspondent facilities from those banks that provide intermediary services. In an initiative to grow the compliance culture in the region, the Caribbean Association of Indigenous Banks successfully launched The Caribbean AML/CTF Principles for Correspondent Banking, and it demonstrates the commitment of Caribbean owned financial institutions to

Guidelines, are a core set of standards to which member banks subscribe by having their board of directors agree to adopt and ensure the compliance of their institution. Banks subscribing to these Principles, including those from Antigua, are identified on the CAIB website www.caribbean-principles.com.

Antigua

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email providing international financial services meet and work with best practices. These taken worldwide to strengthen subject ‘ej’ AML/CTF is strongly subscriptions@ifcreview.com supervised to ensure the Principles, with associated the regulatory oversight ofwith all the

Business Centre

Small jurisdictions such as Antigua have few natural resources other than sun, sand and sea, and therefore the supply of services is critical to the success of the economy. In addition to tourism, financial and information technology services play an important role to support the economic health of the community.

Caribbean financial centres compete with jurisdictions in many other regions and have had to identify strengths in certain niche areas in order to survive.

In the case of Antigua, the island has seen a growth in business with some Latin American jurisdictions with which it has resident diplomatic offices, and has also gravitated towards providing technology driven financial services.

Keep up to date with developments within global wealth management by registering for our free weekly world news round up, delivered every Friday to your inbox.

www.ifcreview.com/Antigua

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Antigua

46

IFC Review • 2011

The combination of well-regulated financial services, world class communications, driven by the telecom giants Cable and Wireless and Digicel, an English-speaking and skilled workforce and strong professional resources offers a positive environment for electronic and international business services. Antigua provides ideal support for information technology services and Internet-driven business opportunities that demand more sophisticated financial services.

The Antigua & Barbuda Investment Authority, established by the Government, assists the investment process and identifies related incentives for certain investment categories.

International business companies (IBCs) will also benefit from a taxneutral business environment.

Modern financial services include internet banking, mobile banking, wire transfers in major currencies, corporate and trust administration, pension and fund management, international payroll services, electronic commerce facilities, that allow online sales of international services, and products and the development of multi-functional prepaid debit cards to facilitate international small payments.

These are powerful financial tools that enable business people to compete in an international and open market environment. The remarkable growth of the internet is impacting economies around the world, and Antigua is no exception. As an independent nation, it is well positioned to attract international business for electronic commerce. The government has passed the relevant legislation to govern e-commerce, the Electronic Transactions Act, and also to control abuse of electronic systems and protect the safety of online activity.

The government is also committed to operating as an e-government and has positioned Antigua to become a leading Caribbean IT centre.

One growing sector of Antigua’s tourism product is a sophisticated yachting industry, which uses Antigua as a base to receive charters, stock up on supplies, and to conduct maintenance.

Some banks provide important services to this community, such as payroll cards for crew members. The yacht owner will establish an account with an international bank and be able to provide a Visa branded prepaid card on which the crew member’s salary will be loaded.

The crew member is able to use the card as a virtual bank account, with online

access to its transactions and balance, and even the ability to remit funds home to an identified family member on the basis of a card to card transfer. The processing of these transactions is now migrating to platforms that support cell phone transfer messages that are linked to card to card transfers.

Processing Services

One of Antigua’s banks sponsors the Global Processing Centre, Ltd., which is a world class processing facility for electronic financial transactions that hosts a platform to support all types of issuing and acquiring transactions for ATM, Point of Sale and web based Ecommerce services. This helps to broaden the scope of services that can be arranged and offered from the jurisdiction, including micro-finance services, international remittances, and a variety of payroll and employee benefit programs, all of which can be successfully managed on payment cards. The processing and data centre helps to support enhanced due diligence for card holders by filtering all cardholder identities through the OFAC list of terrorists and drug offenders, and by hosting customer information details on card holders for all card programmes.

The local processing platform is expanding to support mobile commerce, which will allow it to play a greater role in facilitating small payments worldwide.

The convergence of telecoms into the payment arena is rapidly changing the face of small payments. As the global remittance market continues to rebound, there is a strategic opportunity for Caribbean financial institutions to expand into the mobile payments sector local services and take advantage of new and emerging markets. Antigua has the potential to provide interconnection and interoperability technology and knowhow for servicing mobile users in the region and globally through an enriched processing platform with a new range of solutions focused on the fast growing domain of mobile financial services.

These processing services extend the reach of financial services to unbanked and underbanked people throughout the world by leveraging the convergence of mobility and finance.

Wealth Management

Antigua has become attractive to international investors from Latin America, Europe and the Far East seeking private banking services and wishing to balance their portfolios with certain

commodity and foreign exchange trading services, and who may be interested in property investment in the jurisdiction.

Increasingly, investors have been purchasing properties in Antigua and Barbuda as vacation and second homes.

These investments also qualify them for Permanent Residency, and they can obtain advice from any of the major accounting firms with offices in Antigua such as PriceWaterhouseCoopers, PKF, KPMG or their own advisory resources for tax planning arrangements. Several major real estate developments are being undertaken in Antigua and Barbuda, and interest from international investors has been significant.

Antigua’s financial centre has legislation to govern the operation of various types of formal structures often required to support wealth management strategies, including the establishment of trusts and foundations and the incorporation of international businesses and limited liability companies. There is a fully experienced and professional sector comprised of attorneys-at-law and licensed company providers that can assist in the clearing of names, registration of corporate entities and referring clients for bank account relationships in the jurisdiction.

Antigua’s International Financial Centre

Antigua’s International Financial Centre has demonstrated its return to stability and growth as its public and private sectors overcome the challenges posed by the world financial crisis and has reorganised itself to meet the requirements of modern business and the surge of global demands for financial solutions for international business, wealth management and e-commerce services.

Strong and secure communications defy geographic constraints by putting the bank branch in your backyard and full banking services at your fingertips.

The expansion of technology-driven facilities to support mobile payments will position the jurisdiction to be able to attract micro-finance and payment services. It is redefining the role of international banking relationships and complimenting global business opportunities that need modern financial solutions. The combination of well-regulated financial service providers and the ability to offer technology-driven financial services in a stable environment makes Antigua and Barbuda a premier location for doing global business. www.ifcreview.com/Antigua

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Antigua and Barbuda, West Indies.

Eastern Standard Time.

Approx 90,000 St John’s.

VC Bird International Airport.

English.

Eastern Caribbean dollar (EC$); US$ is widely accepted.

Democratic monarchy. +268.

Common law.

Tourism, financial services, banking/accounting/legal, IT services.

Antigua

Antigua - Fact File

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

10-25%.

0% for international business corporations.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

USD, GBP, EURO, CAD. No minimum except for licensed companies.

None.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Not common.

One-two days (licensed companies at least one month).

US$300 plus Registered Agent Fees.

US$300 plus Registered Agent Fees.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None except for licensed companies.

Yes except for licensed companies.

Annual.

shareholders

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency

To registered agent and also to Financial Services Regulatory Commission for licensed companies.

Yes, provided beneficial ownership is recorded with registered agent and updated.

One. No, but may be registered by registered agent.

Annual.

accounts

Annual return Audit requirements

No, except for licensed companies.

Licensed companies.

other

Registered office

Domicile issues

Company naming restrictions

Must be in Antigua.

Import and export option available.

Must include ‘limited’, ‘corporation’, ‘incorporated’ or the corresponding abbreviations or the foreign equivalent.

www.ifcreview.com/Antigua

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Austria

48

IFC Review • 2011

The Austrian Group Taxation System

By Erich Baier, MBA, LLM (Int’l Tax Law) TEP, Certified Tax Advisor, Vienna, Austria

U

NTIL THE END OF 2004 AUSTRIA APPLIED THE SAME ‘Organschaft System’ as

is currently still in force in Germany.

In 2005 Austria implemented a new group taxation system which is second to none worldwide. The basic principles of the new group taxation system include: • combining all fiscal results of financially integrated subsidiaries in the hands of the group parent; • no necessity for an economical and organisational integration; • no necessity for a profit and loss transfer agreement.

To form a group for tax purposes certain conditions have to be met. The Austrian company has to hold a stake in either a domestic or foreign subsidiary of more than 50 per cent and has to have the majority of voting rights. Furthermore, the group member has to stay within the group for at least three years. The group parent has to file a petition seeking the approval for such a group from the tax authorities.

Provided that these conditions are met and the group is accepted by the tax administration, which it usually is, the benefits for the whole group can be very interesting and are laid out below.

No More Taxes At The Level Of Domestic Subsidiaries

With regard to domestic subsidiaries integrated into a group no more taxes are levied upon the income of the subsidiary.

Profits achieved by a domestic group member are allocated to the parent company, which has to include the profit of the subsidiary in its own tax base.

Losses suffered by the domestic subsidiary can be set off from the tax base of the group parent company.

In the case of domestic subsidiaries integrated into a group, 100 per cent of the profit or loss of the subsidiary is allocated to the parent company, irrespective of the percentage of shareholding the parent company has in its subsidiary. See Table 1.

Foreign Group Members

With regard to foreign subsidiaries the resultant attribution is different.

Where the foreign subsidiary achieves a profit this profit is disregarded for tax purposes, because there are no taxation rights of Austria existing. Dividends distributed by foreign subsidiaries to the Austrian company are tax exempt, capital gains resulting from the sale of shares of foreign corporations are also tax exempt provided that the Austrian company holds 10 per cent of the shares for at least one year.

Nevertheless losses of foreign subsidiaries, provided that the Austrian parent company has included these subsidiaries in the group, are allocated to the group parent with an amount equivalent to the percentage of shareholding. See Table 2.

These foreign losses have to be calculated according to Austrian accounting standards.

Foreign Subsidiary Makes A Loss Carry-Forward

If a foreign subsidiary is using a loss to carry it forward against a profit, these losses, which previously have been set off from the Austrian domestic tax base, have to be recouped into the hands of the Austrian company which used the loss to compensate its other taxable income.

But taking into consideration that www.ifcreview.com/Austria

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IFC Review • 2011

Table 1

be included into the taxable income of the Austrian parent company when the group member leaves the group within a period of three years after it became a group member.

No losses have to be recouped by the Austrian group parent in the case that the foreign group member is liquidated or goes bankrupt.

Indirect Participation Via A Domestic Or Foreign Partnership Or Corporation

The Group Taxation system also works if the group parent is participating only indirectly via a domestic or foreign partnership or a corporation in a domestic or foreign group member.

The graphic on the following page, Table 3, explains how this works and in the case of the foreign group member the general regulation applies that only this percentage of losses (profits stay tax exempt in Austria) are allocated to the group parent, which is equal to the direct or indirect participation of the group parent in the foreign group member.

Tax Deductible Amortisation Of Acquired Shares

Another key feature of the Austrian Group Taxation System is the possibility for the group parent to amortise 50 per

Group Parent

Result Attribution

100%

Nets its own income with the income of the group members 55%

Group Parent

NO TAX is levied at the level of group members

Table 2

loss attribution to Austria - 63

No taxation in Austria

Austria

63%

Foreign country

Group Parent

Group Parent

Profit 100

63%

63%

Loss 100

cent of the acquisition price of the shares of a domestic corporation over a period of 15 years.

The amortisation basis is defined as follows: “Acquisition price of the shares minus equity of the company defined according to the Commercial Code minus hidden reserves in the fixed assets which cannot be amortised or depreciated (eg, land, other participations).”

An example may illustrate this regulation: A corporate investor is acquiring the shares of an Austrian target company for an acquisition price of €1,000.

The Austrian company reflects equity as defined by the Commercial Code of €200 and has hidden reserves in the fixed assets of another €200. The difference between the acquisition price of €1,000 and the equity and the hidden reserves amounting to a total of €400 is €600 and this amount can be amortised over a period of 15 years thereby leading to an annual tax deductible amortisation of €40.

Austria

the foreign losses for Austrian tax purposes have to be calculated according to Austrian accounting standards and that for example, Austria has no debt equity ratios or thin-cap rules, the losses of the foreign subsidiary, calculated according to Austrian standards, will always be bigger than the losses calculated according to local standards of the foreign subsidiary. And only these losses, calculated according to the standards applicable to the subsidiary according to local regulations have to be recouped into the hands of the Austrian group parent. It might even be that according to different accounting regulations the foreign subsidiary might show a profit, whereas the result of the foreign subsidiary, calculated according to Austrian regulations, leads to a loss, which can be set off from the Austrian domestic tax base.

In such a case the Austrian company of course does not have to include a previously deducted foreign loss into its tax base, since the foreign subsidiary will not apply a loss-carry forward, such a loss-carry forward only coming into existence when calculated according to Austrian accounting standards.

Losses of a foreign subsidiary used to compensate the other taxable income of the Austrian group parent have also to

Leveraged Acquisition Of Austrian Companies

Taking into consideration that Austria does not know any debt equity ratios or thin cap rules a leveraged acquisition of target companies in Austria in combination with forming a group build an optimum of legal tax minimization.

The following example illustrates the far reaching benefits of the Austrian Group Taxation System.

Consider that an investor wants to acquire an Austrian company with the help of a loan. He will form an Austrian NewCo, will leverage it with funds from an offshore company and the Austrian NewCo will acquire the shares of the Austrian target company, which is reflecting a profit of €3m exposed to the statutory flat 25 per cent corporate income tax, leading to an annual tax burden of €750,000.

Assume that the acquisition price of the shares amounts to € 12m and the lender will charge six per cent interest for this loan.

Provided that the interest rate of six per cent for the loan facility of €12m is at arm’s length the interest paid is fully tax deductible and is not exposed to any withholding tax at source.

Since the Austrian NewCo has formed a group with the acquired subsidiary the subsidiary no longer is exposed to

www.ifcreview.com/Austria

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IFC Review • 2011

IFC Review • 2008

of these companies, but in the hands of Table 3 the Austrian NEWCo. Interest for the Group Group Group loan granted by the foreign lender is Parent Parent Parent fully tax deductible and not due to any withholding taxes in Austria. 50 per cent 80% 80% 80% of the acquisition price of the shares in the Austrian Hotel GmbH can be Partnership Group member A Group member A amortized over a period of 15 years by the Austrian NEWCo and reduces its tax base. Losses resulting from the Bulgarian 100% 100% 100% Hotel company can be set off from the tax base of the Austrian NEWCo. Profits of the Austrian Hotel GmbH Group member B Group member B Group member B and the new Austrian Hotel GmbH are only taxed on the level of Austrian 80 % of the results 100 % of the results 100 % of the results NEWCo where they are compensated of B are allocated to of B are allocated to of B are allocated to by the losses of the Bulgarian Hotel group parent group parent group parent company, the interest paid for the loan and the amortisation of 50 per cent of any taxes, the profits achieved by this amortisation of €400,000. This the acquisition price of the shares of the Austrian Hotel GmbH. subsidiary are allocated to the group amortisation is tax deductible when defining the tax base of the Austrian parent, the Austrian NewCo, where Conclusion these profits can be netted with the own parent company.

The Austrian Group Taxation System is expenses of the Austrian group parent.

The calculation of the tax base of the another cornerstone of the already very As mentioned above 50 per cent of Austrian parent company looks like as friendly tax system in Austria, offers farfollows: the acquisition price of the shares can be ranging possibilities for cross-border tax amortised over a period of 15 years and Profit allocated from the subsidiary to optimisation within a group and offers the group parent 3,000,000 this amortisation is fully tax deductible. material support in cases of mergers and Thus, 50 per cent of the acquisition - interest for loan - 720,000 acquisitions. price is €6m,nwhich leads to an annual - amortisation of acquired shares

- 400,000 tax base 1,880,000 This profit of €1,880,000 is then exposed to the flat 25 per cent corporate income tax which leads to a tax burden of €470,000.

Taking into consideration that the tax burden of this company was €750,000 before it was integrated into such a group, and forming a group with the target company leads to a tax saving of €280,000 per year, one can see how helpful this group taxation system is and how tax efficient certain merger and acquisition transactions can be structured.

47

Austria

Austria

50

Conclusion

Taking into consideration that Austria has a very large tax treaty network, currently with 89 countries, the most recent with Hong Kong, which came into force on January 1, 2011, furthermore considering that cross-border mergers, spin-offs, splitoffs and similar transactions can be carried out tax-free as laid down in the Austrian Reorganisation Tax Act and considering the fact, that Austria has a very cooperative and open-minded tax authority with a high level of education, it certainly worth considering using Austria as a starting Diagram 3 point for international transactions.

Full range of corporate and trust services

www.ifcreview.com/Austria

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Austria - Fact File general overview

Central Europe.

Greenwich Mean Time +1.

8,200,000.

Vienna.

Vienna, Linz, Salzburg, Graz, Klagenfurt, Innsbruck.

German.

Euro.

Republic. +43.

Civil law.

Tourism, high-tech, biotech, financial services.

Austria

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

Progressive tax rate (up to 50% when tax base exceeds 51,000) numerous exemptions and tax incentives.

Flat 25%, capital gains (cross-border) and inter company dividends (domestic and foreign) tax exempt, far-reaching group taxation system (domestic and foreign losses of sub´s tax deductible).

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies

Minimum authorised capital

Minimum share issue

No restrictions.

GmbH (company with limited liability) €35,000. AG (stock corporation) €70,000.

Private foundation €70,000.

One (AG , GmbH). Foundation has no shares, only beneficiaries.

type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Hardly available.

One week.

Articles of Association €2,500–€4,000. Notary €1,500–€3,000. Registration fees app. €400. Capital duty 1% of paid in share capital.

Minimum corporate tax €1,750 credited against later corporate tax, can be carried forward for indefinite time.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. No. No. As required / discretionary.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Annual return

Audit requirements

Yes. No. One. Yes. As required / discretionary resolutions can be on mail basis.

Obligatory for both trade law and tax law purposes.

AG (stock corporation) and foundation): obligatory GmbH (company with limited liability) depending on size, obligatory if employees are more than 50, assets’ value is more than € 4.84 m and turnover is more than € 9.68 m in a period of 12 months before the end of the business year

other

Registered office

Domicile issues

Company naming restrictions

Required. n/a.

Only necessary that the name of a company has to be clear and distinctive, it is NOT necessary anymore that the purpose of the company is reflected in its name.

www.ifcreview.com/Austria

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The Bahamas

52

IFC Review • 2011

The Bahamas Financial Services: Commitment, Continuity and Consistency

By Wendy Warren, CEO & Executive Director, Bahamas Financial Services Board, The Bahamas

T

HE BAHAMAS, WHILE ONLY 37-YEARS-OLD as an independent

country, is rich in history with the oldest democracy and one of the longest established international financial services sector in the region.

In the world of international business and finance, The Bahamas’ commitment, continuity and consistency provide a firm foundation on which business and clients can rely.

The advantages of doing business in The Bahamas are clear: • Our history as a trusted partner for the international business community and families worldwide, due in large part to the outstanding record of political stability, progress and stewardship, status as an independent territory providing an efficient basis of common law, and the longstanding commitment and continuity of its people and government to the industry and their clients.

• Our ideal location at the cross roads of the Americas in a time zone that is convenient for most of the major centres

in the Americas. Our physical resources of land, premises and fit‐for‐purpose infrastructure all located in one of the most idyllic settings in the world.

To be certain, The Bahamas continues to focus on being a high quality destination for owners of capital. In the midst of one of the most tumultuous times in the finance industry, the government and private sector jointly refined their shared vision for the way forward: “To be a globally competitive international business centre for private wealth management, capital investment in the Americas and emerging markets, and residency”. This vision brings to bear the unique strengths of The Bahamas.

This vision is fulfilled through many major international companies who operate from The Bahamas, such as Freeport Container Port, the largest and deepest transshipment port in the region including the north eastern United States. A further example is a recent capital investment of B$1.7 billion in the Bahamas Oil Refinery www.ifcreview.com/Bahamas

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Compelling and Competitive Platform for Private Clients

When the Organisation for Economic Cooperation and Development (OECD) launched an initiative in 1998 that sought to improve transparency and information exchange in tax matters, The Bahamas, as a sovereign nation, sought in 1999 and, again in 2002, to protect its economic interests and fiscal autonomy in all negotiations with the OECD. The Bahamas considered the establishment of a level playing field, where all OECD members and major finance centres agreed to implement the same standards, to be critical to its economic interests.

By mid-March 2009, a significant levelling of the playing field was achieved with the commitment by all OECD countries and major financial centres to the OECD standard for information exchange. Subsequently, on 25 March 2009, The Bahamas Government, with the support of the private sector, agreed to begin to negotiate suitable arrangements that meet the OECD standard for information exchange.

All of the 22 agreements signed by The Bahamas since then are in accordance with the OECD standard as reflected in its model TIEA and Double Taxation Agreement (DTA), Article 26. As such, the basis on which The Bahamas will cooperate with countries is no greater than those countries that adopted DTA, Article 26. In fact, the OECD Global Forum has confirmed that TIEAs do not provide for spontaneous or automatic information exchange; DTA protocols can provide for such spontaneous and automatic exchange of information.

This is consistent with The Bahamas’ strong commitment to the principle that persons have a right to privacy with respect to the conduct of their affairs. Moreover, respect for the rule of law always has been fundamental to the success and strength of the financial services industry in The Bahamas. As such, clients can be assured that The Bahamas will only exchange information on agreed and transparent protocols.

In particular, through its bilateral agreements, The Bahamas commits to cooperate only upon requests where specific information is provided. This requirement for specific information is critical in furtherance to The Bahamas’ stated position to prevent so called ‘fishing expeditions’.

Further, the well-established confidentiality for those who live or conduct business in The Bahamas will continue. Most importantly, The Bahamas will retain a legislative and administrative system that respects both the privacy of its clients and preserves the banking confidentiality in its financial services sector.

The Bahamas’ Approach to G20/ OECD

The Bahamas has demonstrated that as a sovereign nation it is an active contributor to the discussion on a range of global matters and that it is determined to act in a responsible manner. In particular, The Bahamas is an active participant in the international dialogue concerning the regulation of international financial services.

Specific to the dialogue on cooperation in tax matters, The Bahamas has been an effective member in the Global Forum and on its various sub-committees. Based on its energetic engagement, in September 2009, The Bahamas was elected to membership of the OECD Peer Review Group - a group comprising selected members of a re-vamped OECD Global Forum.

The selection of Bahamian Prime Minister The Hon. Hubert Ingraham to chair the Boards of Governors of the International Monetary Fund (IMF) and World Bank Group (WBG) also reflects favourably on The Bahamas in international circles.

To be certain, the Government of The Bahamas is committed to safeguarding this important segment of the Bahamian economy by ensuring that The Bahamas remains a well regulated jurisdiction which meets evolving standards for offering international financial services.

The Bahamas

Company (BORCO) located on Grand Bahama Island These operations on Grand Bahama complement the many international banks and investment companies that have established themselves in country.

Further evidence of the confidence in the Bahamian economy, notwithstanding the impact of the recent global recession, is a US$2.9bn investment into a hotel resort, supported largely through funding by Chinese institutions.

A Wealth Management Centre

The Bahamas’ strength is rooted in its long history in providing financial services since the 1930s, and has been reinforced by the jurisdiction’s ongoing commitment to maintaining

An Independent Financial Services Company OUR SERVICES INCLUDE: • Formation of Companies and Foundations in multiple jurisdictions; • Secretary to Foundations/Foundation Council Members; • Registered Office facilities; • Registered Agent; • Directors and Officers; • Nominee Shareholders; • Full Corporate Management Services;

• Nominee Founder; • Establishment of Brokerage and Bank Accounts; • International private banking facilities; • Succession Planning; • Secretarial Assistance; • Individual Trustee Services; • Virtual Office Facilities; • Ship Registration

LOCATION: Saffrey Square, 2nd Floor, Suite 201B Bank Lane, P.O. Box FH-14587, Nassau, Bahamas Telephone: (242) 325-0921 or (242) 326-2486 Facsimile : (242) 326-5072 Website: www.offshoremanagers.net Email: info@offshoremanagers.com

www.ifcreview.com/Bahamas

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The Bahamas

54

IFC Review • 2011

and growing its presence as a provider of high quality financial services. This historic involvement has created a jurisdiction that can easily be defined as established, progressive and welcoming for financial services and residency.

Established and progressive

Its established role and expertise in private banking and trust services also has given birth to a comprehensive and compelling array of financial services that includes private banking, estate planning, asset management and fund administration services. The Bahamas also provides services to the international capital markets, and to the insurance and maritime industries.

Corporate registry and legal and accounting services are at the core of the multitude of services available in The Bahamas.

The integrity and continuity offered by institutions located in The Bahamas provide a secure environment. With personnel committed to the local community, continuity of service is more predictable and stable in The Bahamas, and is the basis of its many longstanding institutional and client relationships. The Bahamas’ long tenure in financial services also has created a growing storehouse of skills and experience that is trusted by the international financial community.

The jurisdiction also continues to demonstrate foresight through responsive, progressive developments to meet the requirements of an increasingly sophisticated financial services marketplace.

In this regard, substantive and minor amendments are expected to be enacted early in 2011 to further enhance the value proposition of the Bahamas Trustee Act. A Bahamas Executive Entity Bill (BEE) will also be available shortly, complementing the well-recognised environment for trust services in The Bahamas.

A new Securities Industry Act was also tabled in the closing hours of 2010.

This bill will transform the manner in which the securities industry functions and will greatly enhance the marketing position of The Bahamas.

In addition the Arbitration Act 2009 and Arbitration (Foreign Arbitration Awards) Act 2009 both became law in 2010.

Welcoming

The Bahamas is not only home to more than 250 banks and trust companies,

which enjoy long standing relationships with clients from around the world.

In recent years, as more and more individuals have chosen to ‘follow their money’ with respect to where they live and work, The Bahamas also has become the preferred choice for many who have adopted this way of life.

With a streamlined application process for Economic Permanent Residency (EPR), the ability for individuals to work and live in The Bahamas has become even easier and more attractive. A predictable and user-friendly EPR application process, combined with the country’s physical resources and infrastructure, enhances The Bahamas’ environment as a location for individuals and family offices, as well as for more institutions to consider the establishment of subsidiary operations in the country.

It should be noted that the Government maintains a flexible immigration policy, which recognises that the national development objectives are pursued through a policy suited to the needs of international firms, individuals and families.

A hub for capital investment

The Bahamas is a safe, well-regarded portal for global investment, particularly into the Americas. It is also a favourable location for corporate offices, ownership of intangible assets, the establishment of finance related businesses and light industrial activity.

The Government is committed to building an economic environment in which free enterprise can flourish. In this regard, the National Investment Policy is designed to support an investment friendly climate and guarantees the complementary nature of Bahamian and overseas investments.

The Bahamas’ commitment to political and economic stability has figured prominently in the jurisdiction being recognised as a sound environment for Foreign Direct Investment with an Investment Grade Government Debt rating (Standard & Poor’s and Moody’s).

The Bahamas is ideally located at the crossroads of the Americas. It is in the same time zone as New York with enviable proximity to the US, and Central and South America. Its physical resources are conducive to conducting international business both efficiently and effectively. These include: • Information communications

technology – three separate, fully redundant, self-healing fibre optic cables for global connectivity.

• Modern office facilities.

• Data protection legislation at the OECD Standard.

• Business continuity options.

• Cost competitiveness.

• Six major airports including the YVR managed Lynden O. Pindling International Airport in Nassau and Freeport International Airport. (Overall there are more than 60 airports throughout the islands of The Bahamas).

• Ease of access, air linkages and Freeport’s transshipment and free trade zone status are functional attributes that very few regional competitor jurisdictions can match.

• Available land throughout The Bahamas, including more than 10,000 acres earmarked for industrial and commercial development in Grand Bahama.

Investment incentives under a number of Acts include exemption from the payment of customs duties on building materials, equipment and approved raw materials and real property taxes for periods up to 20 years. Investors may acquire publicly owned lands for approved developments on concessionary terms; and acquire low cost space for lease for industrial enterprises. Government will provide special training and retraining for Bahamian workers to ensure the continuing availability of a highly skilled labour force.

The Way Forward

Over a decade ago, the OECD sought to have The Bahamas implement its standard for transparency and tax cooperation. The Bahamas’ response to the OECD standard was to insist that all countries implement the same standard at the same time as The Bahamas.

As the rules for global trade and financial services were transformed over the past 24 months, The Bahamas continued to fulfill its commitment to clients and the international community.

We expect the years ahead to continue to be one of transition as the global economy and the financial services industry adjust to the new paradigm.

The Bahamas remains unequivocally engaged in the pursuit of an ever‐ improving platform for owners of capital to conduct their international business, to manage their private wealth and to make The Bahamas their home. www.ifcreview.com/Bahamas

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The Bahamas - Fact File

55

general overview

Archipelago of islands in Atlantic Ocean, 80 km off the southeast coast of Florida.

Eastern Daylight Time. (Observed from the second Sunday in March to the first Sunday in November).

347,000 Nassau, New Providence.

Lynden Pindling International Airport formerly known as Nassau International Airport English.

Bahamas.

Constitutional parliamentary democracy; bi-cameral legislature. +242.

Based on English common law.

Leader in private wealth management (PWM) services; banking and trust, investment funds, securities advisory, corporate services.

The Bahamas

Location

Time zone

Population

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Centre’s expertise

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

No. No. Resident: some.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

No restrictions.

IBC: No minimum capital required.

None. (In practice one).

type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Yes. 5-7 working days IBC: US$500 to US$1,500.

IBC with authorised capital of US$0 to US$50,000 – US$350. IBC with authorised capital of US$50,001 and over – US$1,000.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

IBC: one.

A director/ secretary need not be resident.

Yes. Discretionary.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Register of directors and officers.

Not allowed.

IBC: a minimum of one shareholder.

No. IBCs: AGMs are not required but can be held anywhere or by telephone.

accounts

Annual return Audit requirements

IBC: no.

None, unless required by the IBC’s Articles of Association.

other

Registered office

Domicile issues

Company naming restrictions

Yes. An IBC is also required to appoint a registered agent in The Bahamas.

Change of domicile permitted.

IBC Prohibited Names: ‘assurance’, ‘bank’, ‘building society’, ‘chamber of commerce’, ‘chartered’, ‘cooperative’, ‘imperial’, ‘municipal’, ‘royal’, ‘trust’, etc.

Names must end with an appropriate suffix such as ‘incorporated’, ‘limited’, ‘corporation’, ‘gesellschaft mit beschrankkter haftung’, ‘sociedad anonima’ or respective abbreviations.

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Barbados

Barbados: Recession and Post Recession Niches

by Dr Trevor A Carmichael, QC Chancery Chambers, Barbados

T

HE INITIAL LIQUIDITY CRISIS

and its accompanying tyrant, the international recession of the last two years, has presented opportunities for Barbados to reposition its economy and restructure its social development priorities and policies. While this activity remains very much at the policy stage, it is, however, a focus of important proportions which portends possibilities of growth and development in both the short and long term.

Actual performance of the economy within the first nine months of 2010 has been encouraging within the context of the overall global environment. Indeed, the international financial markets continued to show confidence in Barbados in the form of the substantial oversubscription of a two hundred million dollar bond, which was floated in New York in 2010. This positive demand made it possible to obtain a seven per cent interest rate in a 12 year issue in an unstable international market. Showing sound prudence and management, the loan proceeds were applied partly to the retirement of the short term US$1,000,000 loan which had been taken up one month earlier.

With the new maturing obligation, the need to use the Central Bank’s foreign exchange reserve was nullified.

The remaining loan proceeds were

applied to finance the difference between foreign receipts and payments during the low months of tourism expenditures.

Indeed, tourism output itself, which had shown a decline during the liquidity crisis, has now begun to experience a resurgence, with a three per cent increase over January to September 2010, when compared to the similar period of last year. Positively, some restructuring in the tourism industry is being noticed, for although the number of visitors from the United Kingdom has decreased, the American and Canadian arrivals have significantly increased to the degree of more than balancing the United Kingdom falloff.

Similarly, private capital flows during the first half of 2010 are showing increasing signs of improvement with real estate inflows totalling US$43 million compared to US$26.5 million in the same period of 2009. The significant capital injection of approximately US$500 million to finance the building of a new beer factory is also encouraging, as is the US$20 million inflow resulting from the sale of a US dollar series of a Barbados National Oil Company bond issue. Indeed, although there has been some dropping off in revenue, the fiscal deficit for the first half of 2010 is below the comparable period in 2009. The fiscal deficit to GDP ratio estimated

at 9.3 per cent is favourable compared to 10.4 per cent for the similar period of last year. This favourable decline is attributable in large measure to the reduction in expenditures.

While tax revenue collections fell by three per cent in 2010, the value added tax was an exception, yielding nine per cent more in receipts when compared to the similar period last year. The government in recognising the value of the Value Added Tax as a revenue collecting mechanism, has raised the tax itself from 15 per cent to 17.5 per cent as an important measure in the Minister of Finance’s November 2010 budget. While consideration will be given to reducing the level of Value Added Tax after an 18 month experiment, there is little doubt that the expected revenue will put the economy further in balance, and send the right signals to the international financial community, its rating agencies, and to the local public as well.

Furthermore, the quickest growing category of current expenditure for the last 10 years in the form of transfers and subsidies has experienced an overall three per cent reduction. In this regard, expenditure on goods and services has been reduced by 13 per cent and the bill for salaries and wages has registered a decline of six per cent. www.ifcreview.com/Barbados

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The contribution of the international business sector in the year 2009 was US$120.15 million, and represented approximately 58 per cent of all corporate taxes received during that year.

This figure accounted for approximately 11 per cent of total government revenues since the year 2005. In the year 2010, international business companies and exempt insurance companies in particular, have shown significant increases and at least two large insurance and global reinsurance structures have established their centres of operations in Barbados. International business companies in particular have shown significant increases over both periods of the liquidity crisis and the international recession, with 1,883 renewing licences in 2007; 2,418 renewing in 2008 and 2,480 in 2009. In 2010, the figure is likely to surpass the 3,000 mark.

In a word, international business has shown relative increases in a recessionary environment and from licence fees alone in 2009, Barbados has collected in excess of twelve million Barbados dollars. The jurisdiction is clearly benefitting significantly from its international sector, which may safely be seen to be outperforming in a recessionary environment.

The international sector was accorded an appropriate accolade in April 2009 when the OECD, in its report A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard, recognised Barbados as the only independent Caribbean nation which has substantially implemented the internationally agreed tax standard. Indeed, Barbados has met the OECD requirements for the exchange of information on request in all tax matters. Furthermore, the international sector was well recognised in the Global Competitive Report of 2009/2010, which rated Barbados’ overall competitiveness as third in Latin America/The Caribbean, and 44th worldwide; its soundness of banks as fourth in Latin America/Caribbean and its availability of latest technologies as second in Latin America/Caribbean, and 29th worldwide.

The jurisdiction had long ago been given international endorsement by agencies such as United Nations Development Program, which ranked it as fourth worldwide out of 177 countries in terms of literacy. Furthermore, the Human Development Report has

consistently ranked Barbados as first in Latin America and the Caribbean and 37th worldwide out of 179 countries in its human development index. Transparency International in its corruption perceptions index has ranked Barbados as second in Latin America/ Caribbean and 22nd worldwide out of 180 countries. These solid institution building and retaining features have endured to the benefit of Barbados in the recessionary environment, and have allowed its planners to continue to explore and carve out new niche areas along with strengthening its existing foundations.

The tax treaty network continues to be a source for transparent and reputable tax planning. The double taxation treaties are currently being used with full force and effect, some with great results and exposure, while others with more discreet utilisation and enjoyment. Double tax treaty partners include Austria, Botswana, Canada, CARICOM, China, Cuba, Finland, Ghana, Luxembourg, Malta, Mauritius, Mexico, the Netherlands, Norway, Seychelles, Sweden, Switzerland, the UK, the USA, and Venezuela.

The treaty with Mexico is exhibiting increased public use and its novel charitable dimension focus has provided a mechanism to blend philanthropy and business in unique structures with bold intentions and positive benefits.

Furthermore, the bilateral investment treaties continue to provide the investment protection and comfort to investors who seek to use a Barbadian corporate structure to invest worldwide.

For those companies and individuals seeking to invest within Barbados, the bilateral investment treaty with its positive protection mechanisms, including the benefits of international arbitration, provide positive incentive to invest within Barbados, in furtherance of the special niches which the jurisdiction seeks to provide.

