IFS - Information Zone

In the last couple of weeks a lot of media attention has been given to high profile companies considering their future in the UK. HSBC has openly stated that as part of its ongoing business plan it will review whether the UK is the most appropriate place to headquarter its business. Hiscox the insurer has already departed to the sunnier climes of Bermuda – whether this has a material effect on the London and UK insurance market is yet to be seen but it certainly is a sign of the times. We have worked with entrepreneurial individuals and companies for the past 30 years, and there is a real trend towards relocation of individuals and businesses. I was having lunch with two
clients in the Channel Islands a couple of weeks ago (and it was splendid too!), both of whom have recently decided to leave the UK for tax and lifestyle reasons. Over the years they have both paid significant amounts of UK tax and rather than use aggressive tax avoidance schemes and remain the in the UK they have decided to up sticks, the message being “enough is enough”. There is more to a competitive tax system than lower rates of tax. The fact that the UK is no longer a low tax jurisdiction within the EU (nor is it competitive) means action is needed now if future revenue is not going to suffer long lasting damage

 

On a happier note we too are on the move – but not out of the UK! After  spending most of our corporate life in Hampstead and Belsize Park we are moving south to Mayfair. Our new offices are located at 45 Clarges Street, London W1J 7EP which runs from Curzon Street to Piccadilly. We are all very excited about the move and look forward to welcoming you soon. We will be sending out change of address cards in due course. Roy and part of the IFS team are already in situ at the new offices so do feel free to pop by.

 

Finally, our offshore funds conference held a couple of weeks ago was a great success (as was the shooting and golf afterwards) and you can find Roy’s summary of the presentations by clicking here. The next IFS Conference will be held in March, again at the Pennyhill Park Hotel, and will focus on sports and entertainment. We hope you can join us.

Singapore has broadened its appeal as a location for regional holding companies, thanks to tax changes in recent years. It has an extensive tax treaty network with over 50 countries enabling Singapore-based holding companies to benefit from a reduction in withholding taxes on dividends, interest and royalties.

 

Singapore has one of the region's most competitive corporate tax rates at 20% the second lowest after Hong Kong, and since 2003 has adopted a one-tier corporate tax regime. Under this system, tax payable by a company, whether resident in Singapore or not, on its normal chargeable income would constitute a final tax and will not be passed on to its shareholders as a tax credit on payment of dividends.

 

Singapore also operates a territorial tax system and foreign income is only taxable if remitted to Singapore. Furthermore, foreign-sourced dividends distributed to Singapore are now exempted from tax, provided the income is received from a country with a headline corporate tax rate of at least 15 per cent and some tax was paid in that country by way of withholding tax on the dividends or income tax on the profits out of which the dividends are paid. As a result, directly-held foreign subsidiaries of Singapore-based holding companies are now generally able to repatriate dividends to Singapore without attracting further tax in Singapore. There are no thin capitalisation rules in Singapore and the absence of capital gains tax makes it a tax efficient holding company location to use on the sale of shares in a foreign subsidiary.

 

These tax benefits together with Singapore’s strategic location, first class infrastructure, use of the English language and legal system make it an excellent holding company location. The tax tip of the day is to review your existing structures and consider using a Singapore holding company, which may bring about some interesting planning opportunities.

Legislation to abolish Australian capital gains tax (CGT) for foreign residents was introduced on 22 June 2006. A capital gain or loss made by a foreign resident will be subject to CGT only where the assets in question are “taxable Australian property”. Taxable Australian property relates to “real property” and although this is not defined it is to be viewed within its ordinary legal meaning as land and buildings and chattels that are fixed to land. The following will remain subject to CGT:

In a case before the Tax Court of Canada, an individual who purchased shares in a Canadian public company and entered into a series of transactions, the effect of which was to realise a tax-free gain, was held not to have fallen foul of the Canadian General Anti-Avoidance Rule (GAAR). The individual initially purchased shares in Diamond Field Resources Ltd (DFR) which he subsequently transferred to a Cayman Island company, Mil (Investments) SA (MI), which was wholly owned by him in a share-for-share exchange. A second share-for-share exchange took place pursuant to which MI transferred some of its shares in DFR to Inco Ltd (Inco) but continued to hold some shares in DFR directly. MI subsequently redomiciled into Luxembourg and sold some of its shares in DFR. The gain was exempt from tax in Canada under Article 13 of the Canada / Luxembourg double tax treaty, and was also tax free in Luxembourg.

