Issue 60 - 15 Mar 2006
Sentiment
We have had a very eventful start to the year, which is one of the reasons why things have been a little quiet on the ITN front. Don’t worry though: we have not been idle! Zoe Shorten has joined us as a trainee and will, I am sure, be a great addition to the team. We have been busy advising on a number of private equity fund deals, which are investing heavily into the emerging markets, and are busily working on several captive and cell captive insurance structures for sports clubs to medical associations which is really quite fascinating. This 60th edition of the ITN covers nearly as much ground as we have in the last month or so, with interesting news from the Isle of Man about the new flat rate personal tax rate. I was interviewed by the FT on this subject and managed not to put my foot in it – see the new IFS website (www.interfis.com) for both this article and others that Roy and I have been interviewed for recently.
Finally, on a lighter note, I have been accused of many things during my short, but eventful, life to date. Being full of poo is one of those things. Not any longer my tax-loving friends! This, the 60th edition of the ITN, is a worldwide exclusive in which I come clean about my experiences with colonic irrigation. Yes, folks, that’s right, I have taken the plunge where no man has ever been before (at least no Yorkshireman) and have been thoroughly cleansed. As a result I feel on top of the world and am raring to go (skiing in a couple of weeks’ time, but don’t tell Mrs Dean!).
Happy reading!
Tax tip of the day
The concept of using insurance as a tax planning tool is not new, and captive insurance companies have been utilised by public companies for many years. They are, however, somewhat underused, and the reason for this is cost. Not many companies have the insurance cost to justify the establishment of their own captive company. With the advent of protected cell company legislation in a number of jurisdictions, captive insurance companies are now much more accessible. The structures we have been working on combine a captive company and an offshore pension arrangement to provide significant cash-flow, tax and insurance benefits. Please feel free to contact us to discuss how we can help.
France
Capital gains exemption on residences owned by non-residents
The French Finance Law 2004 has introduced a one-off capital gains tax exemption for French and EU nationals (and for residents of states with which France has a non-discrimination clause) when they sell their French residence. It is a requirement that the seller must have been resident in France for at least two years prior to the sale. Under Guideline 8 M-1-06, a second residence may also enjoy such an exemption, provided that the sale relates to the only French residence of a non-resident individual and the second sale takes place at least five years after the sale of a French residence. This is an interesting development and one which will be very welcome for a large number of expats living in France. Another example of the long arm of the ECJ developing domestic tax legislation.
Hong Kong
Non-residents not taxed on Hong Kong transactions?
The Profits Tax Exemption for Offshore Funds Bill may be passed shortly. If passed, the effect of the Act will be to ensure that non-residents will enjoy an exemption from tax on profits from dealing in securities, futures contracts and similar transactions. In order to enjoy the exemption, the non-resident must carry out the transactions through a specified group of service providers and is not allowed to carry on any other business in Hong Kong.
Isle of Man
Budget 2006/2007**
Significant tax changes will take effect from 6 April 2006. The standard rate of tax applicable to trading profits will be 0% (down from 10%), while investment and other income will be taxed at 18%. As far as personal taxation is concerned, a much heralded tax cap of £100,000 will be introduced, making the Isle of Man a viable alternative to Jersey, Guernsey, Monaco, Switzerland and Gibraltar (and many other places for that matter). See www.interfis.com for Miles’ interview with the FT on this subject.
** Contribution prepared with assistance from Paul Beckett, Mannin Chambers, Isle of Man (www.manninchambers.com).
Japan/United Kingdom
New treaty signed
A new treaty between Japan and the United Kingdom was signed in February 2006. Some of the main features of the treaty are as follows:
- Dividends are taxed at the standard rate of 10% (reduced from 15%), reduced to 5% where at least 10% of the shares have been held for at least 6 months. No withholding tax will apply where inter alia the beneficial owner has owned 50% or more of the shares in respect of which the dividends were paid for 6 months or more. However, the latter two reduced rates will not apply where the Japanese company paying the dividend is entitled to deduct dividends paid in determining its taxable profits.