Special Niches

Barbados continues to be recognised as an important jurisdiction for the manufacture of specialty products which require an excellent infrastructure with first world air and seaport facilities together with skilled and well educated labour, and a stable industrial relations climate.

Such manufacture includes the specialty areas of: agro-processing, electronic components and subassemblies, high fashion apparel, jewellery, leather items, medical supplies,

optical devices, pharmaceuticals, printing and publishing. Over the last year, there has been an increased interest in the setting up of such facilities. This has positive implications for increased employment within the jurisdiction.

Furthermore, Barbados has sharpened its efforts to become the premier location for information and communication technologies (ICT investments). The facilitating environment has been improved with training centres, for medical transcriptionists, and training grants which subsidise training of workers.

Such ICT enterprises may be established under the International Business Companies legislation or the International Society with Restricted Liability Act. The novel uses of ICT technology which are increasingly used in the jurisdiction include: call centre computer aid design (CAD), customer and technical support, credit card applications, data entry and fulfillment, database management, health insurance claims processing, and health information management, optical character recognition (OCR) applications, software development, transaction processing, and web application.

In a recessionary environment, the opportunity to start new businesses has been recognised by the Barbadian planners. Efforts have been made to expand the scope of marketing during the years 2009-2010. The results have been encouraging, and significant efforts have also been made by some of the jurisdictions professionals to more creatively use the International Business Company in the areas of art and architecture, music, film, and sports.

Today, many structures are being devised which marry domestic and international components in creative combinations for mutual benefit. The purpose is developmental, the scope is recession proofing and beyond, and the overall intention is the creation of a jurisdiction the social and economic development of which is holistic and self sustaining.

Barbados

A Profitable International Sector

Postscript

As the international recession recedes, Barbados in contrast has steadily increased its recession proofing by building on its inherent strengths and exploring new avenues of commercial and industrial endeavours. While it can not, as in the 18th century, be the sugar capital of the world, it may seek to be in the 21st century, the leading jurisdiction for business and the truly fine art of living.

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Barbados

Barbados - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Most easterly of the Caribbean islands.

Greenwich Mean Time -4.

270,000.

Bridgetown.

Grantley Adams International Airport.

English.

Bds$ pegged to the US$ at two to one.

Westminster model. +246.

English.

Tourism, banking, trust, insurance, international business companies.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Between 20% and 35%.

25%.

Not for tax entities operating in the offshore sector.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

All. Not prescribed.

One.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes. Average five working days, but 24 hours possible for some urgent requests.

US $2,150.

These vary depending on the type of corporate entity.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes. At least one per year.

shareholders

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency

No disclosure of shareholders to the Registrar of Companies for domestic companies.

However, IBC and SRL insurance and banking entities must disclose shareholders in their licence application forms to the Registrar.

Not allowed.

One. No. A company’s register of shareholders is not available to the public at large.

At least one per year.

accounts

Annual return Audit requirements

Required for certain entities.

Audit is required where gross revenue or assets exceed US $500,000.

other

Registered office

Domicile issues

Company naming restrictions

Yes. An overseas incorporated company may: (i) apply to the Registrar of Companies with articles of continuance to move its business to Barbados; or (ii) apply for registration in Barbados as external company. A company migrating from Barbados must file articles of discontinuance with the Registrar of Companies.

As defined by Companies Act.

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Belize

Belize: A Premier Jurisdiction for International Business Services

By Gian C Gandhi, SC, Barrister-At-Law, Director General of the International Financial Services Commission of Belize, Belize

A

RECENT STUDY, as reported by

the Caribbean News Network, has revealed that the vast majority of business managers, professionals and executives in Britain recognise that the use of offshore financial centres (OFCs) provides a competitive advantage for businesses operating internationally.

The OFCs, often stigmatised as ‘tax havens’, have after all gained acceptance in the international financial order.

While there are still some dark clouds on the horizon (for example, Senator Carl Levin’s most recent campaign ‘Business and Investors Against Tax Haven Abuse’), there appears to be a general recognition by the G20, albeit grudgingly, that so long as the OFCs keep in place a legal and regulatory framework, providing for an effective exchange of tax information, as well as a robust anti-money laundering and terrorism compliance system, they would be allowed the right to exist.

TIEAs: Belize is on the ‘White List’

Realizing the importance attached by the G20 to Tax Information Exchange Agreements (TIEAs), Belize made rapid progress in 2010 in concluding TIEAs. As at 31 October 2010, Belize had signed TIEAs with 13 countries, namely, United Kingdom, Australia, Belgium, Netherlands, Sweden, Norway, Denmark, Finland, Iceland, Greenland, the Faroes, Portugal and Ireland.

As a result, Belize has been placed by the OECD into the category of jurisdictions that are considered to have substantially implemented the internationally agreed tax standard (‘the White List’).

International Foundations Act, 2010

As new offshore structures and strategies serve as a catalyst to attract business in a higher competitive environment, Belize enacted the International Foundations Act 2010, which came into force on 12 April 2010. This Act combines

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Belize

IFC Review • 2011

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

www.ifcreview.com/Belize

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otherwise ordered by the Supreme Court.

International Foundations Regulations 2010

These regulations complement the International Foundations Act and prescribe the fees and forms in respect of foundations. The main fees are as follows: • US$200 for certificate of establishment of foundation • US$100 for amendment or change in particulars • US$200 for annual renewal fee • US$50 for change of Registered Agent • US$50 for certificate of continuance • US$350 for certificate of discontinuance • US$25 for certificate of good standing • US$150 for certificate of dissolution • US$500 for restoration to Register (after striking off) Copies of both the International Foundations Act and the Regulations are available at www.ifsc.gov.bz .

Merchant Ships (Registration) Act 2010

This Act, which came into force on 1 November 2010, is a comprehensive piece of legislation and replaces the existing Registration of Merchant Ships Act as well as the Registration of Merchant Ships (Registration and Miscellaneous Provisions) Regulations. Some of the key features of this new law are: • It is based on the International Maritime Organisation (IMO) model and is specially designed to address the needs of the contemporary maritime community.

• It makes improved provisions for registration of ships, transfers and transmissions, registration of mortgages and maritime liens, bareboat charter registration, limitation of liability for maritime claims, revocation of registration and other miscellaneous matters.

• A new form of statutory mortgage has been provided, thereby giving a future mortgagee the option of either adopting a simple statutory mortgage, or creating a contractual mortgage with additional terms and conditions.

• The order of priorities has been changed by placing a Belize mortgage on a higher plane than that of other competing ship registries.

• It updates the provisions of the Convention on Limitation of Liability for Maritime Claims by incorporating the 1996 Protocol.

• It excludes environmental damage from the purview of the limitation of liability provisions.

• It contains a new schedule of fees for registration of ships and other matters.

On the whole, the Act with its regime of modern and upgraded legal institutions is expected to prove attractive to shipowners and financiers, thereby placing the International Merchant Marine Registry of Belize (IMMARBE) at the cutting edge of the global shipping industry.

A copy of this Act is available at www.ifsc.gov.bz .

Belize

the best of both worlds by replicating in a common law jurisdiction the essential characteristics of a civil law foundation, while avoiding unnecessary complications.

The salient features of this new law are: • An ‘international foundation’ is defined as a foundation where (a) the founder or any other person who has contributed assets to the foundation otherwise than for full consideration is not resident in Belize, (b) none of the beneficiaries of the foundation is resident in Belize and (c) the foundation endowment does not include any land situate in Belize or shares of any company beneficially owning any land situate in Belize other than property for use as an office for the administration of the foundation.

• Unlike a common law trust, which is merely a relationship between the trustees and the beneficiaries, a foundation will be a legal entity in its own right and may hold property and do all other acts in that name.

• It makes provisions to facilitate efficient registration, renewal, striking off, restoration, dissolution, continuance and discontinuance of foundations.

• Every foundation shall at all times have a registered agent resident in Belize.

• Registration does not require the foundation charter to be registered, only particulars thereof need to be provided.

• Provisions exist for exchange control and tax exemptions to international foundations which are registered under the Act. • There are special provisions for purposes of civil asset protection, eg, the nonrecognition of foreign judgments and anti-alienation of the foundation endowment, as well as reduction of the limitation period for actions against foundations.

• Provision is made for the mobility of foundations both into and out of Belize.

• Provisions exist for substantial security of costs in respect of claims brought against foundations to avoid frivolous litigation.

• Specific provisions are included for disclosure of information relating to a foundation in pursuance of mutual legal assistance treaties, TIEAs or for the investigation and prosecution of money laundering and terrorism-related offences.

• To safeguard the confidentially of foundations, provision is made for judicial proceedings relating to a foundation to be held in camera unless

International Banking (Amendment) Act

This Act, which came into force on 3 March 2010, provides that all banking business conducted by Export Processing Zones (EPZs) or Commercial Free Zones (CFZs) with an international bank licensed under the International Banking Act must be reported to the Central Bank of Belize. The object of this measure is to improve the regulatory control of the Central Bank over EPZs and CFZs so as to better monitor suspicious transactions.

International Trusts Registry

Belize is one of the few jurisdictions that provides for mandatory registration of international trusts. The International Trusts Registry of Belize, which opened its doors for business in 2007, has proved to be extremely popular among investors for asset protection purposes. During the first 10 months of 2010, as many as 255 trusts were registered, bringing the total trusts registered to date to 1356.

Conclusion

The year 2010 marks the 20th anniversary of the birth of Belize’s offshore industry. Starting from scratch in 1990, Belize has built up a thriving international financial services business.

There are at present 98,562 international business companies on the Register, 1356 international trusts, 852 ships flying the Belize flag around the world, and 152 licensed service providers. With a strong regulatory regime, Belize has earned the reputation of a jurisdiction ‘without compromise’. True to its mandate, the International Financial Services Commission of Belize, in collaboration with a pro-active Belize Offshore Practitioners Association, continues to ‘promote, protect and enhance Belize’ as an international financial centre.

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Belize - Fact File

general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Central America.

Central Time Zone.

333,200.

Belmopan City.

Phillip SW Goldson International Airport.

English, Creole, Spanish.

Belize dollar (BZD). Tied at fixed rate to the US dollar (BZD$2=US$1).

Democratic. +501.

English common law.

International business companies (IBCs), international trusts, international insurance, mutual fund administration and management, international banking. Trading in securities securities and foreign exchange; international money lending, international foundations, ship registration.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None for international financial services.

None for international financial services.

None for offshore activities.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any currency.

US$1.

US$1.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual Fees

Yes. 24 hours.

US$100 if capital is 50,000 or less; US$1,000 if authorised capital exceeds 50,000.

Vary according to service provider.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Permitted.

Subject to memorandum and articles.

shareholders

Disclosure Bearer shares

Minimum number Public share registry Meetings/frequency

No. Permitted but immobolised with local registered agent or foreign professional intermediary.

One. No. As desired by directors or members.

accounts

Annual return Audit requirements

No. No.

other

Registered office Domicile issues Company naming restrictions

Yes. Continuation of IBCs or LDCs to Belize.

Under the Act no company shall be incorporated under a name that contains the words ‘assurance’, ‘bank’, ‘building society’, ‘trusts’, ‘chamber of commerce’, ‘insurance’, municipal’, ‘royal’, ‘fund’, ‘investment management’. www.ifcreview.com/Belize

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Bermuda

Bermuda: A Premier International Finance Centre

By Laura Hershey, Treaty Adviser, Ministry of Finance, Bermuda

I

N 2009, BERMUDA was the first country

to ascend to the white list as compiled by the G20 during its London Summit on 2 April 2009. This coincided with Bermuda signing its 12th tax information exchange agreement (TIEA) on 8 June 2009 with the Netherlands. Not long after, and in recognition of Bermuda’s significant and proactive progress in not only meeting but exceeding international standards in transparency and exchange of information for tax purposes, Bermuda was elected a Vice Chair of the Steering Group of the new Global Forum at the meeting of the Organisation of Economic Cooperation and Development (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes, held in Mexico City on 2 September 2009. Finally, by the end of the year it was announced by the OECD Global Forum that Bermuda was selected to host the third meeting of the 2011 Global Forum in spring 2011.

Never one to rest on its laurels, as 2010 drew to a close, Bermuda’s list of milestones expanded. The OECD Global Forum’s work has expanded to include a Peer Review Process, evaluating all aspects of its members’ legal and regulatory frameworks. Bermuda was enthusiastic about being one of the first candidates to be peer reviewed, to open up the jurisdiction to its peers for intense scrutiny of all aspects of the jurisdiction, from its anti-money laundering legislation to the application of its tax information exchange agreements.

While Bermuda had for years successfully been evaluated by the OECD in its annual assessments, it was clear that the best and perhaps only way to finally and completely demonstrate once and for all that it complies with all aspects of the internationally agreed standard for transparency and exchange of information for tax purposes and to dispel myths about the basis of its consumption-based tax system, one that had been in place for over

100 years as an efficient and accomplished means of collecting tax revenue, was to lead from the front in embracing the OECD Global Forum’s Peer Review Process.

Thus, following a six-month exhaustive review which examined all aspects of Bermuda’s legal and regulatory framework against 10 identified essential elements, government officials from over 90 jurisdictions were provided with an in-depth report, copies of all Bermuda’s legislation and procedures as well as its international agreements, and given the opportunity to demand answers on any aspect of the jurisdiction they wanted.

The OECD Global Forum Peer Review Group then presented Bermuda’s report determinations to the full Global Forum membership. The reports reflected the extent to which the essential elements are in place and made recommendations for improvement where needed.

On 30 September, at the OECD third annual meeting of the new Global Forum in Singapore, the full membership of the Forum reviewed and ratified Bermuda’s Phase 1 Report, determining that Bermuda “meets all elements”, with some recommendations and remains on the OECD white list. Further, a report to the G20 in which Bermuda’s achievements are noted was agreed upon by the Global Forum for submission to the G20 Finance Ministers and leaders.

In addition to Bermuda, only one other jurisdiction’s report of the initial eight submitted for adoption to the Global Forum in Singapore in September 2010 met all the elements, with some recommendations.

In commenting on Bermuda’s achievement, the Hon. Paula A. Cox, JP, MP, Premier of Bermuda and Minister of Finance stated: “To have been included in the first wave of the peer review process, immediately following the successful completion of Bermuda’s Annual Assessment was in itself a great undertaking, but for Bermuda to be one of two countries recognised as having all elements met, with

some recommendations, reflects Bermuda’s longstanding commitment to not only meeting but exceeding international standards. Looking forward, the Ministry of Finance is reviewing the recommendations put forth by the Peer Review Group, and following consultation with industry stakeholders, responding appropriately.”

Moving Forward

Bermuda now looks forward to its next achievement, hosting the 2011 OECD Global Forum, to be held at Bermuda’s Fairmont Southampton Hotel. At this meeting, from 31 May to 1 June 2011, an estimated further 54 peer review reports will be submitted for adoption by the Global Forum, including the majority of OECD and G20 countries, many of whom are undergoing combined Phase 1-2 reviews. Therefore, this meeting will be the first opportunity for the Global Forum to fully discuss the effectiveness of the Peer Review process and the outcomes of those reviews in promoting the adoption of international standards of transparency and exchange of information.

When Bermuda hosts an event, it is not only an opportunity to showcase Bermuda as a premier international finance centre, but also an internationally celebrated tourist destination. At the 2011 Global Forum, Bermuda will welcome heads of state, Ministers of Finance, the OECD Secretariat, high-level government officials from the leading countries underpinning the global financial system and global financial stability, and international media representatives.

Particularly, as the OECD Global Forum has recently expanded from 78 countries to over 90, it is in some cases the first opportunity for many member countries’ leaders and those who are watching the developments from back home to get a more complete picture of the breadth and depth of what Bermuda has to offer.

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Bermuda

Continued Growth of Bermuda Stock Exchange

By Greg Wojciechowski, President and CEO, Bermuda Stock Exchange, Bermuda

T

HE BERMUDA EXCHANGE

STOCK

(BSX) ended 2010 with a record number of listed securities.

Despite the Bermuda domestic capital market continuing to experience pressure as a result of the global market dislocation, BSX international listing business and in particular the listing of Insurance Linked Securities continued to gain momentum and generate positive attention from the global capital markets for Bermuda.

Year End Overview

The total market capitalisation of the BSX as at 31 December 2010 (excluding fund listings) stood at over BM$319 billion of which approximately BM$1.4 billion represented the domestic market.

Total trading volume for the period was 64 million shares with a corresponding value of BM$112 million compared to 5.7 million shares with a corresponding value of BM$50.9 million for 2009.

The RG/BSX Index closed the year at 1149.49 which is 45 per cent lower than 2009.

As at 31 December 2010, 807 issuers were listed on the BSX. Included in the new listings was the Variable Note

program of Lodestone Re. This listing and others from Montana Re and Merna Reinsurance II raised the number of Insurance Linked Securities listed on the BSX to 19 with an approximate market capitalisation of BM$1.83 billion.

In addition, the Exchange listed a further 124 international derivative warrants. There were also 55 new collective investment vehicles listed and seven subsequent issues from listed issuers.

Noteworthy in 2010 was the Bank of Butterfield’s BM$550m capital raise, its subsequent successful rights offering as well as the listing of BM$500m of the Government of Bermuda’s 5.603 per cent Senior Notes and the delisting of the shares of Bermuda Container Line.

This continued activity highlights the fact that the domestic capital market works and that Bermuda based investors have an investment appetite for well structured and regulated investment opportunities. It also shows that despite challenging economic times, new listings continue to be attracted to the BSX. Developments in 2010

In 2010, the BSX continued to enhance

its data dissemination capabilities to the international financial markets by adding RSS and XML feeds for trade data reporting.

The Exchange implemented a new platform supporting the electronic submission of listed fund pricing data and more content was added to the Exchange’s website making issuers’ historical pricing more readily available.

In addition, a data feed to the IDC Group was established further expanding the BSX’s global data coverage.

There is no denying that 2010 was a challenging period for the domestic capital market. Trading volumes and values hit lows as investors reacted to financial market news and results posted

by BSX listed issuers and the RG/BSX index fell by 45 per cent to one of its lowest levels since 1997. However, historically, the domestic capital market tends to lag behind developments (negative or positive) in the larger financial markets.

Encouragingly, many markets have ended 2010 in much stronger positions.

Although the Bermuda economy is in the midst of a negative economic cycle, Bermuda companies continue to operate www.ifcreview.com/Bermuda

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Insurance Linked Securities

With regard to the Exchange’s international business platform it should be noted that the BSX ended the year with a record number of listed issuers. Raising Bermuda’s profile in the global financial markets for the creation, listing and capital market support services of Insurance Linked Securities has also been an objective – once which has been successfully achieve.

Bermuda has an important role to play in supporting this dynamic and growing market which saw over BM$5 billion in new structure issuances in 2010 alone.

The BSX entered this market much later than its competitors and the results to date have been impressive further deepening the Exchange’s commitment to this space.

At the end of 2009, the Bermuda Monetary Authority introduced

legislation that made it easier to form and list Insurance Linked Securities (ILS) on the British Dependent Territory and Bermuda has been positioning itself to attract and list ILS such as catastrophe bonds.

And as a result of this push, in July 2010, the BSX announced it had cat bond listings valued at over BM$1 billion for the first time.

A report in August 2010 by Aon Benfield said new issues of insurance cat bonds should rapidly rebound to pre-financial crisis highs as securities markets stabilise – and Bermuda is capitalising on the interest.

Investors have been showing sustained interest in cat bonds, which enable insurance companies to raise capital through the transfer of insurable risk for events such as hurricane or earthquake damage to financial market investors, while their prices have also remained attractive for sponsors of the bonds.

The BSX has listed 10 cat bonds with a combined value of BM$1.174 billion.

Three of these have been listed since the end of 2009 – State Farm’s Merna Re II (BM$350 million), Flagstone Reinsurance Holdings SA’s Montana Re transaction (BM$175 million) and an

issuance from Chartis, Lodestone Re, worth BM$425 million.

Since this new Bermuda push, growing numbers of institutional investors have made preliminary enquiries about setting up cat bonds on the island.

The publicity following the 2010 listings has pushed the BSX to the fore in the eyes of the Capital Markets and raised the profile of the jurisdiction and the Exchange. BSX has come a long way in a very short period of time.

The Bermuda Stock Exchange continues to work hard and closely with the insurance industry to provide additional levels of stock exchange support for these and other instruments so that the island state solidifies itself as the logical location for the convergence of the capital and insurance markets.

Bermuda

and provide their clients with the products and services which have made them successful over the years. During times of severe economic pressure, investor sentiment wanes, but those that are cautious, deliberate and prudent in their analysis may find solid long term investment opportunities.

Conclusion

The next 12 months promises to be one of continued growth for the BSX. The hard work that has been done in Bermuda to create and sustain a reputable and respected commercial and regulatory environment will drive the country forward, and will help to add new lines of business and further elevate Bermuda’s position amongst the major global financial centres.

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Bermuda

Bermuda - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

tax

Personal Income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements NON-INSURANCE COMPANY share capital

Permitted Currencies

Minimum authorised capital

Minimum share issue type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees accounts

Annual return

Audit requirements INSURANCE COMPANY share capital

Permitted Currencies

Minimum authorised capital

Minimum share issue type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees accounts

Annual return

Audit requirements directors

Minimum number

Residency requirements

Corporate directors

Meetings/frequency shareholders

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency other

Registered office

Domicile issues

Company naming restrictions

North Atlantic ocean, 774 miles south east of New York.

Greenwich Mean Time - 4.

66,183 in 2007.

Hamilton.

St George’s Parish.

English.

Bermuda dollars (on par with US$ dollars).

Self-governing British overseas territory. +1 441.

Based on English common law.

Insurance.

Nil. Bermuda has an average level of taxation on all persons and entities in the form of consumption based tax.

None, if designated as a non-resident.

For full details, please go to www.ifcreview.com/TIEA

Any, other than Bermuda dollars.

None.

One. No. One-five working days.

Starting from $2,500 based on share capital (exclusive of disbursements).

Starting from $1,995 based on share capital.

No. Yes, unless waived.

Any, other than Bermuda dollars. $1 for special purpose insurer; $120,000 for Class 1, Class 2, Class 3, Class 3A, Class 3B; $120,000 for Class A insurer; $250,000 for Class B insurer; $500,000 for Class C, D and E insurer; $1,000,000 for Class 4 insurer; for entities with two classes, the statutory minimum capital is the aggregate amount of the classes.

One. No. Two-four weeks.

Starting from $12,000 based on class of (re)insurer.

Starting from $4,070 based on share capital ($1,995 for special purpose insurer).

Yes (public document for class 4 insurers).

Yes (statutory accounts must be audited).

Two. No. No. No statutory requirement.

Yes. No. One. Yes. Yes, annual.

Yes (insurers must also have a principal office).

Re-domiciliation permitted.

Cannot contain the following : ‘chamber of commerce’, ‘municipal’, ‘chartered’, ‘co-operative’, ‘building society’. www.ifcreview.com/Bermuda

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British Virgin Islands

The BVI in 2010: A Year of Trust and Private Client Expansion

By Raymond Davern, Head of Trust & Private Client, Conyers Dill & Pearman, British Virgin Islands

I

F THERE IS ONE DEVELOPMENT

in the British Virgin Islands (BVI) trust and private client context over the last year that is worthy of comment and analysis it is not so much any legislative or regulatory innovation or precedent setting judicial decision as a professional trend.

As of early 2010, there are three of the major offshore multinational law firms with dedicated trust and private client departments in the BVI by which is meant both that each has established trust and private client departments in one or more other offshore jurisdictions and that each has at least one experienced practitioner permanently on the ground in the BVI. This professional trend surely reflects the view, increasingly widely held, that the BVI is coming of age as a trust and private client jurisdiction - a particularly appropriate metaphor considering that the first steps towards modernising the Trustee Ordinance of 1961 (now called the Trustee Act) were taken in the Trustee (Amendment) Act 1993 whose provisions came into effect on 1 November 1993 and which will therefore have been on the statute books for 18 years in 2011.

This article seeks to identify the principal reasons for the recent expansion of trust and private client legal professional services in the BVI and to highlight four factors in particular.

First, all of these firms have long experience of the BVI and have seen how much the Government of the islands and its Financial Services Commission are prepared to do in order to facilitate development of the jurisdiction generally, but especially in relation to trust and private client.

There has been a very fruitful partnership between the public and private sectors particularly in the promulgation of necessary and desirable trust law reform. Significant modernising amendments were made to the 1961 legislation (itself based closely on the English Trustee Act 1925) in 1993 and again in 2003, the result, in each case, of governmental responsiveness to the expressed needs of the flourishing trust industry.

Of considerable importance also was the establishment on Tortola in early 2009 of the Commercial Court of the Eastern Caribbean Supreme Court to which a distinguished Chancery Silk was appointed as its first judge and to which all disputes concerning trust funds of US$500,000 or more are automatically assigned.

The considerable financial commitment of the BVI government to this project reflects recognition that, as BVI trusts enter their second generation, the jurisdiction will need and should have a Chancery specialism.

Second, the BVI has developed a

www.ifcreview.com/BritishVirginIslands

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British Virgin Islands

IFC Review • 2011

Visit www.ifcreview.com and take advantage of our free trial allowing you unlimited access to the website for three months.

•

New technical articles and commentary added every month

•

World news added every day

•

Detailed jurisdiction sections

•

Full archive of exclusive online articles as well as all articles from the print publication

•

And much more www.ifcreview.com/BritishVirginIslands

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IFC Review • 2011

with any particular jurisdiction. There is now real choice to be had between trust jurisdictions in terms of difference in trust product and commensurability of legal infrastructure. Even time zones no longer dictate the trust forum as is evidenced by the very considerable Hong Kong and Russian interest in BVI trusts and trust related structures such as private trust companies which, since 2007, have been exempt from the licensing requirements which otherwise apply to those who undertake trust business in or from within the BVI. As regards trust product, in addition to purpose trusts, which have been possible since 1993 but which, since 1 March 2004, have been capable of being structured so as to benefit particular persons and may be established without limit in time (allowing a settlor to establish a trust whose purpose it is to benefit individuals, at the trustee’s discretion or otherwise, but which is not subject to the perpetuities regime applicable to trusts for persons), the unique and innovative 2003 provisions facilitating commercial dealings between trustees and third parties and the Virgin Islands Special Trusts Act 2003 (VISTA) are worthy of special mention.

The 2003 provisions relating to dealings with third parties apply to trusts created on or after 1 March 2004. They are based on reforms proposed in 1999 by the English Trust Law Committee (but as yet unenacted in England) and are aimed at making dealings between trusts and third parties better conform to modern, commercial expectations.

They assimilate, to a considerable degree, the BVI trust to the case of the corporate entity with distinct legal personality. This is done in a number of ways. First, section 95 of the Trustee Act contains a useful statutory articulation of the bona fide purchaser doctrine. This deems a transaction properly entered into if the third party takes reasonable steps to establish that the trustee has power to enter into a transaction of the kind in question and clarifies that he need not enquire whether its exercise by entering into the particular transaction in question would amount to a breach of duty other than such as would be committed by failing to comply with any requirements expressly set out in the terms of the power (for example, the consent of a specified person).

Second, a settlor may specify that section 97 of the Trustee Act applies to his trust. In such a case his trustee will

have no personal liability on any contract properly entered into in a disclosed or known fiduciary capacity but a claim based on any contract entered into by the trustee may be asserted by a third party in a judicial proceeding against the trustee in his fiduciary capacity. In addition, a claim based on any obligation arising from ownership or control of trust property or tort committed in the administration of the trust may likewise be asserted whether or not the trustee is liable in a personal capacity.

In each of these cases (contract, property, tort), the third party is entitled to satisfaction out of the trust fund directly rather than by way of subrogation to any right of indemnity of the trustee – a very useful provision which avoids the problem of unconnected indebtedness of the trustee to the trust fund which might diminish or extinguish his right of indemnity in respect of the (properly incurred) liability to the third party.

Third, where a settlor does not specifically apply section 97, section 98 will apply to the trust (but subject to the terms of particular transactions). In this case, where a trustee properly enters into a contract in a disclosed or known fiduciary capacity, the trustee is liable for any sum payable under the contract only to the extent of the value of the trust fund when payment falls due. The ability afforded by section 97 in particular to the counterparty to a contract with a trustee to have access to the fund independently of the state of account between the trustee and the beneficiaries goes a long way towards facilitating dealings with the trust fund as though it were a fund with distinct legal personality.

A VISTA trust is one which may be for persons, purposes or both, the subject matter of which is shares in a BVI incorporated company. It gives legislative sanction to a trust in which the trustee has neither a duty nor the power to intervene in the management of the company save as may be specified in the trust instrument. It also allows a settlor to specify in advance how appointments to the Board shall be made. Both these features have made it highly attractive to wealth-creating settlors who wish to benefit their families through a trust but retain control of the business in which they have been so successful.

These reasons appear to be the principal motivation for major law firms, which have seen the need and opportunity to develop trust and private client practices in the BVI.

British Virgin Islands

very substantial trust industry over the last two decades as is evidenced by the presence on island of over 100 active trust companies.

Some of these entities are very significant players on the international trust and private client field. Whatever the size of its client base, a trust company is likely to have a need for specialist advice from time to time on such matters as how best to achieve the wishes or meet the needs of its settlor clients in nonstandard cases and, on an ongoing basis, as to the extent of its own powers and duties as trustee and, correspondingly, the rights of beneficiaries and others, under existing structures.

It is a sign of the jurisdiction’s maturity that that advice can now be provided on island and that there are sufficient service providers to ensure both a reasonable choice for consumers, including where professional conflicts arise, and that all demand is supplied. The BVI trust need never leave home again. It can be established, administered, amended, otherwise tended and adjudicated upon by trust law specialists entirely within the BVI. Third, it is less than optimal that a law firm which, for example, has given specialist advice to and represented those who have incorporated BVI business companies in their dealings with BVI public authorities at the beginning of a company’s existence and which can offer specialist litigation services in relation to disputes arising between shareholders thereafter, cannot give equally specialist advice on what happens to the shares of a shareholder who dies unexpectedly, including on the likely international elements in that sort of situation or, indeed, BVI estate planning advice in advance of it ever arising.

A considerable amount in terms of the life of the company may turn on BVI rules as to succession in a conflict of laws context or planning based upon them.

An increasing awareness, therefore, of the need to offer the full range of services which might reasonably be required by way of complement to existing corporate and litigation services is no doubt a significant motivation behind some of the current private client expansion.

Fourth but in no sense least, the BVI trust has established itself as a credible and versatile concept for which there has been considerable take up in recent years.

This take up looks likely to continue since sophisticated and well advised settlors no longer identify the offshore trust www.ifcreview.com/BritishVirginIslands

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British Virgin Islands - Fact File general overview

tax

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal Centre’s expertise

Personal income tax Corporate income tax

Exchange restrictions

Tax information exchange agreements share capital

Permitted currencies

Minimum authorised capital

Minimum share issue type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

Eastern Caribbean.

Greenwich Mean Time -4.

App. 26,000.

Road Town.

Beef Island.

English.

US $.

Democratic 13-member Ministerial Government. +1 284.

System based on English common law. UK Privy Council is final court of appeal.

Renowned as a corporate domicile for business companies, trust settlements, captive insurance, mutual funds and shipping registration.

0%.

No income (profit) tax. Payroll tax-resident companies: 10% or 14% (employees: 8% fixed, employers: 2% or 6% depending on business size). Non-resident companies: same as resident, on BVI -based employees only.

None.

For full details, please go to www.ifcreview.com/TIEA. All currencies permitted. Official currency: US $.

One Share

One Share BVI business companies, limited partnerships, segregated portfolio companies, restricted purpose companies, companies limited by shares and/or guarantee.

24 hours (BVI Business Companies, LPs).

None.

Business companies, US$350-US$1,100 depending on share capital structure (number and type of shares authorised for issue); limited partnership US$500.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Permitted.

As directors determine.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Permitted (must be held by an authorised recognised custodian).

One. No. As directors or shareholders determine.

accounts

Annual return

No.

Audit requirements

No.

other

Registered office Domicile issues Company naming restrictions

Yes, must be in BVI and must be the office of the registered agent.

Re-domiciliation to and from BVI allowed under BVI law.

Restricted words such as ‘banking’, ‘insurance’, ‘fund’, ‘trustee’ will not be allowed without relevant licence. www.ifcreview.com/BritishVirginIslands

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Cayman Islands

Legislative Certainty Cheers Buoyant Cayman Fund Industry

By Mark Lewis, Managing Partner - Clients, and Heidi de Vries, Partner, Walkers, Cayman Islands

A

S

THE

WORLD’S

LEADING

offshore jurisdiction for hedge funds, industry trends in the Cayman Islands are closely watched, traditionally proving a good indicator for the health of the global funds sector and performance in 2010 has seen Cayman’s hedge fund industry continue to expand at an impressive rate, compared to other jurisdictions.

With the number of hedge funds registered with the Cayman Islands Monetary Authority (CIMA) poised to pass the all-time high watermark of 10,000 funds in the first half of 2011, coupled with growth in private equity fund formations, the outlook for Cayman is brighter than ever. Cementing this positive picture is the certainty that both EU alternative investment fund managers (EU AIFMs) and non-EU alternative investment fund managers (non-EU AIFMs) managing non-EU funds will continue to have access to European investors.

Confirmation of the final terms of the Alternative Investment Fund Managers Directive (the Directive), which were

approved by the European Parliament on November 11, 2010, ensures that both EU AIFMs and non-EU AIFMs will be able to continue marketing Cayman Islands, BVI and Jersey funds to professional investors in Europe.

Understandably, this news was well received by participants in the funds industry not only in those countries but also by European investors who will not lose access to the attractive investment fund products offered by these jurisdictions.

The final text of the Directive, which emerged from the trialogue meeting of representatives of the European Parliament, European Council and European Commission, also demonstrates that Europe’s ministers have recognised that it would be inappropriate to restrict non-European based funds from Europe, which would have been contrary to the G20 principles of competition.

With regard to the Cayman Islands, going forward the Directive allows for the continued marketing of Cayman-domiciled investment funds

to professional investors in the EU, through the traditional national private placement regime until at least 2018.

It is proposed (subject to the European Securities and Markets Authority’s (ESMA) recommendation) that this regime will transition in 2015 to allow full access to an EU passport marketing regime to both EU AIFMs managing non-EU funds and non-EU AIFMs on the same terms as EU funds.

Between 2015 and 2018 it is expected that the private placement regime and the passport marketing regime will coexist. The Directive applies to both open ended and closed ended funds and applies regardless of the legal form or whether or not the fund is listed on a stock exchange.

The private placement regime introduces certain conditions on both EU AIFMs and non-EU AIFMs for the marketing of non-EU funds in the EU. For non-EU AIFMs these conditions include the need for supervisory co-operation agreements to be in place between the regulator of the EU member state in which a fund is being marketed and the

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regulator of both the fund manager and the fund, which must ensure the efficient exchange of information for the purposes of systemic risk oversight.

Additionally, the country in which both the investment fund and the fund manager are established must not be listed as a non-cooperative country or territory by the Financial Action Task Force (FATF) with regard to AML or terrorist financing. The fund also needs to comply with certain basic transparency requirements with regard to its annual report, disclosure to investors and reporting to competent authorities.

The conditions applied for access to the EU marketing passport will be similar to those for the private placement regime.

In addition, the non-EU fund manager will be required to be authorised in its relevant EU member state of reference.

Also, OECD compliant tax information exchange agreements will need to be in place between the fund domicile and both the fund manager’s EU member state of reference and each other member state in which the fund interests are proposed to be marketed.

It is expected that non-EU funds, including Cayman Islands funds, will be eligible for marketing in the EU under the passporting regime from 2015, being two years after the final transposition date for the Directive (being the deadline for transposition of the legislation in the individual EU member states, (the ’Final Transposition Date‘)). As it is proposed that the private placement regime will be terminated five years after that Final Transposition Date (around 2018), both EU AIFMs and non-EU AIFMs looking to market Cayman domiciled funds in the EU will need to be in position to meet the conditions for the passport in order to be ready for EU passport eligibility in 2015.

In preparation for the Final Transposition Date, CIMA has confirmed its commitment to entering into cooperation agreements with EU regulators as a matter of priority. This follows Cayman’s long history of working with regulators worldwide and reflects Cayman’s own strong regulatory framework.

