16issue sixteen

161113 4 european news

introduction

contents

3

5 usa + caribbean news

6 asia + pacific news

7 legal news

8 fiscal news

9 profile

contact + info10

© The Sovereign Group 2003All rights reserved. No part of this publication may be reproduced, storedin a retrieval system, or transmitted, in any form or by means, electronic,mechanical, photocopying, recording or otherwise, without the priorwritten permission of The Sovereign Group.

The information provided in this report does not constitute advice andno responsibility will be accepted for any loss occasioned directly orindirectly as a result of persons acting, or refraining from acting, whollyor partially in reliance upon it.

Sovereign Trust (Gibraltar) Limited is licensed by the Financial ServicesCommission – Licence No: FSC 00143B.

Sovereign Trust (Isle of Man) Ltd is licensed by the Isle of Man FinancialSupervision Commission as a Corporate Services Provider.

Sovereign Trust (TCI) Limited is licensed by the Financial ServicesCommission – Licence No: 029.

Sovereign Group Partners LLP is regulated by the FSA – No. 208261.

introduction

page 3

chairman

16Sovereign MasterCardUnhappily Axxess International has decided to withdraw from the MasterCard issuing business. Ourapologies to all Sovereign clients who have been affected. We now have an alternative issuer and arein a position to replace the obsolete cards and start processing new applications. Please contact JuliaConnolly in Hong Kong or Marie Pulman in Gibraltar if you would like to obtain a card linked to youroffshore company account.

China and Hong KongChina has initiated the CEPA (“Closer Eco-nomic Partnership Arrangement”) betweenHong Kong and the Chinese Mainland. Underthis arrangement, the usual licensing and capi-talisation requirements applicable to foreigncompanies wishing to establish themselvesin China have been relaxed in relation to HongKong companies either registering in Chinaor setting up wholly-owned subsidiaries. Interms of ease, cost and speed, routing an in-vestment through Hong Kong is therefore anexcellent way of creating a business entity inChina. Our Hong Kong office has details.

Michael Foggo has now left the organisationto set up his own business but continues towork closely with Sovereign. He is replacedby Stuart Stobie who was previously ManagingDirector of the Hong Kong office but thenmoved to head up our office in Gibraltar. Wel-come back to Stuart.

Portuguese property held offshoreTime is running out for those holding a Portugueseproperty through an offshore company to avoid thepunitive new taxes (see page 9). Some action mustbe taken by the end of the year. Whatever arrange-ments are to be made will take time to implement sowe are fast reaching the cut-off point. Nigel Anteney-Hoare could justifiably claim to be a world’s expert inthis rather confusing area so do give him a call in ourPortugal office soonest if you think you may beaffected. Doing nothing is going to be very expensive!

MaltaMalta is the preferred jurisdiction into which to re-domicile offshore companies which own Portugueseproperty. Following an invitation from Professor Ban-nister, Chairman and President of the Malta FinancialServices Authority, our annual conference took placein Malta during the first week in October. The Maltesegovernment kindly hosted a reception for us in thebeautiful walled city of Medina. Many thanks tothem for their kind hospitality.

Sovereign, and in particular Mark Miggiani who heads up our Malta office, was instrumentalin getting new legislation on the statute books which allowed for the redomiciliation of offshorecompanies into Malta and we have a large number of applications underway.

The Sovereign Art FoundationSovereign has established a charitable foundation whose aim is to promote art in Asia. Thefoundation has launched The Sovereign Annual Contemporary Art Competition which carriesa first prize of US$10,000 and is open to any artists who reside in Asia. Entries must bereceived by the end of this year but, initially, it is only necessary to send us an image by e-mail or post. We have an expert panel of judges and there will be an exhibition in Hong Kongfor the final 30 entries during the first quarter of next year. These will be sold at the end ofthe exhibition, with the artists receiving 50% of the proceeds and the remainder being usedto further the charitable aims of the Foundation, such as sponsoring places at the world’sleading art schools. If you are an artist living in Asia then please have a go. Or if you knowof such an artist please encourage them to enter. Further details can be found on the websitewww.sovereignartfoundation.com.