- Royalties are only taxable in the state where the beneficial owner is resident.
- Capital gains derived by a resident of, say, the UK from the sale of shares or a partnership interest that derive 50% or more of their value from immovable property in Japan, will be taxed in Japan, unless the share or interest is traded on a recognised stock exchange and the UK resident holds 5% or less of the shares.
- The new treaty contains a detailed limitation on benefits provision, under which certain treaty benefits only accrue to a person who is a “qualified person” under the definition of Art. 22 of the treaty. It is yet to be announced when the new treaty will take effect.
Spain
Possible significant tax law changes
A draft bill was published at the beginning of 2006 which, when introduced, will have significant effect for personal taxation. The main provisions of the bill in respect of non-resident tax are:
- Where a non-resident has a permanent establishment (PE) in Spain, the PE’s income will be taxed at a rate of 35%, which will gradually decrease to 30% in 2011. This brings the taxation of a PE in line with Spanish corporation tax.
- Where the non-resident has no PE in Spain, the tax rate on profits, such as rental income, will be 24%, instead of the current 25%. Significantly, the capital gains tax rate for non-residents under these circumstances will be reduced from 35% to 18%.
** Contribution prepared with assistance from Jaime Azcona and Clara Fernández of Azcona & Asociados, S.L. (www.azconaasociados.com).
Switzerland
Federal Decree applicable to Savings Directive
The Federal Decree of 1962, including the two related Circulars (see ITN 55), will be applicable to Art. 15 of the EC-Switzerland Savings Directive Agreement. Consequently, the 0% withholding tax rate under the Agreement on dividends, interest and royalties can only be invoked if such relief is not claimed in an abusive manner by a foreign taxpayer.
Minimum interest rates – related party loans Under an Instruction issued by the Federal Tax Administration, the minimum interest rates to be levied on loans during 2006 between companies and their shareholders, or between related parties, have been laid down. Interest on loans financed by equity to shareholders must at least be 2.25%. Where loans are financed by debt, the minimum rate of interest has to be the rate that the company pays for the loan plus 0.5%, where the loan does not exceed CHF10 million. Interest rates in excess of these instructions will be deemed a distribution of profits, subject to a 35% withholding tax. Additionally, the excess interest is not deductible in the hands of the company making the loan.
Switzerland/United Kingdom
Protocol to tax treaty signed
A protocol to the tax treaty between Switzerland and the United Kingdom was signed at the start of 2006. Under the protocol, the withholding tax rate on dividends paid to, amongst others, corporate shareholders that own a substantial participation in the subsidiary, will be reduced to zero. Additionally, lump sum payments received from pension schemes will only be taxed in the source country, i.e. where the pension scheme is based. This is an interesting development. As many readers will know, the OECD Model Tax Convention provides for pension payments to be taxed only in the country of residence of the recipient. This change to the treaty prevents an individual from moving from the UK, collapsing a pension scheme and taking the benefit subject to Swiss taxation (perhaps under a forfeit arrangement to limit the Swiss taxation).
United States
Tax free mergers involving foreign companies allowed
Final regulations (Treas. Reg. §1.368-2(b)(1)) have been issued that revise the definition of “statutory merger or consolidation” for the purpose of Section 368(a)(1)(A) regarding corporate reorganisations. Under the new provisions, mergers under a foreign law can now qualify as tax-free, namely as an “A” type reorganisation, if the relevant conditions are met.
Dual chartered entities – final regulations issued
Clarity as to entities that are organised (i.e. incorporated) in more than one jurisdiction is now provided under the IRS’s check-the-box regulations. The regulations are effective from January 2006 and apply to business entities that have existed since August 2004. Under the final regulations, an entity organised in more than one jurisdiction will be a company for US tax purposes if in any of the jurisdictions in which it is organised it takes on a corporate form, as recognised by the check-the-box regulations. Where a company is organised in the US and in another jurisdiction, it will be regarded a US company.