Cayman is also a member of the OECD’s ‘White List’ of nations, which have substantially implemented the internationally agreed standards on tax and information exchange. The Cayman Islands has signed 20 such Tax Information Exchange Agreements, with many G20 and European Union nations including the USA, UK, France,

Germany and Australia, with further agreements to follow.

While it is still early days in determining the exact nature of any legislative changes that may be required in the Cayman Islands to accommodate the Directive, there have been some very positive developments over the past six to 12 months in relation to public/ private sector collaboration, providing stakeholders with confidence that any proposed legislative changes in Cayman will be done with full consultation.

The passing of the Directive and the removal of a cloud of uncertainty for both EU AIFMs and non-EU AIFMs with respect to marketing non-EU funds in Europe, has the potential to deliver a significant boost to the hedge fund industry in Cayman, which has now rebounded strongly from the liquidity crisis following the meltdown in the banking and credit markets towards the end of 2008.

The number of hedge fund registrations with CIMA has continued an upward trajectory through 2010 with approximately 100 new funds registered each month (excluding the significant number of new single investor funds and private equity funds which are not required to be registered). With the number of terminations back at historical norms, Cayman is seeing around 60 net new funds registered each month, which is significantly ahead of competing jurisdictions.

Some of the industry headlines earlier in 2010, which pointed to investment managers’ preference for registering funds in UCITS jurisdictions such as Luxembourg at Cayman’s expense would appear to be inaccurate. The more likely scenario had always been that these domiciles would co-exist with the Cayman Islands, each appealing to different, if partially overlapping, segments within the investor and investment manager communities.

In fact, very few funds have redomiciled from Cayman to set up elsewhere. While UCITS funds are suitable for particular strategies and investors with certain requirements, they are often unsuitable for a large number of others that continue to enjoy the benefits of the Cayman regulatory regime. This demonstrates that the Cayman model is incredibly resilient, as borne out by the statistics on fund registrations as well as the experience of Walkers and other firms regarding recent instructions for the establishment

of new funds.

One trend that Walkers has recognised has been the preference of managers and investors to establish parallel funds in the Cayman Islands and in European Union jurisdictions. This was one of the reasons that Walkers established an office in Dublin, Ireland in October 2010.

For North American investors, the responsiveness of Ireland’s financial regulator as well as cultural and language similarities with the US make it an attractive jurisdiction to do business with compared to other European fund centres.

Another important development in the jurisdiction has been the establishment of the Grand Court of the Cayman Islands’ new Financial Services Division (the FSD), which has delivered tangible improvements in the manner in which civil litigation is conducted in Cayman. With dedicated and highly respected judges assigned to the division, the FSD has provided greater capacity for civil litigation, which raises complex and novel legal issues.

The introduction of the FSD is also timely, given the increase in these complex, high-value disputes and demonstrates a clear commitment by the jurisdiction to being able to service the needs of the financial sector. This was demonstrated with regard to the recent investment funds cases assigned to be argued before the FSD, including a number of winding up petitions brought against funds by investors dissatisfied with the informal wind down process undertaken by managers and directors.

One recent case before the FSD, which Walkers was involved in, marked the first time that a pure loss of substratum has been fully argued in this jurisdiction.

Overall for the Cayman Islands, all the conditions, which over the years have made this jurisdiction the domicile of choice for hedge funds, remain intact, essentially the pro-business, cost efficient environment within a strong system of regulation that adheres to international standards under UK common law.

Now for the first time in over two years, following the passing of the Directive, there is some legislative certainty for international investment managers and the way forward to raising capital is much clearer. There will be some significant opportunities for managers, particularly in Europe, which the hedge fund industry in Cayman is extremely well placed to capitalise on. www.ifcreview.com/CaymanIslands

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general overview

Location

Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

The Cayman Islands are in the western Caribbean about 150 miles south of Cuba, 460 miles south of Miami, Florida and 167 miles northwest of Jamaica.

Eastern Standard Time (Nov–Feb) Central Standard Time (Mar–Oct).

App. 50,000.

George Town, Grand Cayman.

Owen Roberts International Airport.

English.

Cayman Islands dollar (CI$) Fixed at CI$1.00: US$1.25.

Parliamentary democracy with judicial, executive and legislative branches. +345.

Common law and statute.

Investment funds, capital markets, banking, trusts, etc.

Cayman Islands

Cayman Islands - Fact File

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

None.

None.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

No restrictions.

No restrictions.

One share issued to the subscriber on incorporation by operation of law. A Cayman Islands company must always have at least one member.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

24 hours for an express incorporation.

Fees start at approximately US$732 for an Exempted Company.

Fees start at approximately US$732 per annum.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Two if regulated by the Cayman Islands Monetary Authority.

None.

No requirement.

None.

shareholders

Disclosure Bearer shares Minimum number

Public share registry Meetings/frequency

No public disclosure for exempted companies.

Allowed but with very strict custody rules.

One share issued to the subscriber on incorporation by operation of law. A Cayman Islands company must always have at least one member.

None for exempted companies.

None.

accounts

Annual return Audit requirements

None.

None unless regulated by the Cayman Islands Monetary Authority.

other

Registered office Domicile issues Company naming restrictions

Must be located in the Cayman Islands.

Transfer of domicile is permissible.

Yes – no two companies may have the same name and certain other restrictions as specified in the Companies Law (as amended).

www.ifcreview.com/CaymanIslands

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Cyprus

74

IFC Review • 2011

Cyprus’ Evolving Legal Framework

by Christos Mavrellis, Chrysses Demetriades & Co, LLC, Cyprus

C

YPRUS,

IN

ACCORDANCE

with its declared policy to play an important role as an attractive location for international businesses, as well as one of the world’s most important ship registries, has continued the modernisation of its legal regime in the fields of corporate law, shipping law and taxation.

Corporate Law

The recent changes in the Cyprus Companies Law, Cap. 113, are laid out below.

Execution of deeds and power of

attorney

The archaic provisions in the Companies Law, which required deeds, powers of attorney and some other contracts entered into by a Cyprus company to be necessarily executed under the common seal of the company, have been amended, making it now possible for all such deeds and documents to be executed under the signature of any person authorised by the company.

Prospectus issues

Provisions of the Companies Law dealing with the requirement for the issue of prospectus, filing of prospectus and other relevant provisions, shall not apply in all cases relating to the issue of shares or

debentures to which the Public Offer and Prospectus Law and/or the law dealing with Collective Investment Organisations of Open Type, which laws have in fact introduced into the Cyprus legal system the relevant provisions of the corresponding EU Directives, are applicable.

These developments make it much easier for Cyprus companies to offer their shares in accordance with the provisions of the EU Prospectus Directive, not only for listing in Cyprus but also in any other recognised stock exchange without the need to go through the cumbersome provision of the Companies Law and without the necessity to file the prospectus in the Greek language and some times without the need to even issue a prospectus when such issue falls within the exemptions of the Prospectus Directive and the corresponding Cyprus legislation.

Linked to the above is also the amendment to the relevant provisions of the Companies Law enabling a Cyprus company to have and maintain a registry abroad, not only within Her Majesty’s Dominions, as it was the case until recently.

Transfer of shares

Furthermore, provisions have been introduced accepting transfer of shares www.ifcreview.com/Cyprus

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Financial assistance for purchase of shares

One very important development is the amendment to the provisions of the law prohibiting direct or indirect financial assistance by a company in connection with the subscription or purchase of its shares. Following such amendment it is now possible for private companies, which are not themselves subsidiaries of a public company, to offer such financial assistance, provided that the decision is approved by an affirmative vote of 90 per cent of all the issued shares of such company. Following such amendments, the concept of whitewashing has now been introduced.

Registered charges

One long standing ambiguity as to whether pledges by Cyprus companies of shares in the capital of a Cyprus company constitute registerable charges for the purposes of the Companies Law has been clarified by the introduction of a new provision in the law making it clear that such pledges need not be registered as charges in order to be valid against the liquidator of the Cyprus company that owns such pledged shares.

Electronic voting

In line with the provisions of the EU Directive 2004/25/EC, extensive provisions have been introduced in the law enabling the shareholders of a company which is listed in an organised market to vote through electronic means and to receive documents, to convene extraordinary general meetings etc.

Merchant Shipping

In 2010, the long awaited amendments to the Merchant Shipping (Fees and Taxing Provisions) Law were introduced having first been approved by the appropriate authorities of the European Union.

The amendments, as introduced, have first reaffirmed the exemption from tax of the profits from the ownership, bareboat chartering and operation of Cyprus ships, as well as profits from ship management and of all dividends distributed to

shareholders by corporate ship owners or ship managers. In addition, it has extended the tax benefits to the charterer of ships. The amendments have also extended the tax exemptions to cover not only owners and bareboat charterers for Cyprus registered ships, but also owners of European Community ships and in some cases, under certain conditions, to owners and operators of non-Community ships if a combination of Community and non-Community ships exists.

It has also been clarified that profits realised from the disposal of a ship are tax exempt.

Now ship owners, ship managers and charterers, if they are managed and controlled in Cyprus or they have a permanent establishment in Cyprus, can opt to be taxed on tonnage tax basis by reference to the tonnage of the ships they own, manage or operate under a bareboat, demise, time or voyage charter. The tonnage tax rates are such so as to result in an overall low tax burden for those qualifying owners, operators, managers or charterers.

Further to the above, interest earned by ship owning companies is, under certain conditions, tax exempt.

With the amendments introduced, Cyprus not only expects to maintain its leading position in international shipping but also to attract more ship owners to use the Cyprus Registry and the Cyprus flag and also to remain a major third party ship management centre of the world. The tax exemptions that have been introduced with respect to profits from chartering operations are expected to attract to Cyprus international chartering companies, which may establish their offices on the island and manage their activities with a low tax exposure as profits from such operations can now be taxed, at the charterer’s option, on the basis of the tonnage of the ships under charter.

Tax Legislation

New provisions have been introduced into the Income Tax Laws and thus have extended the exemption of interest income from income tax to all persons, including legal entities.

Before the amendment, 50 per cent of interest earned by legal entities was subject to 10 per cent corporation tax. Still, this exemption

does not cover interest earned by any person in the ordinary course of its business as well as interest closely connected with the carrying on of such person’s business and interest earned by a collective and investment undertaking of close or open type. Interest earned by banks or financial institutions as well as interest earned by Cyprus companies in connection with intergroup financing are considered business profits and they are liable to income tax. Of course, all expenses relating to the income are deductible.

It has now been clarified that any profit on the disposal of any securities, including any share or interest in a collective investment scheme of open or closed type, including any profit realised on the redemption of any interest in such a collective investment scheme, are fully exempt from income tax.

As regards the Special Defence Contribution levy, the relevant legislation has been amended: • Abolishing the requirement for a minimum holding of one per cent in the foreign company paying the dividends for the application of the exemption from special defence contribution of dividends received by a company having a permanent establishment in Cyprus. This amendment was considered necessary to attract to Cyprus funds and collective investment schemes which, as a rule, do not hold more than one per cent in international companies in which they invest.

• Connected to the above was also the amendment to the Special Defence Contribution Law under which any dividends received by any person who is resident in the Republic of Cyprus or who is deemed to have received from a collective investment scheme or similar institution, shall not be subject to the usual 10 per cent special defence contribution but it shall be subject only to three per cent levy on the gross amount of the dividend.

• At the same time, it has been provided in the law that any interest earned by a collective investment scheme of open or closed type shall not be deemed interest for the purposes of the Special Defence Contribution Law.

Cyprus

of companies listed in recognised stock exchanges if they are made in compliance with the rules of the relevant stock exchange, which may include dematerialisation of share certificates, and without the need to use an instrument of transfer in such cases.

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IFC Review • 2011

Cyprus – Russia Protocol Signed Christodoulos G Vassiliades, Managing Director, Christodoulos G Vassiliades & Co LLC, Cyprus

I

n an era when the business world

is seeking ways to restore financial balance, the relationship between Cyprus and Russia, two strongly affiliated countries, is improving steadily. Following the signing of the treaty for the avoidance of double taxation (DTT) back in 1998, Cyprus was and still is amongst the largest investors in the Russian market while Russia constitutes one of the pioneers in the area of foreign investments in Cyprus.

On a global scale, innovation and transformation of the business sector challenge the traditional business relations between the two countries calling for a re-adaptation of these relations. This re-adaptation is reflected in the recent commitment by the Presidents of the two countries to further their mutual cooperation, sealed in October 2010 in Nicosia with the signing of the amending Protocol to the current DTT. Under the amending Protocol to the DTT, various changes in line with the OECD Model Tax Convention on Income and on Capital have been introduced. This signifies that both countries are willing to improve their reputation on an international level.

It is considered a great achievement for Cyprus to be able to maintain the existing withholding rates with the current DTT in relation to dividends, interest and royalties with only limited differentiating clauses and clarifications adopted. In line with this, dividends will maintain the five per cent withholding tax rate at source if the beneficial owner has directly invested the equivalent of at least €100,000 in the capital of the company paying the dividends. The current provision has been amended only with regards to the currency of the investment, switching from US dollars to Euro.

The definition of ‘dividends’ of the Protocol now further clarifies that payments on shares of mutual investment funds or other similar collective investment vehicles will be subject to the withholding tax rates applicable to dividends. In contrast, distributions by real estate investment trusts and real estate investment funds will be treated and taxed as income from immovable property instead of being treated as dividends or other income. Additionally, the definition of ‘dividends’ now extends to

include the distributions from shares held in the form of depositary receipts which will also be subject to the relevant taxation.

The withholding tax on interest will continue to be at the rate of zero per cent.

The definition of ‘interest’ is now fully in line with the OECD Model Tax Convention to cover income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying the right to participate in the debtor’s profits. Under the new definition, no penalty charges are included concerning late payments or interest regarded as dividends. Such reclassified interest will be subject to the existing withholding tax rates of dividends.

Royalties will continue to enjoy the zero per cent withholding tax rate with no further clarifications or amendments being brought about by the new Protocol.

A clarification has been introduced in relation to the treatment of residency under which a higher level of cooperation between the relevant tax authorities of Cyprus and Russia is required. The clause provides for both the aforementioned authorities to consult with each other and reach a mutual decision concerning the cases whereby the ‘effective management’ cannot be determined.

An improvement has also been added with regards to the permanent establishment treatment provided under the DDT. A new paragraph has been inserted in order to clarify the provision of services by individuals in a contracting state. Under the Protocol it is now clear that a permanent establishment may arise from administration or business activities executed through service providers who will be deemed to be present in a contracting state for more than 183 days in a period of 12 months.

Provisions relating to income deriving from international transportation underwent a replacement, and now provide for the taxation of such income only in the contracting state in which the place of effective management of the persons deriving the transportation income is situated.

Despite the significant changes outlined above, the interest of the business community focuses on the major changes being brought about in relation to the capital gains treatment, the exchange of

information and the introduction of a limitation of benefits clause.

The capital gains article has been amended to permit a contracting state to tax capital gains derived by a resident of the other contracting state from the alienation of shares or similar rights which derive more than 50 per cent of their value from immovable property situated in the contracting state. Capital gains resulting from the disposal of shares, the value of which does not derive for more than 50 per cent from immovable assets remain taxable in the alienator’s country of residence. The new provisions adopted do not affect gains deriving from the disposal of shares in the course of a corporate re-organisation, the disposal of listed shares on a recognised stock exchange and, finally, the disposal of shares derived by a pension fund, a provident fund and the government of either of the two countries.

The Protocol provides for a four-year grace period from the date of ratification of the Treaty for implementation of the new provisions of the capital gains article.

This grace period has been interpreted as a ‘catching up’ period for other investing countries in the Russian market, which currently seem to be negotiating their existing treaties. In line with this, Russia has undertaken that by the implementation date of the capital gains clause incorporated in the Protocol with Cyprus, the same capital gains treatment will be adopted in all its treaties concluded with its main foreign investors.

Another important change lies with the exchange of information article, which has been revised to adopt the exact OECD Tax Convention on Income and Capital under which the relevant tax authorities of both contracting states are under obligation to permit exchange of information by utilising and mobilising their national mechanism in order to collect the required information.

According to the Protocol, the exchange of information is not limited in scope to taxation covered by the DTT but it can also extend to include indirect taxation.

Such information, once obtained by the competent authorities, shall be treated with confidentiality; however, it may be www.ifcreview.com/Cyprus

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IFC Review • 2011

to take place. It is important to mention that both contracting states are not expected to go beyond the powers granted by their national legislation in order to obtain information, but remain under the obligation to obtain the data that is available and is possible to collect.

Lastly, the limitation of benefits is a new clause added to the Protocol aimed at the prevention of treaty abuse. The tax authorities of both contracting states reserve the right to refuse the tax benefits of the Treaty to any company created for the specific purpose of obtaining the Treaty benefits and provided that it is neither registered in Cyprus nor Russia. Companies incorporated in Cyprus or Russia are excluded from such limitation but this may apply to companies not registered in Cyprus but tax resident in Cyprus (ie, having their management and control in Cyprus). The decision for the application of this clause shall be the result of mutual consultation between the two relevant authorities, aimed at the elimination of ‘treaty shopping’.

The Protocol itself was signed in October 2010 and was expected to come into force from the 1 January 2011. However, Russia is seeking parliamentary ratification of the treaty, which is ongoing today, whereas the

Council of Ministers in Cyprus have already ratified the Treaty.

Cyprus had been expecting the ratification of the protocol by the Russian parliament prior to the end of 2010 but despite the determination of Mr Medvedev back in October 2010 in Nicosia, the treaty did not come into force as initially expected.

The Russian president committed upon his recent visit to Cyprus that the enforcement of the Treaty will result in the removal of Cyprus from the Russian ‘black list’ of uncooperative jurisdictions. As a result, dividends received by Russian shareholders from equity participations in Cyprus subsidiaries may be able to qualify for the Russian ‘participation exemption’ and will not be taxed in Russia. For obtaining this tax benefit of non-taxation of dividends from abroad the Russian government requires amongst other provisos that the dividends are received from countries or territories which do not provide a ‘preferential’ tax (offshore) regime.

With the ratification of the Treaty by the Russian Parliament and the removal of Cyprus from the Russian ‘blacklist’, it is expected that the investment opportunities will be boosted in an environment inspiring greater confidence, clarity and professionalism.

Cyprus

disclosed, if needed, in court proceedings.

In order for a contracting state to obtain the desired information, it is obliged to proceed in line with the national legislation and collection of information mechanism in place at the other contracting state. The mechanism currently in place in Cyprus is outlined in the following paragraphs.

In 2000, Cyprus signed a commitment letter provided by the OECD along with other countries with regards to the elimination of harmful tax practices and the embracing of the international standards of transparency and the exchange of information. This commitment resulted in the amendment of the Cyprus national legislation (Assessment and Collection of Taxes Law, 72 (I)/2008) in 2008 providing for the exchange of information as well as the procedure to be followed for the collection of the required information.

The right for the initiation of the national mechanism for the collection of information rests with the Director of Inland Revenue who may request evidence regarding a person under investigation and must provide the justification for such a request. Upon the provision of satisfactory justification the Attorney General of the Republic may grant his written consent in order for the collection of information

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Cyprus - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Cyprus is an island in the eastern Mediterranean Sea. Greenwich Mean Time+2.

820,000.

Nicosia.

Larnaca Airport and Pafos Airport.

Greek and Turkish are the official languages but English is widely spoken.

Euro as of 1 January 2008.

Democratic Republic member of the EU. +357.

Based on common law and harmonised to Acquis Communautaire.

Financial centre, double tax treaties, tax incentives, lowest tax in EU.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Depending on income. Maximum 30%.

10% on profits.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any. No minimum.

Usually one thousand.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Available.

Subject to name approval, four to seven days with acceleration fee.

Depends on the authorised share capital of the company, at the rate of 0.6%.

Annual return filing fee (€17).

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Local not required but advisable for tax purposes.

Yes. Obligations for annual meeting.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Names of the shareholders disclosed. Use of nominees possible.

No. One. Publicly accessible records.

Written decisions signed by all directors possible.

accounts

Annual return Audit requirements

Yes. Yes, small companies – as defined – are exempt.

other

Registered office Domicile issues Company naming restrictions

Yes. Yes. Any word that the Registrar of Companies considers undesirable or that is similar or identical to an existing company name, or that implies legal activity or royal or government patronage. Any words, among others, which include ‘asset management’, ‘assurance’, ‘bank’, ‘credit’, ‘dealer’ etc. www.ifcreview.com/Cyprus

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Gibraltar

Seismic Changes for Gibraltar Tax System

By Chris White, Partner, Hassans, Gibraltar

O

N 16 JUNE AWAITED text

THE

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of the new Income Tax Act was published as a draft for public comment. Shortly after, on 1 July, the 2010 budget was announced. In the first week of September following the consultation period, the revised Income Tax Bill was published. The Bill came to Parliament at the end of October and its provisions are effective from 1 January 2011.

The implementation of the new Income Tax Act signalled the end of Gibraltar as a tax jurisdiction which relied on administrative and statutory ring fencing and secretive tax exempt companies and trusts to attract inward investment. By creating a level playing field for both local and inward investors, Gibraltar swept away the obstacles to it taking full membership of the company of respectable jurisdictions, which no other jurisdiction had grounds to black list or censure.

Corporate Tax Rate: 10 Per Cent

Although the European Court of Justice, when the issue came before it, had not denied Gibraltar the opportunity to implement the zero per cent/eight per cent regime, which had previously been prepared for legislation and submitted for EU approval, the Government decided that it would be a more responsible approach and more consistent with the modern requirements for the acceptability and credibility of offshore finance centres

to retain the principles of the current Act, modernise it and create a structure, which would enable an enduring reduction of the rate of tax chargeable on corporate entities from 22 per cent to 10 per cent.

The only exception to this low rate of tax would be a surcharge of an additional 10 per cent on utility companies (electricity, telecommunications, water, petroleum and sewage) and any company which has a dominant market position and abuses it.

Gibraltar’s tax regime has, since its inception, been based on the colonial laws handed down by the UK government in the early and middle parts of the 20th century. A fundamental part of that body of law was to restrict the powers of the colony to its own territory. The Government, although now a dependent territory rather than a colony, has decided to retain and clarify this territorial basis in so far as it refers to taxation and will only tax income which accrues in or derives from Gibraltar. The new Act defines the concept of “accrued in” or “derived from” to amplify the meaning from binding Privy Council case law previously relied on and expands the definition to ensure that companies which operate under a licence granted by Gibraltar or passport into Gibraltar under a licence issued elsewhere (eg, insurance companies) are entitled to take advantage of the 10 per cent rate of tax while not suffering tax on the activities they undertake through a branch or permanent establishment outside Gibraltar.

It is interesting and re-assuring to note that the UK Government has recently launched a consultation paper exploring the possibility of moving parts of its own tax system to a territorial basis.

Sustainability Of Low Tax Rate

That the 10 per cent tax rate is sustainable over the long term was demonstrated by the details of the state of the economy announced in the budget. Gibraltar may have a small economy but, at a time when most of the economies of the Western World are in dire straits, the economy of Gibraltar is alive and well!

In the year to 31 March 2010, economic growth was 5.4 per cent and the budget showed a surplus of £29.4 million on a gross domestic product of £848 million. Public debt represented 15.2 per cent of GDP. Comparably, the UK and much of the rest of the developed world are struggling with huge deficits; debt is about 70 per cent of GDP in the UK and in many countries, approaching 100 per cent.

This state of economic health has enabled not only the reduction of the corporate tax rate to 10 per cent but also has several subsidiary effects.

Passive Income

Gibraltar tax operates on the principle that tax is only due where there is a clear legislative imposition of tax on a source of income. In drawing up the legislation all forms of interest (apart from trading interest received

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taxable sources of income to reflect the Government’s policy that there is no intent to tax those sources.

Dividends are not excluded from taxation but their taxation is significantly limited.

Dividends paid between companies are not taxed, dividends paid to non-residents of Gibraltar are not taxed and dividends paid to Gibraltar resident individuals are only taxed if they do not arise from quoted companies and, even then, only to the extent that the underlying income of the company is taxable in Gibraltar.

Overall Advantages For Individuals

The removal of the taxation of interest, royalties and the majority of dividends reflected an advance in the Government’s program of reducing the taxation of savings and passive income by removing from chargeability on all interest on investments orm providing a taxation platform of both individuals and corporate rmbusiness objectives tives nd entities. Parallel to the removal ves taxation of this large swathe onfidentiality.from of investment income is previous form legislation which reduced the rate of able advice, reputable taxation on pension income for those rm ble ctives over 60 years of age to zero per cent. rm ves The Government’s emphasis on doing ves away with the taxation of savings and pension income is, in itself, not only an table ble incentive for the population of Gibraltar to invest for their future, but also, when ble combined with the lack of capital gains tax or any sort of estate/wealth tax, a powerful attraction for those with savings income who wish to relocate from a high tax jurisdiction to a more economically friendly jurisdiction.

The budget also went on to announce reductions in the tax rates applicable to individuals who have income which is taxable. The top rate of tax for those earning up to £353,000 will be 29 per cent. Above that level tax rates begin to fall. The effective rate of tax on earnings i of £1m is 20 per cent, anything above that is charged at five per cent. The stated intention of the Government is i to continue the reduction of the rates of taxation charged on individuals across i the board to bring it closer to that of a.gi companies. opa.gi ltar The quid pro quo for the significant raltar 08B • Email info@europa.gi 9013 reductions in the levels of corporate 0108B 0511 andGibraltar personal taxation and an integral rgardens 6, Suite 24, a.gi 10511 part of the plan to produce the income vices No 00108B ltar Commission Licence which will allow future reductions ሇҰ‫ބ‬Gibraltar Registration No 10511 108B a.gi 0511 ropa.gi ltar www.ifcreview.com/Gibraltar

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81

in individuals’ taxation, is that the Government has taken measures to enable it to feel confident that it will be able to collect the tax it intends to collect and has introduced self assessment, legislation to modernise the collection of tax and extensive measures to counter the avoidance or evasion of tax.

Trusts

Although the taxation of trusts and beneficiaries of trusts has been introduced where the beneficiaries of a trust are outside Gibraltar, the taxation position remains much the same as it was before.

Taxation on the income of a trust is limited to those trusts which have Gibraltar resident beneficiaries (for this purpose, those High Net Worth Individuals who have Category 2 status and their spouse and children are treated as not resident). If a trust has Gibraltar residents amongst its beneficiaries or potential beneficiaries, the absence of taxation on savings or passive income applies just as much to the trust as it would to an individual.

The taxation on the beneficiaries of a trust rather than the trust itself is limited to those beneficiaries (other than the Category 2 individuals and their families) who are resident in Gibraltar and even this is restricted to taxing the distributions which can be matched with the taxable income of the trust and the offsetting of any underlying tax which has been paid by the trust.

If neither the trust nor the beneficiaries are subject to tax, a licensed trustee will have no need to make returns for the trust or to make the trust known to the Commissioner of Income Tax. Funds

The principle of reducing the taxation of savings and passive income is carried on into funds and their investors.

The position of the fund itself is unchanged by the new Act and the same exemptions apply as before strengthened by the further exclusion of categories of savings and passive income from taxation.

In the case of the investor into a fund there are changes which make the trust regime even more attractive.

Income from a fund which is available to the general public is no longer taxable regardless of how the income arose in the fund.

If a fund is not available to the

general public, a look through basis is used and taxability is limited to whatever the tax would have been if the recipient had received the income from the entity underlying the fund. Again the entity will have the advantage of the absence of tax on savings and passive income, which means that with very few exceptions (eg, a fund investing in Gibraltar real estate), there will be no tax payable by the investor.

Gibraltar

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Treasury/Holding Companies

Taxation on interest is limited to that interest received by banks or moneylenders as trading receipts. In the case of both, trading receipts are defined to exclude the interest which would arise from a Treasury function. This gives banks and moneylenders the same advantages as all other companies where the possibility of using Gibraltar as a Treasury base arises.

Effectively a non-Gibraltar group company can borrow money from the Gibraltar Treasury company, receiving a deduction in accordance with the laws of its jurisdiction, and the Treasury company will not be taxed on the receipt of the interest.

The changes made in the new Act are also beneficial for those companies receiving dividends from their subsidiaries.

Gibraltar is already in the position that it does not tax the receipt of dividends from EU subsidiary companies, it has added to this by taking away the taxing rights to any part of a dividend received from a company which carries out its profit making activities elsewhere. With neither liability to tax nor withholding on dividends paid to non-residents, group profits can flow through or be invested in Gibraltar without taxation.

Conclusion

There is a lot more detail to the legislation but, all in all, its aim is to create a corporate low tax environment and lay the foundations for, not only the security of the corporate environment, but also the continued reduction in the tax burden on individuals.

The environment created by the new legislation not only places Gibraltar amongst those jurisdictions who comply with all international codes of conduct relating to tax behaviour but also leaves it as an attractive and tax efficient location for individuals and businesses who wish to locate either in whole or in part to a pleasant, tax efficient, new home.

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Gibraltar

Gibraltar - Fact File general overview

Location

Time zone Population Capital Airport(s) Language Official language Currency Political system International dialling code Legal system Centre’s expertise

Peninsula at southern tip of Spain, Self Governing British Overseas Territory, part of Euopean Union GMT +1 c 27,000 Gibraltar.

Gibraltar . Malaga and Jerez both within 1.5 hours.

Business Language –English. Social language English or Spanish.

Pound Sterling; local notes also in issue.

Parliamentary democracy. +350.

Common Law based on English law with local variations.

Internet gaming centre, trusts, insurance, captives, protected cell companies, funds and wealth management.

tax

Personal income tax

Corporate income tax

Exchange restrictions Tax information exchange agreements

Progressive rate bands to 29% for income up to £353K. Marginal rates then fall to the point where any income over £1m is charged at 5%. Beneficial regimes also available for High Net Worth Individuals and High Executives possessing Specialist Skills.

10% for all companies other than utility companies and companies which have and abuse a dominant market position (20%) None.

So far 19, including most of the major European jurisdictions, but increasing.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

All major currencies.

No minimum specified.

One.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Available Usually 3 days can be accelerated to one day if urgent. £50 (£100 for urgent incorporation).

Filing of –Return- £45 ,Accounts- £10, Particulars of directors or secretaries- £10

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

Private company –one, Public company- seven None.

Yes. At least one a year at any location.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Yes with some limitations.

One. Companies house.

Once a year; any location.

Annual return Audit requirements

Yes. Required with derogations for small companies.

accounts

other

Registered office Domicile issues Company naming restrictions

Required.

Re-domiciliation in or out available in appropriate cases.

Yes.

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Guernsey

Guernsey: The Future in its Hands

By Paul Christopher, Partner, Mourant Ozannes, Guernsey

W

HEN DISCUSSING THE HISTORY OF MANKIND Mao

Tse Tung observed: “Man has constantly to sum up experience and go on discovering, inventing, creating and advancing. Ideas of stagnation, pessimism, inertia and complacency are all wrong. They are wrong because they agree neither with the historical facts of social development over the past million years, nor with the historical facts of nature...” The past 12 months have served as a period of time in which to reflect on and deal with the consequences of the global financial crisis. This article intends to cover any discernable trends for Guernsey which have evolved during that period.

A positive note was sounded in March 2010 by Michael Foot, author of the report commissioned by HM Treasury into British Crown Dependencies and overseas territories published in October 2009. He recognised that whilst the global financial crisis had resulted in greater scrutiny of so called ‘offshore centres’,, Guernsey specifically had responded positively, and, in his view, was well positioned for the future: “A jurisdiction like Guernsey has its own future in its own hands and it needs to be left to get on with that within a framework of good governance” said Mr Foot. “You have the flexibility and ability to sit down in a room and talk - industry,

regulatory and government…about what really matters and plan for the future”.

Corporate Governance

Against this background Guernsey has initiated a number of internal consultations; chronologically the first of which was in relation to corporate governance for licensed businesses and was issued by the Guernsey Financial Services Commission (GFSC) in the first quarter of the year. The response to the consultation from industry was so overwhelming that a further consultation is anticipated.

Corporate Tax Review

Consultations in other important areas have also taken place in relation to amendments to the Company Law (introduced in 2008) and the corporate tax regime generally, the outcomes of which are still pending. It has, however, already been confirmed that investment funds and their structures will continue to benefit from a tax exempt status.

Given the similarity of the Guernsey corporate regime to that of Jersey and the Isle of Man, which are at the time of writing under review in relation to the EU Tax Code of Conduct, those reviews will no doubt, have consequences in relation to Guernsey’s own proposals for its future tax system. In particular Guernsey’s government has made a number of statements asserting its desire to work together with the other Crown

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Dependencies on future tax regimes.

To the extent that a new tax regime is required it is anticipated that this will not be before 2015 at the earliest.

Emerging Markets

Earlier this year Nils Johnson from Spence Johnson who authored the report ‘Offshore Evolution’, that was published in 2009 in association with the Society of Trust and Estate Practitioners, noted: “Guernsey’s benefit is there is no legacy of non-compliant portfolios clogging up their books….where that can manifest itself as a strength is where it starts to focus on emerging elements of wealth, where family wealth is growing rapidly, such as India and Russia”.

Guernsey Finance, the promotional body for the finance industry in Guernsey, lead a delegation of government and industry to India in October 2010 and at the time of writing, is shortly to be leading a similar delegation to China. Xiao Jie, Commissioner of the State Administration of Taxation, People’s Republic of China, visited Guernsey to sign a tax information exchange agreement on 27 October 2010. That was the 19th agreement that Guernsey has finalised with another territory. Guernsey’s Chief Minister in the forthcoming delegation to China is expected to sign a memorandum of understanding (MoU) with the Shanghai Municipal Financial Services Office to promote exchange and cooperation in financial services between the two centres.

The delegation also will seek approvals for Guernsey companies to list on the Hong Kong Stock Exchange, will progress the signing of an MoU with the China Banking Regulatory Commission and move forward signing a similar MoU with the China Securities Regulatory Commission.

Tax Information Exchange Agreements

Guernsey is close to conclusion of a further 12 Tax Information Exchange Agreements (TIEAs), in addition to the 19 that it has already entered into, which it expects to sign in the near future. TIEAs have been entered into with the following jurisdictions: Australia, China, Denmark, Faroe Islands, Finland, France, Germany, Greece, Greenland, Iceland, Ireland, Netherlands, New Zealand, Norway, Portugal, San Marino, Sweden, the United Kingdom and the United States of America.

Fiduciary

Anecdotally Guernsey now appears to be the jurisdiction of choice for Qualifying Recognised Overseas Pension Schemes

(QROPS). The fiduciary business in the Island has also been re-invigorated by the opportunities which it perceives in the emerging markets. Guernsey has also been seen as a favourable jurisdiction for the establishment and operation of family limited partnerships as well as more conventional wealth structuring arrangements. It also continues to be a jurisdiction which attracts complex and high value business as a response to the sophistication and experience of the service providers and the judiciary.

Investment Funds

Guernsey’s position as a leading fund domicile has been further endorsed by a series of new administrators and managers establishing a presence in the Island. JP Morgan and BNY Mellon both added their names to the list of fund administrators in Guernsey. BlueCrest Capital Management – one of Europe’s largest hedge fund managers – and stockbroker Shore Capital relocated significant aspects of their business from London to the Island during the first half of 2010.

Private equity firm, Terra Firma, also expanded its Guernsey office in parallel with Chairman, Guy Hands, taking up residence in the Island. Other private equity managers including Primera, EQT, Alchemy and John Moulton’s, Better Capital also have significant funds administered in Guernsey.

Statistical information in relation to investment funds also shows that the net asset value of total funds under management and administration grew by £18.9 billion (8.4 per cent) over the quarter ended 30 September 2010 to £243.1 billion. For the year since 30 September 2009 total net asset values increased by £61.6 billion (33.9 per cent).

Asset management and stock broking information at the time of writing also showed substantial increases of gross assets under management as well as a substantial increase of turnover of stock broking activities.

According to data direct from the Market Authority the London Stock Exchange (LSE) statistics to the end of September 2010 also showed that there are more Guernsey incorporated companies listed on the markets of the LSE than any of its competitor finance centres, LSE statistics to the end of September 2010 show there are more Guernseyincorporated companies on each of the UK Main Market, the Alternative Investment Market (AIM) and the Specialist Fund Market (SFM) than any competitor jurisdiction.

