Issue 80 - 15 February 2008
Sentiment
Lady Margaret Thatcher’s most famous phrase when confronting the trade unions was “U-Turn if you want to; this lady’s not for turning”. How Alastair Darling (the current UK Chancellor of the Exchequer) must wish he could say the same thing, but he has U-turned twice since our last ITN to his utter discredit and to the chagrin of the Labour Government. Never has a Minister revealed proposed legislation in as much detail as he has done, and then said in a Government sponsored release this week something like “Well I didn’t really mean what the legislation says, it was badly drafted by HMRC and the Government had no intention of taxing retrospective gains of non-domiciliaries”. Similar to his comments a couple of weeks ago “Well I didn’t really mean to increase the 10% capital gains tax rate for entrepreneurs to 18%, so I have very kindly listened to the furore I have created and decided to introduce a 10% entrepreneur’s relief instead”.
In our last ITN a couple of weeks ago, my own comments regarding how the UK Government was shooting itself in the foot have been reflected in great clarity and depth in our national newspapers. It is unusual for tax to be front page news other than on budget days, but the City is rightly aghast at the prospect of this Government spoiling the lucrative party enjoyed by the City of London since the Thatcher days. For those of you who missed my comments, http://www.interfis.com/information-zone/roys-sentiment
On a sunnier note, Miles is enjoying this week in Sharm-el-Sheik with Bec and the two boys (one of whom seems to have driven him back to drink). All of us at IFS miss him and wish him a happy holiday. Maybe he can teach the Chancellor his scuba diving expertise, as there has certainly been a lot of ducking and diving over here during his absence.
And I am enjoying my grand-daughter’s presence over here from Shanghai, where my son Nick has been living for the past seven years. She may only be two, but I think she can teach the Chancellor some arithmetic as well - £800 million is considerably lower than £2.1 billion (see Tax Tip One below). I have been teaching her this week to say “Move over Darling”.
Happy reading!
Tax tips of the day
Tax Tip One
United Kingdom
Through the proposed changes to the tax treatment on foreign domiciliaries resident in the UK, HMRC propose to raise an extra £800 million a year by 2010 by levying a £30,000 annual tax on such individuals, a relatively trivial tax receipt that in reality will never probably be received!
A report by the Society of Trust and Estate Practitioners (STEP) shows that so-called ‘non-doms’ account for £7.16 billion in tax (predominantly VAT) a year and that the changes could cost the Government £2.1 billion in lost tax receipts due to a ‘capital flight’. This is where the so-called ‘super rich’ leave the UK taking their money with them, undoubtedly threatening London’s role as a world finance centre.
Further, there are claims that the 100 (approximately) Greek family owned shipping companies whose headquarters are run out of London are set to leave the UK. These 100 companies are said to control about 20% of the world’s biggest shipping fleet and are estimated to contribute £5bn a year to the UK financial services industry. This is just one of many such claims; the long term and overall effects of the proposed changes cannot be realistically quantified, and the fall out from these poorly thought out changes will continue for a long time yet.
So what does it all mean?
The remittance basis continues to exist, however the meaning of remittance has been given a new definition. Foreign domiciliaries can use the remittance basis for any fiscal year for which they pay the £30,000 levy. Such individuals may opt in or out of it year by year. Payments must be made per person, and so it may be more beneficial to have one person hold all of a family’s assets. However, the £30,000 is not due unless the foreign domiciliary has been resident in the UK for at least 7 full tax years out of 10 years (effectively biting in the 8th year of residence).
The draft legislation also includes certain provisions by which income or gains that would not have been taxed on a UK resident foreign domiciliary previously will be taxed on him after 6 April 2008. As such, existing structures used to protect UK assets from UK tax will become ineffective from 6 April 2008.
Remittance by or for the benefit of a relevant person will in future be included as a remittance. A relevant person within the draft legislation means an individual or a person connected with the individual. It must be noted that the usual meaning of connected person, i.e. linear relations, is extended to include individuals living with a partner as ‘husband and wife’ or as ‘civil partners’.
