IFS - Information Zone

• If the asset is located in Ireland, or
• If the asset is located abroad, and the deceased or beneficiary is resident or ordinarily resident in Ireland.

With effect from 1 December 2004, a foreign domiciled person will not be considered resident or ordinarily resident in the State unless he/she was resident for the five consecutive years of assessment preceding the date of the benefit and on that date is either resident or ordinarily resident in the State. 

Canada is similarly an interesting option (albeit further afield).  Our friends at Stikeman Elliot LLP have contributed the following analysis on the tax treatment of new residents: 

• Offshore income and gains arising in a foreign trust can be accrued tax-free for up to five years;
• Income and gains arising in the foreign trust can be capitalised and later distributed without tax to Canadian beneficiaries; 
• Permission to immigrate is readily available to wealthy foreigners and their families, though the status takes a year or more to process;
• New residents meeting physical presence requirements may apply for citizenship (passport) after three years; and 
• Unlike the US, Canada has no estate or gift tax and it does not tax non-resident citizens.

It must be noted that income and gains earned outside the foreign trust or from Canadian sources is fully taxable for the new residents.   

For those of you thinking about leaving the UK (if you haven’t done so already), we always advocate that considerable thought is given to the impact this has on family, social and business lives – tax shouldn’t be the main driver. 

Germany

Tax reforms 

2007 will be remembered as the year in which Germany made big changes to its tax law (although Prince Alois may not agree – see below).  The 2008 Corporate Tax Reform Act is the highlight of the year, introducing groundbreaking changes which aim to give an additional push to the German economy.  A first draft of the 2008 Tax Act has also been published.  Key features of both are as follows: 

• A reduction in the corporate income tax rate from 25% to 15%.  Taken together with changes to the trade tax rules, the combined German tax rate will come down to approximately 29.8% from approximately 38.65%. 
• A new earnings-stripping rule to replace the thin capitalization rules, which limits the maximum net interest deductions to 30% of EBITDA, regardless of whoever the lender is or whether long-term or short-term lending is given.  These are seen as a downside of the tax reforms, as for many leveraged German companies they may absorb the advantages of the tax rate deductions. 
• Write-down of shareholder loans are generally not tax deductible.  For fiscal years from 2008 onwards, this rule is to be extended to write-downs by shareholders that hold directly or indirectly more than 25% of the shares in a corporation or by related persons or third parties with recourse to shareholders or related persons.  But an exception will be made if it can be proved that a third party would have granted the loan under the same circumstances. 
• German controlled foreign company (CFC) rules are not to be applied when it can be proved that an EU or EEA company (the “controlled” company) is undertaking a real active business and is not an artificial construct.  This follows from the 2006 case of Cadbury Schweppes when the ECJ decided that the UK CFC rules violate EU freedom of establishment principles. 
• New anti-abuse provisions which provide that a tax cannot be avoided by an abuse of legal forms.  The use of a legal vehicle inappropriate to the substance of the transaction to obtain an illegitimate tax advantage, will lead to taxes being assessed unless a convincing non-tax motive is shown.  Notaries will now be required to forward copies of the documents to the locally responsible tax office when registering branches of foreign companies.

Germany is clearly a fast-moving tax environment and we are working with our German colleagues on ways to make use of the new rules for our clients.    

Liechtenstein

Probes into Europe’s tax havens 

Over the past few weeks, there has been some considerable scrutiny of what exactly is going on inside Europe’s last few tax havens by those tax authorities that feel they are not getting a fair share. 

The UK’s tax authority has confirmed that it has paid an informant for data regarding British citizens who have bank accounts in Liechtenstein. The aim is to establish whether the taxpayers in question have made proper disclosure of these bank accounts – you can’t help but suspect they have not been declared! 

There have also been reports that the UK is turning its sights on wealthy British nationals who keep their money in Monaco. Chancellor of the Exchequer Alistair Darling (he certainly gets around), and European finance ministers will meet this week at the Economic and Financial Affairs Council (ECOFIN) where it is thought they will discuss plans to charge anyone in Europe who deposits money in a Monaco account. 

Separately, Germany is involved in its own probe over Liechtenstein accounts using data also from an anonymous informant, who was reportedly paid €5m (£3.7m; $7.4m) for information. In response, Prince Alois of Liechtenstein, a little upset with these happenings, has reportedly uttered the following: 

“An international study has ranked the German tax system as the worst in the world – even behind Haiti.  Germany would do better to use its tax revenues for the improvement of its own tax system, rather than spending millions on stolen data”. 

Germany now seems to have the bit between its teeth, and is rallying its European counterparts, especially the UK and France, for a clamp-down on the continent’s last tax havens, forcing them to co-operate more fully with their neighbouring countries. At least HMRC only paid a fraction of what the Germans did. 

The Dutch have also joined the party, with the Information Directorate of the Dutch Ministry of Finance publishing a press release on 27 February in which it was indicated that The Netherlands and Germany had contacted each other about data concerning bank account holders in Liechtenstein and that it is intending to carry out its own investigations.  

In these current times, the UK, Germany and The Netherlands may find truth in the saying “Better the devil you know, than the devil you don’t”.  It is thought that Singapore, the world’s fastest growing private banking centre, could be the main beneficiary from the Liechtenstein probe because its bank secrecy and trust laws governing inheritance are among the tightest in the world.  Once funds have left the continent, it may indeed prove more difficult (and costly?) to secure such information, although this type of “tax planning” is certainly not what we would advocate… 

Spain

Requested to amend ‘discriminatory’ anti-abuse rules 

The European Commission has sent Spain a formal request to amend its discriminatory anti-abuse rules in its corporate tax law according to which income originating from specific Member States or territories of the EU is taxed more heavily than domestic income. The Commission considers these rules incompatible with the freedoms of the EC Treaty. This request is in the form of a reasoned opinion, the second stage of the infringement procedure under Article 226 of the Treaty. If Spain does not amend its law within two months, the Commission may refer the case to the Court of Justice. 

According to the request, there are three aspects of the Spanish legislation that constitute infringements of EC law: 

• Tax treatment of dividends distributed by companies established in particular Member States  

Under Spanish law, dividends distributed by companies located in certain Member States or territories of the EU, in which a Spanish company holds a participation of more than 5%, do not benefit from tax exemption while such an exemption would be granted if dividends were distributed from companies located in Spain or in other Member States. According to Article 56 of the EC Treaty all restrictions on the movement of capital between the Member States shall be prohibited. 

• Spanish "Controlled Foreign Company" legislation  

Under Spanish CFC legislation, the profits of a subsidiary established in Member States or territories of the EU qualified as tax havens are immediately taxed in the hands of the Spanish parent company and not only at the time of distribution. According to the Commission, the Spanish legislation is contrary to Art. 43 of the EC Treaty (freedom of establishment) since it is applicable, in general, even to parent companies controlling subsidiaries carrying out economic activities in those territories and not only to "wholly artificial arrangements" as it is accepted by the ECJ. 

• Non-deductibility of depreciation provision  

Under Spanish law, the provision for depreciation related to holdings in companies resident in the above-mentioned tax havens is not tax deductible. The Commission considers that rule as a restriction on the freedom of establishment (Art. 43 EC Treaty) and the free movement of capital (Art. 56 EC Treaty) as it creates a higher tax burden on resident investors in those companies and dissuades them from investing in those EU Member States.