In addition, Guernsey also leads the

way in terms of numbers of “equity investment instruments” – the majority of investment funds – listed on the exchanges both individually and collectively. This includes the fact that it has more equity investment instruments listed on AIM than any other jurisdiction, including the UK and more than the UK, Jersey and the Isle of Man combined.

The figures from the LSE website indicate that there had been more new listings so far in 2010 from Guernsey than other jurisdiction.

The LSE website also shows that there are 106 Guernsey-incorporated companies with a market value of £21 billion listed on the LSE markets as of 30 September 2010. Of these, 60 were invested on the UK Main Market, 41 on AIM and five on SFM. There were 66 equity investment instruments from Guernsey on the exchanges at this time, with 44 on the Main Market, 19 on AIM and 3 on SFM. Banking

In relation to banking licenses there continues to be a downward trend in the number of bank licenses which are issued by the GFSC from 54 in 2004 to 44 in 2009 representing 15 different countries of origin. Total assets and liabilities in relation to deposits held at Guernsey banks at the end of September 2010 decreased 3.5 per cent over the year in Sterling terms.

However, the GFSC commented “Swiss fiduciary deposits were “essentially stable”.

Swiss deposits represented 33.9% of all deposits at the end of September 2010.

Any Other Business

During 2011 the GFSC will conduct a “root and branch review” of financial regulation in Guernsey. The GFSC will appoint consultants to undertake the study in an attempt to identify the requirements for regulation for the next 10 years and the most efficient methods of delivery.

In terms of its international personality Guernsey has established an office in Brussels along with Jersey to enable the islands to engage at the heart of Europe. The strategies of Guernsey and Jersey working together and at the same time developing their respective international personalities is one which looks set to continue. Local press, for example, has noted that senior politicians in both Jersey and Guernsey have identified scope for pan-island financial services regulation, auditor general and possibly even a fused legal profession. Local debates are also being held at a senior and academic level in relation to the “loosening” of the ties with the UK. www.ifcreview.com/Guernsey

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Channel Islands.

Greenwich Mean Time + 1 in summer.

60,000.

St Peter Port.

Guernsey.

English.

Pound sterling.

Democracy with a unicameral parliament. +44 1481.

Guernsey has its own legal system – common law with statues.

Investment funds, captive insurance, fiduciary and banking.

Guernsey

Guernsey - Fact File

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

20%.

0% as standard, except banks which are levied at 10% on their regulated business.

Investment funds can still apply to be exempt companies.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any. No minimum authorised share capital is prescribed by the Companies (Guernsey) Law, 2008 One share for a company Limited by Shares

type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

No, but standard Memorandum and Articles of Incorporation are available.

One day maximum.

Fee dependent on speed of incorporation, starting at £100.

Annual validation fee dependent on type of company, generally starting from £250.

Where applicable, continuing tax exempt fee £600.

Directors

Minimum number

Residency requirements

Corporate directors shareholders

Meetings/frequency

Disclosure

Bearer shares

Minimum number

Public share registry accounts

Meetings/frequency

Annual return other

Audit requirements

Registered office

Domicile issues

Company naming restrictions

One No, as a matter of corporate law. Regulated businesses will require resident directors.

Yes. None.

Yes, but beneficial ownership not publicly available.

No. One founder member for a company Limited by Shares. One founder member or a company Limited by Guarantee No. Not required (subject to redemption being passed).

No annual submission of accounts required.

Various exemptions, but not for regulated businesses.

Yes. None.

Yes.

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Hong Kong

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Privacy First: Tax Treaties and Information Exchange

By Martin Crawford, Chief Executive Officer, Offshore Incorporations Limited (OIL)

H

ONG KONG INVESTORS should be reassured by laws that prevent foreign tax authorities from freely digging into private financial affairs.

There can be little argument that moves made by Hong Kong to strengthen tax transparency will be good for offshore investment. The spate of double taxation agreements Hong Kong has entered into in recent months, bringing the total number up to 17 (see Appendix 1), offer new opportunities for financial efficiency in an increasingly demanding operating environment.

Although Hong Kong is hardly an offshore finance center in the traditional mould – offering low tax and sophisticated services rather than no tax and minimum disclosure – it is in its best interest to respond positively to the global push for greater transparency. As such, Hong Kong

has been busy signing the requisite number of tax treaties to qualify for the OECD ‘white list’ of jurisdictions that have substantially implemented the internationally agreed tax standard.

Yet some investors are wary. Chief among their concerns is that the information exchange agreements present in these treaties will give overseas authorities license to probe into the private financial affairs of individuals. And this could be done without the individuals in question ever knowing about it.

There is little to fear. The Hong Kong authorities have not been blind to the rights of local taxpayers or deaf to their publicly expressed concerns.

As a result, plenty of safeguards have been woven into the fabric of these treaties (see Appendix 2).

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If anything, information exchange agreements are a symptom of the more complicated environment that has come with the rise of treaty jurisdictions.

Hong Kong is fortunate in that it is able to sign full double taxation agreements: residents drawing income from a treaty partner territory have a degree of certainty as to when and how tax is imposed and they qualify for credits or exemption so that the same income is not taxed twice. Many other jurisdictions have been forced to meet the OECD’s transparency requirements by signing Tax Information Exchange Agreements (TIEAs), which offer no material benefits to investors.

However, investors can only use treaty networks to serve their commercial interests if they stay abreast of the regulatory nuances.

Understanding how a particular jurisdiction handles exchange of information requests is just as important as being aware of the tax reductions on income distributions (interest, dividend and royalties) available under certain tax treaties.

Offshore finance has undergone radical change in the last 12 months.

It is important that investors know where they stand – in terms of risks and returns.

Appendices Appendix 1. Hong Kong CDTAs in place

In effect: • Belgium • Thailand • PRC • Luxembourg • Vietnam Signed: • Brunei • Indonesia • The Netherlands • Kuwait • Hungary • Austria • UK • Ireland Negotiations concluded: • Switzerland • Japan • Liechtenstein • France Appendix 2. Exchange of Information (EoI) - Hong Kong

Competent Authority of CDTA Country

Makes Request Written request must include: • Identity of the subject person • Purpose of the request • The tax types concerned • The nature of the information sought • Relevance of the information to such request • Nature of the information required • Who they believe has possession of the info & grounds for believing so • The tax period for which the information is requested (A) If notification of subject party by the IRD is denied, requesting party has to substantiate why (e.g. records will be destroyed if subject person notified; covert criminal investigation; repeat offender )

Hong Kong

request must provide specific details of what it is looking for, including the names of individuals involved, the type of taxes concerned, the nature and relevance of the information required, and its intended purpose.

There is to be no casting the net widely – asking a jurisdiction for records of all bank accounts held by citizens of a certain country, for example – in the hope that some fish will fail to slip through.

If a request passes muster, the individual concerned will be made aware of it, unless there is reason to believe that doing this would undermine the investigation. The individual is granted time to review the information requested, ask for amendments before it is exchanged and can appeal against a refusal to make amendments. Crucially, no requests can be made for information that pre-dates the signing of the tax treaty.

The new Hong Kong legislation is similar to that passed by Singapore in October of last year. The “domestic interest” condition, under which the authorities could only collect information to enforce local tax laws, was removed, but at the same time measures were put in place to ensure that requests are based on fact as opposed to merely suspicion.

While requests are channelled through a tax authority, they may apply to information not present in the authority’s files. In tracking down details of the owners of companies and the beneficiaries of trusts, the likes of banks and financial services providers might be called upon to hand over documents relating to the formation of an entity, changes in name, address and share ownership, as well as names and addresses of directors.

In the event that a member of the OIL Group receives an information request, it will be obliged to comply with the laws of the applicable jurisdiction. But just as the safeguards in information exchange agreements are designed to prevent an encroachment on individual rights, stringent procedures regarding the handling of requests endeavour to ensure that confidential client information remains confidential.

Legal advice will be sought on the proper course of conduct should there be any uncertainty regarding adherence to the requirements by the requesting party.

HK Commissioner of IRD* Assesses Request *or IRD Officer not below rank of Chief Assessor authorised in writing by the Commissioner Request Approved must comply with: • EoI provisions • DTA wording / date of effect (no retrospective) • Info being “foreseeably relevant” • “Taxes covered” article • Not at variance with HK Laws / Administrative Practices • Information is obtainable under normal course of administration in HK • Doesn’t disclose trade or business secrets Subject Party Notified: • Unless commitment given not to under (A), or • All the addresses of the subject party are undeliverable, or • Prior notification is likely to undermine the chance of success of the investigation, or • The Commissioner is under a tight time constraint to disclose the information Subject Party May Request A Copy of the Information Exchange: • May request to amend any part of the/information exchange with documentary evidence Information Supplied: • Generally within 90 days • By IRD Commissioner or 2 x Deputy Commissioners • Must be treated as confidential • Shall not be used for non-tax purposes

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Hong Kong - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Hong Kong.

GMT +8.

7,000,000.

Hong Kong.

Chek Lap Kok. Cantonese/English.

HK$.

Elected legislature. +852.

Common law.

Everything.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

15% (max.).

16.5%.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

All. No Restriction No Restriction

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes. Four working days.

US$220.

Pls refer to http://www.ird.gov.hk/eng/pdf/br_fee_n_levy_table.pdf

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Nil. Yes (for private groups).

Nil.

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Listed companies only.

No. One. No. One per year.

shareholders

accounts

Annual return Audit requirements

Yes. Yes.

other

Registered office Domicile issues Company naming restrictions

In Hong Kong.

Nil. Nothing significant (eg, there are restrictions on “Bank” or “Trust”)

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Ireland

Asset Protection in Ireland: Practical Issues and Legal Implications

By Cormac Brennan, McCann FitzGerald Solicitors, Ireland

T

HE ISSUE PROTECTION

OF

ASSET

has become increasingly relevant in the current economic climate in Ireland.

Plummeting property values have left many borrowers exposed, and many clients with significant borrowings wish to ensure, insofar as possible, that a portion of their assets can be protected in a worst case scenario, where they may be unable to meet their debts in the future. This is often manifested in the practical imperative of putting assets out of the reach of creditors.

For some borrowers, it is too late to consider asset protection structures, as they may already be insolvent, but for those who remain solvent, taking action now can effectively ringfence some assets against creditors.

The issues arising include: When should one start protecting assets? What assets should be protected? What mechanisms are available to protect assets? What are the benefits and potential downsides of introducing such protection?

Where clients have significant borrowings it is often prudent for them to consider divesting themselves of

certain ‘vital assets’ (for example the family home, investments or cash) so that creditors cannot claim against those assets, particularly in circumstances where borrowings have been taken out in the name of the client individually, or the client has given personal guarantees in respect of borrowings of related companies. At the same time, clients frequently wish to retain the assets for their own use and enjoyment during their lifetimes and have as much control over them as possible.

Creditors can be categorised separately, as present, potential or future creditors: • Present creditors are those to whom liabilities are now due from past dealings.

• Potential creditors are those to whom liabilities may become due from current dealings (for example under personal guarantees).

• Future creditors are those to whom liabilities may become due from future dealings (for example in a start-up position).

How Assets are Protected

Assets may be protected through a range of mechanisms, some straightforward and others more complicated.

Use of trusts

Frequently trusts are used as an asset protection mechanism, so that the person who owns the assets (the ‘settlor’) transfers the assets to trustees to hold solely for the benefit of the settlor for his lifetime, with the assets passing on the settlor’s death in a certain way (for example to his spouse and/or children).

In these circumstances it is important to be aware that the beneficiary of the interest in possession (ie, the settlor) has a right to receive the income from the trust, and if he should become bankrupt his creditors could require the trustees to pay that income to them to meet the debts incurred. However, the capital of the trust would be protected for the remainder beneficiaries.

As an alternative, a discretionary trust can be established for a class of beneficiaries including the settlor and his family. The effect of this is that funds would still be available to the settlor through payments by the trustees to his family or on a discretionary basis to discharge outgoings actually incurred by him, yet he would not automatically be entitled to the assets if his creditors seek

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to recover from him.

Frequently these types of trusts are established offshore to put in place a further obstacle to creditors. However, offshore trusts, particularly those located outside of the EU, can introduce adverse taxation implications.

Transfers to spouse/children

The most straightforward and the most tax effective method of protecting assets is to transfer them to a spouse, provided that the client is comfortable with the spouse owning the assets solely going forward. Family law implications need to be carefully explained to clients in these circumstances as any transfer of assets between spouses could ‘muddy the waters’ in the event of marital breakdown.

Clients are generally comfortable in transferring the family home to their spouse, although it would be sensible to do so only where all borrowings have been cleared in advance of the transfer.

A further option (particularly where the spouse is also involved in the business or otherwise has significant liabilities, and may therefore also be vulnerable to being made a bankrupt) is to transfer assets to children, or on trust for them until they reach the age of 18. This type of transfer will however generally trigger taxes, depending on the type of asset transferred.

Again it would seem sensible to transfer only assets that have no borrowings secured against them. In addition, clients are generally concerned not to transfer significant assets to their children until they have the level of maturity to deal with them sensibly.

Legal Issues – Voidable Transactions

If assets are transferred into any asset protection structure, including a transfer to a spouse, care must be taken to ensure that legislative provisions will not apply to set aside the transfer and make the assets available on bankruptcy.

The first step is to ascertain that the client is currently solvent, and for the client to swear a declaration of solvency stating that he is solvent without recourse to the assets proposed to be transferred. In addition, it would seem sensible for the client to support that declaration with a statement of net worth that has been prepared and analysed critically by a professional.

However, even where this process has been carried out, if the client is ultimately declared bankrupt within two years of any voluntary transfer, this transfer can be declared void whether or

not the client was in fact insolvent at the time of the transfer. A voluntary transfer can also be set aside if bankruptcy occurs within five years of the transfer (but after the two year period has passed), although it would be a good defence for the client to show that he was solvent at the time when the transfer was made without recourse to the property transferred. 1.

In addition, under the Land and Conveyancing Law Reform Act 2009, where a conveyance of property is made with the intent to defraud creditors, such a conveyance is voidable unless the conveyance is bona fide for full consideration to a person not having notice or knowledge of the intended fraud 2. There is no time limit on this provision, although in this case the intent to defraud would have to be proven, which can present difficulties.

Similar provisions are also included in the NAMA Act 2009, which establishes the National Asset Management Agency (NAMA). The Agency is a statutory corporation established to acquire (principally) security over development land owned by designated credit institutions where the loans are impaired. Under Section 211 of the NAMA Act, NAMA has power to apply to Court to set aside transactions executed by a debtor with the effect of prejudicing NAMA. The Court will be empowered to declare a disposition to be void if, in its opinion, it would be just and equitable to do so. It is unclear as yet whether any time limit applies to the setting aside of such transactions and this provision has not yet been tested.

Taxation

While taxation is generally not at the forefront of clients’ minds, it is also important to consider taxation in the overall context of asset protection in order to avoid triggering significant taxes where possible.

On the creation of an asset protection structure, the client is disposing of his assets and effectively putting them out of his (and his creditors’) reach. This means that for tax purposes, he is disposing of his assets and, unless the disposal falls into any of the available exemptions or reliefs or is a disposal of a non-chargeable asset, there are likely to be Irish capital acquisitions tax, capital gains tax and stamp duty implications on the creation of the structure. For this reason, the client would generally attempt to limit the amount and type of asset put into the trust to cash assets and assets that will not trigger a significant tax charge; as to do otherwise would create a further

debt for the client (a tax charge).

On the transfer of assets from an individual client to his spouse, any capital gains tax, capital acquisitions tax or stamp duty that would normally arise will be exempted. Therefore, at least for taxation purposes, the transfer of assets to the spouse can be the most efficient method of asset protection. However, as mentioned above, such a transfer may not provide any protection depending on the exposure of the spouse in his/her own right to liabilities or potential liabilities.

Ireland as an Offshore Asset Protection Trust Jurisdiction

Similarly to Irish resident individuals frequently opting to establish offshore trusts with a view to increasing the level of asset protection, Ireland can be an attractive jurisdiction for the establishment of asset protection trusts by non-resident individuals with no connection to Ireland, and where the trust assets would not consist of Irish property.

Ireland is a member of the European Union and as such is an OECD ‘white list’ jurisdiction. The establishment of an Irish offshore trust in circumstances where there is otherwise no connection with Ireland can, if carefully structured, present significant tax planning opportunities wherein charges to Irish taxation should not arise.

Conclusion

For many clients considering asset protection structures, the main conceptual difficulty is the loss of control over the use of the assets, whether this control passes to trustees or to the spouse or other family members. However, if the settlor should effectively seek to retain too much control over the assets, the arrangement is likely to be set aside as a sham.

In addition, if the settlor does in fact become insolvent in the future there can be difficulties in benefiting him or her from the asset protection structure (ie, without those funds themselves being subject to a claim by his creditors).

However, with careful planning, this issue can be dealt with in practice.

Any asset protection mechanism, other than a transfer of assets to a spouse, is likely to give rise to certain tax implications and detailed tax advice should be sought in addition to appropriate legal advice.

1.Section 58 of the Bankruptcy Act 1988 2.Section 74(3) of the Land and Conveyancing Law Reform Act 2009. www.ifcreview.com/Ireland

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Western Europe.

Greenwich Mean Time +/– 0.

4,200,000.

Dublin.

Dublin, Cork and Shannon Airports.

English.

Euro.

Democratic Republic. +353.

Statute and common law.

Finance, banking, international trusts.

Ireland

Ireland - Fact File

tax

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Standard rate of income tax at 20% and higher rate at 41%.

12.5%.

None.

For full details, please go to www.ifcreview.com/TIEA

share capital

Permitted Currencies Minimum authorised capital Minimum share issue

All major currencies.

No minimum requirement. €1.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Not available.

5 – 10 working days. €100.

Annual return €40.

directors

Minimum number Residency requirements

Corporate directors Meetings/frequency

Two. Every company must have one Irish director or failing that, provide a fund to value of €25,394.76 as a surety.

Not permitted.

At the discretion and convenience of the directors.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Permitted but restricted.

One. None.

Must hold an annual general meeting.

accounts

Annual return Audit requirements

Yes. Yes.

Registered office Domicile issues Company naming restrictions

Yes.

other

Yes.

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Isle of Man

IFC Review • 2011

The Isle of Man: Taking Centre Stage

By Nick Verardi, Partner, Appleby, Isle of Man

T

HE ISLE OF MAN IS PLAYING A BIGGER part on the global

stage. Both 2009 and 2010 have been critical for the island in terms of the direction it is choosing to take in the world. It is dealing state to state on international matters - as an active member of the OECD’s Global Forum and at ministerial level at the summits of the British-Irish Council. Despite recent global financial turmoil, the island is in its 26th year of unbroken growth and has been able to maintain its coveted AAA credit rating from both Standard & Poor’s and Moody’s.

The Isle of Man’s direct taxes are not high by international standards – the top rate of personal income tax is 20 per cent - but it has been able to build up substantial reserves of almost £1.5 billion. In addition, the island has not fallen into recession, in large part down to the government’s successful strategy of diversifying the economy and encouraging business such as hitech manufacturing, e-commerce, clean tech, film, pensions and aircraft and yacht registration as well as maintaining traditional sectors such as banking, insurance and finance.

The Island’s International Reputation

The Isle of Man takes its international status seriously. In April 2009 it was placed straight onto the OECD’s white list with regard to implementing internationally agreed tax standards. It signed its first Taxation Information Exchange Agreement (TIEA) with the

USA in 2002 and now has 17, including agreements with Australia, Germany, France, New Zealand, the Netherlands and most recently China. The island has signed double taxation agreements with the UK, Estonia, Malta and Belgium and is in negotiation with numerous other states. Recently the island announced plans for the automatic exchange of information on savings interest with the UK and other EU member states.

The IMF published its review of the Isle of Man in September 2009, confirming its continuing high standards of compliance with global standards of regulation and supervision in financial services. In 2009 the UK government commissioned a report (the ‘Foot Report’) to examine financial supervision and transparency, taxation in relation to sustainability and future competence, financial crisis management and the international co-operation of the Crown Dependencies. The Isle of Man was praised, and the report noted that the Isle of Man and the other Crown Dependencies make a significant contribution to the liquidity of the UK market, providing net financing to UK banks of US$332.5 bn.

The UK government last year changed the terms of the customs and excise agreement to which the Isle of Man has been a party for many years, requiring the island’s government to rebalance its budget. The government has taken steps to spend less and to increase revenue.

This year it established the Department of Economic Development, the mandate

of which is to focus on developing and diversifying the Island’s economy.

Legislative Developments

The Proceeds of Crime (Money Laundering) Code 2010 came into force in September 2010, updating existing legislation in accordance with latest international standards, while ensuring that the island still provides a competitive environment for business.

October 2010 saw the introduction of a new type of pension scheme. While the scheme is available to Isle of Man residents, it is also expected to meet HMRC requirements on QROPS. This will enable the new scheme to be used by British expatriates who wish to transfer their pension rights offshore.

Any payment made to a person resident outside the Isle of Man is paid gross, and is not subject to Isle of Man income tax, whereas previously payments made from an Isle of Man-domiciled QROPS were subject to Isle of Man income tax. The legislation is designed to allow the island to compete with other jurisdictions whose QROPS do not incur income tax.

There have also been improvements to the Companies Act and in 2011 incorporated cell structures, foundations as well as new intellectual property legislation will be introduced.

Funds

EU economic affairs and finance ministers recently reached agreement on the controversial Directive on Alternative Investment Fund Managers (AIFM), www.ifcreview.com/IsleofMan

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Shipping

In 2009 the Isle of Man Ship Registry celebrated 25 successful years as an international ship registry. The Isle of Man flag is popular with owners and lenders alike and boasts in excess of 12 million gross tonnage. The Isle of Man has developed into a ‘Shipping Centre of Excellence’ and is home to international companies offering specialist maritime services in both ship and yacht management, finance, maritime insurance, maritime law and company formation.

The Isle of Man Registry is a Category One British Registry with international safety convention status for vessels of all sizes and classes. Isle of Man vessels have the protection and assistance from the British Royal Navy and British consular services worldwide. It is an important flag for commercial shipping and yachts.

The Ship Registry provides 24/7 cover for both registration and survey requirements and its experienced professionals offer efficient support, assistance and pragmatic solutions to its customers.

There is only an initial registration fee payable on registration of a vessel and thereafter an annual registration fee of £700 per vessel regardless of vessel size (subject to fleet and other discounts).

There are no ‘tonnage taxes’, consular fees, annual inspection fees or charges on casualty investigation. Owners can enter an Alternative Fees Scheme whereby they pay a fixed monthly subscription and in return the Registry appoints the vessel’s classification society to undertake routine statutory surveys. Isle of Man surveyors attend to and complete ISM audits, ILO inspections, ISPS verifications and general inspections at the statutory intervals, at no further cost to the owner. This scheme is automatic for commercial yachts.

Aircraft

Since its launch in 2007, the Isle of Man Aircraft Register has surpassed all expectations. The total number of registered aircraft stands at over 300 and includes a number of privately operated models of the Boeing and Airbus families as well as the latest Dassault, Bombardier and Gulfstream business jets. This is partly down to careful legislative planning.

Sections 60 and 61 of the UK’s Civil Aviation Act 1982 have been applied to the Isle of Man, which enables the UK to satisfy its obligations under the Chicago Convention as the Contracting State responsible for the Crown Dependencies.

The island was targeted for an ICAO audit last year and produced an extraordinarily impressive result which, when set against the UK and those Overseas Territories with registers, could only make them blanche. Of the 14 audit findings, the majority reflected the adoption of UK legislation.

The Isle of Man has succeeded in identifying the essence of the business jet community’s requirement for efficiency and commerciality whilst at the same time ensuring that regulatory oversight matches the highest of standards. As a result the Isle of Man Aircraft Register has become the aircraft register of choice.

Isle of Man aircraft carry the prefix “M”.

E-gaming

Over recent years, the number employed in this industry in the Isle of Man has almost quadrupled whilst the total tax paid has increased over six fold. The resulting success of the online gaming industry on the Isle of Man has created a cluster effect of businesses such as software developers, hosting companies, online affiliate marketing companies and payment providers which provide quality employment and income.

The Isle of Man offers a world class telecommunications infrastructure and

reliable power. Connectivity off the Island is provided by two resilient fibre optic rings, owned respectively by BT and Cable & Wireless, which connect with England and Northern Ireland.

These links employ ‘self healing SDH loop’ technology which guarantees that if a fault occurs in any part of the link, voice and data traffic is seamlessly rerouted in the other direction. The total available capacity is three million channels (240GB) with a current capacity utilisation of less than 0.2 per cent on the main cable alone. In addition, the Isle of Man Government owns a third undersea cable connecting the Isle of Man with England and offers further capacity to support island businesses. This infrastructure is envied amongst the island’s competitors.

The Gaming Supervision Commission is responsible for the granting of licences and undertaking post licensing compliance. A licence typically takes 10-12 weeks to process.

There is a processing fee of £1,000 and the official fee for a full licence is £35,000 per annum (a sub-licence fee is £5,000 per annum). In addition, online gambling attracts online gambling duty with a sliding scale from 1.5 down to 0.1 per cent, except where the online gambling activity is considered pool betting in which case the duty is 15 per cent.

A unique aspect of Isle of Man regulation is that players’ funds are held on trust for the players to ensure that in the event of an operator’s insolvency, players’ funds are ring fenced from other debts and liabilities.

Isle of Man

raising the prospect that the legislation could be finalised in 2010. Of particular interest to the Isle of Man, the latest agreement will allow non-EU managers and funds to obtain the same panEuropean marketing ‘passport’ as their European-based counterparts two years after the Directive comes into force; the current private placement arrangements will remain in place until then, and there will be no interference with reverse solicitation - so any anticipated adverse consequences have so far not materialised.

The Isle of Man’s fund industry is confident that the island will be able to provide the necessary level of oversight and regulation that will be required by third-country funds to facilitate access to the EU. It is a commonly held view that the Isle of Man (along with several other offshore jurisdictions), is already better regulated than many EU countries meaning that equivalence under the AIFM Directive will be achievable. An equivalent regime for some Isle of Man funds would obviously be a significant benefit to the island’s fund industry.

The Isle of Man is confident that its alternative fund industry will continue to grow whatever the outcome of the EU’s deliberations.

Space

Since the Isle of Man used its orbital filing as a foundation for the space industry, its status as a leading jurisdiction in space activities has continued to grow. This, together with its favourable corporate operational and tax environment has seen the island attract some of the world’s largest satellite companies. The island is an important player in this sector and was chosen to host the fourth Google Lunar X PRIZE Team summit.

Conclusion

The Isle of Man offers, as it always has, a favourable tax and business environment and political and economic stability.

It has been repeatedly endorsed as a well regulated jurisdiction and it will continue to comply with international standards to maintain this position.

www.ifcreview.com/IsleofMan

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Isle of Man

general overview

Location

Centre of the Irish Sea, within sight of England, Scotland, Ireland and Wales.

Time zone

Greenwich Mean Time.

Population

App. 80,000.

Capital

Douglas.

Airport(s)

One airport situated in the south of the island.

Language

Predominantly English but also Manx.

Currency

The Isle of Man is in currency union with the UK although it issues its

own currency, which is legal tender only within the Isle of Man. One Manx pound is therefore equivalent to one UK pound sterling.

Political system

International dialling code

Legal system

Centre’s expertise

Independent. +44 1624.

Common law jurisdiction.

International legal, accounting, banking and fiduciary services.

tax

Personal income tax

Low rates of income tax – each resident is entitled to an attractive pre-tax allowance with a low rate of 10% and the standard/high rate of 20%. The amount of income tax payable is capped at £115,000 per individual.

Corporate income tax

Most companies pay income tax at a standard rate of 0% on all income; companies that receive income from banking business or from land and property situated in the Island pay tax at a 10% rate on profits from those sources and the standard 0% rate on their remaining income.

Exchange restrictions

None for both resident and non-resident.

Tax information exchange agreements

share capital

For full details, please go to

http://www.gov.im/treasury/incometax/sections/practitioners/internationalagreements.xml

Permitted currencies

Any.

Minimum authorised capital

No minimum. Concept of capital maintenance replaced by solvency test.

Minimum share issue

No minimum. Concept of capital maintenance replaced by solvency test.

type of entity

Shelf companies

Timescale for new entities

Incorporation fees

£195.

Annual fees

£360.

Minimum number

One.

Residency requirements

No.

Corporate directors

Yes.

Meetings/frequency

As the directors or members require.

Yes. 24 hours.

directors

shareholders

Disclosure

Annual return required including directors name. Member only if elect to file.

Bearer shares

Minimum number

No.

Public share registry

Yes, only if elect to file.

Meetings/frequency

As the directors or members require.

One.

accounts

Annual return

Yes.

Audit requirements

No.

other

Registered office

Domicile issues

Company naming restrictions

Must, at all times, be on the Isle of Man. Must have registered agent.

Transfer to domicile permissable.

The FSC can refuse to register a company with a name which in its opinion is undesirable, ie misleading, offensive or harmful to the public.

www.ifcreview.com/IsleofMan

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Jersey

Jersey Rises to Economic and Global Challenges

By Wendy Benjamin, Partner, Appleby, Jersey

T

HE LAST 12 MONTHS have

brought their share of challenges for Jersey’s finance industry. It started well with the 2010 first quarter’s statistics showing marked increases in the net asset value of funds administered and in deposits held in the island. But the statistics collated by the Jersey Finance, the representative body for the finance industry, show that for the quarterly period ending 30 June, 2010: • the net asset value of funds under administration in Jersey decreased by £4.6 billion during the second quarter to £175.9 billion; • the total number of funds decreased by 33 to 1287 over the second quarter although the number of unregulated funds increased; • company formations rose by 9.9 per cent against the same period in 2009 and the number of live companies on the register increased by 191 in the second quarter of 2010 to 33,570; • bank deposits fell by £10.7 billion during the second quarter to just under £167 billion.

Unsurprisingly the statistics suggest that Jersey’s economic recovery is unlikely to be entirely even, instead with peaks and troughs in growth. That bank deposits have fallen in the second quarter is to be expected with interest rates remaining low and currency fluctuations during the period. Whilst overall net asset values of funds may have also fallen in the second quarter, the curve is upwards when looked at on a bi-annual basis and some classes, such as private equity funds, grew over the quarter.

Jersey has still outperformed major

market indices and many of its competitor jurisdictions. Against a background of global austerity measures and sharp falls in financial markets indices such as FTSE100, down 13.43 per cent during the same period, Jersey appears to be performing well. The third quarter’s statistics which were released at the end of December reported growth across the majority of key financial sectors. Anecdotally the results of the final quarter of 2010 should show further encouraging signs.

Also encouragingly, inflation remains within government targets. The Jersey Retail Price Index for the 12 months prior to September 2010 stood at 2.1 per cent, down by 0.7 per cent from the previous quarter. The figures for gross national income (GNI) for 2010 will not be available until April 2011. It will be interesting to see how they compare with 2009. The States of Jersey Statistics Unit annual report, Jersey in Figures 2009, showed that the island produced an annual gross national income (GNI) of £4 billion, and a GNI per capita of £44,000 in 2009, approaching double that of the United Kingdom and representing one of the world’s highest.

Global Recognition

Such statistics suggest that Jersey’s global reputation and standing has helped it through the worst of the economic downturn. That is no accident. In recent years the island has focussed upon a series of regulatory and legislative measures aimed at maintaining and enhancing its international reputation and competitiveness.

As a result it has achieved global

recognition for its financial sector regulation and supervision, which were found to be of a “high standard” and to “comply well” with international standards by the IMF report in 2009. Jersey is compliant or largely compliant with 44 of the 49 general FAFT recommendations, compared to Singapore and USA at 43.

The latest Global Financial Centres Index in September 2010 ranks Jersey 22nd overall, ahead of its neighbour Guernsey which falls into 26th place, the Isle of Man at 32 and Cayman at 34. It was 12 places above the highest ranking Caribbean jurisdiction. The report notes that Jersey and Guernsey are the only offshore centres to achieve a rating over 600 and are working hard to change perceptions and rise above the status of offshore centres to be the only ones close to achieving wider recognition as “global specialists”.

Tax Information Exchange Agreements (TIEAs)

A key element of Jersey’s international strategy has been developing its network of TIEAs. The OECD’s initiative on harmful tax practices emphasises international standards of transparency and exchange of information on tax matters.

One of the ways in which these standards can be met is through TIEAs being entered into by jurisdictions to permit the exchange, on request, of information relevant to tax matters covered by the agreements. Jersey signed its first TIEA with USA in 2002. It has since gone on over the last eight years to sign another 18 TIEAS, many of

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which are with OECD member nations.

The most recent TIEAs this year include Portugal, China, Turkey and Mexico. There are another seven TIEAs initialled or ready for signing including those with India, Brazil, Argentina, Canada and South Africa.

There are more TIEAs in well advanced negotiations including Japan. Partially as a consequence of its TIEA network, Jersey was one of the first offshore centres to be “white-listed” by the OECD. TIEAs aim to strike a balance between exchange of information and protection of taxpayer’s privacy. Wholesale ‘fishing exercises’ are not possible under TIEAs. Information is not automatically exchanged following a request by a relevant jurisdiction. A request must be substantiated under TIEAs by the requesting jurisdiction providing information such as: • the identity of the person under examination; • the period for which information is requested; • the nature of the information requested; and • the tax purpose for which the information is requested.

Information is typically delivered by the Comptroller of Taxes in Jersey within 40 days of request, in the absence of any appeal. The taxpayer has a right of appeal to the Royal Court of Jersey.

To date there have been relatively few cases of disclosures following the above proving processes.

Jersey is also building its network of double taxation agreements (DTA).

This year a new DTA with Malta came into force. Further DTAs with Estonia, Bahrain, Belgium and Qatar are in well advanced negotiation.

Zero/Ten Tax Regime

The EU Code of Conduct Group met in Brussels in November to give further consideration to elements of Jersey’s zero/ten tax regime. Under the regime there is a general corporate income tax rate of zero with a higher rate of 10 per cent applying to income arising from certain financial services and of 20 per cent applying to utilities carried on in the island and income derived from Jersey real estate.

The specific areas under review are the deemed distribution provisions applicable to shareholders and the combined effect of company and shareholder taxation. This aspect is very narrow and affects Jersey resident individuals with shareholdings in Jersey

companies. No conclusions as to whether or not these aspects come within the definition of business taxation covered by the Code has yet been reached. Jersey contends that the deemed distribution provisions do not, instead arguing that they come within personal taxation.

No doubt the discussions on this point will continue for sometime. In the meantime it is helpful to note that the zero/ten regime as a whole is not the focus and that no substantive concerns have been raised under the Code with that framework as a whole.

Jersey’s tax regime will thus continue in a competitive and efficient basis.

The Code is not the only issue originating from Europe that Jersey has had to face this year. Another has arisen in the funds industry.

Funds

The successful funds regime in Jersey has developed following changes of legislation and policy by the Jersey Financial Services Commission (JFSC) over the past decade. The success began in earnest with the introduction of the expert fund category, which is targeted at institutional, professional and sophisticated investors.

Funds falling within this category benefit from a fast-track approval process and light regulatory touch from the JFSC. Next came the introduction of a listed fund category (which recognises listings on AIM, Euronext, the London Stock Exchange, and other recognised exchanges) - the flexible and fasttrack approval process which had been achieved for Jersey expert funds was adapted for listed funds.

Then a new category of unregulated funds aimed at institutional and other eligible investors investing more than an initial US$1 million was introduced in 2008. Provided a fund can ensure compliance with this requirement, the regulatory obligations placed upon it in Jersey are minimal. In particular, an unregulated fund will not be required to appoint any Jersey-based service providers.

AIFM Directive

The EU Alternative Investment Fund Managers Directive (AIFM Directive) raised some issues for Jersey’s funds industry. Constitutionally, Jersey is a self-governing dependency of the British Crown and is not part of the United Kingdom or the European Union. It has complete autonomy in relation to its domestic affairs including tax and business

law.

However, the ability to market funds domiciled in Jersey into the EU is an important element for the continued success of its funds industry. So the vote in November on the final text of the AIFM Directive was welcomed in Jersey as it is confident that it will meet the agreed criteria for ongoing market access into Europe. Jersey is expected to be amongst the first jurisdictions to obtain a passport for non-EU alternative investment funds and managers when, as expected, the passporting regime is extended to include third countries in 2015.