Inco later purchased all the remaining shares in DFR, including those still held by MI, giving rise to a whopping gain of C$425m. MI claimed under Article 13 of the Canada / Luxembourg treaty that the gain was exempt from Canadian tax. The Court considered whether the GAAR could be applied in this situation to deny the tax benefits of the structure. The Court took a 3-step approach in determining its application. Firstly, whether a tax benefit arises from the transaction, secondly, whether the transaction was made for bona fide purposes other than to obtain a tax benefit and thirdly, whether the transaction was abusive.

There was clearly a (significant) tax benefit; however, all three provisions had to be satisfied in order for the GAAR to have effect. The Court held that there was an avoidance transaction but concluded that the transaction took place for bona fide reasons. The primary reason for the transaction was not to obtain a tax benefit but to secure long-term financial security for the taxpayer. It is interesting to note that the Court also held that the sale of the remaining DFR shares to Inco was not in fact an avoidance transaction since MI could not have foreseen this eventuality when it redomiciled to Luxembourg.

The Court ruled that the selection of a treaty to minimise tax on its own cannot be regarded as abusive. This conclusion mirrors to a certain extent the decision of the ECJ in the Cadbury Schweppes Case (see ITN 65), where the Court proclaimed that it is possible to rely on Community law to gain a tax benefit provided the arrangements are not wholly artificial and that there is a commercial reason for a presence in a particular jurisdiction. The attitude of the Court in the MI case is to be welcomed as pragmatic and sensible – long may it continue.

The Danish government has announced that it will amend Denmark's CFC rules to bring them in line with the European Court of Justice's judgment in the Cadbury Schweppes case. Currently the Danish CFC regime is not confined to “wholly artificial arrangements” (this phrase will no doubt become the benchmark for anti-avoidance rules in Europe within the near future) created to escape the tax normally due on profits generated by activities carried out in Denmark. The existing CFC rules apply to foreign financial companies controlled by a Danish company if the effective overseas tax rate is essentially lower than the Danish corporate tax rate. If CFC taxation applies, the income of the subsidiary is subject to Danish tax. Draft legislation to amend the CFC regime will be introduced in December.

The Advocate-General (AG) Kokott recently delivered her opinion on the Oy AA case concerning the applicability of the Finnish Group Contribution (FGC) regime in cross border situations. Under the FGC regime, a Finish company is entitled to offset its profits against the loss of a company within the same domestic group. The contribution is treated as a tax-deductible expense for the contributing company and income for the recipient company. In this case, Oy AA, a profit making Finnish resident company, contemplated transferring a group contribution to its 100% indirect UK subsidiary, AA Ltd. The advance ruling obtained stated that the contribution would not be tax deductible for Oy AA, resulting in an appeal to the Finnish Administrative court, which in turn referred the issue to the ECJ.

 

The AG opined that the FGC regime does in principal amount to a restriction on the freedom of establishment, but nevertheless went on to accept the same three justifications for Finland to deny cross-border contributions as the ECJ did in the Marks and Spencer case; namely the preservation of allocation of taxing powers between member states, the preservation of double tax relief and the risk of tax avoidance. However, the AG concluded that although it may be necessary to override domestic taxation to give priority to the freedom of establishment in exceptional circumstances, the FGC regime is not in breach of EU law. What is interesting to note is that it appears as though the AG did not base her conclusion on the combined defences outlined in the Marks and Spencer case but on the sole justification concerning the need to preserve member states’ taxing rights.

 

If the ECJ goes on to accept the allocation of taxing powers as a standalone defence, the ability to offset crossborder profits and losses will be limited and member states will see the emergence of a defence, which could be relied on to protect domestic rules. In ITN 65, we reported that the Dutch Lower Court decided that the Dutch group taxation regime is, in fact, compatible with the freedom of establishment and stated that the justifications detailed in the Marks and Spencer case did not apply. It will be interesting to see how the ECJ will respond to these two cases.

In earlier editions we informed you of the pending corporate tax reform scheduled for 2007. The proposed bill which includes various interesting international tax planning incentives was approved by Parliament (Second Chamber) on 3 October (last). Only marginal amendments have been included in the process and it is expected that the bill will soon be approved by the Senate (First Chamber). The new legislation will enter into force as of 1 January 2007 returning the Netherlands to its status as a primary international tax jurisdiction again.

A law has been adopted facilitating international joint ventures and cross-border restructurings. Cross border legal mergers involving a Dutch and another EU corporation are now more simplified. The law recognizes the position of minority shareholders and secures the position of the employees employed by the merging corporations. The law is a direct result of the Directive 2005/56/EC aimed at streamlining cross-border mergers of EU corporations.

