Issue 82 - 10th April 2008

Sentiment 

‘It’s a complete shambles. You’re a disgrace. You’re fired!’ so says Sir Alan Sugar on the UK reality game show The Apprentice as he points his finger to the unlucky candidate. We all know the Peter Principle where people are constantly promoted until they reach the job that they are incapable of performing. And haven’t we got the perfect example in the UK’s beleaguered Chancellor of the Exchequer? 

I have just been reading the parts of the Finance Bill that relate to the new legislation affecting ‘non-doms’ and am incensed. English is my mother tongue which I have spoken for my entire life. I am an avid reader, and read a book recently written partly in ancient Anglo-Saxon. I have to say that the Finance Bill is even more incomprehensible!  I don’t mind complexity – after all that’s how I earn my living – but I do object to incompetence. And this even seems to have been recognised by the Government; it has since announced that elements of the Finance Bill itself will be changed as it proceeds through Parliament.  However, these are significant changes which have a material effect on what people previously understood was going to be the legislation. And of course the Finance Bill was different from the Budget Notes, and the Budget Notes were very significantly different from the draft legislation emanating out of the Pre-Budget Report in November 2007. Terminal 5 may indeed be a shambles but it will be back to normal in a week (fingers crossed!) – this country’s appeal to foreign individuals has taken a severe wound which will take much longer to heal. 

So in summary, a month or so ago in a recent ITN, I ended very politely with the words ‘Move Over Darling’. Now, I am going to be more robust and say ‘It’s a complete shambles. You’re a disgrace. You’re fired!’ 

On to more domestic matters, Miles has been away skiing last week (‘again’, did I hear you say!) where his son James won top prize in his class, a feat that Miles has always aspired to yet never achieved. In the meantime, his slaves, Binne, Ilonka, Lara and Zoe and I have been beavering tirelessly away during the first glimpse of spring that we briefly saw last week. Next on the calendar is a trip to Gibraltar and Marbella for Miles (The Flying Yorkshireman). I am then off to Zurich the following week with him (after which Miles may make his way to Lech in the Arlberg for two final days skiing before the end of the season!), and then off to Paris for a very well earned 5 day break with my wife Sonia. Next is the TTN Conference in New York which Miles and Zoe are attending, followed by International Tax Planning Association conference in Cyprus on the 19-21 May where I will be attending as an Executive Committee member, together with Lara as one of ITPA’s newest members. Binne and Ilonka are up in Glasgow in a week’s time for client meetings, and Binne is then off to Eastern Europe for client work later this month (so we will now have The Flying Dutchman as well as The Flying Yorkshireman). If you would like to meet any of the team while we are on our travels please do feel free to get in touch. 

Happy reading! 

Tax Tip 

The so-called “IOM partnership scheme” has been closed down by the Budget 2008 (see BN66 “Double Taxation Treaty Abuse” for specific details) with retroactive effect to 1987.  

UK tax is avoided by the establishment of two interest in possession trusts which together form an Isle of Man partnership.  The scheme is designed so as to ensure that the income realised by the partnership continues to belong to the UK resident, as beneficiary of the foreign trust. 

This structure was commonly used for undertaking UK real estate development projects.  We have always been quite blunt when clients have asked us about this structure; it doesn’t work!  A scheme devised so that a UK resident individual who has UK property development activities is able to make a profit subject to no tax and bring it all back into the UK for his enjoyment will never find favour with HMRC – unsurprisingly.   

If you have been affected by these anti-avoidance measures and would like a reality check of what can still be done to minimise tax on property developments please contact us. 

EU / Netherlands

ECJ Opinion on real estate IHT transfer tax 

The Dutch Supreme Court asked for a preliminary ruling from the ECJ in respect of case Arens-Sikken v. Staatssecretaris van Financien (C-43/07). AG Mazak gave his opinion regarding the rules on Dutch inheritance tax affecting residents and non-residents.   

In the Netherlands residents and non-residents are taxed differently on inheritances received.  A resident testator’s assets are subject to inheritance tax.  For non-residents, inheritance tax is levied only on certain Dutch source assets such as immovable property. 

For residents, when calculating the Dutch IHT due on immovable property, any debts relating to the property are subtracted from the value of the property, before levying IHT.  In addition if the inheritor has other debts to settle out of the funds of the property (over-endowment debts) as instructed by the testator, these will also be subtracted from the value of the property. 

However, non-residents are not entitled to subtract over-endowment debts from the value of the property when calculating the amount chargeable to IHT. 

The facts of the case before the AG involved an Italian resident testator who owned a Dutch property.  In his testament the property was left to his wife on the condition that she later paid each of the children the cash equivalent of their share of the estate, i.e. her over-endowment debts.  The Dutch authorities would not allow the wife to deduct these debts from the value of the property when calculating the Dutch IHT liability. 

The AG made the following comments:

• Cross border inheritance is a ‘movement of capital’ within the meaning of Art 56 of the EC Treaty.
• The case was not purely domestic as the immovable property situated in the Netherlands was inherited from a person who was a resident on another Member State.
• Immovable property situated in the Netherlands and inherited from a non-resident person is treated less favourably than a resident person.
• The AG opined that the Dutch legislation constitutes a restriction on the free movement of capital. 