New Products And Markets

There have been no radical changes to Jersey’s company law this year, although there were some changes to approval and oversight of auditors and auditing. Jersey is continuing to promote the recently introduced foundations as an alterative to trusts, particularly in jurisdictions unfamiliar with trust law concepts.

Legislation introducing new incorporated limited partnership (ILP) and separate limited partnerships (SLP) was approved and is due to be enacted in 2011 following Privy Council approval.

ILPs will be corporate bodies with separate legal personality whereas SLPs will have separate legal personality but will not be bodies corporate. As such they will be transparent for the purposes of UK income tax, corporation tax and capital gains. (ILPs will lack transparency for capital gains.) The introduction of SLPs and ILPs broadens the range of limited partnerships available.

Aside from new products, the island has also been looking at new markets and increasing its visibility in key jurisdictions by removing barriers to business development. A good example of this is in relation to the Hong Kong. Jersey companies were recently approved for listing on the Hong Kong Stock Exchange and a number of successful listings have followed this year. The promotional activities of Jersey Finance have included establishing a permanent representative office in Hong Kong coupled with several delegations in the region.

In conclusion, Jersey continues to offer a low tax business environment with economic and political stability with easy access to London, Europe and further afield.

Its laws and regulations continue to address economic and political challenges and to support the island’s premier position in international finance. www.ifcreview.com/Jersey

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Channel Islands.

Greenwich Mean Time +1 in summer.

90,000.

St Helier.

One. English, French.

Pound sterling.

Parliamentary democracy. + 44 (0)1534.

Customary law with a strong influence of common law.

Private wealth management and capital market transactions, trusts, international insurance, mutual fund administration and management, international banking.

Jersey

Jersey - Fact File

tax

Personal income tax Corporate income tax

Exchange restrictions Tax information exchange agreements

20%.

0% as standard rate with higher rates of 10% applying to income derived from certain locally based financial services business (excluding fund managers) and of 20% applying to income derived from local utilities and local real estate.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any currency.

No. No (subject to minimum number of shareholders as referred to below).

type of entity

Shelf companies Timescale for new entities

Incorporation fees Annual fees

Available.

Two days for a standard incorporation. Fast-track incorporation available (two hours).

Standard: £200, Fast-track: £400. £150.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

Private company: one, Public company: two.

No. Allowed.

No specific requirement.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Not permitted.

Private company: one. Public company: two.

No, but disclosure of membership once a year in annual return.

Annual general meeting (can be waived).

accounts

Annual return Audit requirements

Yes. Public company: mandatory. Private company: optional.

other

Registered office Domicile issues Company naming restrictions

Yes: must be situated in Jersey.

None.

Yes.

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Labuan

Labuan: A Welcome Mat for a New Era

By David Kinloch, CEO – Labuan IBFC Inc Sdn Bhd, Labuan

H

IGH NET WORTH INDIVIDUALS

or families and those involved in wealth management in search of a safe refuge can expect a warm welcome at Labuan International Business and Financial Centre, especially now with the new and amended laws, enacted earlier in 2010.

The range of business entities permitted in the jurisdiction has been expanded to meet the changing needs of modern business and wealthy individuals. Depending on the objective, an investor can now structure a protected cell company, a limited partnership or limited liability partnership, a private trust company or a foundation. These options were previously not available in Labuan but the jurisdiction has now moved forward to broaden the opportunities.

For those contemplating investing in the domicile but uncertain as to the tax obligations their proposed business structure would attract, the new provisions provide certainty and clarity.

Once a structure has been planned by a prospective client and their professional advisers, it may be submitted to the Malaysian Inland Revenue Board for an advance tax ruling. This avenue is provided for under the revised Labuan Business Activity Tax Act as part of Labuan’s move to deliver greater certainty and clarity to investors.

The good news doesn’t end there.

With four new laws and radical amendments to four existing Acts governing the jurisdiction, there are significant opportunities waiting for

those intrepid enough to seek them out.

The new Acts are the Labuan Islamic Financial Services and Securities Act 2010 (LIFSSA); Labuan Financial Services and Securities Act 2010 (LFSSA); Labuan Foundations Act 2010 (LFA); and the Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 (LLPLLPA).

Those Acts radically amended are the Labuan Companies Act 1990 (LCA); Labuan Business Activity Tax Act 1990 (LBATA); Labuan Financial Services Authority Act 1996 (LFSAA), which renames the regulator, formerly known as Labuan Offshore Financial Services Authority); and the Labuan Trusts Act 1996 (LTA).

This article is confined to highlights of those Acts relating to wealth management, the amended Labuan Trusts Act 1996 and the new Labuan Foundations Act 2010.

Labuan Trusts Act - As Modern As Can Be

Because the times ‘they are a-changing’, Labuan has amended the Labuan Trusts Act to enhance the jurisdiction’s appeal.

An instance of this modernisation is the retention of day-to-day control over the direction and management of investments and businesses by a settlor or protector. This highly sought-after feature in Trust Law is addressed in the Labuan Trusts Act, which offers reserved powers to a settlor.

Another feature is the ‘Labuan Special Trust’ (LST), which provides for ‘a trust of

company shares’ to be established under which (a) the shares may be retained indefinitely; and (b) the management of the company may be carried out without power of intervention by the trustees.

The Labuan Special Trust goes even further to meet contemporary needs as the trustee is not liable for losses from speculative or imprudent activities of the company.

Duration of a trust is important and Labuan allows for a trust to exist in perpetuity as a default provision. There is flexibility for a fixed term trust to be converted to a perpetual trust and vice versa; to shorten or extend the duration; and to make this retrospective for existing trusts.

There is protection in Labuan in the case of a foreign law claim or enforcement of a foreign law judgement arising from marriage, divorce, succession rights, or creditors’ claims in an insolvency.

The types of trusts that can be structured in Labuan are as wide ranging as those in other domiciles.

In Labuan, the list includes purpose trusts, charitable trusts, the promotion of religion and one currently unique to Labuan – ‘the advancement of human rights and fundamental freedom’.

As far as confidentiality is concerned, Labuan has provisions to ensure this issue is balanced against those requiring trustees to provide information.

Labuan’s guidelines covering the right for beneficiaries, a settlor, protector, enforcer and for the court to receive information, position Labuan at the same level as other jurisdictions. www.ifcreview.com/labuan

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Although Labuan is a ‘white listed’ jurisdiction that endorses the OECD ‘level playing field’ principle on the bilateral exchange of tax information with foreign tax authorities, there are significant safeguards in place and limitations on the sharing of information which ensure that no ‘fishing expeditions’ will be entertained.

Building A Strong Case For Labuan Foundations

Rights to information

For people more familiar with the civil law code or who want complete control over their assets, a foundation may be a preferable alternative to a trust. Labuan IBFC is one of a few common law jurisdictions in Asia Pacific that caters for both trusts and foundations.

Trusts and foundations share many similar features. Both have beneficiaries and both vehicles can exist in perpetuity.

Where a trust has a settlor with reserved powers, a foundation has a founder who may have rights reserved to him over the management of the foundation; a trust has a trustee, a foundation has a council and officers; a trust has a trust deed but a foundation is governed by a charter, which states the objectives or purposes and articles that provide a set of detailed rules on its administration; a trust is not a legal entity but a foundation is a registered, legal entity.

In the case of liabilities, trustees have unlimited liability in respect of the trust but a foundation’s administrators and the founder who comply with the requirements of the charter and articles are not personally liable for the debts of the foundation. The liability of a foundation is limited to the value or its net assets.

Much thought and consultation have gone into the crafting of the Labuan Foundations Act 2010 (LFA) to ensure that it is comprehensive and modern enough to meet contemporary needs.

Some of the distinctive features of the Act – which other jurisdictions may not offer - are summarised here.

Confidentiality

The LFA provides for it to be a criminal offence (with a possible custodial penalty) to wrongfully disclose any information concerning the foundation.

Exceptions include the Labuan Financial Services Authority (‘the Authority’) in its regulatory capacity; requirements under a court order; and when the information provided is with the consent of the foundation.

Any request to an officer or the secretary of a foundation by an individual with vested interest, if requested to do so, must result in the provision of accurate information to the court, the Authority, founder, council member, supervisory person or any beneficiary, except when there is duress. Notwithstanding, the court may restrict the rights of any individual seeking information.

The LFA also provides strict confidentiality requirements on council members, the supervisory person, any officer and the secretary. There is a provision for confidentiality with regard to disclosure of information to a beneficiary, if other beneficiaries have requested this or if the council, supervisory person or officers determine that confidentiality to be in the best interests of the beneficiaries. Even so, the Court may, on an application by a beneficiary, order information to be provided. The LFA provides for a beneficiary having a vested interest to obtain information and documents relating to his interest.

Asset protection

The LFA contains provisions defining a fraudulent disposition to a foundation, which may leave it liable to meet the claims of creditors.

In particular, the property of a disposition is saved from such a claim if the foundation was established or registered or the disposition took place after two years from the date on which the creditor’s cause of action arose.

Unenforceability of foreign claim or judgement against a validly established foundation is addressed, with particular regard paid to the personal and proprietary consequences of marriage or succession rights or the claims of creditors in insolvency. Just as in trusts, there is protection against claims in respect of foreign forced heirship.

Distribution to a beneficiary

Unless the charter and articles otherwise provide, a valid distribution is only made

when the document providing for it is signed by all the officers. However, all the officers may delegate the power to one of their number. No such distribution can be made to defeat the claim of any creditor of the foundation.

Other features of a Labuan foundation include redomiciliation of a foundation into or out of Labuan as well as clear and detailed provisions for the amendment of the charter. There are provisions covering the change of name of a foundation and how this shall not affect the rights or obligations of the foundation; provisions for a supervisory person who may be in addition to, or in lieu of, the council; and legislative framework covering dissolution and entitlement to property remaining at the end of dissolution.

Labuan

There are provisions covering beneficiaries, protectors, letter of wishes, redomiciliation into or out of Labuan in the Act, including the requirement that a Labuan trust shall be in writing and can be by unilateral ‘declaration of trust’, which need not name the settlor. Thus, Labuan provides the clearest and most user friendly provisions in trust law.

Tax and Exemptions

Labuan IBFC is a low tax jurisdiction and under the Labuan Business Activity Tax Act 1990 (LBATA), Foundations and Trusts domiciled here enjoy the same generous tax benefits as other Labuan business entities.

Under LBATA, trading activities are taxed at three per cent of audited profit or a flat tax of MYR 20,000 (about US$6,000) while non-trading activities (such as investment holding) pay no tax.

A foundation or trust with income from non-Malaysian property qualifies to be taxed under LBATA but income derived from the holding of Malaysian property will be subject to the Income Tax Act 1967. The Exchange Control Act 1953 does not apply to Labuan foundations and there are also no withholding taxes on the income distribution to beneficiaries.

Alternatively, a Labuan entity can make an irrevocable election to be subject to tax under the country’s Income Tax Act 1967 (ITA) at the prevailing corporate rate (currently 25 per cent) thereby gaining more secure access to the 75 double taxation agreements that Malaysia has signed with its treaty partners.

Conclusion

Labuan IBFC is a very attractive and safe domicile for high net worth individuals or families to set up a trust or foundation.

The combination of retention of management control, the confidentiality issues addressed, and the flexibility offered add up to an irresistible opportunity. www.LabuanIBFC.my

www.ifcreview.com/Labuan

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Labuan

Labuan - Fact File general overview

Location

Time zone

Population .

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Located at 05 degrees North and longitude 115 degrees East, about 10km off the west cost of the Sabah in east Malaysia.

GMT +8.

About 90,000 (as at 2009).

Bandar Labuan.

Labuan Airport.

Mainly Malay, English.

Ringgit Malaysia (RM).

Labuan is a federal territory of Malaysia based on parliamentary democracy. +6 087.

The Malaysian legal system is based on English common laws.

Centre’s expertise

Banking, Islamic Finance, insurance and captive insurance, fund management, leasing, capital market, investment holding, private wealth management and trading.

tax

Personal income tax

Corporate income tax

Directors fees received by foreign directors from a Labuan company are exempted from tax.

Labuan trading companies are taxed at 3% on audited net profit or flat rate of RM20,000. No tax for non-trading Labuan companies.

Exchange restrictions

Tax information exchange agreements

share capital

Permitted currencies

Minimum authorised capital

Minimum share issue

No exchange control on foreign currency transactions Labuan companies can make an irrevocable election to be taxed under the Malaysia Income Tax Act 1967 at the rate of 25% p.a. which allows access to 75 Malaysia’s DTA. In any foreign currencies except RM One share of any denomination in foreign currency.

One share of any denomination in foreign currency.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Available from early 2011 One to two days for manual applications RM1200 to RM5,200 depending on authorised capital Government : RM1500 for Labuan companies; RM5,300 for Foreign Labuan companies

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One (either individual or corporate entity) Resident director is optional Allowed.

Directors meeting required annually

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

There are secrecy provision in the legislation governing Labuan companies Not allowed One (either individual or corporate entity) No, records of Labuan companies are not public records Yes, at the discretion of the companies

accounts

Annual return

Audit requirements

Filed annually not later than 30 days from the date of the incorporation of the Labuan company Optional, except for Labuan companies opting to pay 3% tax p.a. on audited net profits and licensed companies such as banks, insurance entities and trust companies

other

Registered office

The principal office of a Labuan trust company is deemed as the registered office of a Labuan company

Domicile issues

Company naming restrictions

Change in domicile is permitted The name may contain any word or abbreviation thereof in the national language of any country that denotes a company limited by shares or guarantee. Approval is required from the Authority and may be reserved for a period of up to three months.

www.ifcreview.com/Labuan

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Liechtenstein

Liechtenstein – Pick up or Slow Down? Economical and Legal Developments in 2010

By Dr Markus H Wanger, Wanger Law & Trust, Liechtenstein

L

IECHTENSTEIN’S ECONOMY HAS BEGUN to recover from the

crisis of 2008/2009. Slowly the order-books are filling up again and qualified personnel are once more needed.

A budget deficit of CHF 36 Mio has passed through parliament with the expressed objective of creating a stable household by 2015. Savings are scheduled in practically every part of the Liechtenstein government and state household. Although Liechtenstein industry is still healthy, savings are a theme there too.

However the industry is growing, but the latest changes in the financial sector have had a huge impact for the trustees.

Liechtenstein is no longer an offshore center: all offshore companies and domiciliary companies are now onshore.

This is due to the new tax law, which came into force on January 1, 2011.

This is reflected in the continuous task to transform the financial sector into an attractive on-shore financial center. This

process began in 2009 and will be going on for at least another five to six years.

Vat Changes

What is new on the legal side in Liechtenstein? On 1 January 2010 a new Liechtenstein VAT law came in to force. Due to the Customs Treaty 1923, Liechtenstein and Switzerland share the same VAT system, and so this legislation applies to Switzerland too.

The basic change is that every commercial unit or entity is subject to the VAT law, except for those companies the turnover of which is under CHF 100,000 – such companies need not apply for a VAT number or charge VAT to customers.

The VAT legislation is quite complicated and there are a lot of exemptions, however, the administrative burden for a medium sized entrepreneur and has not been lessened by this reform.

As of 1 January 2011 the VAT rates increased as follows: The ordinary rate

increased from 7.6 per cent to eight per cent, the rate for basic products increased from 2.4 per cent to 2.5 per cent and the rate for those in the tourist industry increased from 3.6 per cent to 3.8 per cent. The period when the activity is performed is relevant. If it is performed in 2010, the rate will be 7.6 per cent, if it is performed in 2011, the rate will be eight per cent.

TIEAs

The most important development in the Liechtenstein legal system is the incorporation of the TIEAs, concluded in 2009, into the Liechtenstein law. Additionally on 30 June 2010 the legislation on international administrative assistance in tax matters and the law governing the administrative assistance in tax matters with the UK and Northern Ireland went into force.

These developments had their roots a year earlier in 2009. It was then that the era of Liechtenstein tax secrecy

www.ifcreview.com/Liechtenstein

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ended when on 12 March in the buildup to the G20 summit in London, Liechtenstein made a declaration to be cooperative in the matter of exchanging tax data and preventing people from tax crimes and offences, the so called ‘Liechtenstein declaration’. Liechtenstein committed itself to implementing global standards of transparency and exchange of information as developed by the Organisation for Economic Cooperation and Development (OECD).

Liechtenstein has since concluded 12 tax information exchange agreements (TIEA) with the USA, UK, Germany, San Marino, Monaco, France, St. Vincent and the Grenadines, Ireland, the Netherlands, Antigua and Barbuda, Belgium, St. Kitts and Nevis, and four double tax treaties (DTA) with an information exchange clause with Luxemburg, Andorra, Uruguay and Hong Kong1.

Information will be exchanged from as early as 1 January 2010. The most favourable agreement has been reached with the United Kingdom, which requires compliance by 31 March 2015.

Requests concerning tax fraud have been made from 1 January 2010.

Together with the treaty, a Memorandum of Understanding (MoU) has been signed with the English tax authorities and a joint declaration of both governments completes the package. The MoU offers an interesting possibility of tax disclosure for persons with a connection to Liechtenstein (which started in September 2009 for persons that had a Liechtenstein connection then). Even those without an existing connection to Liechtenstein could make use of this disclosure procedure from December 2009, simply by transferring part of their structures to Liechtenstein.

There will be a tax on the last 10 years (respectively on all years after and including 1999) together with interests and (in most cases) a 10 per cent fine of the tax payable. There is also the possibility of paying a composite tax rate of 40 per cent for all possible taxes together for a UK tax year, if several taxes (like income tax and inheritance tax etc.) are involved. This disclosure facility might be very interesting for several clients. In our opinion it is a good opportunity because it means there is a chance that some assets will remain in Europe and not be moved to far-away jurisdictions.

On October 11, 2010 the second

Joint Declaration concerning the MOU relating to taxes between Liechtenstein and HMRC was signed, which clarified a lot of details. Also it has been specified that until September 11, 2011 all clients with an English tax background must be identified by the Liechtenstein financial intermediaries. The goal of these agreements is to have no undeclared funds deriving from taxable sources in GB remaining in Liechtenstein by 2015. These agreements offer a lot of opportunities to both countries and may be a chance for some interesting developments and new relationships.

The most important legal development of 2010 came into force on 1 January 2011, when Liechtenstein’s new tax regime was implemented.

The most important changes are as follows: There is a flat tax of 12.5 per cent of the profits for all legal entities.

No difference shall be made as to the point of which activity these entities have and were these activities take place.

There shall be a minimum tax for all legal entities of CHF 1,200 a year. Very small commercial entities will be exempt from this minimum tax. The capital tax is abolished completely.

Losses may be carried forward against future profits for an unlimited period of time. Of course this provision only applies to losses still existed on 1 January 2011, which means that in 2011 the period of losses to be carried forward still will not exceed five years. It will be one year more each of the following years.

There will be a deduction of four per cent (which may be changed yearly) of the modified capital (special definition in the law). This deduction will be available for legal entities and for persons or partnerships equally, due to the principle of the “neutrality of decision”. The modified capital consists of the capital paid in and the reserves which represent own assets. Participations, foreign real estate or permanent establishments as well as assets, which are not necessary for conducting the scope of the entity, shall be deducted. The valuation will take place as at the start of each business year.

There will be a deduction for license fees of 80 per cent of the income deriving from immaterial rights, which seems to be an interesting opportunity for some companies. Restructuring legal entities should be possible without adverse tax implications due to the new law.

Group taxation will be the possible if there is a group of entities with a Liechtenstein major participant.

Losses of foreign participations may be deducted in Liechtenstein if they are not deducted elsewhere.

All special tax regimes will cease to exist within the next five years. Entities qualifying as Private Asset Structures (PAS) will be taxed with a tax of 1200 Swiss Francs.

Such Private Asset Structures (PAS) are allowed to hold only hold bankable assets and the ‘owners’ must not have a direct or indirect influence on the administration of any companies held by the PAS. However, this type of ‘tax subject’ has to be accepted by the ESA, the European Surveillance authority.

This is expected in due course.

The Coupon Tax, a tax of four per cent on the reserves of a company will be abolished completely. There will be a special tax regime for old reserves. If they are taxed deliberately within the two years 2011 and 2012, the coupon tax will only be two per cent. It shall be four per cent from then on.

What’s new for natural persons? The inheritance tax and other corresponding taxes will be abolished completely.

There will be a new tax system for natural persons, too, but the changes will be very moderate. There will also be modifications regarding the taxation of profits connected to the sale of real estate.

In the context of trying to get a modern double tax treaty system and taking into consideration that Liechtenstein is a member of the EEA (and thus has to follow the respective rules) the new Liechtenstein tax law is modern and offers one of the lowest tax regimes (12.5 percent flat tax rate) worldwide.

There were some modifications in the criminal law regarding money laundering - the falsification of documents is regarded as a preliminary act to money laundering.

More local changes include several changes in the Liechtenstein trade law, regarding the education of trainees and so called ‘declarations of common binding character of agreements’ between the associations of Liechtenstein employees and employers regarding model working contracts. As not every employer has to be member of such an association these declarations were necessary to hinder the dumping of wages of the employees.

1. http://www.liechtenstein.li/eliechtenstein_ main_sites/portal_fuerstentum_liechtenstein/ fl-med-steuerabkommen.htm www.ifcreview.com/Liechtenstein

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Liechtenstein - Fact File Location Time zone Population Capital Airport(s) Language Currency Political system

International dialling code Legal system

Centre’s expertise

Central Europe, between Switzerland and Austria.

Central European Time.

App 37,000 Vaduz.

None (120 km to Zurich airport).

German (German dialect) Swiss Franc (CHF).

Political power shared between hereditary monarch and democratically elected government; extremely stable. +423.

Civil law system based in part on Swiss law, in part on Austrian law, and

incorporating the common law concept of ‘trust’.

Numerous types of companies, foundations and trusts, interesting also for insurance agencies and funds. Highly educated personnel, strict professional secrecy.

Liechtenstein

general overview

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements share capital

Permitted currencies

Minimum authorised capital

Minimum share issue

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Up to 18%.

There is a flat corporate income tax rate of 12.5%. A minimum tax of CHF1200 has to be paid if the structure qualifies as a private investment structure. This has to be agreed by the European Supervisory Authority.

None.

For full details, please go to www.ifcreview.com/TIEA. CHF, EUR, US$ 30,000/50,000 depending on type of company.

Depends on type of company.

N/A Two to five days approx. CHF 800.

Professional fees, approx. CHF 5’000-10’000, depending on time spent. Additional fees for accounting and auditing (if required), charged on hourly bases and taxes.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One-three depends on type of vehicle.

Yes. Yes. Depends on type of company and its statutes.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Yes. Two. No. Depends on type of company and statutes.

Annual return Audit requirements

Usually requested.

Depends on type of company and statutes.

accounts

other

Registered office Domicile issues Company naming restrictions

Yes. Registered agent/trustee.

Name availability to be checked with registrar.

www.ifcreview.com/Liechtenstein

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Luxembourg

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Luxembourg: Continuing to Grow

By Francis Hoogewerf FCA, Hoogewerf & CIE, Luxembourg

H

AVING A PRIME MINISTER

who is also head of the Euro keeps Luxembourg very much in the picture. Jean Claude Juncker must be one of the longest serving Prime Ministers in the EU. Prime Ministers from countries around the world like to keep in touch with the Euro so they visit Luxembourg and friendships are made.

The Euro is slowly finding its way but not without sacrifices and problems. The next problem to face will no doubt be inflation.

Luxembourg’s banking, finance and fund industry is doing well, all things considered. Unemployment remains at around six per cent while private banking is still consolidating. The net job losses in this sector in 2010 were around 600 persons which is reasonable in the circumstances and means that the salary costs have not increased over the last year. Some banks are growing, such as a Brazilian bank (which intends to double its staff in 2011) and Chinese banks in Luxembourg.

The tail end of the UBS-Madoff situation still needs to be sorted out (one problem leads to other problems).

Clearstream, the clearing house, remains a world leader for the global market place, with its state of the art facilities being constantly developed.

Islamic Finance is taking root in Luxembourg, being promoted by the Luxembourg for Finance Agency.

ALFI (the Association of the Luxembourg Fund Industry) has

recently and logically opened an office in Hong Kong covering the areas of HK, Japan, Thailand, Singapore and mainland China. This office will be the eyes, ears and voice for both Europe and Asia, especially in relation to new European directives.

Luxembourg had a Pavilion at the Shanghai World Expo and by October 2010 over seven million visitors had visited the Luxembourg Pavilion.

On the practical side at last ‘they’ are talking about a fast train service from Brussels to Bâle via Luxembourg and Strasbourg. The Luxembourg to Strasbourg route is moving forward and Paris to Luxembourg is already an easy two hours.

Property prices continue to rise in Luxembourg.

Some weak points still exist - there is a need for staff from outside the EU and the work permits are very slow indeed.

Also the need to obtain authorisation for commercial businesses remains a barrier to doing business from Luxembourg and improving the unemployment position.

Life Insurance

The life insurance industry has been growing fast. The latest figures, which cover 2009 to 2010, show nearly a 100 per cent growth in premium income in the area of ‘guaranteed’ products. It is felt that some of this growth is due to the possibility of a new EU Savings Directive. www.ifcreview.com/Luxembourg

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The 1929 Holding Company legislation came to an end on 31 December 2010.

To some extent the 1929 Holding Company law was replaced by the more restrictive but tax advantageous Family Holding Company (SPF).

On the other hand the Luxembourg SOPARFI with its parent subsidiary tax exemptions is going to be hit by a minimum annual tax of €1500, whether or not there are profits to be taxed. This tax is expected to raise €50 million per annum to help cover the crisis costs. In addition there is to be a €350 per annum charge for the Luxembourg Chamber of Commerce and other extra smaller taxes of plus or minus €70.

It is felt that the Luxembourg SOPARFI will be at a disadvantage compared to Malta, Cyprus and other EU locations. It is common knowledge that Luxembourg is often considered to be the ‘Rolls Royce’ of EU holding companies, but not everyone can afford to pay the price of a Rolls Royce. This tax will no doubt lead to a consolidation of the firms providing SOPARFI services in Luxembourg.

The one advantage of this corporation tax is that vis à vis other countries not being happy with Luxembourg’s positive approach, at least corporate tax will have been paid (even at an effective rate of 100 per cent when there are no profits).

Shipping Luxembourg Celebrates 20 Years

Towards the end of the 1980s some people were surprised to see that Luxembourg intended to become a shipping nation. Luxembourg surrounded by France, Germany and Belgium had no sea. However, more or less at the suggestion of Belgium, a ship register came into being and Luxembourg became a sea-faring nation. Luxembourg became known for its mega yachts and is now becoming known for dredgers and the like.

The Luxembourg flag is well respected and is on the list of the 22 most respected flags globally. It follows that Luxembourg, known as a centre for transport by road, by air, by rail, is now celebrated as a centre for transport by sea.

Tax Treaties

The onshore world needs tax treaties.

Luxembourg being a finance and holding company hub is much in need of good tax treaties and has over 76 tax treaties.

As one of the biggest worldwide investors in Russia, Luxembourg needs to sign a good treaty with the Federation and is expected to conclude the Treaty before May 2011.

Both Hong Kong and China are important. Luxembourg has a particularity good treaty with Hong Kong and a treaty with China as well as India and Brazil. Monaco and Liechtenstein are also likely to be interesting tax treaties.

Luxembourg

Holding Companies

Conclusion

Luxembourg remains high on the world map both for investment funds and for banking. We must not forget Arcelor-Mittal, the world’s biggest steel group headquartered in Luxembourg.

If one looks at the size of Luxembourg compared with its population, it is relatively under populated and therefore has considerable room for growth in the future.

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

www.ifcreview.com/Luxembourg

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Luxembourg - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Central Europe.

Greenwich Mean Time +1. +450,000.

Luxembourg.

One. Luxembourgish, French, German.

Euro.

Democracy. +352.

Roman law.

Financial.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

0% to 38.95%.

28.59% No. For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any convertible currency. €12,500 (SARL) or €31,000(SA).

25% of capital for an SA. 100% of capital for an SARL.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

shareholders

accounts

other

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency Annual return Audit requirements

Registered office Domicile issues Company naming restrictions

No. Two days. €5,700 (some costs min capital). €7,500 (some costs min capital).

One. No. Yes. No Yes, Nominee possible.

SA: yes. SARL: no.

One. No One per year minimum.

Yes. Yes, if two of the conditions are exceeded: average number of employees of 50; balance sheet total of €3,125,000; turnover of €6,250,000. SA requires a commissaire.

Luxembourg.

No. Different from existing ones.

www.ifcreview.com/Luxembourg

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Madeira

The Portuguese Non-Habitual Residents’ Personal Income Tax Regime

By Sara Teixeira, MLGT Madeira – Management and Investment, SA, Madeira

P

ART OF THE GLOBAL TAX STRATEGY of the Portuguese

Government is the DecreeLaw nr. 249/2009, of September 23, which approved the Tax Code of Investment (“Código Fiscal do Investimento”). The objective of the Code was to improve Portuguese international competitiveness, and, among other measures, it created a new Personal Income Tax regime for non-habitual resident individuals.

This new non-habitual residents’ personal income tax regime aims to attract to Portugal qualified foreign residents engaged in high added value activities and also other high net worth individual investors by establishing a favourable tax regime for those who choose to take up Portuguese tax residency. It is particularly interesting when compared with similar regimes adopted in countries such as the United Kingdom, France or Spain.

According to the new regime, the status of non-habitual resident individuals will be granted to individuals who become resident for tax purposes in Portugal starting from January 1, 2009 without having had this status in the preceding five years.

For these purposes, it is important to bear in mind that a tax resident in Portuguese territory is, in general terms:

• A person who stayed there for more than 183 days (continuously or with interruptions) in the relevant taxable year; or • A person who, staying less than 183 days have, on the 31 December of the relevant taxable year, has in Portuguese territory a dwelling in such a way that one may presume an intention of maintaining and occupying it as their regular residence.

• A person who, on the 31 December of the relevant taxable year, is a crew member of a ship or aircraft at the service of an entity with residence, head office or effective management in Portugal; • All members of the household whose head is a resident in Portugal.

This being said, individuals may voluntarily register as a non-habitual residents in Portugal provided that they qualify as a Portuguese tax resident (in the terms described above) and that they have not been taxed as a resident in the Portuguese territory in the five years prior to their qualification as such.

It is also worth highlighting the regime’s flexibility, since it targets individuals who take up either a permanent or temporary residence in Portugal and also because the entitlement to be taxed as a nonhabitual resident is not lost even if the individual fails to qualify as a Portuguese resident in any of the years during the

www.ifcreview.com/Madeira

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10-year period, provided that he again qualifies as Portuguese resident for tax purposes in any of the following years until the 10-year period elapses.

The main feature of this non-habitual resident regime is the possibility of benefitting from the application of a special flat rate on Portuguese-source employment and business income and also to benefit from the application of the exemption method (with progression) on foreign-source income.

Portuguese-Source Income

An individual under this non-habitual resident regime will be liable to autonomous taxation at a special flat rate of 20 per cent on his Portuguesesource employment and business or professional income. In the latter case, income must arise from high added value activities that are of a scientific, artistic, or technical nature. These high added value activities have been defined by an order of the Portuguese Ministry of Finance and include a broad range of activities, as follows: • architects, engineers and geologists; • artistes (actors, musicians, painters and sculptors); • auditors and tax consultants; • medical doctors and dentists; • university professors; • psychologists; • learned professions, technicians and related activities (archaeologist; biologists and experts in life science; • computer programmers, consulting and computer programming and activities related to information technology and computer; • data process activities, information hosting and related services, web portals and other information activities; • news agencies activities; • scientific research and development; research and development of natural and physical sciences; • research and development in biotechnology; • designers; • investors, directors and managers of companies that promote productive investment, provided that they are allocated to eligible projects and with tax relief agreements under the Investment Tax Code; • companies’ senior officials.

Despite being eligible to the application of the 20 per cent flat tax rate, it may prove to be more tax efficient if the non-habitual resident opts to aggregate this income to his

taxable income and be subject to the general regime of progressive rates. The advice on whether or not to take this option would depend on the specific situation of each taxpayer.

Foreign-Source Income

With regard to foreign-source income, the regime establishes two sets of rules depending on the type of income to consider.

In respect to foreign-source income comprising income from employment and from pensions, the exemption method (with progression) will be applicable, provided such income is subject to effective taxation in the source State, according to the rules of a double tax treaty entered into

by Portugal and such State or, if no treaty is in place, that the income is subject to effective taxation in the source State and that it is not considered to arise from a Portuguese source under the Portuguese territoriality rules.

With regard to foreign-source pension income specifically, it includes benefits due to retirement pensions, old age, invalidity, survival, and maintenance, benefits payable by insurance companies, pension funds, or other entities, under a supplementary social security system due to the employer’s contributions – although not considered as employment income – and other pensions and allowances and temporary or life annuities. Whenever this income is based on contributions, the application of the exemption method will be limited to the portion of the income that has not led to a specific deduction in accordance to the Portuguese personal income tax rules.

In respect to foreign-source income, comprising passive income – such as interest, dividends, capital gains and other income from capital, income from immovable property – and income deriving from independent personal services or from intellectual or industrial property, or yet from the provision of information relating to an experience gained in the industrial, commercial, or scientific areas, the exemption method (with progression) will also be applicable, although under different conditions. In these cases, in order for the exemption method to be applicable, it is required that such income may be taxed in the source State under the rules of a double tax treaty entered into by Portugal and the source State.

Further, in case there is no double tax treaty between Portugal and the

source State, the exemption method will be applicable if the income may be taxed in the source State according to the rules of the OECD Model Tax Convention on Income and on Capital – as interpreted according to the Portuguese reservations on its articles and observations on its commentary – and also if it is not considered to arise from a Portuguese source under the Portuguese territoriality rules nor from a region or territory included in the Portuguese tax haven black list.

It is important to highlight that, regarding both foreignsource passive income and income deriving from independent personal services the regime requires only the potential liability to taxation in the source State under the rules of a tax treaty or of the OECD Model Tax Convention, and therefore no effective taxation is required.

The non-habitual tax resident regime appears to be quite attractive and competitive, especially when compared with similar regimes established in other EU jurisdictions.

Its flexibility and wide scope prove to be quite interesting both for (i) the straight forward taxation of domestic source income at the flat rate of 20 per cent – most likely a lower rate than the ones applicable to other Portuguese tax residents in the same income ceiling – and for (ii) the elimination of double taxation of foreign source income through the exemption method – differently from the general rule in Portugal, which is the credit method – benefiting from the Portuguese wide treaty network of more than 50 double tax treaties, in some cases requiring only the potential taxation in the source State.

The regime also proves to be interesting within the scope of the new regime of Madeira International Business Center, since its attractive features may smooth the fulfillment of the employment eligibility criteria by drawing qualified foreign residents engaged in high added value activities and other high net worth individual investors involved with companies established therein to take up Portuguese tax residency.

The complexity of the legal and tax terms of the non-habitual resident tax regime recommends, however, to take proper legal advice on the qualification for the application of this regime before any decision is taken in this regard. www.ifcreview.com/Madeira

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Situated north of Canary Islands, north-west coast of Africa.

- 1h CET. 260,000.

Funchal.

Madeira International Airport.

Portuguese.

Euro.

Autonomous Region of the Portuguese Parliamentary Republic. +351.

Parliamentary Republic.

Services, financial, shipping and industrial.

Madeira

Madeira - Fact File

tax

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Progressive rate (general regime).

Total exemption or low rate, depending on the type of license.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted Currencies Minimum authorised capital Minimum share issue

Euro. @5,000 (Lda companies); @50,000 (SA companies).

One.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Limited liability companies; changeable to SA companies.

One week, provided all documentation from the shareholders is ready. @750 or @1,000 payable to SDM. From @1,000 to @1,800 payable to SDM plus management fees.

directors

Minimum number

Residency requirements Corporate directors Meetings/frequency

One (for S.A. companies, if share capital is higher than @200,000 a minimum of two directors is required).

N/A. None, in case of limited liability companies; one per year in case of SA companies.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes. Registered or bearer shares.

One. Only for limited liability companies.

One per year.

accounts

Annual return Audit requirements

Once or twice a year.