Christmas and New YearWe would like to use this opportunity to wish all our clients, colleagues and friends a veryhappy Christmas and a prosperous New Year. We will not be contributing to the destructionof rainforests by sending out Christmas cards but this doesn’t mean we don’t love you.Instead, we’ll be donating an equivalent sum to charity.

Howard Bilton BA(Hons)

Barrister-at-Law (England, Wales & Gibraltar)

Chairman of The Sovereign Group

16newseuropean

page 4

europe

benefits) are permitted without tax penaltyand there is no tax on capital contributionsand transfers, and no stamp duty. CurrentSwedish controlled foreign company (CFC)rules apply if the income of the participationis taxed at a rate below 15.4%. If the incomeis considered CFC income, the Swedish parentwill be taxed in Sweden on its share.

Sovereign comment

It is interesting to note that Sweden is intro-ducing an attractive holding company regimeat a time when other holding regimes areunder attack from the OECD. It is incon-ceivable that Sweden has introduced thisregime without consultation with the OECDor without taking account of their views, sowhat is happening? The level playing fieldcertainly does not appear to be working.

Sweden introduces new holding company regimeNew changes to the Swedish holding company regime may open Sweden as a competitivealternative to the traditional holding regimes. The regime is expected to be fully effective as of 2004.

The company (“aktiebolag,” is abbreviated to“AB”) is the main entity for conducting businessin Sweden. It may be acquired and held byforeign nationals without any special acquisitionpermits. All corporation shares must be of equalpar value and must total at least SEK 100,000(Euro11,000) – the minimum capitalisation.

As an onshore jurisdiction with a global net-work of tax treaties, a Swedish holding com-pany may provide advantages including: notax on dividends received (for listed shares,the exemption requires at least 10% shareownership and a holding period of 12 months);no withholding tax on dividends or interestpaid and no capital gains taxation. Interestpaid by the holding company is also tax de-ductible and no thin capitalisation rules apply.

Interest-free loans (and other shareholder

Gibraltar finally received passporting rights into the EU and EEA single market forinvestment services in July, enabling Gibraltar-based investment services providers tooperate in other member states on the basis of their Gibraltar authorisation.

The move is likely to spur further growth in the investment services sector, which hasalready seen the number of Gibraltar-licensed investment firms rise from 11 in 1998 to27 in 2003. Similar passporting rights in respect of banking and insurance were grantedin 1999 and 1997 respectively.

Recognition of passporting rights for investment services has also enabled the Gibraltargovernment to bring the Investor Compensation Scheme Ordinance, which was passed by

the House in July 2002, into force.

Deputy Chief Minister Keith Azopardi said:"The Gibraltar government has been nego-tiating this with the British government for nearlytwo years. It is an important development be-cause it will allow Gibraltar’s Finance Centreto grow in yet another area of activity, namelyinvestment services, just as it is currentlygrowing in insurance business.”

The Gibraltar government also welcomeda House of Commons Foreign Affairs Com-mittee report which recommended that theForeign & Commonwealth Office withdrawits unacceptable joint sovereignty proposal,and instead establish normal relations bet-ween Spain and Gibraltar as should be thecase between member states of the EUand their dependent territories.

Gibraltar gains EU “passporting” for investment servicesThe Committee questioned the current nego-tiating arrangements which give the UK andSpain the right to agree measures relating toGibraltar without its consent, except in casesaffecting sovereignty which require a ref-erendum. It instead supported a reversion tothe policy of not sanctioning any proposals con-cerning Gibraltar without its specific consent.

The Foreign Office said it does not acceptthe main conclusion in the report, that jointsovereignty was unacceptable.

Sovereign comment

Gibraltar has long been touted as havinga unique advantage due to its full mem-bership of the European Union – it doesnot have to comply with the common agri-cultural policy, the imposition of VAT andthe common tariffs and trades directive,but is otherwise a full member of the EUfor all purposes. But the reality was thatthe EU membership was only of benefit ifit gained Gibraltar companies these pass-porting rights. Gibraltar has quite diligentlyimplemented EU directives which are notbeneficial but, despite this, had struggledto gain full passporting rights. This latestdevelopment does give investment busi-nesses the full advantage of EU membership.