Gains made by non-UK companies which would be a close company if it were resident in the UK (i.e. has 5 or fewer individuals as owners) will be attributed to those owners and taxed on an arising basis in respect of UK assets, and on the remittance basis for non-UK assets (to the extent the remittance basis is claimed).
The existing rules which tax trust gains on trust assets in the hands of the settlor or beneficiaries (namely ss. 86 and 87 TCGA 1992) are extended to UK resident foreign domiciliaries. For foreign domiciled settlers, gains realised on disposal of UK assets will be taxed on an arising basis, and gains realised on foreign assets will be taxed on the remittance basis (to the extent that it is claimed).
For beneficiaries the new rules are far more draconian; gains from disposals of foreign assets which are not remitted to the UK may now be taxed when a capital payment is received. Although the changes apply from 6 April 2008, it was feared that HMRC would match capital payments after that date to gains realised by the Trustees before that date (as far back as 17 March 1998). However, HMRC clarified on Tuesday 12 February that their intention was not to impose retrospective taxation and as such this provision may be amended before the final legislation is published (see Sentiment above).
What should you do now?
1. Crystallise gains in what would be a close company (see above) regardless of where the assets are located before 6 April 2008.
2. If a trust owns a low value UK property, consider hiving this down into an EU company, with the eventual exit strategy being to sell the shares of that company.
3. Make gifts abroad between spouses before 6 April 08 with the donee spouse bringing the funds to the UK before 6 April 08.
4. If bank accounts have been closed and sources ceased prior to 6 April 2007, the funds should be remitted before 6 April 2008.
5. Close down s.87 trusts and appoint all the funds to non-UK domiciled beneficiaries.
Tax Tip Two
Switzerland v. UK
The changes to the non-dom rules have resulted in an exodus to more favourable tax regimes such as Dubai and Switzerland. In ITN 77 we commented on the benefits of Switzerland as a tax friendly jurisdiction for relocation. We highlight once again these benefits, directly contrasting the tax treatment of foreign domiciliaries in Switzerland with the UK, and the treatment of trusts for such individuals.
Forfait v. £30,000
Generally, individuals resident in Switzerland are liable to Swiss tax on their worldwide income. However, foreigners moving to Switzerland may opt to be taxed on a lump sum basis known as the ‘forfait’ arrangement. This means that Swiss taxes are levied on the basis of expenses and the relevant standard of living in Switzerland. In most cantons the minimum required taxable income will vary between £110,000 and £225,000 which will be equal a total annual Swiss tax burden between £45,000 and £75,000. All income and gains may be enjoyed by the individual in Switzerland without worrying about the remittance basis of taxation, nor any increases in the agreed tax burden.
Individuals who are resident but non-domiciled in the UK for longer than 7 out of the past 10 years of assessment will only be liable to use the remittance basis on payment of an annual remittance basis charge (RBC) of £30,000. The RBC is a payment to exempt an individual from liability to pay income tax and capital gains, and it is clearly not itself a form of income tax (or capital gains tax) for the purposes of double tax relief. Once the RBC is paid, the foreign domiciled individual will still be subject to UK tax on their offshore income and gains to the extent that such income and gains are remitted to the UK. Thus if the individual wants to enjoy the income and gains in the UK, income tax and capital gains tax will still be payable regardless of the payment of the RBC. This is far less favourable when compared with the Swiss forfait (a one off lump sum tax subject to Swiss federal and cantonal taxes).
Swiss treatment of trusts v. UK treatment of trusts
In ITN 78 we reported that Switzerland had issued guidelines for the taxation of trusts, having ratified the Hague Trust Convention in July 2007, legally ensuring the full and complete recognition of foreign trusts in Switzerland.
As such, a foreign trust is generally not subject to taxation in Switzerland because under Swiss law it is not considered a legal entity. At the level of the settlor, the establishment of the trust has no gift or estate tax consequences; capital gains are generally tax exempt from Swiss tax; distributions to the beneficiaries are taxed as donations, although most donations from parents to children under Swiss law are not taxable; and there is tax protection for the settlor and beneficiaries of a pre-immigration trust who enjoy the forfait arrangement in Switzerland. However, it should be noted that a Swiss resident settlor would have to pay gift tax for setting up a trust, and ordinary Swiss resident beneficiaries would pay income tax on all distributions received.