Only for SA and pure holding companies, and limited liability companies that rise above some thresholds.

other

Registered office Domicile issues Company naming restrictions

Madeira.

Re-domiciliation is permitted.

Subject to administrative approval.

www.ifcreview.com/Madeira

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Malta

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The Re-Domiciliation of Investment Funds to Malta

By Antonia Zammit, Ganado & Associates, Advocates, Malta

T

HE PERFORMANCE in the investment services and fund industry in 2010 is a clear indication that Malta’s robust yet flexible investment services and fund regime has been tried, tested and is now much sought after by the industry. It has, in fact, been a record year in terms of the number of investment funds and fund management companies that have relocated to Malta, primarily from offshore jurisdictions.

The introduction of the legislative framework in relation to the continuation of companies to Malta is not recent. The Continuation of Companies Regulations was introduced in 2002. The regulations were used sporadically throughout the years but it is only in the last couple of years that they have proved to be an extremely beneficial tool for the further development of Malta’s ever growing financial services industry.

The Malta Financial Services Authority has recognised this increase in demand by investment fund promoters to redomicile investment funds to Malta and in fact, at the beginning of 2010, issued guidelines entitled “Guidelines on re-domiciliation of offshore Funds to Malta” to facilitate the regulatory process undertaken by the investment funds that decide to re-domicile to Malta.

The result of re-domiciliation is that an investment fund moves from one domicile of choice to another.

It is the change in nationality of the investment fund whereby the company is not dissolved and another company formed, but the fund ceases to be registered in the exit jurisdiction and once the required procedures are carried out, is registered as a Maltese company with the registrar of companies in Malta. The investment fund is then

subject to Maltese company law, which incorporates the EU Company Law Directives, and Maltese tax law. The investment fund is then also subject to the Maltese regulatory framework, whereby it is required to seek authorisation and obtain a licence by the Malta Financial Services Authority on its relocation to Malta.

The possibility of re-domiciling an existing investment fund from a third country is an important facility, in that it does not give rise to the crystallisation of capital gains for investors. The assets remain untouched, with no need to be transferred or adjusted. Also, the custody or prime brokerage agreement may remain in place since Malta offers the possibility for the setting up of funds where the service providers need not be based on the island. The MFSA finds no need for the principal service providers to be based in or regulated in Malta so long as they are based in an equally reputable jurisdiction.

The process involved in respect of the re-domiciliation of an investment fund to Malta is relatively straight forward. The company must be a body corporate registered or incorporated in an “approved country or jurisdiction”.

The MFSA permits the re-domiciliation of companies from all EU, EEA and OECD member states as well as the Bahamas, Bermuda, the British Virgin Islands, The Cayman Islands, Gibraltar, Guernsey, the Isle of Man, Jersey and the Mauritius, to name a few. Also, the law of the exit jurisdictions and the company’s constitutive documents must provide for the option for the continuation of companies.

The list of documents required by the Registrar of Companies in Malta www.ifcreview.com/Malta

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rights of the foreign investment fund, authorising the re-domiciliation to Malta; a good standing certificate issued by the exit jurisdiction’s registrar of companies; a declaration signed by at least two directors of the fund, as well as a legal opinion confirming a number of issues regarding the status of the investment fund.

The uncertainty posed on third country managers and investment funds by the proposed Alternative Investment Fund Managers Directive has resulted in a number of already existing investment funds moving to Malta. The latest draft of the Directive, which is in its final leg of the approval stage and which is set to be implemented by all member states of the European Union by 2013, has resolved a few of the uncertainties in respect of non-European fund managers marketing non-European funds in the European Union. However, there still remain restrictions which concern offshore investment funds interested in European investors and consequently, such funds will continue to shift their operations onshore.

the next decision is: where to? Malta has become a favourable jurisdiction not only because of re-domiciliation procedures but also due to a number of other features that give Malta that winning formula. Malta is renowned for having a sophisticated legal framework.

Maltese law is primarily civil law based, having adopted throughout the years a number of interesting common law concepts, especially in the company law sphere. The combination of the two legal systems provides for a variety of legal structures for fund promoters to choose from. The most popular legal framework when setting up funds in Malta is the SICAV, due to its flexibility. SICAVs may issue multi-currency classes of shares and may be set up as single fund structures or as umbrella structures with segregated sub-funds. Classes of shares in a SICAV may also have different features - such as different rights, different fee structures and different entry requirements.

Malta’s popularity as a financial services centre has increased tremendously also because of the investor protection mechanism included in the legal system.

structure, from those of other sub-funds in the same umbrella structure, is also a very attractive feature.

Another winning asset is the quality of the human resources Malta has to offer. The widespread use of the English language and its strategic geographical position are also key features of this jurisdiction.

Investment funds registered in Malta are exempt from paying any tax on their income or capital gains unless these are made from assets situated in Malta.

The large number of double taxation agreements Malta has entered into is also beneficial in attracting more investment funds to the island.

Indeed, Malta has experienced significant growth in 2010 as a fund domicile in view of its status as an onshore financial centre having a legal and regulatory framework which is flexible yet still having sound supervisory practices. Despite the encouraging positive performance being experience, Malta is determined to strive to maximize its potential and become the European fund domicile of choice.

Malta

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Malta

Malta - Fact File general overview

Location

Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system

Centre’s expertise

Malta lies at the centre of the Mediterranean Sea, 93km south of Sicily and 288km north of Africa.

Central European Time.

412,970.

Valletta.

Malta International Airport, Luqa.

Maltese, English.

Euro.

Democratic republic. +356.

Mixed legal system; company law and commercial laws mostly based on UK statutes and general property law based on a Civil Code.

Corporate services, including holding company structures; investment services

including hedge fund domiciliation; captive insurance.

Personal income tax

Corporate income tax Exchange restrictions

Tax information exchange agreements

Rates vary according to income brackets and whether computed jointly with spouse or individually.

35%.

No, however in certain instances there may be a duty to notify the Central Bank of Malta for statistical purposes.

For full details, please go to www.ifcreview.com/TIEA.

tax

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Any convertible currency. €46,587.47 (plc); €1,164.69 (private company). €46,587.47 (plc); €1,164.69 (private company).

type of entity

Shelf companies

Timescale for new entities Incorporation fees

Annual fees

Not used in practice in Malta as companies can be registered in a short time given the correct documentation.

Two-three working days.

An authorised share capital fee. The fees range from €210 to €2,250 depending on share capital and on whether registration is carried out in paper or electronic format.

Fees vary from €85 to €1,400 according to the authorised share capital of the company and according to whether registration of the annual return of the company is carried out in paper or electronic format.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

Two in the case of a public company; one in the case of a private company.

None.

Permitted (director may be any ‘person’).

N/A.

shareholders

Disclosure

Bearer shares

Minimum number Public share registry Meetings/frequency

Yes, but when shares are held on trust or under a fiduciary agreement one only finds the information about the registered shareholders and not the beneficial interests.

Warrants to bearer can only be issued by public companies and then only if so authorised by the companies Memorandum or Article of Association and the shares are fully paid up.

Two. Yes. Every company must hold an annual general meeting.

accounts

Annual return

Audit requirements

Required upon each anniversary of company’s registration. Must be signed by at least one director or the company secretary and submitted to the Registrar of Companies within 42 days after the date to which it is made up.

Required to appoint a Maltese auditor(s) at each AGM at which annual accounts are laid.

other

Registered office Domicile issues Company naming restrictions

Yes. N/A A public or private company may be designated by any name not already used by another company and not offensive or restricted. Such name must end with Plc or Ltd. www.ifcreview.com/Malta

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IFC Review • 2011

Marshall Islands: Rising to the Challenge

By Michael Wyler, Managing Director, IRI Corporate & Maritime Services (Switzerland) AG

R

ECENT YEARS HAVE BEEN CHALLENGING for economies

globally and the Corporate Registry of the Republic of the Marshall Islands, with its network of offices around the globe, has been in a good position to assess and serve the changing needs of its corporate citizens in these difficult times.

The Marshall Islands constantly evolves and adapts to ensure that it stays at the forefront of the international business community and it remains the jurisdiction of choice for international shipping entities.

The Registry has witnessed dynamic growth in recent years, largely attributable to the Marshall Islands’ modern and responsive corporate law. In keeping with its reputation for innovation, the Government of the Marshall Islands amended the Associations Law to create an exception to the appraisal rights of dissenting shareholders of Marshall Islands publicly traded companies during consolidation or merger.

The new section, 100(c) of the Business Corporations Act (BCA), provides that, on merger or consolidation, the price for the shares of dissenting shareholders may be pre-fixed through either the prospectus, Articles of Incorporation or resolutions for the issuance of the subject shares. This amendment to the BCA brings the

Marshall Islands Associations Law in line with the corporate laws of New York and Delaware.

This is only the latest change in an ongoing strategy to support corporate clients that began nearly 20 years ago when International Registries, Inc. (IRI) became the Maritime and Corporate Administrators of the Republic of the Marshall Islands. The philosophy from the outset has been to offer world class registration and customer services that are second to none.

That goal has largely been accomplished by IRI through the decentralisation of its operations.

With 20 offices worldwide, clients are able to contact a corporate specialist at any time who can register a new corporation, issue certificates of good standing, file an amendment or answer client questions.

With the Associations Law modelled on US corporate law, the Marshall Islands offers several advantages, including: • zero taxation; • free redomiciliation – migration of domicile, permitted both into and out of the jurisdiction; • low administrative costs; • same day formation and filing of corporate documents; • simple maintenance with no annual filings, no notarisation requirements

and permitted facsimile filings; • confidentiality of shareholders, members, limited partners, directors, managers and officers; • standard Articles of Incorporation available in English, Chinese, French, Portuguese, Russian and Spanish; • capital expressed in any currency; free Apostilles; political stability; and • a staff of attorneys that is available to respond to inquiries regarding business entities.

Decentralisation

Decentralisation of operations has been a hallmark of the Marshall Islands Registry from its inception, and while IRI’s offices are located in worldwide maritime centres, many of those locations are also key business centres.

With its roots in the maritime industry, the Marshall Islands Maritime Registry, the fourth largest open registry in the world, has over 2,000 vessels registered comprising more than 52 million gross tons.

Additionally, the Marshall Islands Maritime Registry enjoys an excellent reputation for service and quality and is listed on both the Paris and Tokyo Memorandums of Understanding (MoUs) white lists and the United States (US) Coast Guard Qualship 21 roster.

www.ifcreview.com/MarshallIslands

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IRI’s specialists in these full service offices are local professionals, hired because of their knowledge and expertise with the local business and maritime communities. IRI’s decentralised operations are enhanced by a 21st century communications system that links all of the Registry’s offices. In addition to each office being linked to a fully backed up database, many of the offices are also linked by satellite-based video conferencing capabilities that allow issues to be dealt with quickly and pro-actively.

Corporate Governance

As with the most recent change to the BCA, which was amended to ensure easy completion of mergers and consolidations of publicly traded entities, the Registry constantly works to keep the Marshall Islands Associations Law, originally adopted in 1990, in step with the latest developments in corporate governance.

This is accomplished largely because IRI’s attorneys work closely with clients and the Government of the Marshall Islands.

IRI’s attorneys are available to respond to enquiries regarding corporate and maritime matters in the Republic of the Marshall Islands.

While IRI, as a corporate service company, cannot give legal advice, its attorneys can provide information and guidance on Marshall Islands corporate and maritime law, vessel and yacht registration, forming a foreign maritime entity and preparing and filing corporate documents.

IRI: A History of Service

IRI and its group of affiliated companies have been administering maritime and corporate registries since 1948 and offer a complete line of corporate and maritime services. Through a legislatively endorsed joint venture with the Government of the Republic of the Marshall Islands, IRI and its affiliates have administered the corporate and maritime programs of the Republic of the Marshall Islands since 1990.

A German possession until World War I, the Republic of the Marshall Islands was controlled by Japan between the World Wars. After World War II, they became a trust territory of the United Nations under United States administration until becoming an independent nation in 1986. In 1991, the Marshall Islands became a full member of the United Nations.

The Marshall Islands maintains a

politically stable, democratically elected parliamentary system of government. The Constitution, signed in 1979, is a blend of American and British models of government and the official language is English. The Marshall Islands has enjoyed political stability since its independence as a nation, attained in 1986.

Under the Marshall Islands’ parliamentary system, the legislature, known as the Nitijela, elects a President from among its members. In turn, the President nominates a Cabinet of sixto-ten members. The legal system is based in Common Law and the judicial system consists of local courts whose judges are appointed by the Cabinet.

The court system is comprised of local courts of first instance, a Traditional Rights Court with jurisdiction over real property matters and a High Court with corporate and maritime jurisdiction.

Appeals may be brought before the Supreme Court in all cases.

Agriculture and tourism are the mainstays of the economy. The most important commercial crops are coconuts and breadfruit and small scale industry is limited to handicrafts, copra and tuna processing. The principal trading partners are the US, Japan and Australia. Air transportation is facilitated by two international airports, plus airstrips scattered throughout the larger islands. There are twelve deepwater docks for large ocean-going ships. Excellent international communications are provided by satellite links for telephone, fax and telex.

Corporate Programme

First enacted in 1990, and continually updated, the Marshall Islands corporate law is one of the most modern in the world. Although based on US corporate law, the Marshall Islands law contains unique provisions enabling the use of British-style corporate management.

In addition, there are no requirements to have corporate documentation authenticated by a consular official.

In 1996, the Marshall Islands enacted its Limited Liability Company (LLC) Act modeled after the Delaware LLC law in the US. LLCs formed under the Act provide a cost-efficient way to maximise profits while minimising liability in a completely confidential environment.

In 2005, large scale amendments were made to the Marshall Islands Associations Law including

amendments to the BCA, Limited Partnership Act and LLC Act. In addition to these amendments, the Partnership Act was repealed and a new act, the Marshall Islands Revised Partnership Act, which is based on the Delaware Revised Partnership Act, was adopted.

Professionals worldwide have recognised the Marshall Islands’ ability to aggressively and efficiently address the key issues facing the corporate industry.

As governments and international organisations join forces to impact offshore entities, it has become increasingly difficult for a jurisdiction to retain the elements that make an offshore corporate program successful.

The Marshall Islands, however, has met these challenges head-on while maintaining its fundamental elements, making it the corporate jurisdiction of choice for many professionals.

Maritime Programme

The Marshall Islands ship registry program was initiated by the Marshall Islands Government in 1988. With the adoption of a new Maritime Act in 1990, the maritime laws of the Republic were brought in line with the many changes in ship registration, regulation, financing and licensing which had occurred in the shipping industry. In addition, the Marshall Islands has adopted groundbreaking legislation that permits the registration of a vessel that is still subject to a recorded mortgage in its present country of registry. This legislation provides for the continuation of the preferred status of the mortgage without interruption; thus, the foreign mortgage lien accompanies the vessel into the Marshall Islands Registry.

Vessels and yachts may be registered if owned by a Marshall Islands citizen, national, corporation, limited or general partnership, LLC or a foreign maritime entity qualified in the Marshall Islands.

IRI and its affiliates currently have a network of offices in Baltimore, Dalian, Dubai, Ft. Lauderdale, Geneva, Hamburg, Hong Kong, Houston, Istanbul, London, Mumbai, New York, Piraeus, Roosendaal, Seoul, Shanghai, Singapore, Tokyo, Washington DC/ Reston and Zurich that have the ability to register a vessel or yacht, record a mortgage, incorporate a company and service clientele. www.ifcreview.com/MarshallIslands

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Asia Pacific – Oceania.

Greenwich Mean Time +12.

65,859.

Majuro.

One international, three domestic.

English.

US $.

Republic. +692.

Common law.

Corporate and maritime registries since 1990.

Marshall Islands

Marshall Islands - Fact File

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

N/A. None.

None.

12: United States, Australia, New Zealand, Ireland, Denmark, Finland, Iceland, Norway, Sweden, Faroe Islands, Greenland, Cook Islands.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

All. None.

One.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual Fees:

Yes. One working day.

US$650.

US$450.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. None.

Yes. Flexible.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

None.

Yes. One. No. Annual meeting.

accounts

Annual return Audit requirements

No. None.

other

Registered office

Domicile issues

Company naming restrictions

Provided with incorporation.

Free redomiciliation into the Marshall Islands; redomiciliation out of the Marshall Islands permitted.

No use of bank, insurance or trust. Names may be in any language, as long as Roman characters are used.

www.ifcreview.com/MarshallIslands

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Mauritius

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IFC Review • 2011

Mauritius: The Year in Review

By Ludovic C Verbist, Managing Director, AAMIL Group, Mauritius

I

N ORDER TO BETTER ATTRACT

the listing of investment funds, the Stock Exchange of Mauritius Ltd has developed a new highly transparent and user-friendly specific investment funds listing regime. This is essentially meant for investment funds seeking investment opportunities in Africa and Asia.

A number of alterations have been made to the listing rules to attract specific investment funds who wish to benefit from investment opportunities in Africa and Asia. The new listing rules are considered to be more transparent and user-friendly. The SEM ensures a speedy processing of applications, within two weeks once the application is complete.

GBOT

In October 2010, the Global Board of Trade (GBOT) was launched in Mauritius. This is an international multi-asset class international derivatives exchange. GBOT trades mainly in currency and commodity futures and is innovating by trading in two African currencies namely the Mauritian Rupee and the South African Rand. It plans to expand to include other currencies later.

GBOT operates as an electronic exchange, which allows buyers and sellers from various parts of the world to place their orders anonymously. Trading in futures enables risk mitigation and safeguards the investor from fluctuations in both the prices of commodities and currency fluctuations. GBOT has served to reinforce the country’s stance as an international finance centre in the

African region. It has been set up to simultaneously allow global investors to connect to Africa and Africa to connect to the global markets. GBOT operates within internationally acclaimed and accepted rules and regulations. Thomson Reuters and GBOT have recently entered into an agreement whereby Thomson Reuters will carry the data from GBOT in real-time. Hence users of Thomson Reuters will be able to view the bid and ask prices, volumes, latest trades and related information and news on the commodities and currencies.

The Financial Services Commission

The Financial Services Commission (FSC) is the regulator of the nonbanking financial activities in Mauritius.

It was awarded the ‘Most Innovative Capital Market Regulator of the Year Award’ in 2010 by Africa Investor at a summit organised by Africa Investor in collaboration with New York Stock Exchange (NYSE) Euronext.

The criteria considered for the award were the basis of commitment to increasing transparency and efficiency, support for innovative technologies, employment of best regulatory practice, openness to foreign investors and investor protection, participation in industry associations such as IOSCO and efforts to create an enabling environment for the capital markets industry. The summit was organized with the hope of promoting investment opportunities in Africa mainly for fund managers www.ifcreview.com/Maritius

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The Global Business Sector

The Companies Act 2001 applies to all companies incorporations. Any nonresident wishing to set up a company under the laws of Mauritius, but not active within the Island’s territory, will incorporate a Global Business Company. It will either hold a licence category 1 (GBL1) or 2 (GBL2). A GBL1 can act as a holding company or in financial activities (insurance, asset management…) or be incorporated as an investment fund. It can benefit from the double taxation agreements (DTA) network Mauritius has established.

Today, there are 34 such DTAs in force. GBL1 are used frequently as investment vehicles or to receive royalties from countries such as India, China, Luxembourg or South Africa, countries with which Mauritius has what is seen as very attractive DTAs. GBL1 are taxed on their corporate income at the flat rate of 15 per cent.

Mauritius tax law allows an underlying foreign tax credit up to the amount due in Mauritius; the effective tax rate varies therefore between 0 per cent and 3 per cent. There is no capital gains tax nor withholding tax on dividends and interest paid to non-residents.

While GBL1 benefit from a very attractive tax regime, GBL2 are not subject to any taxation. GBL2 are ideally suited for example for trading purposes, international contracts or holding of assets. It is equivalent to the IBC type company. The procedure to incorporate is carried out quickly. The subsequent administration is simple with few statutory and filing requirements.

However, the FSC brought changes to the filing requirements of GBL2 in 2010.

Henceforth, management companies will be required to provide details to the FSC on the identity of the beneficial owner before incorporation, an outline of the business objective (already in force before) and annual financial summaries.

To those clients who would find these new requirements too burdensome or costly, other jurisdictions, such as the Seychelles, can still be proposed. These do not require such communication of information.

Although these measures increase the cost of such GBL2, by the need to hold accounts, there is a great advantage to these new rules. By now making these GBL2 fully transparent, these zero tax GBL2 should be acceptable to countries which routinely put all ‘offshore’ companies onto their own national blacklists. GBL2 should no longer be on such blacklists. This would then allow the beneficial owner to operate in full legality a company with limited liability and with a zero corporate tax rate.

Mauritius

and US pension funds. The FSC anticipates American fund managers to structure investments in Africa through the Mauritius International Financial Centre.

E*Trade Mauritius: Capital Gains Exempt From Tax In India

E* Trade Mauritius Ltd (E*Trade), a Mauritius company, sold its shareholding in IL&FS Investmart Ltd (IL&FS), an Indian company, to HSBC Violet Investments (Mauritius) Ltd (HVI), a second Mauritius company. E*Trade then made an application to the Indian Tax Authorities to allow HVI to pay out the full amount of the acquisition of said shares to it, by pointing out that according to the double taxation agreement (DTA) between Mauritius and India, it was not liable to capital

www.ifcreview.com/Mauritius

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gains taxes on the sale of these shares. The Tax Authorities refused.

E*Trade subsequently filed a writ petition in the Bombay High Court against the tax authorities. The Court instructed E*Trade to file a revised application to the Director of Income Tax (International Tax) (DIT). DIT confirmed the position taken by the tax authorities. The Bombay High Court then instructed HVI to withhold taxes and pay the Government.

E*Trade then turned to the Authority for Advance Ruling (AAR). In its ruling pursuant to the request, the AAR recently upheld that under Article 13(4) of the DTA, capital gains are not liable to tax in the hands of E*Trade.

The AAR also made strong reference to the Azadi Bachao Andolan case, where the Indian Supreme Court had confirmed that Tax treaty shopping was not against the law, and that it was even very understandable that taxpayers would try to lower their taxes, as long as it was done within the scope of the law.

This serves as a reiteration of the permanency of the tax benefits existing under the DTA in Mauritius.

International Opening And Residency

Fundamentally, successive governments in Mauritius have successfully transformed the economy from a rather agricultural one into a service oriented one. The Global Business Sector is contributing significantly to the GDP. So is the Business Process Outsourcing (BPO), which has created over 10,000 workplaces in just a few years. Mauritius has truly opened itself to the international world. The services industries represent today 72 per cent of GDP. In turn, these new industries favour the return of many educated Mauritians from abroad and the influx of expatriates.

Indeed, those Mauritians who were educated abroad and stayed there to work in better jobs can now find similar jobs in Mauritius. Likewise, the expansion in foreign investment brings with it the arrival on the island of many expatriates.

These two factors, combined with the passage of many tourists each year, bring about a very cosmopolitan and international way of life in Mauritius.

Governments have favoured this opening to expatriates by making it increasingly easier to obtain and renew work permits in Mauritius. The

accession to property by foreigners has also been eased considerably. While until recently, no foreigner could purchase any real estate in Mauritius (unless by special consent of the Prime Minister), this has now been changed. After three years residency, any foreigner has the right to purchase residential property anywhere in Mauritius. Commercial property can be purchased on the day of the investment in any business.

Through the Integrated Resort Scheme (IRS), launched in 2002, it is possible to any foreign individual without prior residency or to any domestic company to buy freehold homes in dedicated resort-type residential developments, generally providing catering and hotel services, a golf course and several other amenities. Several projects are currently on the market; the minimum investment must be US$500,000. A purchase of a house in such a project allows the foreigner and his / her close relatives to become resident in Mauritius, benefiting from a highly pleasant lifestyle and a very attractive tax environment, where only locally earned or remitted income is taxed at the single rate of 15 per cent. There are no gift or estate taxes.

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Indian Ocean.

Greenwich Mean Time +3/4 winter.

1,250,000.

Port Louis.

SSR International Airport.

English, French, Hindi, Urdu, Chinese.

Mauritian rupees (Rs).

Democratic parliamentary system. +230.

Hybrid, mix of common law and civil law.

Tourism, Financial services, Agriculture and Textile.

Mauritius

Mauritius - Fact File

tax

Personal Income tax Corporate Income tax Exchange restrictions Tax information exchange agreements

15%.

15% with foreign tax credit for GBL1 companies. No taxation for GBL2.

No. For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted Currencies Minimum authorised capital Minimum share issue

Any currency.

No authorised capital, but stated capital (no minimum).

One share.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Yes, for GBL2 companies.

Seven–15 days. c150 for GBL2 companies, c500 for GBL1 companies. c250 for GBL2 companies, c1,500 for GBL1 companies.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One, two for GBL1 companies.

GBL1 companies only, for tax residency purposes.

Allowed for GBL2 companies only.

Yes, for GBL1 companies/not specified.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes for GBL1 & GBL2 companies.

No. One. No for GBL1 and GBL2 companies.

Yes, for GBL1 companies/at least once a year.

accounts

Annual return Audit requirements

Yes, for GBL1 companies only.

Yes, for GBL1 companies only.

other

Registered office Domicile issues Company naming restrictions

Yes. No. Very few.

www.ifcreview.com/Mauritius

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Netherlands

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The Netherlands: Tax Planning and Tax Treaty Developments

By Leo E C Neve LLM, Tax Advisor, Neve Tax Consultants, Rotterdam, The Netherlands

I

N THIS ARTICLE, I want to discuss

two elements for qualification under a tax treaty. The first element is the residence of a corporate entity.

In situations of dual residence, the socalled ‘tie-breaker’ rule will determine in which State the entity will ultimately be a resident for the purpose of application of the treaty. The second element is the limitation of benefits.

Once a corporate entity is deemed to be a resident, the benefits of a treaty may be restricted to so-called ‘qualifying’ residents. These two elements make tax planning a challenging exercise.

Corporate Residence

The purpose of a residence definition in a tax treaty ( art 4 OECD) is that it determines the personal scope of a tax treaty, and it resolves issues of dual residence. The contracting States to the treaty may have different concepts of residence, for example, in the USA residence is based on nationality (place of incorporation), whereas in Turkey residence of a corporate entity is based on ‘the registered office’ criterion, while Canada has reserved the right to deny companies with dual residence the benefits of a tax treaty.

If source-States and situs-States each apply different criteria, a corporate entity could become a resident of both contracting

States (dual-residence). In order to determine which State has priority, so-called tie-breaker rules have been developed 1. The standard tie-breaker rule is explained by paragraph 3 of art 4 of the OECD Model: “Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.”

But what is the ‘place of effective management’? In the Observations on the Commentary2, France considers that the definition of the place of effective management in paragraph 24 of the Commentary, according to which “the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made”, will generally correspond to the place where the person or group of persons who exercises the most senior functions (for example a board of directors or management board) makes its decisions.

The Netherlands, however, interprets the place of effective management as meaning where day-to-day effective management occurs - the place where board meetings are held is of less importance. www.ifcreview.com/Netherlands

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New UK-NL Treaty3

In the new treaty between the UK and the Netherlands, the corporate tiebreaker rule is replaced by a mutual agreement procedure. The competent authorities of the contracting States will determine the residence of a dual resident company by mutual agreement. If no agreement is made, the entity will not be entitled to treaty benefits. The residence will be determined on the basis of facts and circumstances. If the entity has moved for reasons of achieving unjustified benefits, it will be refrained from obtaining these benefits.

Wholly artificial arrangements will be ignored. An arrangement is considered ‘wholly artificial’ if avoidance of tax is the justifying reason for setting up the arrangement. A nontax reason is necessary for the reason not to be ‘wholly artificial’.

The decision of the competent authorities cannot be appealed.

In many instances, the reason for creating corporate structures is tax oriented. And in many instances the structure can be said to be ‘artificial’.

However, if there is a business reason, with the tax benefits as a happy consequence, the structure cannot be said to be ‘wholly artificial’.

Limitation Of Benefits

A second big and expanding issue is the limitation of the benefits (LOB) that can be obtained under the treaty. Stringent conditions are increasingly applied in tax treaties especially with respect to an entitlement to reduce withholding taxes for dividends (art 10), interest (art 11) and royalties (art 12),.

Most of our readers will be familiar with some form of limitation in the use of tax treaties. In the famous 1963 Swiss anti-abuse rules it was already stated that any benefit would be denied if the ultimate purpose

of the structure was to obtain the benefits of the treaty.

This has evolved into the famous LOB articles in the USA-Netherlands treaty. What was in those days an exception is becoming more and more common in modern treaty practice.

A limitation based on beneficial ownership is common. Beneficial ownership in this sense means that the receiving entity is at liberty in the use and disposal of the proceeds.

In case the use of the proceeds is restricted, the receiving entity cannot be seen as the ‘beneficial owner’ of the received funds.

A limitation based on purpose is of more recent times. This trend is also apparent in the new treaty between Cyprus and the Russian Federation. In this treaty, non-Cypriot entities that have become a resident of Cyprus for Cyprus tax purposes, will not qualify directly for benefits, but only after competent authority proceedings have established that the main purposes for the creation of the entity has been to obtain benefits under the Agreement not otherwise available. This so-called ‘Purpose Test’ has become an essential element in tax planning.

Many new treaties today contain LOB clauses, which are construed by defining who is entitled or ‘qualified’ to benefit from a treaty, ‘Qualified’ persons are usually residents that are natural persons. Legal persons will qualify if they fulfill additional criteria, for example, pension funds can qualify if the majority of participants are resident or make contributions. Listed companies can qualify if their primary place of management and control is in the Contracting State, of which it is a resident. Non-qualifying persons can still qualify if the shares in that entity are held by so-called ‘equivalent beneficiaries’, being residents of a third country that has a treaty with the source State, providing for similar or better conditions. Also non-residents can qualify if the benefits derived can be allocated to an active business in the Contracting State.

When an EU State makes a treaty with a non- EU State, the EU State must observe the general nondiscrimination rules.

Residents of another EU State may not be discriminated against residents of the Contracting State. And companies controlled by other EU residents

cannot be discriminated against companies controlled by residents of the contracting State. A limitation of benefits clause must be proportionate which means that it can only be applied in wholly artificial arrangements.

On this issue the Court of Justice recently held4 : “27. The need to prevent the reduction of national tax revenues – a reduction which, in the main proceedings, the grant of the tax credit at issue to Tankreederei would result in – is not an overriding reason in the public interest capable of justifying a restriction on a freedom instituted by the FEU Treaty (see, to that effect, Case C136/00 Danner [2002] ECR I8147, paragraph 56, and Case C-318/07 Persche [2009] ECR I359, paragraph 46).

“28. As regards the need to prevent abuse, it is true that it is apparent from settled case-law that a restriction on the freedom to provide services can be justified where it specifically targets wholly artificial arrangements which do not reflect economic reality and whose only purpose is to obtain a tax advantage (see, inter alia, Jobra, paragraph 35 and the case-law cited).”

Netherlands

Instead of a general rule for resolving the issue of dual residence of companies, some countries include a competent authority procedure. These countries endeavour to determine by mutual agreement the State of which the entity will be deemed to be a resident. This as general rule, based on the OECD Model and Commentary.

The new Agreement between the Netherlands and the United Kingdom, however, deviates from this rule.

Conclusion

We have seen that the developments in tax treaty practices circles around defining ‘residence’ and specifically targets dual resident companies.

On the other hand benefits are restricted for those who seek to benefit artificially from a given treaty. It means that prevention of abusive usage of treaties is possible, but only in those limited cases where there is a wholly artificial arrangement, that has no economic substance and whose only purpose is to obtain a tax advantage. Tax planners beware!

1. S ee also Commentary on art 4 (3) of OECD Model Tax Convention on Income and Capital.

2. C ommentary on article 4, para 26.3 3. Treaty signed in London on 26 September 2008, with protocol. The treaty is effective in the Netherlands for fiscal years starting on or after 01-012011 and for the United Kingdom for fiscal years starting on or after 6th of April 2011.

4. C ase Court of Justice EU, 22 Dec 2010, C-287/10, (Tankreederei SA).

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Netherlands - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

Netherlands.

Greenwich Mean Time +1.

16,000,000.

Amsterdam.

Schiphol (Amsterdam), Rotterdam, Eindhoven.

Dutch, many speak English.

Euro.

Democracy, two houses of representatives.

31.

Civil code.

tax

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Max 52%.

25%.

No. 89 DTA, 23 TIEA.

share capital

Permitted Currencies Minimum authorised capital Minimum share issue

EURO. €18,000. €18,000.

type of entity

. directors

Shelf companies Timescale for new entities Incorporation fees Annual fees Minimum number Residency requirements Corporate directors Meetings/frequency

Not allowed to incorporate for the shelf.

Two-three weeks.

Government €90.

Government €250.

One. None.

Yes. Once.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Solely if one shareholder company.

Yes, for NV companies.

One. No, at office of company, not for public.

One.

accounts

Annual return Audit requirements

Yes. Depending on size.

other

Registered office Domicile issues Company naming restrictions

Seat or place of residence.

Minor restrictions.

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Nevis

Nevis: A Return to Innovation

By L Burke Files, Tarsus Trust Co Ltd, Nevis

N

EVIS IS A THAT CAN.

JURISDICTION

Nevis, as an international finance centre, started its IFC economic life with its very own uniquely crafted LLC legislation.

In time many other laws, expanding the choice for the IFC professionals, followed that unique LLC legislation. The choices of legal entities and financial constructions grew with the professional community allowing those in Nevis greater choice.

These new choices were those supported by laws, not constructions merely permitted in the absence of the laws. Many of these new laws were laws that were Nevisian adaptations from other jurisdictions. Successful and wellcrafted laws were taken as a template and adapted, revised and updated for a better fit into the Nevisian scheme of a competitive finance centre.

This is the natural evolution of legislation. Some jurisdiction are leaders in some forms of laws and other jurisdiction take what they like from those jurisdictions and craft new laws that better fit their needs and their domestic legal framework. As Nevis has made effective use of the prior legal art to fuel its foundation and expansion as a finance centre, so have others adapted several of Nevis’s legal innovations to expand their opportunities as an IFC. This model of innovation and adaptation is a natural progression for most jurisdictions – not just international finance centres but even the large industrial nations.

As you can quickly surmise if IFCs are all adopting and adapting the best parts of each other’s legislation, in time, without new innovations a

homogenisation of the body of law and choices begins to take shape.

Once this homogenisation occurs there is no competition between jurisdictions based upon an individual jurisdiction’s specialties. The competition between jurisdictions is reduced to consumer choices based upon ease of use and the lowest price.

As we all have often heard the critics of IFCs declare – ‘they [IFCs] are all the same it is just a race to the bottom with the lowest level of price and compliance that will win the day’. The same criticism can be said about the “levelling” of laws between industrialised nations being forced on these nations by the Financial Action Task Force and the Bank for International Settlements.

These institutions, through their initiatives at harmonisation, remind me of the Borg and the Borg tag line from Star Trek, “You will be assimilated, resistance is futile.”

So while many other IFCs are copying each other, and the legislative Borg are meeting in Brussels - Nevis is getting back to innovation.

The Nevis Island Service Providers Association (NISPA) is beginning the process of looking at new economic opportunities for the jurisdiction as an IFC. In particular the NISPA is looking at legal innovations in the fields of intellectual property and Internet based businesses.

In the last 25 years the value of public companies has gone from 20 per cent intangible assets to over 80 per cent intangible assets.

The IFCs began working with the tangible assets; it is now time for the IFCs to start working with the intangible assets. It is these intangible

assets that represent the other 80 per cent of a modern company’s balance sheet.

Internet based businesses are growing rapidly. Innovations in merchandising are eliminating the middleman and manufacturers are going direct to customers all over the world. Chinese manufactures are selling directly to European consumers. Latin American resorts are selling directly to tourists without travel agents. Books are being sold as digital content and are not even being printed. Education of all sorts from simple seminars to fully accredited degrees - are being provided on the and over the Internet. Software can be paid for and downloaded in minutes from anywhere in the world.

These opportunities with intangible assets, collective known as Intellectual Property and Critical Information (IPCI), and the Internet are at the forefront of the economic forces of the future. These are wise choices by NIPSA. Further, NIPSA is also having its members work on a methodical review of the laws and regulations currently in place for Nevis’ offshore sector with an eye to best practices and new opportunities.