Isle of Man will not applyretrospective KYC checksThe Financial Supervision Commission said it will

not be introducing compulsory retrospective Know

Your Customer (KYC) checks after the UK Financial

Services Authority abandoned a similar proposal

because of fears of disruption to financial institutions

and service providers.

The UK's largest banks agreed instead to employ a

simpler risk-based system which would minimise the

disruption to their day-to-day business.

Under existing rules, financial service providers

in the Isle of Man are expected to identify new cus-

tomers by carrying out the KYC tests, but this does

not apply to clients who pre-existed the introduction

of the KYC rules.

The Financial Supervision Commission issued the

150th Corporate Service Provider (CSP) Licence in July.

It has now considered all outstanding applications although

a final decision has been deferred in a few cases.

Sovereign comment. Sovereign’s Isle of Man

office was long ago granted its CSP license. There

are still many businesses operating in the Isle of Man

which have neither been granted a licence nor been

required to cease operating. We believe there is little

point in having a regulated system if companies

which require a licence are allowed to continue doing

business without one.

usa + caribbean news

16usa+caribbean

page 5

that the displacement or 'outburdening' bythe EU of tax enforcement burdens to theCayman Islands and other colonies whichreceive no benefit from the EU distorts eco-nomic competition, particularly when the EUis offering much less onerous burdens tiedto substantial economic benefits to othercountries, such as Switzerland."

The European Commission reported thatreciprocal deals with Monaco, San Marinoand Andorra were within reach. But EU inter-nal market commissioner Frits Bolkesteinwarned that Liechtenstein remained unwillingto co-operate. "The Commission has askedthe EU to apply pressure on Liechtenstein,"his spokesman said.

Sovereign commentWe believe that the Cayman Islands will haveno choice but to toe the EU line. This is furtherclarification of the determination of the UKgovernment to make the Cayman Islands dowhat it says, irrespective of any other judg-ments the Cayman Islands may obtain in theEuropean or other courts (see Issue 15 fordetails). Both Cayman and Bermuda havethreatened to seek independence if they areforced to introduce legislation against theirwill, but this seems unlikely because theirstability and good reputation rely partly ontheir strong British connection.

UK makes tax law threat to Cayman IslandsUK Chancellor Gordon Brown threatened to legislate to force the Cayman Islands to complywith European Union savings tax directive. The Chancellor, who led the way in demandinga system of exchange of information between EU tax authorities, told fellow EU financeministers in Italy on 14 September that the British overseas territory had not yet told theTreasury how it intended to apply the new rules.

In response to German finance minister HansEichel, who asked for assurances that all theUK's territories had fallen into line, Brown saidthat Guernsey, Jersey and the Isle of Man wouldapply a withholding tax regime similar to thatpermitted in Austria, Belgium and Luxembourg.

The British Virgin Islands, Turks & Caicos Is-lands and Montserrat had also indicated theywould comply with the new EU rules. ButBrown admitted that the Cayman Islands hadnot come forward with proposals, and he wouldlegislate if necessary. "It would probably bethrough a Treasury order – secondary legis-lation," said the Treasury.

In a letter to the European Commission, theCayman government questioned the legitimacyof efforts to compel the Caribbean OverseasTerritories to go along with the savings directiveand reiterated its desire for formal discussionsunder the procedure available to associatedand dependent territories of EU member states.

"The government," it said, "is very concerned

IRS issues summons to identify tax evadersThe US Internal Revenue Service (IRS) has, for the first time, issued a summons to a lawfirm for the primary purpose of obtaining the identities of the investors in what the IRS hasdetermined are potentially abusive tax shelters.

The IRS received approval from the US DistrictCourt for the Northern District of Illinois toserve a John Doe summons on Jenkens & Gil-christ, asking the law firm to identify taxpayerswho may have invested in listed transactionsor other potentially abusive transactions org-anised or sold by the firm’s Chicago office.

This is the latest step in a comprehensive stra-tegy by the Treasury Department, the IRS andthe Department of Justice to combat abusivetax avoidance transactions by requiring promptdisclosure of potentially abusive transactionsby taxpayers and promoters.