Luxembourg

Improvement to the SICAR  

The Luxembourg SICAR is a regulated investment vehicle used for investments in risk capital.  It is a private equity and venture capital vehicle that can take a number of different forms.  Most notable is the corporate form which, as a general rule, is subject to Luxembourg corporate and municipal tax and (in the view of the Luxembourg authorities) in principle can rely on EU Directives and benefit from Luxembourg’s tax treaty network. Some EU member states (France, The Netherlands) have disputed that the SICAR can benefit from double tax treaties.  

Luxembourg, in a bid to improve the legislative framework of its financial sector, has proposed new measures regarding the SICAR.  The proposals may be summarised as follows: 

• Creating sub-funds or multiple compartments within a SICAR, i.e. an umbrella fund;
• Ability to segregate assets and liabilities;
• Securities may have different par value within each sub-fund;
• Investor liabilities will be limited to each sub-fund;
• Each sub-fund can be liquidated separately. 

These changes coupled with other administrative modifications make the SICAR regime more flexible and make Luxembourg an even more favourable jurisdiction for establishing such funds. 

As a re-cap, the tax advantages of the SICAR are as follows: 

• Normal Luxembourg 1% capital duty is capped at €1,250;
• Income resulting from the sale of securities and from the sale, contribution or liquidation of these assets does not constitute taxable income;
• There is no withholding tax on dividends or liquidation proceeds distributed by a SICAR to its shareholders;
• The return on short-term cash deposits held pending their investment into qualifying targets does not constitute taxable income within a maximum period of 12 months preceding their investment in risk capital. 

Singapore

Budget and new competitiveness 

On 15 February Singapore announced its 2008 Budget.  There were no changes to the corporate tax rate (which is 18%) and no change to the various withholding tax rates in respect of dividends, interest or royalties paid to non-residents. 

However, the message was one of enhancing Singapore as a business centre.  The following measures were announced: 

Tax exemption for start-ups

For start-up businesses there is an exemption from tax on the first SGD 100,000 of normal chargeable income and a 50% exemption on the next SGD 200,000 for the first 3 years.  In order to qualify for this exemption there are 3 conditions to be met; the company: 

• must be incorporated in Singapore;
• must be tax resident in Singapore; and
• the share capital must be held, directly or indirectly, by no more than 20 persons, all of who are individuals. 

This third point has been relaxed; the company’s total share capital must be held by no more than 20 persons, directly or indirectly, all of who are individuals, or of which at least is an individual shareholder holding at least 10% of the total number of issued ordinary shares. 

Financial Sector Incentive

The ‘financial sector incentive’ (FSI) gives a reduced corporate tax rate of 5% to companies which actively contribute to the development of Singapore’s finance industry.  This incentive which was due to expire at the end of 2008 has been extended for a further 5 years. 

Effective 1 April 2008, a new FSI in respect of Islamic Finance will grant a reduced corporate tax rate of 5% for 5 years on income derived from qualifying Shariah investments.   

Tax benefits

Singaporean companies benefit from an exemption on dividends received (provided certain conditions are met), no withholding tax on dividends paid and no tax on capital gains.  It also has an extensive treaty network.  All this should make Singapore an attractive holding company jurisdiction…but in order for dividends receivable to be exempt the profits from which they have been paid must have been subject to tax in the subsidiary jurisdiction. 

By way of example a Singapore company owns a Dutch intermediate holding company.  It is likely that the Dutch company’s profits are exempt in the Netherlands under the Dutch participation exemption on the basis that its subsidiaries have paid tax locally. In this case dividends received in Singapore would be subject to Singaporean corporate income tax. This is something of an anomaly in that had the Singaporean company owned the subsidiaries directly the dividends would be tax exempt; it is the interposition of the Dutch holding company and the application of the Dutch participation exemption which “taints” the income so to speak. 

Last week Binne and Zoe met with representatives of the Singapore government who were actively promoting Singapore.  Binne took this opportunity to explain that if the ‘subject to tax’ condition explained above were repealed then Singapore would be even more attractive as a holding company jurisdiction. So watch this space! 

Turkey

Punishment for tax fraud increased 

On 8 February Turkey’s imprisonment sanctions in respect of tax fraud were increased to combat those involved in so-called ‘grey accounting’.  The falsifying of invoices and other such documents will carry prison sentences of up to 5 years and non-disclosure may lead to a 3 year stretch!   

United Kingdom 

London has lost the opportunity to host the 2010 Champions League Final at its famous Wembley Stadium because of tax reasons.  The English Football Association assured football body UEFA that the non-UK resident players playing at Wembley would not be taxed here.  However, the UK tax authorities did nothing to confirm this and we lost out to Real Madrid’s Bernabeu Stadium.  The chance to host a great sporting event that would have raised considerable revenue for the country from tourism, ticket sales, TV coverage etc has been thrown away because of the short-sightedness and incompetence of the English tax authorities.  

In the Agassi case, the UK tax authorities successfully argued that tennis player Andre Agassi should be taxed in the UK in respect of the matches he played here.  However, they also successfully argued that a larger proportion of his sponsorship income should be apportioned to the UK even though he only spent 2 weeks playing at Wimbledon.  Their argument being that it was the most high profile event in which he participates and so construed that the sponsorship received was primarily because of this event.  This contrasts with the attitude of the German authorities when Germany hosted the 2006 World Cup and the decision of the Dutch authorities to abolish the taxation of non-resident sportsmen and entertainers (as reported in previous ITNs).  The UK continues to block the paths of talented individuals, whether it is sport stars or non-dom entrepreneurs, wanting to contribute to the UK and showcase their talents here.