The willingness to actively explore new economic and legislative advantages and the work to keep laws already on the books current and economically relevant are signs, not of a small nimble jurisdiction, or of a larger jurisdiction with a deep pool of talent, but that of a jurisdiction with good and conscientious stewardship.

I look forward to the process as I do the eventual fruits of the collaboration.

www.ifcreview.com/Nevis

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tarsus

Sound Financial Management is the Staple of Financial Health Tarsus specializes in helping professionals provide for their client’s needs.

We also support professionals with IIBB (International Internet Based Businesses).

We are helping web based businesses internationalize their operations. The company is set up in an offshore jurisdiction. It banks offshore, payments clear offshore, the site is hosted offshore, you have an international domain address, and the End User License Agreement and Terms of service domicile all disputes offshore. The International Internet Based Businesses is a turnkey solution for Internet entrepreneurs.

Please allow us the opportunity to make a difference for you and your client.

tarsus trust COMPaNY LtD Nevis Main Street POB 11 Charlestown, Nevis W.I. T: 869.469.4602 F: 869.469.4603 Email info@tarsustrust.com Web www.tarsustrust.com News www.tarsustrust.com/reporter.php

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Nevis - Fact File

Location

Time zone

Population

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Centre’s expertise

tax

Personal income tax

Corporate income tax

Exchange restrictions

Tax information exchange agreements

Eastern Caribbean, 200 miles south east of Puerto Rico.

Atlantic Standard Time, European Standard Time +1/ 0, Greenwich Mean Time -4 /-5.

App 13,000 Charlestown.

Vance W. Amory International Airport.

English.

Eastern Caribbean dollar.

Stable democratic. +869.

English common law.

IBC and LLC formation and management, insurance services, trust administration and foundations, as well as private, professional and public fund management and administration.

Nevis

general overview

None.

None for IBCs and LLCs. Local companies: 35%.

None.

Enabling legislation in place and TIEA are being entered into with full public notice.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

US, euro, pound sterling.

None.

None.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

None.

24 hours.

US$220.

US$220.

directors

Minimum number

Residency requirements

Corporate directors

Meetings/frequency

Three directors “except that where all the shares of a corporation are held by fewer than three shareholders, the number of directors may be fewer than three but not fewer than the number of shareholders”.

None.

Yes. Yes, held at a time and place as fixed by the company by-laws or as indicated by the board.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

None.

Yes but restricted.

One. None.

Yes, held at a time and place as fixed by the company by-laws or as indicated by the board.

accounts

Annual return Audit requirements

No filing required.

None.

other

Registered office

Domicile issues

Company naming restrictions

Yes. Yes, redomiciliation permitted. Note, trusts may only be redomiciled if within 45 days of the date on which the trust was created, settled or established, further there is no changes made to the international trust, no illegal activity perpetrated by the trust and / or pending litigation against the trust.

Yes, cannot have the same name as an existing company.

www.ifcreview.com/Nevis

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New Zealand

IFC Review • 2011

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

www.ifcreview.com/NewZealand

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general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

South Pacific.

Greenwich Mean Time +12.00.

4.4million.

Wellington.

International – include Wellington, Auckland, Christchurch, Queenstown.

English.

NZ dollar.

Constitutional democracy. +64.

Common law.

High.

New Zealand

New Zealand - Fact File

tax

Personal Income tax

Corporate income tax Exchange restrictions Tax Treaties

0 to NZ$14k -10.5%; NZ$14,001 to NZ$48k – 17.5%; NZ$48,001 to NZ$70,000 -30%; NZ$70k and above – 33%.

28%.

None.

36.

share capital

Permitted Currencies Minimum authorised capital Minimum share issue

Shares not required to be denominated in money.

Nil. Nil.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

Available from Company Providers but not so relevant because of rapid incorporation time.

Can be set up within 24 hours.

NZ$173.33 including GST of 15%.

Nil if lodged electronically. Otherwise $30.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. Currently none, but later in 2011 a NZ resident director/agent will be required.

Not permitted.

On notice by a director.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

Yes (trusts no disclosure).

Share register must show names of shareholders.

One. Company must make register available for inspection by public.

Annual meeting, or 75% shareholders’ resolution.

accounts

Annual return

Audit requirements

Publicly listed or issuers of securities or large companies must file (large if two out of three conditions apply: turnover NZ$20mn, assets NZ$10mn, or over 50 staff ).

Audit requirements: not required for exempt companies; required for public companies.

other

Registered office Domicile issues Company naming restrictions

Must be in New Zealand. Company must have address for services in NZ. Companies may emigrate or immigrate.

Name forbidden that: 1. Contravenes enactment 2. Identical to another company 3. Is offensive.

www.ifcreview.com/NewZealand

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Seychelles

IFC Review • 2011

Seychelles Trusts and Foundations

By Simon Mitchell, Seychelles Attorney-at-Law and Consultant to Mayfair Trust Group Limited, Seychelles

O

VER THE LAST 15 YEARS,

Seychelles has made quite extraordinary progress as an international financial centre. There are over 60 licensed corporate service providers operating in Seychelles and an impressive 80,000 Seychelles IBCs (tax exempt companies incorporated under the International Business Companies Act 1994) have been incorporated. The success of the IBC has paved the way for more value-added financial services products.

In this article I examine Seychelles trusts and, in particular, foundations.

Trusts

Seychelles trusts are proving to be increasingly popular in the global offshore trust market, especially irrevocable discretionary trusts for high-net worth families. Trusts under Seychelles law have a statutory basis, namely, the International Trusts Act 1994. English and other Commonwealth trust case law is persuasive, but not binding, in Seychelles courts.

As well as the usual Common law trust features, the International Trusts Act 1994 puts in place robust asset protection provisions (beyond that offered by general insolvency law) protecting dispositions to a trust from challenge from creditors of the settler, and a two-year statute of limitations for creditors’ claims. Specific provision is also made for exclusion of foreign inheritance laws.

Although the trust deed is not filed with any Seychelles’ government registry or department, a Seychelles trust is ‘registered’ with the Seychelles International Business Authority and a registration number is allocated to the trust. There is no requirement to file particulars of the settlor or the beneficiaries (except for any beneficiaries who are Seychellois nationals) with any Seychelles’ government registry or department. There is a requirement that at least one of the trustees of a Seychelles trust must be a licensed resident trustee.

There are no Seychelles law restrictions

on having a non-resident as a co-trustee and a Seychelles trust is not subject to tax in Seychelles in respect of foreign sourced income or profits.

While Seychelles trusts are already very attractive, particularly from an asset-protection perspective, government is presently reviewing the International Trusts Act 1994 with a view to modernising and enhancing Seychelles trust law. Proposed amendments to the law being considered include: • provision for private trust companies; • express provision for settlor reserved powers; • express provisions dealing with protectors; • expansion of provisions relating to enforcers of purpose trusts; • refinement of conflict of laws provisions; and removal of the rule against perpetuities, and allowing for unlimited duration trusts.

As a trust is managed and controlled by the trustee (rather than the settlor) and the assets of a valid trust are owned by the trustee (and do not form part of the settlor’s personal property), trusts are commonly used for tax and succession planning as well as for risk management purposes. In general terms, both trusts and foundations share the common characteristic of providing a legal means for a person to divest himself of legal ownership of assets while still retaining some influence over the way the assets are enjoyed and distributed.

Foundations

While use of foundations for wealth management purposes was pioneered in civil law jurisdictions (including Liechtenstein, Panama, Netherland Antilles and Austria), in recent years a growing number of common law jurisdictions have introduced foundation legislation (including Jersey, Bahamas and Anguilla). Notwithstanding that use of foundations continues to primarily be in civil law jurisdictions (partly due to issues over legal recognition and tax treatment in some Common law

countries), interest in foundations for wealth management purposes is certainly on the increase around the world.

Indeed, with the steadily increasing global emphasis in exchange of information, I think we will see a shift from high-net wealth individuals simply focusing on “mere” IBC usage to more robust legal structures comprising trusts and foundations with offshore companies.

While trusts will continue to be popular in many markets, it is easy to see why many professional advisors are increasingly promoting foundations, especially in some of the larger emerging markets, including China and Russia.

Significant factors in the attractiveness of the foundation over the trust include: • a foundation being less “complex” than a trust; • the cost-effectiveness and operational ease of foundations; • avoidance of a trustee owning hard-earned wealth; and • in contrast to the position with respect to a trust, a founder may have greater influence on administration of a foundation without undermining the structure.

The Foundations Act 2009 (the Act) added the foundation to Seychelles’ financial services product repertoire.

A foundation is a separate legal entity, which may hold property in its own right (in contrast to a trust, which may only operate and own property through a trustee). Once the founder of a foundation transfers assets to the foundation, those assets become the sole property of the foundation. As neither the founder nor beneficiaries of a foundation have any ownership interest in foundation assets and as management and control of a foundation is typically with the foundation’s council (which may be located in a tax-favourable jurisdiction), a foundation is a highly useful entity for tax planning, asset protection, wealth management and “outside estate” succession planning.

A Seychelles foundation is established by www.ifcreview.com/Seychelles

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a councillor, but a protector cannot be a sole councillor. In contrast to a number of other jurisdictions, there is no mandatory requirement for the appointment of a Seychelles resident and licensed councillor. A Seychelles foundation must have a registered agent in Seychelles, being a company licensed

by SIBA to conduct foundation services.

A foundation is exempt from Seychelles business tax on its income and is exempt from Seychelles withholding tax, social security contributions and stamp duty (except in relation to any permitted lease of Seychelles real estate for own office use).

A foundation may own assets worldwide.

However, the assets of a foundation may not include any Seychelles real estate or other Seychelles property (subject to various exceptions under the Act, including shares in Seychelles IBCs, interests under a Seychelles trust, limited partnership or another foundation, or a Seychelles bank account, etc).

The founder of a Seychelles foundation is the person who subscribes his name to the charter establishing a foundation, acting either on that person’s own account or on behalf of another, and who endows the foundation with its initial assets.

Consequently, nominee founders are permissible. In common with other foundation jurisdictions, it is mandatory to state the name of the founder in the charter.

As a foundation’s charter is filed at the Registry (and is therefore publicly accessible), a nominee founder is commonly used to enhance privacy. A founder may be a natural person or a corporate entity, and a founder may be a foundation beneficiary but not the sole beneficiary. A founder may reserve, in the foundation charter or regulations, to the founder or for other persons, various rights – such as the right to approve investment activities of the foundation and the right to appoint or remove councillors, protectors and beneficiaries. The founder may, in the foundation charter or by written instrument, assign or transfer all or any part of his rights, powers and obligations as founder to such person or persons as the founder shall determine.

The appointment of a protector (otherwise known as a guardian) is optional. A protector may be a natural or legal person. Typically, where appointed, a protector is given limited veto power in that the protector’s prior approval will be required in respect of certain foundation decisions, such as the addition or removal of a beneficiary or councillor. A founder, beneficiary or councillor of a foundation

may be appointed as a protector, but a sole councillor or a sole beneficiary may not act as a protector. If required, the appointment of a protector may be effected by a foundation’s regulations, so that the protector’s identity is not publicly accessible (as a foundation’s regulations, unlike its charter, are not filed at the Registry).

Seychelles foundation assets are the property of the foundation only, that is, neither the founder nor the beneficiaries have any ownership interest in foundation assets. Once a founder has transferred assets to a foundation, those assets belong solely to the foundation and cease to be property of the founder. Foundation assets do not become the assets of a beneficiary unless distributed in accordance with the provisions of the foundation’s charter or regulations. The Act further provides robust foundation asset protection, as follows: • provisions protecting dispositions to a Seychelles foundation from challenge from creditors of the founder; and a twoyear statute of limitations for creditors’ claims coupled with a high onus of proof (beyond reasonable doubt, rather than on the balance of probabilities); • specific exclusion of foreign forcedheirship laws; • provision may be made for the foundation to retain title to assets conditionally distributed to beneficiaries; • beneficiaries’ rights to information may be restricted; and • provision may be made to disentitle a beneficiary who challenges asset transfers to or distributions by a foundation.

While a Seychelles foundation is required to keep proper books of account and records as its council considers necessary in order to reflect the financial position of the foundation, it is not subject to a mandatory annual audit requirement or to any requirement to file financial accounts in Seychelles. The Act provides for continuation of foreign foundations in Seychelles and for continuation of Seychelles foundations overseas. The Act also provides for two or more existing foundations to consolidate into a new foundation and for an existing foundation to merge into another existing foundation.

In conclusion, the Seychelles foundation is an innovative and robust yet versatile entity, with various competitive advantages, including strong asset protection features, ease of formation and administration, value for money and privacy.

Seychelles

a charter made in writing and signed by one or more founders and on the issuance of a certificate of registration by the Seychelles International Business Authority (SIBA) upon registration of the foundation under the Act. The sole document to be filed when applying for registration of a Seychelles foundation is the foundation’s charter. On registration, a foundation is a separate legal entity. A competitive fee of US$200 is payable to SIBA on establishment of a Seychelles foundation and an annual renewal fee of US$200 is payable annually thereafter to the Registry (due on the day before the foundation’s initial registration anniversary date).

In contrast to other jurisdictions which impose a higher initial asset value requirement, the assets of a Seychelles foundation must be of a value of not less than US$1 or the equivalent in any other currency. The initial assets may be endowed after registration of a foundation. Also unlike in other foundation jurisdictions, it is not mandatory to state in the charter, or to otherwise file at the Registry, the names of the councillors of a Seychelles foundation. This preserves privacy, in that the filed charter is accessible by public search. Additionally, it is not obligatory to state in the charter, or to otherwise file at the Registry, the names of the beneficiaries.

While the charter of a foundation is required to be filed at the Registry, there is no requirement to file a foundation’s regulations. While a foundation must have a charter, it may adopt regulations.

A foundation will commonly adopt regulations to ensure that matters pertaining to foundation beneficiaries and distribution entitlements remain nonpublic.

The objects of a Seychelles foundation may be charitable, non-charitable or both, and may be to benefit a beneficiary or beneficiaries, or to carry out a specified purpose, or to do both. A foundation’s objects must include the management of the foundation’s assets and income and the distribution thereof to its beneficiaries or, in the case of a foundation which has a specified purpose, in fulfillment of that specified purpose.

A foundation’s council manages the foundation and is responsible for carrying out the foundation’s objects, including the administration and distribution of the foundation’s assets.

A Seychelles foundation must have a minimum of one councillor, who may be a natural person or corporate entity.

A founder may be a councillor, but a founder cannot be a sole councillor.

A protector of a foundation may be

www.mayfair-offshore.com

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IFC Review • 2011

The Seychelles: Company Formation

By Steve Fanny, CEO and Managing Director of the Seychelles International Business Authority (SIBA), Seychelles

S

EYCHELLES IS NOW a well-

known and respected jurisdiction in the global financial services market. Over the past 10 years, the Seychelles offshore financial services industry has experienced a significant increase in know-how, business volumes and international profile.

A central factor in Seychelles’ rise as an international financial centre has been its strategy of striking an effective balance between sound regulatory practice and the marketplace. Seychelles’ northern Indian Ocean location (GMT+4) has also proved to be a significant advantage in servicing the Europeans, Asians, Middle Eastern and African markets.

The tax-exempt Seychelles International Business Company (IBC) has enjoyed substantial success, as shown by surging registrations over the past five years – 7,097 new incorporations in 2005, 8238 in 2006, 10,295 in 2007, 13,751 in 2008 and 12,408 in 2009 (making it now one of the most popular IBC registration jurisdictions in the world).

Seychelles is also steadily developing more value-added areas of offshore business, including CSLs (Seychelles tax resident companies, which may access Seychelles double taxation avoidance agreements), trusts, limited partnerships, securities and mutual funds.

International Business Companies (IBC)

An IBC is a limited company that undertakes business activities, licensed

by SIBA. These companies are, however, exempt from all forms of taxation and have been licensed with the exclusive aim of conducting international business outside Seychelles. IBCs are commonly used for: • Holding Companies • Asset Protection • International consultancy companies • Companies involved in international trade Subject to the limit set by its objects, an IBC can generally do anything that a body corporate can do. However, the Act specifically prohibits it from conducting business as a bank, insurer, reinsurer, or trustee (all three types of offshore businesses are regulated by special legislation) and except as specifically permitted by law, from carrying on any business in Seychelles or owning or leasing immovable property in Seychelles. It is an attractive financial structure that can be converted to other resident companies such as a Special License Company (CSL).

International Trusts

Trusts set up under the International Trust Act 1994 provide an effective and legitimate means of protecting one’s assets. Various types of trusts may be set up, such as charitable and revocable or irrevocable discretionary trusts. Some features of the trust include: • The accumulation of income is unrestricted; • The settler may choose the law of the trust;

• There are no requirements to name the settlors or the beneficiaries, except if the beneficiaries are Seychellois citizens; • The trust may own assets worldwide (except in Seychelles); • It may hold shares and maintain bank accounts in Seychelles.

Companies Special License (CSL)

The Companies (Special Licenses) Act 2003 allows a company to take advantage of the Seychelles’ network of double taxation treaties as it is incorporated under the Companies Act 1972 and to be considered a tax resident under the Seychelles laws. The special provisions afforded under the Act provide it with a measure of confidentiality as well as a low tax status, calculated at 1.5 per cent of gross income. The CSL meets all the criteria of modern legislation, mainly in relation to disclosure requirements, which are, however, not accessible by the public.

CSLs are increasingly being used by international listed groups as intermediary holding companies to hold shares and other investments. The attraction for the international groups is that use of a CSL, in conjunction with Double Tax Treaty agreements, provides significant scope for foreign investors to reduce their tax exposure in their respective country.

Key Features of the Seychelles CSL include: • A one-off registration fee; • An application accompanied by the Memorandum and Articles of Association, the names and addresses www.ifcreview.com/Seychelles

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Protected Cell Companies

Protected Cell Companies (PCC) are incorporated under the Companies Act 1972, which allows companies with specified activities to separate into identifiable cells without having to assume a separate legal entity. Cells within a PCC are protected against liabilities incurred by cells of the same company, and are therefore attractive for a number of business activities.

Qualified activities include offshore insurance and mutual funds businesses, and other collective investments.

Limited Partnerships

Securities

Limited Partnerships are registered under the Limited Partnership Act 2003, and are subject to the Seychelles Commercial Code. The Code provides for a general partner, who must be a Seychelles resident, and one or more limited partners. Limited Partnerships are commonly used for joint ventures.

The Securities legislation, enacted in 2007, provides the regulatory framework for securities trading within the Seychelles. The laws safeguard investor confidence by licensing and regulating all components of the market and enforcing internationally accepted guidelines.

The legislation also provides the legal framework for the setting up of the Seychelles Stock Exchange.

Mutual Funds

The recently enacted Mutual and Hedge Funds Act provides a new legal framework and approach to the licensing of mutual and hedge funds in the Seychelles. Seychelles allows for companies, unit trusts or partnerships to be licensed as mutual funds, giving fund managers a long list of potential fund vehicles. These companies, unit trusts or partnerships can be constituted in Seychelles or in any one of 31 recognised jurisdictions. An Exempt Foreign Fund status is available to funds that can satisfy the Authority that it is in good legal standing and holds a valid license from one of the recognised jurisdictions, administered by a Seychelles licensed fund administrator and either listed on a stock exchange or have a minimum investment of US$100,000.

Seychelles

of the beneficial owners and a written declaration containing the names and addresses of the directors and company secretary; • Accounts, returns and beneficial ownership information must be filed, but these are not made public; • 1.5 per cent corporate tax with complete exemption from withholding tax and full treaty access; • A minimum of two directors who need not be resident in Seychelles; • Corporate directors are not allowed; • A Seychelles resident secretary is required.

Foundations

Foundations are the latest addition to the Seychelles portfolio of financial services products. The Seychelles Foundation is a separate legal entity. Once the founder transfers assets to a foundation, those assets become the sole property of that foundation with full legal and beneficial title and do not form part of the founder’s personal estate.

Conclusion

Seychelles has maximised its appeal and effectiveness as an offshore financial services centre by striking an effective balance between sound regulatory practice and attractive products. With Seychelles’ financial industry gathering momentum, it is now well placed to serve the international market.

Keep up to date every month with all new articles and more by registering for the IFC Review monthly e-journal. Simply email subscriptions@ifcreview.com with the subject ‘ej’

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Seychelles

Seychelles - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system

International dialling code Legal system Centre’s expertise

Indian Ocean.

Greenwich Mean Time +4.

87,000.

Victoria.

Seychelles International Airport.

English, French, Creole.

Seychelles rupee.

Seychelles is an independent republic, a multi-party democracy and a member of the Commonwealth. +248.

Based on English Common Law and French Civil Law International Business Company (IBC) Companies (Special Licence) (CSL).

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

15% for Seychellois employees and 10% for non-Seychellois employees.

IBC: exempt. CSL: 1.5% of worldwide taxable income.

None.

For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

All major convertible currencies IBC: US$1. CSL: No minimum.

IBC: US$1 CSL: At least 10% of all the shares the company may issue.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

IBC: Yes. CSL: No. IBC within 24 hours; CSL within five working days.

IBC: US$100. CSL: US$1,200.

IBC: US$100. CSL: US$1,000.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

IBC: one. CSL: two.

IBC: no. CSL: no.

IBC: yes. CSL: no.

IBC: worldwide and no minimum. CSL: worldwide and one.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

IBC: To service providers CSL: To service providers & the Authority.

IBC: registered bearer shares only. CSL: no.

IBC: one. CSL: two.

IBC: no. CSL: no.

IBC: worldwide (no AGM requirement). CSL: worldwide (annual AG M).

accounts

Annual return Audit requirements

IBC: no. CSL: yes.

IBC: no. CSL: yes.

other

Registered office

Domicile issues

Company naming restrictions

IBC: Yes CSL: Yes IBC: tax non-resident. CSL: tax resident.

In line with global norms, prohibited words include, for example, ‘bank’, ‘building society’, and the registry has discretion to reject names that are indecent, offensive or misleading, etc.

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Singapore

Singapore: Setting the Standard

By Keon Chee, Assistant General Manager, Heritage Trust Group, Singapore

S

INGAPORE IS CONSISTENTLY RECOGNISED as one of the best

cities in the world for business.

For instance, the World Bank in 2010 ranked it the world’s easiest place to do business. It has a well established and diversified financial infrastructure, providing a gateway to opportunities in India and China. Financial institutions in Singapore can trade around-theclock with Asia-Pacific centres, as well as European and American centres, making Singapore a convenient hub for 24-hour trading in foreign exchange and securities.

The wealth management industry is prospering, even as the US and Europe continue to grapple with the most stubborn financial crisis in a generation.

The business and financial boom in Asia in the last two decades, particularly in Malaysia, India, China, Indonesia, Thailand and the Philippines have provided the source for much of the managed wealth in Singapore. Singapore has the highest density of millionaires in the world where millionaire households accounted for 11.4 per cent of all households according to a 2010 Boston Consulting Group report. Just about every major private-banking concern in the world has set up shop in Singapore with Citigroup, UBS, Credit Suisse, HSBC, Julius Baer and Merrill Lynch leading the charge.1 Licensing of Trust Companies

Eight new trust business licenses were issued by the Monetary Authority of Singapore (MAS) between August 2010 and January 2011 bringing the total number of licenses issued to 48. While this was not in itself a momentous event, the issuance did allay uncertainty in the

market as before August 2010, the MAS had not issued any new licenses since October 2009, a period of ten months.

The Singapore trust licensing regime was established only recently in 2005. At the time, trust companies in Singapore were regulated by the Accounting & Corporate Regulatory Authority (ACRA) under the old Trust Companies Act where the registration of trust companies was voluntary. With the 2005 Trust Companies Act (TCA), licensing is mandatory for anyone providing trust services in Singapore regardless of whether the trusts are established under Singapore law or other law. Trust business is defined broadly to include any business of creating or administering an express trust or of acting as or arranging for a person to act as, a trustee of an express trust. For example, giving advice on how to set up a trust, and managing and distributing trust assets, are activities that would fall under the TCA.2 The Act regulates financial institutions that provide trust services for investment and wealth management purposes. The activities regulated include providing services with respect to express trusts in the areas of creation, trustee services, arranging for any person to act as trustee and trust administration. Advisers on wills, executors and administrators of the estates of deceased persons, bare trustees, and managers and trustees of business trusts are excluded from the ambit of the TCA, as the trusts involved are not actively used for investment and wealth planning purposes.

The related Trustees Act (Cap 337) provides the legislative framework for trustees of trusts established under

Singapore law. The Trustees Act provides, among others, safeguards to ensure that trustees adhere to certain minimum standards when they exercise their trustee powers, and defines a duty of care for trustees when carrying out specified duties or acts. The Trustees Act is administered by the Ministry of Law. A trust company regulated by MAS under the TCA would also have to comply with the TA if it is acting as trustee of a trust established under Singapore law. In accordance with the Trustees Act, every Singapore trust shall have at least one trustee, and a maximum of four trustees. The trustee must be a Singapore-licensed trust company or individual.

Singapore’s Stand on Transparency and Confidentiality

Singapore is by and large considered a transparent jurisdiction and most surveys regard Singapore favorably. To cite two surveys: • The IMD World Competitiveness Yearbook 2009 ranked Singapore the most transparent country in the world.

• Transparency International in its Corruption Perceptions Index 2010 ranked Singapore the most transparent country in the world.

Singapore has one of the largest networks of double tax agreements (DTAs) in the world. It has 64 comprehensive DTAs which cover all types of income. What is important to note is that each DTA includes provisions for the exchange of information for tax purposes. Treaty partners may make requests for information for tax purposes to the Comptroller of Income Tax. Such a process ensures that there

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is transparency in how information is exchanged. Additionally, there are strong safeguards in ensuring that information collected is kept confidential and used for purposes defined in the DTA. In March 2009, Singapore announced its endorsement of the 2005 OECD Model Tax Convention. The Ministry of Finance (MOF) introduced the Income Tax (Amendment) (Exchange of Information) Bill to receive the internationally agreed Standard. The Bill was passed by Parliament on 19 October 2009 and enhances the scope of information exchange cooperation under DTAs. Singapore signed its 12th agreement on 13 November 2009 and joined OECD’s white list. As of January 2011, agreements have been signed with 22 countries: Australia, Austria, Bahrain, Belgium, Brunei, China, Denmark, Finland, France, Ireland, Japan, Malta, Mexico, Netherlands, New Zealand, Norway, Panama, Qatar, Saudi Arabia, Slovenia, South Korea and the UK. Singapore’s positive response reflects the importance of participating in OECD’s global initiative.

Some quarters have expressed worry about whether this increased transparency would diminish confidentiality. After all, according to the amended Income Tax Act: • The new section 105F lifts the domestic interest condition to enable the Inland Revenue Authority of Singapore or IRAS, Singapore’s tax authority, to satisfy its obligations under the prescribed DTAs. • Under previous law, IRAS may only obtain banking and trust information for the purpose of investigating or prosecuting a suspected domestic tax offence. The internationally agreed Standard requires the exchange of information which is foreseeably relevant to the administration of the requesting jurisdiction’s own tax laws, without it being predicated on the taxpayer having committed an offence.

IRAS’ information gathering powers will be widened under the new Part XXB to enable it to access bank and trust information to accommodate requests on tax administration matters under prescribed DTAs and domestic tax administration matters.

While these new provisions, among others, do appear to create a chink in Singapore’s confidentiality armor, the Act contains added provisions to safeguard confidentiality. Spurious or frivolous

requests for information will not be acceded to. Further, it does not allow for what is called ‘fishing expeditions’ - it requires requests for information to be specific, detailed and relevant to the tax affairs of the taxpayer in question.

Importantly, there will be safeguards for assisting in requests relating to information that is protected from unauthorised disclosure under the Banking Act and the Trust Companies Act. The new Part XXB sets up a judicial process for IRAS to obtain such information in response to requests under prescribed DTAs. The affected taxpayer and bank or trust company will be notified of the request, unless there are exceptional circumstances, such as if doing so would prejudice an investigation into any breach of tax laws, or prevent or unduly delay the effective exchange of information. IRAS will make an application to the High Court for a production order to access the requested information. The affected taxpayer and bank or trust company will have the right to apply to the Court to discharge or vary the Court order.

The Standard does not allow jurisdictions to take advantage of the information system of another jurisdiction if it is wider than their own system. Hence, Singapore will only exchange information that a requesting jurisdiction would have ordinarily been able to obtain under its own laws or administrative practices, had the information resided in that jurisdiction in the first place. Jurisdictions must also have pursued all domestic means to access the requested information before putting forth a request to Singapore.

The Standard also sets out clear limits on the types of information that jurisdictions are obliged to exchange. Jurisdictions are not obliged to exchange trade or business secrets, or information that is subject to legal privilege. They may also decline to exchange certain information if doing so would be contrary to public policy.

Some examples of such information include state secrets or information sought for the purposes of political, religious or racial persecution.

Such safeguards do not impede the effective exchange of information. They are provided for by the internationally agreed Standard to uphold the principle of respecting taxpayers’ rights. With the amendments, Singapore is committed to respecting these rights, while fully meeting her obligations under the

Standard and playing its full role as a trusted and responsible jurisdiction.

A Global Phenomenon

The OECD Tax Convention is not merely a standard brandished by the group of 33 economically powerful countries to collect tax dollars, but it is in fact an international tax standard that was endorsed by the United Nations Committee of Experts on International Cooperation in Tax Matters in October 2008. The tax exchange of information is a global phenomenon and countries that wish to promote themselves as jurisdictions of substance would certainly pay heed to the Standard.

Attesting further to its position as a flag bearer of transparency, Singapore hosted The Global Forum on Transparency and Exchange of Information for Tax Purposes in September 2010. More than 190 delegates from 80 members and nine international organisations and regional groupings met in Singapore, to welcome the 2010 annual assessment on the legal frameworks for transparency and exchange of information in over 90 jurisdictions.

Singapore’s response is aligned with the international community, which clearly sees the critical benefits of a transparent process of tax exchange of information that contains strong safeguards for protecting confidentiality and taxpayers’ rights.

Conclusion

Singapore sits strategically in Asia between the two emerging giants of India and China.

It is a region that is expected to outperform the global economy in the immediate future and will continue to provide strong growth opportunities and geographical diversification benefits for investors. This makes the region an increasingly important source of asset and income base.

Singapore’s continued success rests on four pillars -- legal, regulatory, political and financial. Its business-friendly regulations and policies have driven most international wealth management firms to establish a presence there. It has rigorous bank confidentiality laws, a reliable legal system, a highly efficient government and a well-regulated financial sector.

1. Excerpted from the chapter on Singapore in World’s Leading Financial & Trust Centres, published in 2010 by Sweet & Maxwell.

2. “Explanatory Brief: Trust Companies Bill 2005,” 25 Jan 2005 www.mas.gov.sg.

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Singapore

Singapore - Fact File general overview

Location

Time zone

Population

Capital

Airport(s)

Language

Currency

Political system

International dialling code

Legal system

Centre’s expertise

South-East Asia.

Greenwich Mean Time + 8.

4,800,000.

Singapore.

Changi International Airport.

English, Malay, Mandarin and Tamil.

Singapore dollars.

Democracy. +65.

Based on English common caw.

Financial services, international banking,international holding companies, captive insurance, fund management, trustee services.

tax

Personal Income tax Corporate income tax Exchange restrictions Tax information exchange agreements

0–20%.

17%.

No. For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted Currencies

Minimum authorised capital

Minimum share issue

All currencies.

No authorised capital.

One share of no par value.

type of entity

Shelf companies

Timescale for new entities

Incorporation fees

Annual fees

No – but companies can be incorporated within one day.

One day turnaround. $300 (Singapore dollars).

No fixed annual fee – nominal fees (S$20) for filing of various returns.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. At least one director.

Not permitted.

None, unless required by the company.

shareholders

Disclosure

Bearer shares

Minimum number

Public share registry

Meetings/frequency

Yes. Not permitted.

One. Yes. Annual.

accounts

Annual return

Audit requirements

Yes. Yes, unless the company qualifies for audit exemption.

other

Registered office

Domicile issues

Company naming restrictions

Singapore.

Re-domiciliation is not permitted.

Names of sensitive nature or similar to statutory boards or government departments are not permitted. Names indicating activities related to banking, trust and certain activities require licencing or prior approval of certain statutory boards.

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Switzerland

Switzerland

IFC Review • 2011

Swiss Developments in 2010

By Walter Stresemann, Vistra SA, Geneva, Switzerland

F

OLLOWING THE SEMINAL CHANGE of facilitated exchange

of information, which the Swiss Federal Government decided to adopt in March 2009, many observers predicted the “end of banking secrecy”.

With considerable haste Switzerland negotiated the necessary 12 revised Double Tax Agreements which the OECD stipulated were needed to be removed from its ‘grey list’. By the end of 2010 Switzerland has initialled, signed, or ratified a total of 31 new or revised DTAs, providing for administrative exchange of information provisions.

The revised DTAs contain an extended administrative assistance clause in accordance with Article 26 of the OECD Model Convention. The adoption of the OECD standard on administrative assistance in tax matters, according to Article 26 of the OECD’s Model Tax Convention, means that Switzerland shall no longer distinguish between tax fraud and tax evasion.

In accordance with the provisions of said Article 26, the new treaties will not provide for any automatic exchange of information, which the European Union practices and advocates, but which Switzerland and other financial centres reject. Administrative assistance will therefore only be provided upon formal written request of a contracting state. In order to clarify such procedure

the Swiss Federal Council adopted the Administrative Assistance Ordinance on September 1, 2010.

If a country submits a request for administrative assistance on the basis of a DTA concluded with Switzerland, then the Federal Tax Administration will conduct a preliminary examination.

The Administrative Assistance Ordinance will apply to all administrative assistance requests only within the scope of new or revised DTAs, which entered into force after the enactment of the ordinance on 1 September 2010. There will be no retroactive effects.

Requests from other countries will be rejected following the preliminary examination by the federal authorities if: • it is not compatible with the fundamental values of Swiss law or contravenes the essential interest of Switzerland, • the demand does not respect the principle of good faith, or • it is based on information obtained or transmitted by acts punishable under Swiss law (for example data theft).

Furthermore, as a necessary condition for the opening of a procedure for administrative assistance, the authority requesting it must supply the following information for the preliminary examination: • explicit mention of the applicable legal basis; • identification without doubt of the

person concerned; • identification without doubt of the holder of the sought information; • a description of the information and its form in which the requesting state wishes to receive the information; • the tax objective and reasons why the information sought is pertinent for achieving that goal; • grounds for the reasons underlying the belief that the information requested is in the possession of the presumed holder of the information; • the tax period (starting and ending date) to which the request of information relates to; and • a declaration stating that the requesting state has beforehand exhausted all usual sources of information existing under its internal taxation procedures.

Finally, the request for information may not relate to the search of unauthorised evidence and may only refer to the scope of application of the DTA at hand.

The parameters decided by the Swiss Federal Council in March 2009 are thus implemented, whereby Switzerland will not provide administrative assistance in the case of so-called ‘fishing expeditions’.

The procedural rights of those concerned will in any case remain fully safeguarded. A person subject to a request of information demand may file an appeal with the Federal Administrative www.ifcreview.com/Switzerland

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Court against the conclusive decrees of the Federal Tax Authorities, upon which the provision of administrative assistance is based and which determine the extent of the information to be provided.

However, before even testing the new treaty system, the European Union and some of its member states proclaimed early in 2010 that information request on demand was only an intermediate step to the full automatic exchange of information.

In response to this perceived “threat” and in anticipation of the EU Savings Directive withholding tax re-negotiations, the Swiss Banking Association then proposed a future withholding tax to be levied in Switzerland, not just on savings income as is presently the case.

The proposal (called ‘Rubik’) was intended to extend withholding tax on EU citizens to include dividend income generated by stocks and mutual funds, as well as capital gains. In accordance with the EU’s Taxation of Savings Income Directive, Switzerland has already levied a withholding tax on EU citizens since 2005, but it covers only income from certain types of investment, principally from bonds. According to the proponents of Rubik, the proposal “would generate tax revenues while respecting the privacy of bank clients and it would represent an efficient alternative to a system of automatic information exchange”.

Indeed, several EU and OECD member states already operate a system of flat rate or withholding tax for the taxation of capital income of natural persons. Interest, dividends and, in some cases, capital gains on securities are taxed by so-called paying agents. They assess and withhold the tax due on the interest, dividends and capital gains for the client at a proportional rate and transfer the tax payable directly to the tax authorities.