Since 2002, the IRS has issued 268 summon-ses to 35 promoters to examine their com-pliance with the registration and list main-tenance requirements, by requesting informationand investor lists. Of these, 78 involving sevenpromoters have been referred to the Depart-

Swiss/US clarify treatylimitation on benefitsThe Swiss and US authorities agreed to clarify thederivative benefits test in the limitation on benefits articleof the 1996 Switzerland-US tax treaty and the accom-panying memorandum of understanding (MOU).

The agreement provides that a US resident will qualifyas a resident of a North American Free Trade Agreement(NAFTA) party if the US resident is: an individual residentin the US; a political subdivision of the US or the USitself or instrumentalities thereof; or a publicly tradedcompany incorporated in the US.

There was previously doubt about whether USresidents could be taken into account in meeting thetest's ownership rules, because "the US does not havea comprehensive income tax convention with itself."

Sovereign comment. Limitation of Benefitsclauses simply state that if the recipient company is notowned by residents of the recipient territory then thetreaty will not apply. This modification is an extensionto the principle because, for example, it may be that aSwiss company is owned by residents of another state.In this case the US would either apply the tax treatywith that other state or, if the owners of the recipientcompany are residents of a non-treaty country, then notreaty relief would be available. Under certain cir-cumstances these anti-avoidance rules can be veryuseful in a tax planning exercise because transparentstructures owned by residents of treaty countries canbe used to collect income tax free.

ment of Justice for enforcement.

The IRS has also established a new nation-wide partnership agreement to share infor-mation about abusive tax avoidance schemeswith the 40 participating state authorities.

Sovereign comment

There is a general move around the world tomake advisors liable for the actions of theirclients and, in particular, to cite advisors asaccessories to tax fraud if they can show thattheir clients have set up structures whichhave been used in an abusive manner. Again,the emphasis is on tax evasion whichgenerally means lying on your tax form. Anyperson is still entitled to arrange their affairsin a tax effective manner but those arrange-ments should be made within the laws andthis is rarely going to be easy or inexpensive.

16asia+ pacific

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newsasia + pacific

South Africa issues draft regulations for tax amnestyDraft regulations, finally released for comment on 18 August, have significantly extendedthe scope of the Exchange Control Amnesty & Amendment of Taxation Laws Act of 2003.

The Act provides amnesty in respect of voluntary disclosure by South African resident taxpayers,of contraventions of exchange control (excon) measures. It also covers failure to comply withdomestic tax legislation to the extent that these contraventions relate to undisclosed foreign assets.

Applicants can be natural persons, close corporations, trusts or deceased estates. Offshoretrusts are included if the applicant was the settlor or is a beneficiary. Local and offshorecompanies are excluded unless the applicant is a "related party" to the company, meaninga director or shareholder. Levies of 5% and 10% are applied to a successful applicant whereassets are returned to South Africa or left overseas respectively. Assets are then also disclosed

apply as a facilitator, but only if the unrelatedshareholders apply for the amnesty together.The draft regulations now allow, for purposesof calculating a levy, offshore loans to be de-ducted from the market value of offshoreassets that serve as security for the repay-ment of the debt.

With regard to domestic tax, the draft reg-ulations clarify that the 2% levy will be leviedonly once in relation to a particular amount.This means that for undisclosed income thatwas donated to an offshore trust, the 2% levywill not be payable on both the amount pre-viously undisclosed and the amount donated.

The draft regulations have not affected theperiod of the amnesty, which is still plannedto end on 30 November, after which no fur-ther amnesty applications will be accepted.The amnesty commenced on 1 June 2003.

Sovereign comment

The tax amnesty unit said it had received1,010 applications by the end of August,but would not disclose how much moneywas involved. The uncertainty surroundingthe legislation, which was amended fourtimes, and the subsequent delays in issuingregulations have made taxpayers reluctantto apply.

to the SA Revenue Service and will be taxedin future years.

Under the draft regulations, the amnestywill now include tax that would otherwisehave arisen on direct or indirect donationsby an SA tax resident to an offshore discre-tionary trust.

The Act stated that companies could applyfor amnesty as facilitators only if they werewholly-owned by the applicant or their relatives.This has now been extended to cover com-panies where all the shares are held by anSA trust and all the beneficiaries of the trustare related.