The ECJ has ruled that the Dutch system on exit taxation of persons emigrating within the EU is incompatible with EU law. Dutch private individuals owning a substantial interest (5% or more) in a company are currently assessed to tax on the deemed disposal upon emigration. With a so-called protective assessment the capital gain is calculated and taxed for income tax purposes, although payment of the tax is deferred until actual alienation of the shares. After the De Lasteyrie du Saillant ruling, emigrating Dutch taxpayers no longer needed to furnish the Tax Administration with collateral (e.g. a bank guarantee) if they emigrate to another EU Member State. Because the deemed disposal for capital gains tax purposes takes place on the day of emigration and any decrease in value of the assets after emigration is not allowed in computing the gain on actual disposition, the exit taxation imposes a limitation on the freedom of establishment. As a consequence, not only is the protective assessment disallowed but the system of exit taxation as a whole is incompatible with community law. It will be interesting to see how the Dutch Minister of Finance will deal with this ECJ decision and how it will affect exit taxes in other EU countries.

Contribution gratefully received from our good friend Lex Van der Zande at Strik in Amsterdam.

A formal announcement has been made that Romania and Bulgaria will join the EU from 1 January 2007 rather than a year later. The European Commission's recommendation, due to be approved by EU leaders in October, will list reforms that both countries must complete to avoid being deprived initially of full membership benefits. The addition of the two Balkan nations would bring the bloc's membership to 27 countries, raise its population by 30 million to 490 million and expand its borders to the Black Sea.

A Swiss company was wholly owned by a Danish holding company, which in turn was owned by a Guernsey company, which was owned by a Bermudan company. The Danish holding company did not have an office or workforce and did not carry on any real business activities in Denmark; there was no apparent economic reason for a presence in Denmark. Although the Switzerland / Denmark tax treaty does not contain an anti-abuse provision (in fact very few Swiss double tax agreements contain such provisions); the Swiss Supreme Court held that a reservation of an abuse of rights was inherent in all treaties. The justification for this, being found in the Vienna Convention on the law of treaties, which provides that to take advantage of a legal principle in a way in which was not intended is prohibited. Therefore, due to treaty abuse the Supreme Court disallowed the repayment of Swiss withholding tax.

We have seen, as discussed recently in previous ITN editions, HMRC’s continuous attacks on sportspersons coming to the UK, from the Agassi case to the taxation of the Pakistani cricketers. However, it appears that HMRC will be unable to tax those involved in the Olympic Games. A pre-condition to the UK holding the Olympics was that taxation must have no major impact on the games; the Finance Act 2006 introduced measures to ensure that this is fulfilled. Based on this, tax exemptions to the International Olympic Committee (IOC) and the London Organising Committee of the Games Ltd (LOCOG) are granted. Besides, the IOC will not have to pay UK tax on the revenue it receives from broadcasting rights, sponsorships, tickets and royalties. It is possible that without this exemption the IOC would have been considered to have a permanent establishment in the UK and would have thus been subject to UK tax on the profits allocated to that presence. Similarly LOCOG is specifically exempted from corporation tax from the date of its incorporation. In addition, payments of royalties and other payments to LOCOG are not subject to the deduction of UK tax at source. There is also a special exemption for competitors, officials, and broadcasting and media staff. The UK would normally be able to tax those sportspersons practicing their profession in the UK under national law and the “artists and sportspersons” article of the various tax treaties that the UK is party to. However, the competitors in the Olympic Games will not have any income tax liability on income derived from taking part in the games. It is important to note that income arising from personal appearances, for example, does not appear to be included in the tax exemption.

We originally reported on the US ‘war on tax shelters’ in ITN 41, where the US Federal Court ordered KPMG to disclose names of participants in a tax shelter being investigated by the Internal Revenue Service (IRS). Marked as the largest criminal tax fraud case in history, one of the justifications for charging KPMG with conspiracy to defraud the IRS was the fact that they did not register the tax shelters in point with the IRS. However, in a fascinating turn of events it has since come to light that the IRS was not even sure as to whether the tax shelters were required to be registered with them. Furthermore, there is evidence from the IRS Acting Chief Counsel assuring KPMG that there was no criminal activity in the marketing of the shelters. KMPG’s argument that they believed that the shelters which they were marketing were wholly legal appears to hold quite a lot of water!