For instance, in the case of the flat rate tax on investment income introduced in Germany on 1 January 2009, the bank as paying agent deducts the tax on the investment income (capital gains, interest and dividends) at source and transfers it to the relevant tax authority without naming the tax subject involved.

The Swiss flat rate tax proposal is aligned to the Italian and German models which protect the client’s privacy, while at the same ensuring definitive (‘libératoire’) payment of the latter’s tax.

Switzerland offers to collect the flat rate tax on income paid on balances of foreign domiciled clients for countries that wish

to avail themselves of the service. This tax is deducted by the paying agent (the bank) and credited to the tax authorities of the client’s tax domicile.

In essence the consequence of such a system means that the client’s/ tax subject’s obligations to the tax authorities of his/her/its country of domicile are fulfilled and therefore the client’s anonymity protected. The issue of automatic exchange of information thus becomes obsolete.

The primary subjects concerned are natural persons resident in a treaty state.

The flat rate tax model also applies to domiciliary companies such as domestic or foreign legal entities, companies, Anstalten (establishments), foundations, fiduciary companies or similar associations that do not engage in any commercial or manufacturing business or any other form of commercial operation the beneficial owners of which are natural persons domiciled in a treaty state.

When the Rubik principle was launched in early 2010, the initial international reaction ranged from reserved to outright critical. “I cannot see Rubik as being able to convince our member countries,” Pascal Saint-Amans, head of international cooperation and tax competition at the Paris-based OECD, told the delegates at the British Swiss Chamber of Commerce in Geneva.

While the OECD has no official position: “I cannot see how you can explain to a jurisdiction, Germany, France, the US, whoever, that you will levy the taxes for free if it doesn’t hide something,” he said.

Then in the spring of 2010 the Euro crisis triggered by Greece appears to have changed the game. Switzerland massively supported the Euro on foreign exchange markets and the attacks on the Swiss financial system subsided over night.

In October 2010 Germany and England accepted the Swiss Rubik proposal for withholding tax in exchange of the continuation of banking secrecy. Whilst the details for the implementation of withholding taxes will still need to be negotiated, clearly pragmatic national Treasury needs have gained the upper hand.

More importantly, the United Kingdom and Germany have placed there national interests over the lofty EU Commission goals of automatic exchange of information. In addition, this bilateral strategy has irked and

confused other EU member countries, who insist that any negotiation with Switzerland must be subjected to the EU’s mandate for the re-negotiation and extension of the EU Savings Directive withholding tax. Finally, the OECD has clearly stated that exchange of information on request was the universal standard and that automatic exchange of information was “not on the agenda”.

In the midst of all this confusion, enter the Ireland bailout and second Euro crisis. Capital flight continues from Europe to Switzerland and Asia, while for many clients systemic Euro risk considerations have taken precedence over tax optimisation considerations.

Looking towards next year, the FATF drive to qualify and thus criminalise tax evasion as a predicate money laundering offence deserves full attention. This would render administrative exchange of information almost redundant, as only the application of Mutual Legal Assistance Treaties for penal matters would apply! In this (brave new?) world anti-money laundering laws, initially, intended to fight drug trafficking etc, would be used against citizens whose criminal activity is limited to the nonpayment of outstanding taxes.

In practice, such standards would have very far reaching consequences not only for all financial intermediaries but for economic actors in general. Financial intermediaries would need to apply foreign tax laws to respect their own national anti-money laundering laws.

It is questionable to what extent financial intermediaries should evolve into quasi tax compliance arms for the benefit of foreign tax authorities. However, if tax evasion were indeed one day qualified as a preliminary act to money laundering, all creditors would be affected and obliged to verify the tax compliant source of funds before accepting payment. The logical consequence would be that the shadow economy as such would need to be re-qualified as money laundering. It is estimated that the shadow economy in Germany represents over 14 per cent of GDP, which translates into €352 billion! In Greece, Spain and Italy the shadow economies represent 28-22 per cent of GDP. In this context it should be emphasised that most economists agree that the current economic and financial crisis will lead to an expansion of the shadow economy in almost all OECD countries.

Switzerland

Switzerland

IFC Review • 2011

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Switzerland - Fact File general overview

Location Time zone Population Capital Airport(s) Language Currency Political system International dialling code Legal system Centre’s expertise

East of France, south of Germany, north of Italy.

Central Time Zone.

7,300,000.

Berne.

Zurich, Geneva, Basel, Lugano.

German, French, Italian.

Swiss Franc.

Federal democracy. +41.

Civil (Roman) law.

Finance, banking, fiduciary.

tax

Personal income tax Corporate income tax Exchange restrictions Tax information exchange agreements

Depending on canton.

Federal rate 8.5%; cantonal rates vary.

No. For full details, please go to www.ifcreview.com/TIEA.

share capital

Permitted currencies Minimum authorised capital Minimum share issue

Swiss franc.

Corporations: CHF100,000. / LLCS: CHF 20,000.

CHF 50,000. / LLCS: CHF 10,000.

type of entity

Shelf companies Timescale for new entities Incorporation fees Annual fees

No. 10 days.

CHF6,000.

CHF6,000 director fees.

directors

Minimum number Residency requirements Corporate directors Meetings/frequency

One. At least one director or manager, who can bind the Company No. Minimum of one per year.

shareholders

Disclosure Bearer shares Minimum number Public share registry Meetings/frequency

No. Yes, (for corporations) One. No. Minimum of one per year.

accounts

Annual return Audit requirements

Yes. Depending on activity and number of employees.

other

Registered office Domicile issues Company naming restrictions

Yes. No. Partial.

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Professional Pages

IFC Review • 2011

antigua

Global Bank of Commerce, Ltd Global Commerce Centre, Old Parham Road, P.O.Box W1803, St. John’s, Antigua, West Indies

Tel: +1 268 480 2240 Fax: +1 268 462 1831 customer.service@gbc.ag www.globalbankofcommerce.com

barbados

Chancery Chambers Chancery House, High Street, Bridgetown, Barbados. BB11128

Tel: (001) 246 431 0070 Fax: (001) 246 431 0076 chancery@chancerychambers.com www.chancerychambers.org Contacts

Winston St. Agathe, General Manager Brian Stuart-Young, Chief Executive Officer

Barbados office contacts Dr Trevor. A Carmichael, BSc (Econ). QC Mr Andrew C Ferreira, LLB (Hons) Mrs Angela R Robinson, BSc(Hons), LLB (Hons), ACIS

Services

Services

Contacts

International corporate and personal banking services provided by the oldest financial institution in the jurisdiction, licensed since 1983, with full service offices.

• Wealth management • Multi-currency accounts • Trust and IBC formation • Alternative investments • Online banking • Visa credit, debit, prepaid cards • e-commerce • Electronic funds transfer services

Chancery is one of the more diversified law firms in the Caribbean; it provides a full complement of legal services to national and international clients.

Areas of practice include but are not limited to: Arbitration, Aviation Law, Banking & Finance, Charities Law, Corporate Governance, Economic Development Consulting, Employment, Environment law, Insurance and Reinsurance, Intellectual Property, Mergers and Acquisitions, Real Estate, Securities & Financial Markets & Tax Law.

austria

Bilanz-Data Wirtschaftstreuhand GmbH

Amphora Life Insurance Company Ltd CGI Tower, 2nd Floor, Warrens, St. Michael BB22026, Barbados

Contact

Contacts

Services

• Corporate and individual tax-planning • Corporate reorganizations • Inheritance and gift tax-planning • Tax litigation • Working out and obtaining advance tax rulings from the tax authorities • Nominee and trustee services • Corporate services: Establishing and managing of trading companies, royalty companies, holding companies, private foundations

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Alpha & Omega Group Trident House, Lower Broad Street, Bridgetown, Barbados

Tel: +1 246 431 0798 Fax: +1 246 431 0797 info@alpha-omegainternational.com www.alpha-omegainternational.com Contact

Yolande Bannister Services

Alpha & Omega exists to provide a range of legal and administrative services to the international business community. We combine the solid expertise of traditional legal services with modern technical resources to each client whether corporate, institutional or individual.

Alexandria Trust Corporation Ground Floor, 38 Pine Road, Belleville, St. Michael, Barbados

Tel: +1 246 228 8402 Fax: +1246 429 1920 E-mail:carlos.stevenson@ ATCBarbados.com Website: www. ATCbarbados.com Contact:

Carlos Stevenson

Schwarzenbergstraße 1-3/14a, 1010 Vienna, Austria Tel: +43 1 516 120 Fax: +43 1 516 1214 baier@austrian-taxes.com www.austrian-taxes.com

Erich Baier, MBA, LL.M. (International Tax Law), Certified Tax Advisor

139

Tel: (246) 421-7674 Fax: (246) 421-8547 wayne.fields@amphoralife.com www.amphoralife.com

Wayne Fields: President & CEO wayne.fields@amphoralife.com Michael Foster: Vice President – Insurance Operations michael.foster@amphoralife.com Services

We provide cutting edge life insurance solutions to high-net-worth families around the globe. In doing so, we help them not only to preserve what they have, but to increase it.

In the hands of our team of financial experts, life insurance becomes a powerful strategy for preserving wealth.

Services:

• Trustee Services • Company Management Based in Barbados, Alexandria Trust provides administration services for private clients and multi-national businesses. belize

Bay Trust Corporate Services Limited Bay Trust Corporate Services Limited, The Matalon Business Center, 5th Floor, Suite 500, Coney Drive Belize City, Belize

Tel: + 501 223 1756 Fax: + 501 223 1775 E-mail: karen@baytrustbelize.com Contact:

Karen Longsworth Services:

We provide trust, companies and insurance establishment and management services to practitioners, banks, and intermediaries.

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belize continued

International Business Companies Registry of Belize Suite 201, Marina Towers, Newtown Barracks, Belize City, Belize

Tel: +501 223 5108/223 5120 Fax: +501 223 5124 ibc@btl.net www.ibcbelize.com Contacts

Katherine Haylock, Deputy Registrar Senior Registration Officers: Santiago Gonzalez, Beverly Gallaty Services

Incorporation of Belize international business companies (IBCs) and limited duration companies (LDCs) inclusive of all related services. Same day registration. Competitive Registry Fees. Registration in any language.

Highly qualified professional services.

Online name checks and name reservations.

British Caribbean Bank International Limited 21 Regent Street, 4th Floor, P.O. Box 364, Belize City, Belize, Central America Tel: +501 227 0697/1548 Fax: +501 227 0983 services@bcbankinternational.com www.bcbankinternational.com Contacts

Christopher Coye, Director (international financial services) Lizanni Cuellar, Operations Manager Services

Foreign currency bank accounts; Visa/MasterCard International, credit cards; international Visa debit cards; Visa prepaid Cards; online securities trading and brokerage services; US dollar credit facilities; online banking; e-commerce merchant acquiring services.

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IFC Review • 2011

Belize Corporate Services Ltd 21 Regent Street, 2nd Floor, P.O. Box 364, Belize City, Belize, Central America

bermuda

Winchester Global Trust Company Limited

Tel: +501 227 2567/1591 Fax: +501 227 7018 corporate@belizebank.com www.belizecompanies.com

A member of The CACEIS Group Address: Williams House, 20 Reid Street, Hamilton HM11, Bermuda Mailing: P. O. Box HM3396, Hamilton HMPX, Bermuda

Contacts

Christopher Coye, Director International Financial Services Ava Lovell, Operations Manager

Tel: + 1 441 296 2000 Fax: + 1 441 296 1199 trust@wgt.bm www.caceis.com

Services

Contacts

BCSL provides a full range of professional business services including, but not limited to: offshore company formation and maintenance services; trust services; foundations; specialized virtual office services; corporate administration and bookkeeping services. Value, speed and quality of Service have proven to be the hallmark of our success and remains an integral component of our business strategy.

AME Consulting Group

William F Maycock, President David G Goodwin, Vice President Services

Licensed and supervised by Bermuda Monetary Authority to provide a wide variety of fiduciary services.

For individuals: discretionary and non-discretionary trusts; purpose trusts; asset protection trusts; charitable trusts For corporate clients: master trusts; business trusts. Winchester through its management company also offers incorporation, administration, nominee and private client services.

7 Craig Street, PO Box 322 Belize City, Belize

Tel: +(501) 223 4501 Fax: 501-223-4821 E-mail: support@ame.bz Services

AME is your local partner in Belize, whether you need to establish a domestic or offshore company, purchase or sell real estate, or develop a property in Belize, whatever your needs are, you can turn to us with confidence.

The services our group of companies offer includes: Offshore Corporate Services: • offshore companies in Belize, Panama, and other jurisdictions; • bank and credit card accounts, and merchant services; • trusts, private foundations, and trustee services; • registration of intellectual property; • registration of yachts and merchant ships in Belize.

• Real Estate Brokerage • Real Estate Development • Management Consulting

The Bermuda Stock Exchange Washington Mall, Phase 1, 3rd Floor, Hamilton, HM 11, Bermuda, P.O. Box HM 1369 Hamilton, Bermuda HMFX

Tel: +1 441 292 7212 Fax: +1 441 292 7619 info@bsx.com www.bsx.com Contacts

Gregory Wojciechowski, CEO James McKirdy, Chief Compliance Officer

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Professional Pages

IFC Review • 2011

british virgin islands

Coverdale Trust Services Limited 30 de Castro, P.O. Box 4519, Road Town, Tortola, British Virgin Islands, VG1110

canada

Unitrust Capital Corp.

1600 Steeles Avenue West Suite 228 Concord, Ontario, Canada L4K 4M2

Tel: 284 494 6727 Fax: 284 494 6583 Website: www.coverdalebvi.com

Tel: +1 905 660 4044 Fax: +1 905 660 0946 E-mail:info@unitrustcapital.com Website: www.unitrustcapital.com

Contacts

Contact:

Cornel Baptiste cbaptiste@coverdalebvi.com Services

• Company Formations & Registered Office/Agent • Trust Formations & Trustee Services • Yachts Registration • Mutual Funds Administration • Authorized Representative

Hudsun Trust Company Limited P.O. Box 986, Third Floor, Geneva Place Road Town, Tortola British Virgin Islands, VG1110

Tel: 284 494 6544 Fax: 284 494 6532 Email: Admin@hudsun.vg Website: www.hudsuntrust.com Contacts

Anelta Hodge Turnbull Managing Director Services

Hudsun Trust Company Limited is a fully licensed British Virgin Islands trust company. Its services include the provision of Trustee Services, Mutual Funds Administration, and Corporate Services including the incorporation, maintenance and management of Companies.

IFC_2011_directory_Final.indd 141

Paul Rostorotsky Managing Director Services:

• Company formation in Anguilla, Belize, BVI, Costa Rica, Dominica, Gibraltar, Hong Kong, Malta, Nevis, Panama, Seychelles, Delaware, other U.S. states, UK, other jurisdictions • Nominee Directors & Shareholders • Apostille • Legalization services with foreign embassies in USA, Canada, China, and UK • Offshore bank accounts opening • Virtual Office cayman islands

Alexandria Bancorp Limited Grand Pavilion Commercial Centre, 802 West Bay Road, PO Box 2428, Seven Mile Beach, Grand Cayman, Cayman Islands, KY1-1105

Tel: +1 345 945 1111 Fax: +1 345 945 1122 bancorp@alexandriabancorp.com Website: Alexandriabancorp.com Contact:

Robert F. Madden Dayra Triana-Manroe Services:

• Offshore private banking • Investment services • Trust administration • Corporate administration Established in 1990, Alexandria Bancorp provides personalised investment and private banking services to qualified persons around the globe.

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Caribbean Management Ltd 5th Floor Bermuda House Dr Roy’s Drive P.O. Box 1044 Grand Cayman Cayman Islands KY1-1102

Tel: +345 949 8728 Fax: +345 949 7325 ijohnson@gtcayman.com www.caribbeanmanagement.com Contacts

Ian R Johnson Elizabeth Ibeh Terry Carson Services

Company incorporation Registered office Secretarial and clerical services Accounting and invoicing services

cyprus

Andreas Neocleous & Co LLC Neocleous House 195 Archbishop Makarios III Avenue P.O. Box 50613 Limassol CY-3608 Cyprus

Tel: +357 25 110000 Fax: +357 25 110001 info@neocleous.com www.neocleous.com Contacts

Andreas Neocleous, Managing Partner Services

The largest law firm in Cyprus, and recognised as the market leader. Focus on providing international clients with world-class legal assistance and service.

Specialist departments provide a full service in all areas of the law.Extensive in-depth experience of cross-border investment and international tax planning.

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Professional Pages

Christodoulos G. Vassiliades & Co LLC Advocates – Legal Consultants Ledra House, 15 Agiou Pavlou Street, Agios Andreas, 1105-Nicosia, Cyprus

Tel: +357 22 55 66 77 Fax: +357 22 55 66 88 Mr Christodoulos G. Vassiliades www.vasslaw.com info@vasslaw.net

FBME Bank 90 Archbishop Makarios III Ave, 1077 Nicosia, Cyprus/ P.O. Box 25566, 1391 Nicosia, Cyprus

Tel: (+357) 22 888 444 Fax: (+357) 22 888 555 Email: banking@fbme.com Website: www.fbme.com Services

FBME Bank is an International Commercial Bank. The Cyprus branch was established in 1982, which makes FBME one of the island’s longeststanding international banks. For nearly three decades, we have built on our sustainable business strategies through providing products and services along traditional banking lines. This has resulted in strong financial growth and liquidity, consequently enabling us to provide our Partners with secure and reliable banking solutions.

Having a solid base, FBME specialises in cross-border transactions and commercial trading facilities in addition to: • International Payment Services • Swift Account Services • Credit Facilities • Trade Finance • FOREX Trading Facilities • E- banking • International Card Services Solutions

A.K. CosmoServe Ltd 89 Kennedy Ave., 2nd Floor, Off. 201, P.O. Box 26624, 1640-Nicosia, Cyprus

Tel: +357 2237 9210 Fax: +357 2237 9212 consult@cosmoserve.com www.cosmoserve.com Contacts

Antonis Kassapis Katia Petri Services

Company formation, branch registration, corporate services, tax planning, banking services, accounting and auditing services, company redomiciliations, trust and formation services.

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IFC Review • 2011

Mutual Trust Cyprus Ltd 7 Heliopolis Street Ayios Andreas 1101 Nicosia Cyprus Tel: +357 22 772240 Fax: +357 22 778862 ibrooks@mutual-trust.com lbogunovic@mutual-trust.com www.mutual-trust.com Contacts

Ian Brooks – Managing Director Ljubisa Bogunovic – Business Development Director Services

Trust and Corporate Services including: • Company Incorporation • Trust formation • Nominee services • Investment & Fund Administration • Consultancy • Office Representation • Business & Trade • Accounting • Banking • Legal denmark

CorpNordic Denmark A/S CorpNordic Denmark A/S, Harbour House, Sundkrogsgade 21 DK-2100 Copenhagen, Denmark

Tel: +45 3318 9000 Fax: + 45 3318 9001 E-mail:denmark@corpnordic.com Website: www.corpnordic.com Contact:

Henrik Damm Krogh h.krogh@corpnordic.com Services:

CorpNordic is the leading provider of company formation and management services in the Nordic countries.

Registered address, local directors, accounting and legal administrations are provided based on the specific requirements of each client.

VAT-representation, investor representation and payroll management are also provided.

dubai

Freemont Group Office address: Office 418, Building 6EA Dubai Airport Free Zone United Arab Emirates Postal address: P.O. Box 293670 Dubai Airport Free Zone Dubai United Arab Emirates

Tel: +971 4 7030 100 Fax: +971 4 7030 110 info@freemontgroup.com www.freemontgroup.com Contact

Mr Pieter Vermeulen,Country Manager, Freemont Dubai Mr Adriaan Struijk,Chairman, Freemont Group Services

Freemont Group is a comprehensive provider of fiduciary services including corporate formation and administration, trust, fund formation, legal-and tax services. Our clients are entrepreneurs, business owners, consultants and HNWIs. Our staff of 20 professionals in our offices in Cyprus, Curaçao, Panama, Dubai and The Netherlands includes qualified accountants, tax planners, and attorneys.

• Fiduciary services • Corporate formation and administration • Trust, fund formation • Legal and tax services

Sunil Thacker PO Box 184125 Dubai United Arab Emirates • Dubai • Abu Dhabi • Doha • Riyadh • Mumbai • London

Tel: +971 50 2427334 Email: sunil@sunilthacker.com Website: www.sunilthacker.com Contact:

Sunil Thacker sunil@sunilthacker.com Services

We advise on business set-up in Middle East and Asia on: • Corporate/M&A • Construction and Real Estate • Litigation and Dispute Resolution • Intellectual Property • Employment and Residency Regulations • International Tax Advisory • Franchising and Distribution.

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Professional Pages

IFC Review • 2011

finland

CorpNordic Finland OY CorpNordic Finland OY, Mannerheimintie 12 B, 00100 Helsinki, Finland

Tel: +358 9 2516 6247 Fax: + 358 9 2516 6100 E-mail:finland@corpnordic.com Website: www.corpnordic.com Contact:

Charlotte Törnberg c.tornberg@corpnordic.com Services:

CorpNordic is the leading provider of company formation and management services in the Nordic countries.

Registered address, local directors, accounting and legal administrations are provided based on the specific requirements of each client.

VAT-representation, investor representation and payroll management are also provided.

guernsey

Carey Olsen P.O.Box 98, Carey House, Les Banques, St Peter Port, Guernsey, GY1 4BZ

Tel: +44 (0)1481 727272 Fax: +44 (0)1481 711052 www.careyolsen.com Contacts

Russell Clark Michael Eades Konrad Friedlaender Services

Carey Olsen is a full-service Channel Island law firm with offices in Guernsey, Jersey and London. We provide clients with dedicated legal services on all aspects of private client and trust law. The fiduciary law group is the largest legal team specialising in trust and fiduciary law in the Channel Islands and offers clients an unparalleled level of knowledge and expertise.

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hong kong

Offshore Incorporations 9th Floor, Ruttonjee House 11 Duddell Street Central, Hong Kong

Tel: +852 2521 2515 Fax: +852 2810 4525 marketing@offshore-inc.com www.offshore-inc.com Services

Offshore Incorporations Limited (OIL) is Asia’s Company Formation Specialist with 25 years of expertise serving clients worldwide through offices in Hong Kong, China, Singapore and Taiwan. OIL provides a comprehensive range of company formation and ongoing post incorporation services in premier jurisdictions including BVI, Hong Kong, Singapore, Cayman Islands, Samoa, Seychelles, Anguilla, Bahamas, Delaware and Mauritius.

North Asia Corporate Services Ltd Suite 1005, Albion Plaza, 2-6 Granville Road, Tsimshatsui, Kowloon, Hong Kong

Tel: +852 27241223 Fax: +852 27224373 nacs@nacs.com.hk www.nacs.com.hk Contact

Stella Ho, Managing Director Services

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Azuretax Ltd Suite 1010 10/F Tower 2 Lippo Centre Queensway, HK

Tel: + 852 2123 9370 Fax: + 852 2122 9209 info@azuretax.com www.azuretax.com Contacts:

Ms Deborah Annells, CTA (Fellow) Mr Graham Moore, CTA Services:

• HK Tax Services • US Tax Services • UK Tax Services • PRC Tax Services • Trustee Services and Executorships • Will Writing Services • Company Secretarial Services

jersey

Apex Trust Company Limited PO Box 129, Commercial House, Commercial Street, St Helier, Jersey JE4 8QS

Tel: +44 (0)1534 883 630 Mobile: +44 (0)7700 883 630 phill.evans@apextrustco.com www.apextrustco.com Contacts

Phill Evans TEP, Director

Ready-made/custom-made Companies & Trusts from over 20 offshore jurisdictions. Registered Office, company secretary, business address, mail forwarding. Offshore banking, accounting, L/C and trade documentation services. Customised offshore operation management.

Forming WFOE, Rep Office.

Investment Visas for Hong Kong and European countries.

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labuan

Labuan Ibfc Inc. Sdn Bhd Suite 3A-2, Level 2, Block 3A Plaza Sentral Jalan Stesen Sentral KL Sentral 50470 Kuala Lumpur, Malaysia.

IFC Review • 2011

luxembourg

KMG SICAV-SIF S.A. 19 Rue Eugène Ruppert L-2453, Luxembourg

Tel +352 26 30 24 23 Fax +352 26 30 24 25 sicavs@kmgsicavsif.com www.kmgsicavsif.com

Tel: +603 2773 8977 Fax: +603 2780 2077 E-mail:info@LabuanIBFC.my Website: www.LabuanIBFC.my

Contacts

Contact:

KMG SICAV-SIF is an “open architecture platform”, created exclusively to enable third parties to launch their own fully supported and administered Luxembourg regulated SICAV SIF Funds, quickly, without the usual red tape and the costs involved both in time and money.

• Incorporation • Custody • Transfers • Administration • Domiciliation, Corporate Secretariat • Management & Organisation • Investment Management • Promotion, Distribution • Corporate Branding

David Kinloch CEO, Labuan IBFC Inc. Sdn Bhd Julie Chong Head of Marketing, Labuan IBFC Inc. Sdn Bhd Services:

Labuan IBFC offers a wide range of opportunities such as captive insurance, trusts, foundations, fund management, leasing, banking, estate planning, wealth management and Islamic Financial products.

Investors can enjoy the benefits of Labuan’s business friendly environment as well as access to 63 Malaysia DTAs. For more information please visit www.LabuanIBFC.my

Kevin Mudd, Director Paul Pavli, Operations Director Services

marshall islands liberia

LISCR Virginia, USA (Head Office)

Tel: +1 703 251 2455 Fax: +1 703 251 2489 corporate@liscr.com www.liscr.com Contact

Stephen Frey, Manager Zürich, Switzerland

Tel: +41 44 250 8650 Fax: +41 44 250 8655 info@liscr.ch www.liscr.com Contact

Peter Kidman, Manager Services

• LISCR LLC – exclusive administrator • The LISCR Trust Company exclusive Registered Agent • Same day formation of Corporations, Registered Companies, LLCs, Limited Partnerships, Foundations and Registered Trusts • Low formation, filing and annual fees • Full service offices also in Hamburg, Hong Kong, London, Athens and Tokyo

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International Registries, Inc. (IRI)

mauritius

The Cim Global Businesses Companies: CIM Trustees; IMM; Multiconsult; CIM Tax Services 3rd Floor, Les Cascades, Edith Cavell Street, Port Louis, Mauritius

Tel: +230 212 9800 Fax: +230 212 9833 bd@cimglobalbusiness.com www.cimglobalbusiness.com Contacts

Bilal I. Sassa Ashwin Jugbandhan Deven Coopoosamy Madhvi Narain Services

Cim Global Businesses are represented

by International Management (Mauritius) Limited, Multiconsult, Cim Trustees Limited and Cim Tax Services Limited.

Beyond delivering fund, company and trust administration, we work hard at providing efficient wealth management and structuring solutions in investment and asset management.

CKLB International Management Ltd

11495 Commerce Park Drive Reston, VA 20191-1507 USA

1st Floor, Felix House, 24 Dr Joseph, Riviere Street, Port Louis, Mauritius

Tel: +1 703 620 4880 Fax: +1 703 476 8522 corp@register-iri.com www.register-iri.com

Tel: +230 216 8800 Fax: +230 216 9800 cklbmru@cklb.com www.cklb.com

Contacts

Contacts

Alison Yurovchak, Associate General Counsel Meredith Kirby, Associate General Counsel

Kathleen Lai, BA. FCCA. TEP. Director Kathleenlai@cklb.com Andre Chung Shui, BSc. FCA. Director Andrechungshui@cklb.com

Services

Services

International Registries, Inc. (IRI) and its group of affiliated companies are the Maritime and Corporate Administrators of the Republic of the Marshall Islands. IRI has been administering maritime and corporate registries since 1948. IRI has a network of offices in Baltimore, Dalian, Dubai, Ft. Lauderdale, Geneva, Hamburg, Hong Kong, Houston, Istanbul, London, Mumbai, New York, Piraeus, Roosendaal, Seoul, Shanghai, Singapore, Tokyo, Washington, DC/Reston and Zurich that have the ability to incorporate a company, issue company related documentation, register a vessel or yacht, and service clientele.

CKLB is a Financial Services Group focusing primarily on the provision of tailor made solutions to private individuals and corporate clients. Our range of services include company formation, corporate management, administration and accounting, fund set-up and administration, establishment of trust and provision of trustee services, and back office administration and accounting services, capital market related services including stock broking and portfolio advisory services.

Mauritius • London Hong Kong • Seychelles

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Professional Pages

IFC Review • 2011

nevis

Tarsus Trust Company P.O. Box 11, Main Street, Charlestown, Nevis, W.I.

Tel: +1 869 469 4602 Fax: +1 869 469 4603 info@tarsustrust.com www.tarsustrust.com

norway

CorpNordic Norway As CorpNordic Norway AS C.J Hambros Plass 2C, 0164, Oslo, Norway

seychelles

A.C.T. - Offshore Limited Oliaji Trade Centre - 1st Floor Victoria, Mahe, Seychelles

Tel: +47 22 99 6119 Fax: +47 22 99 6010 E-mail:norway@corpnordic.com Website: www.corpnordic.com

Tel: +248 321377 Fax: +248 324777 Email: email@actoffshore.com Website: www.actoffshore.com

Thomas E Ferneau III , Esq June Hanley L Burke Files

Contact:

Contacts

Services

Services:

Contacts

Tarsus supports international financial experts and multinational financial planners with current information, custom products and services. We back you so you can back your clients. Look to us for mutual funds, insurance companies, Custom International annuities, entity formation and more.

new zealand

Asiaciti Trust New Zealand Limited Plaza Level, 41 Shortland Street, P.O. Box 1194, Shortland Street, Auckland, New Zealand

Tel: +64 9 302 0140 Fax: +64 9 302 0150 new_zealand@asiacititrust.com www.asiacititrust.com Contacts

Lauren Williams, General Manager Services

Henning Torgersen h.torgersen@corpnordic.com CorpNordic is the leading provider of company formation and management services in the Nordic countries.

Registered address, local directors, accounting and legal administrations are provided based on the specific requirements of each client.

VAT-representation, investor representation and payroll management are also provided.

Samoa International Finance Authority (SIFA) Tel: +685 24071 Fax: +685 20880 intlbusiness@sifa.ws or offshore@lesamoa.net www.sifa.ws Contacts

Erna Va’ai, Chief Executive Officer Mr. Cheshire Malua, Assistant Chief Executive Officer Mrs Sieni Voorwinden, Assistant Chief Executive Officer

NZ Securities Trusts

Services

Tel: +64 9 4899453 Fax: +64 9 4899452 info@nzsecurities.com www.nzsecurities.com Contacts

Karl Pragassen Michelle Pouponneau Vanessa Pillay Bettyna Talma Services

Fast, easy, friendly formation and maintenance of Seychelles International Business Companies (IBCs), Trusts, low-taxed companies with access to double taxation agreements.

Maintains the largest list of readymade Seychelles companies, available for immediate use.

Specializes in providing Seychelles corporate and trustee services to lawyers, accountants and other fellow service providers.

samoa

• Trustee services • Fiduciary services • Managed trust companies • Private trust companies • Limited partnerships

P.O. Box 32528, Auckland , New Zealand.

Level 1, 412 Lake Road, Takapuna, Auckland

145

Registration of international companies, trusts, partnerships and segregated funds and licensing of trustee companies, international banks, insurance companies, mutual funds and fund managers.

International Corporate Agents Limited Suite 102, Aarti Chambers, Mont Fleuri, Mahe, Seychelles

Tel: +248 225 755; +248 524 900 Fax: +248 225 991 ical@ibcagent.com Ical@seychelles.net www.ibcagent.com Contacts

Ms. Nahil Francois Services

Licensed corporate and trustee service provider for: • Company formation in Seychelles and major offshore jurisdictions for individual and corporate clients.

• Formation of company special license (CSL) • Ship and yacht registration • Provision of nominee, trustee and secretarial services • Opening of bank accounts

Garth Melville or Carolyn Gee

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Professional Pages Seychelles International Business Authority (SIBA)

P.O. Box 991, Bois de Rose Avenue, Victoria, Mahé, Seychelles

Tel: +248 380 800 Fax: +248 380 888 enquiries@siba.net www.siba.net Contact

IFC Review • 2011

Mayfair Trust Group Limited 2nd Floor, Capital City Independence Avenue P.O. Box 1312 Victoria, Mahé Seychelles

Tel +248 443 8888 Fax +248 443 8800 info@mayfair-offshore.com www.mayfair-offshore.com

Steve Fanny (msc, ifa, Ad Dip Acc (cima), mabe, acfe), Managing Director and Chief Executive Officer

Contacts

Services

Services

• Regulatory Authority • International Business Companies Act • International Trust Act • International Corporate Service Providers Act • Companies (Special Licenses) Act • Protected Cell Companies Act • Limited Partnerships Act • Foundation Act • Securities Act • Mutual Fund and Hedge Fund Act

Peter Burian (Managing Director) Gemma Mein (Corporate Services Director) Mayfair is one of the leading corporate, trustee and foundation service providers in Seychelles.

We can assist with the formation and administration of Seychelles tax exempt IBCs, tax resident CSLs, trusts, foundations, limited partnerships, mutual fund formation and arranging related legal services.

sweden

CorpNordic Sweden AB CorpNordic Sweden AB Sergels Torg 12, 12th floor, 111 57, Stockholm

Mailing Address: P.O Box 162 85, 103 25, Stockholm Tel: +46 8 402 72 00 Fax: + 46 8 402 72 99 E-mail:sweden@corpnordic.com Website: www.corpnordic.com Contact:

Martin Gorne m.gorne@corpnordic.com Services:

CorpNordic is the leading provider of company formation and management services in the Nordic countries.

Registered address, local directors, accounting and legal administrations are provided based on the specific requirements of each client.

VAT-representation, investor representation and payroll management are also provided.

singapore

Sast Offshore Services Ltd Suite 14, 1st floor, Trinity House, Victoria, Mahe, Seychelles.

Tel: +248 226111; +248 323944; +248 579348 Fax: +248 324226; +248 226111 sast@seychelles.net offshore@seychelles.net Contacts

David J Lowseck Managing Director

Asiaciti Trust Singapore Pte Ltd Asiaciti Corporate Services Pte Ltd Asiaciti Management Pte Ltd 163 Penang Road No. 02-03 Winsland House II Singapore 238463

Tel: +65 6533 2611 Fax: +65 6532 5092 Singapore@asiacititrust.com www.asiacititrust.com Contacts

Sean A Coughlan, Managing Director Singapore Cara L Briggs, Manager Client Services Services

Formation and management of Singapore companies including international holding companies; trustee services for Singapore and foreign trusts; formation and administration of offshore companies in all jurisdictions, strategic planning services to private and corporate clients for offshore trust, international tax and asset protection. Member of the Asiaciti Trust Group with offices in Cook Islands, Hong Kong, New Zealand, Samoa and Uruguay.

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VANUATU

Vanuatu Financial Services Commission (VFSC) Companies House, Rue Bougainville PMB No. 9023, Port Vila, Rep. of Vanuatu

Tel: +678 22 247 Fax: +678 22 242 info@vfsc.com.vu gandrews@vfsc.com.vu sobed@vfsc.com.vu www.vfsc.vu; www.insurance.vu Contacts

George Andrews, Commissioner Serah Obed, Deputy Commissioner Services

Company formation including: local; oversea, international; protected cell and incorporated cell companies. Registration of business names, registration of charitable organizations, registration of EU patents and trademarks, registration of credit unions, registration of trade unions, licensing of trust companies and principals, licensing of mutual funds and administrators, licensing of security dealers and principals, controller of stamp duties and personal property securities, corporate liquidation and insolvencies.

08/02/2011 19:22

COMING SOON workinwealth.com The dedicated jobs board for the Offshore finance Industry

IFC_2010_Cover.indd 2

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www.ifcreview.com

m

78 York Street, London W1H 1DP • Tel: +44 (0) 20 7692 0932 • Fax: +44 (0) 20 7692 0933 Email: info@ifcreview.com • Website: www.ifcreview.com

IFC_2010_Cover.indd 3

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