Where unrelated people jointly hold the sharesof an SA company that facilitated an exchangecontrol or tax violation, this company may also

Jebel Ali introducesoffshore companiesThe Dubai government has introduced offshorecompanies by bringing the Jebel Ali Free Zone (JAFZ)Offshore Companies Regulations 2003 into effect on15 January 2003. The regulations were made by thechairman of the Dubai Port, Customs & Free ZoneCorporation under laws Numbers 1 and 4 of 2001.

Jebel Ali Offshore Companies must have a minimumof one shareholder, two directors who must be indivi-duals, and a local registered agent who must belicensed by the Dubai authorities. The legislation isbased on Jersey law but, for the time being, incor-poration times can be slow.

The UAE Federal Cabinet approved a FederalDecree to allow the Dubai International Financial Cen-tre (DIFC) a large degree of sovereignty. The decisionmust now be ratified by the Supreme Council. TheDIFC must also be granted a specific decree toestablish it as a Financial Free Zone.

Sovereign comment. Sovereign was one ofthe first organisations to be approved by the Dubaiauthorities as a registered agent. The fact that Dubaispecifically, and the UAE generally, are not membersof the OECD and not listed as harmful tax regimesshould mean that the jurisdiction will not have to intro-duce exchange of information into its laws. Jebel Alioffshore companies may therefore be of interest tothose who wish to retain a degree of confidentialityover and above that which will be found in thetraditional OFCs.

The Reserve Bank of India (RBI) has imposed a ban on overseas corporate bodies (OCBs),prohibiting them from investing in India in any privileged form, and 'derecognising' them asinvestment vehicles.

India bans investing through Overseas Corporate Bodies

OCBs are companies or partnerships in whichmore than 60% of the shares are held by non-resident Indians (NRIs). In November 2001,the RBI prohibited OCBs from investing in theIndian stock market under the portfolio invest-ment scheme. But they were still permitted toopen non-resident accounts, and to makedirect investments.

In a statement issued on 16 September, theregulator said: “It has been decided, in con-sultation with the government, that henceforth,OCBs shall not be permitted to make freshinvestments under the FDI scheme and inother investments, deposits or loans underthe various routes/schemes available to non-residents under exchange control regulations.”

The decision to ban OCBs outright followsthe recommendations of a joint parliamentarycommittee tasked to investigate Mauritius-

based OCBs. Tax disputes with the govern-ments of regional powers such as SouthAfrica and India were highlighted as a poten-tial problem in a recent Financial SectorAssessment on Mauritius published by theIMF and World Bank.

Sovereign commentIt is clear that many resident Indians weresetting up OCBs to re-invest money backinto India, often using overseas relatives asowners. In short, the privileges granted tothese OCBs have been abused so it is notunsurprising that action has been taken. Butthis does not mean that Mauritius is no longeruseful for genuine foreign investors. TheMauritius/India treaty continues to be therecommended and preferred route for gen-uine non-Indian nationals to invest into India.Cyprus would be another alternative andSovereign has offices in both jurisdictions.

page 7

16legal

legal news

clared a sham. They argued that as settlor,Sheikh Fahad had exercised "substantialand effective control" over the trust.

The Royal Court held that a trust deedwould not be held to be a sham unless boththe settlor and the trustee had the necessary‘shamming’ intention. It found, on the facts,that they had both intended there to be agenuine discretionary trust on the terms ofthe trust deed. The plaintiffs’ case, said theCourt, would have failed even if it was suf-ficient that the settlor alone had a shammingintention, because it was satisfied thatSheikh Fahad had no such intention.

Sovereign commentBanks and other financial institutions fre-quently use trusts as a way of capturing in-vestment clients with the promise that they

FATF revises anti-money laundering standards

The major changes include: specifying a list ofcrimes that must underpin a money launderingoffence; expanding the customer due diligenceprocess for financial institutions; enhancingmeasures for higher risk customers and trans-actions, including correspondent banking andpolitically exposed persons; strengtheningtransparency requirements through informationon the beneficial ownership of companies ortrusts; and prohibiting shell banks.

Anti-money laundering measures will also beextended to designated non-financial busi-nesses and professions including casinos,real estate agents, dealers of precious metalsor stones, accountants, lawyers, notaries andindependent legal professions, and trust andcompany service providers.