Compare this with the new rules affecting UK resident (foreign domiciled) settlors and beneficiaries of trusts as explained above, and Switzerland certainly seems like a more viable option for such individuals!
France / Denmark
Treaty termination
On 22 January 2008, the Danish parliament adopted a Bill to allow the Danish Government to terminate the double tax treaty on income and capital between France and Denmark.
We reported in ITN 62 that under the double tax treaty between Luxembourg and France, profits generated by a Luxembourg company from French real estate were not subject to French tax if the Luxembourg company did not have a permanent establishment in France. Neither was the profit subject to Luxembourg tax. The French tax administration amended the double tax treaty to allow the profits to be subject to French tax. Effectively, the same treatment was available under the Denmark / France treaty where a Danish company was used to own French real estate. The termination of the Denmark / France treaty puts an end to this beneficial tax treatment. We have considered other tax efficient ways of owning French property and if you would like any further information please contact one of the IFS team.
Guernsey
Deferral of reporting date
Since 1 January 2008, most companies in Guernsey have been subject to tax at the standard rate of 0%. However, they have an obligation to deduct tax and submit quarterly reports in respect of any distributions (including deemed distributions) and qualifying loans to certain shareholders. The reports should be filed within 15 days of the end of the quarter in which the distribution or loan was made.
The first quarterly reporting period ends on 31 March 2008. Reports in respect of that period should therefore be filed by 15 April 2008. However, the Income Tax Office has announced that, in order to help companies to get used to the scheme, the reporting date will be deferred until 15 July 2008. Reports will therefore be due on that date for the quarters ending 31 March 2008 and 30 June 2008.
In the meantime, there is still no news on whether and to what extent the UK will demand a renegotiation of the Guernsey / UK treaty, although this is anticipated in light of the new Guernsey tax rate. We are keeping a close eye on this and advising some clients on revisions to their offshore structures in light of the uncertainty.
Israel
Yanko-Weiss Holdings (1996) Ltd. v. Holon Assessment Officer (No. 5663/07)
An Israeli District Court ruled in the case of Yanko-Weiss Holdings (1996) Ltd. v. Holon Assessment Officer (No. 5663/07) on 30 December 2007. This case concerned a company that was incorporated in Israel. In 1999, its shareholders met in Belgium and resolved to make it a Belgian resident company by moving the registered office, management and activity to Brussels. The company paid taxes in Belgium and it obtained a residency certificate of the Belgian tax authorities. Subsequently, the company claimed a reduced rate of withholding tax under the Israel-Belgium Tax Treaty on dividends paid from an Israeli resident subsidiary company.
The Israeli assessor claimed that 'management and control' of the company was handled in Israel and therefore the company remained an Israeli resident for domestic tax purposes. An alternate argument of the Israeli assessor was that, even if it would be determined that the company is a Belgian resident under the tie-breaker rule of the treaty, the registration in Belgium was a sham and driven by motives for avoidance of tax only (Sec. 86 of the Income Tax Ordinance). In that case, the assessor would be entitled to disregard the Belgian tax residency and the company's income would remain fully taxable in Israel.
The company taxpayer requested the Court to strike this argument of artificiality posed by the tax authorities, arguing that an internal section such as Sec. 86 of the ITO cannot rule the treaty.
The Court rejected this request by the company, stressing that in situations where there are no business and economic motives for certain actions or structures (substance over form), the Court will allow the tax authorities to argue artificiality in order to block 'treaty abuse'. Therefore, the court ruled that the Israeli Tax Authority is allowed to raise a claim of artificiality, notwithstanding the applicability of a tax treaty.
This case clearly demonstrates the importance that the Israeli tax authorities place on the commercial reality of a transaction, and we therefore reiterate for our Israeli clients what we say in our previous ITN – effective tax planning cannot be done without careful attention to and investment in creating substance.
