Issue 72 - 1st May 2007
Oh the joys of parenthood! Tommy, the slightly wild and unhinged youngest member of the Dean brood, has at last succumbed to potty-training. It has been a long, rocky and more often than not smelly and washer/drier intensive experience. He will thank me for writing this in the future, but both he and Jim have - thanks to their cousins, who shall remain nameless (although their parents do receive a copy of this splendid newsletter, so I best go easy), have contracted a dire dose of head-lice, although Jim is pleased as he can impress his girlfriend and skive school. We are delighted to announce that we have taken a third floor at 45 Clarges Street – for those of you who haven’t been to see us yet, do feel to drop by; we could always pop into the Fox Club next door for a sharpener (depending on time of day of course), and you will be converted for good! Roy was busy last week chairing the ‘Effective Hedge Fund Tax Practices’ conference. For those interested in receiving a copy of our conference headline notes please click here. Finally, we will soon be modernising the ITN which will make it an even better newsletter. Distribution will be in HTML format, in full colour and just as enjoyable as ever.
Happy reading!
Hedge Fund Seminar
The hedge fund conference brought together senior investment professionals from the hedge fund industry as well as tax professionals, HMRC and the FSA. Much of the discussion focussed on future developments in the industry, such as the Investment Manager Exemption, transfer pricing strategies and best practices. US tax issues affecting European hedge funds were considered, as was the structuring of international hedge funds.
Tax tip of the day
We have come across several US citizens who are married to non-US citizens and who are not taking advantage of a simple solution to reduce their worldwide tax liabilities to the IRS. If the US-citizen spouse is the individual with substantial funds, any income derived from those funds will be subject to US tax wherever it arises. However, those funds can be lent to the other (non-US citizen) spouse without interest, so that any income derived by that spouse may only be subject to tax in that person’s country of residence. The ‘marriage’ of a US-citizen spouse and, say, a UK non-domiciled but resident spouse, who is not a US citizen, could therefore lead to interesting consequences. The funds could be invested in a new business venture, possibly via a trust, so that the non-US citizen spouse (or the trust created by that individual), can generate significant capital gains in the future without the long arm of Uncle Sam being able to tax those gains.
Luxembourg
Specialised Investment Funds (SIF)
Luxembourg has introduced a new law for investment funds which replaces the 1991 institutional investment fund law. The new law on Specialised Investment Funds (“SIFs”) is essentially characterised by a more relaxed regulatory regime, broadening of the circle of investors and greater flexibility with regard to the investment policy.Under the new law a SIF may in principle start its activities without prior approval of the Luxembourg financial supervisory authorities (“CSSF”), provided approval is sought in the month following the launch of the Fund. It must reach a minimum fund size of Euro 1.25 million within 12 months of its date of authorisation. The significant change is that the scope of eligible investors is broadened to include not only institutional investors but also professional investors and informed investors. The latter category includes private individuals that have declared that they are an informed investor and either invest a minimum of Euro 125,000 in the SIF or have an appraisal from, for example, a bank confirming the individual has the appropriate experience and knowledge to adequately understand the investment being made. Based on the new law a SIF should apply the principle of risk diversification, but may otherwise invest in all types of investments, i.e. in traditional investments as well as alternative investments, for example Money Market instruments, private equity, commodities and real estate. The SIF is in principle not subject to Luxembourg income tax. Distributions by a SIF are not subject to dividend withholding tax in Luxembourg. The SIF is subject to a subscription tax which amounts to 0.01% a year. The taxable basis of the subscription tax is the entire net assets of the SIF, valued on the last day of each quarter. Certain exceptions from subscription tax are available. There is also a one off capital contribution tax of Euro 1,250 which is payable upon incorporation of the SIF. We feel that the SIF provides a flexible, lightly regulated and tax efficient structure that certainly needs to be taken into consideration when establishing future investment funds.
Belgium
Tax deduction for patent income to be introduced
In Belgium a Bill has been announced which provides for a tax deduction in respect of patent income received by a Belgian company or permanent establishment. The deduction would amount to 80% of the patent income received and would result in an effective tax rate of 6.8%. The deduction would only apply to patents which:have not been used before 1 January 2007; and patents owned by the Belgian company or permanent establishment resulting from its own R&D activities in Belgium or abroad which qualify as a branch activity; andpatents acquired by the Belgian company or establishment via purchase, contribution or under a license agreement if the patents are further developed by the Belgian company. The new regime would enter into force on 1 January 2008.
Denmark recently introduced a voluntary patent taxation scheme under which a company may choose to include only 55% of its patent income in its taxable income, resulting in an effective rate of 12.1%.In ITN Bulletin 62 we summarised the new Dutch patent box regime which would subject royalty income to a tax rate of 12.5%. The competition amongst EU member states to attract licence activities is therefore heating up. There are differences in the tax treatment of these activities between the three countries and we suggest clients carefully analyse each scheme before making a choice.
Germany
Real Estate Investment Trust (REIT’s) introduced
We reported in ITN 67 that draft legislation had been issued to introduce real estate investment trusts. The Bill was passed on 30 March 2007, with the following changes:
Half of the capital gains realised on the sale of real estate will be exempt where it forms part of a business asset for a period of more than 5 years. This exemption applies only to contracts concluded between 1 January 2007 and 31 December 2009
As a measure to protect private tenants of rented property, such real estate built before 1 January 2007 cannot be transferred into a REIT. However, real estate constructed after this date may be transferred into a REIT provided it is used 50% for business purposes
Foreign real estate rented for private use may also be transferred into a REIT provided the foreign jurisdiction allows such a transfer.
The changes to the draft legislation as discussed in ITN 67 are minimal and the REIT looks promising for attracting foreign and domestic investment into German real estate.
Russia
Exemption of dividends
Under the old rules dividends distributed by a Russian company to its non-resident parent company were subject to withholding tax in Russia. However, on 20th April 2007 a Bill was passed that now provides an exemption for dividends paid to qualifying parent companies. A qualifying parent company is one that either holds 50% of the registered share capital of the Russian subsidiary or is entitled to 50% of dividend distributions.