South Africa and the Russian Federation havebeen admitted as full members of the FATF

following an assessment of their systemsfor combating money laundering and ter-rorist financing.

The FATF has removed St Vincent & theGrenadines from the list of Non-CooperativeCountries & Territories (NCCTs). The cur-rent list of NCCTs is: Cook Islands, Egypt,Guatemala, Indonesia, Myanmar, Nauru,Nigeria, Philippines and Ukraine.

Sovereign comment

Although the FATF is a sub-division of theOECD, it concerns itself solely with moneylaundering whereas the OECD has a muchbroader, and sometimes unwelcome, agenda.Many of the countries on the list of NCCTsare perceived as international pariahs andbusinessmen should be wary of doing busi-ness with them.

The Financial Action Task Force (FATF) issued a revised set of Forty Recommendationsto combat money laundering at the conclusion of its plenary meeting in Berlin in June.The revision makes significant changes, which when combined with the Eight SpecialRecommendations to combat terrorist financing, create a substantially strengthenedinternational framework.

Jersey Court rules on sham trustsThe Jersey Royal Court ruled that a trust deed will not be held to be a sham unless boththe settlor and the trustee have the necessary intention to make it so.

In Abacus (CI) Ltd v Sheikh Fahad Mohammad al Sabah, handed down on 13 June, theCourt dismissed a claim by Grupo Torres (GT), a Spanish-based subsidiary of the KuwaitiInvestment Office, against the assets of the trust, to enforce a judgment against thecompany's former chairman, Sheikh Fahad Al-Sabah, for having defrauded it of US$430mbetween May 1988 and October 1990.

The Esteem Settlement was one of a numberof trusts established in several jurisdictionsby Sheikh Fahad between 1981 and 1994. In1999 the UK High Court found Sheikh Fahad,his wife and son liable for having conspiredto defraud GT and ordered them to pay a totalof US$800m.

GT lodged a claim on the assets in the Jerseytrusts. In a first hearing, the Royal Court heldit could not order the trustee to pay out assetsto Sheikh Fahad's creditor because it wouldnot be for his benefit. But GT was successfulin a second action for restitution of 'tainted'assets within the trust that were traced directlyto the fraud.

In a further action to secure “untainted” assets,GT and Sheikh Fahad's trustee in bankruptcyasked for the Esteem Settlement to be de-

Caricom toestablish CaribbeanCourt of JusticeThe regional governments of the Caribbean Com-

munity (Caricom) signed legal instruments for the

establishment of the Caribbean Court of Justice

(CCJ) on 4 July. This will replace the British Privy

Council as the final appellate court for members.

An inauguration date had not yet been finalised,

but heads of government have agreed a start-up

date in the second half of 2003 and steps to bring a

regional Judicial & Services Commission into oper-

ation are underway.

Caricom members are: Antigua & Barbuda;

Bahamas; Barbados; Belize; Dominica; Grenada,

Guyana; Haiti; Jamaica; Montserrat; St kitts & Nevis;

St Lucia; St Vincent & the Grenadines; Suriname;

and Trinidad & Tobago.

Sovereign comment. International business

interests will not necessarily be best served by a

locally-empowered final court of appeal and it may

be that they will prefer to use other jurisdictions

which will continue to be part of the British legal

system for settlement of commercial disputes. We

believe that this may be an argument for preferring

British overseas territories rather than those

independent territories who are moving away from

the British legal system.

can remain in control of their money duringtheir lifetime. Indeed this phraseology is oftenused in the marketing literature. It isn’t possible!

You cannot have the advantages withoutsome of the disadvantages, and settlorsshould be used to the idea that their sug-gestions to the trustees may be rebuffed. Iftheir ideas are accepted without any dis-cussion they should question whether thetrustees are doing their job properly andprotecting their long term interests.

16fiscal

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newsfiscal

Sovereign commentThere is no level playing field here. Nearlyevery other EU/OECD member state hasregimes for holding companies or other “ring-fenced” tax regimes which have been identi-fied by the OECD as harmful. But none ofthese countries are doing anything aboutrepealing their legislation and, indeed, Swedenhas only just introduced a new and very at-tractive holding company without causingcomment. For now, our advice would be torefrain from using Swiss holding structuresuntil the matter is clarified. There are plentyof other holding structures which give equalor better advantage and none of these appearto be under current attack from the OECD.

OECD threatens Switzerland with tax blacklisting

Although there is no special holding companystatus under federal Swiss law, holding com-panies qualify for total exemption from incometax while paying a low corporate tax rate inmost cantons. Dividends from a qualifiedsubsidiary also benefit from the participationexemption rule.

Switzerland, which abstained from joining theForum when it was established in 1998, isthe only OECD member to be named by thebody. In June 2000, the Forum listed Switzer-land as among dozens of developed countrieshaving 'potentially' harmful tax practices. AnOECD spokesman said that since then,Switzerland had not changed its tax practices.

The OECD has threatened to place Switzerland on its “harmful tax” blacklist according toa leaked internal report. The Swiss finance ministry is engaged in talks with the OECD'sForum on Harmful Tax Competition to resolve the issue.

OECD reports on access to bank information for tax purposesThe OECD Council considered issues relating to access to bank information for tax purposes.It failed to secure agreement on a draft recommendation for improving access to bankinformation for tax purposes, but 28 members accepted a common understanding of tax fraudand 26 agreed to take appropriate initiatives to achieve, by 31 December 2005, access tobank information for the verification of tax liabilities and other tax administration purposes.

In April 2000, the Committee on Fiscal Affairs published a report, "Improving Access to BankInformation for Tax Purposes", which set out a standard of access to bank information, that“all Member countries should permit access to bank information, directly or indirectly, for alltax purposes so that tax authorities can fully discharge their revenue raising responsibilitiesand engage in effective exchange of information with their treaty partners.”

In 2003 the Committee undertook a formalreview of the steps taken by member coun-tries. It found there had been positive dev-elopments in implementing several measures:anonymous accounts could no longer beopened in any OECD country, customer identi-fication requirements had been establishedin all OECD countries, and no OECD countrystill required a domestic tax interest to obtaininformation for a treaty partner.

But there were also key areas where littleprogress had occurred. A common under-standing of tax fraud had not yet been agreedby all 30 member countries and few develop-ments in the area of access to bank informationfor civil tax purposes had been reported.

It noted that in response to the OECD’s Harm-ful Tax Practices initiative, 32 jurisdictionshad made political commitments to engagein effective exchange of information for criminaltax matters for tax periods starting from 1

January 2004 and for civil tax matters for taxperiods starting from 2006.

A number of these jurisdictions had alreadynegotiated or were in the process of nego-tiating Tax Information Exchange Agreements(TIEAS), which required access to bank infor-mation for both civil and criminal tax purposes.

Since 2000, the US had signed TIEAS withAntigua & Barbuda, the Bahamas, the BritishVirgin Islands, the Cayman Islands, Guernsey,Isle of Man, Jersey and the Netherlands Antil-les. Other OECD members such as Ger-many, Ireland, the Netherlands and Spainwere in the process of negotiating similaragreements with the committed jurisdictions.

Sovereign comment

Confidentiality is dead! By the end of next yearthe US will have TIEAs with all the offshorejurisdictions. Under these agreements the UScan get whatever information it requires aboutthe tax affairs – and ownership of offshorecompanies and trusts – in order to tax its citi-zens correctly. Other nations are also nowcommitted to implementing TIEAs with therelevant OFCs and the OECD and EU are alsorequiring exchange of information. In short,any tax planning must be well thought out andcapable of withstanding scrutiny from the hometax authority of the client. Reliance on confi-dentiality has never been good tax planningbut now it is even more likely to end in tears.

EU proposes to extend Parent-Subsidiary DirectiveThe European Commission has issued a proposal toextend the scope of the parent-subsidiary directive. Theminimum shareholding requirement for a parent companyto own a qualifying shareholding in its subsidiary wouldbe reduced from 25% to 10% and, where the parentcompany tax regime eliminates double tax for underlyingtaxes on the dividend from the subsidiary through aforeign tax credit rather than by exemption, the require-ment for full foreign tax credits would be extended tolower-tier subsidiaries in a chain of ownership as wellas the directly-held subsidiary.

Where the member state in which the entity is esta-blished treats the company as a corporation for taxpurposes, but another member state, whose residenthas an interest in the entity treats it as transparent, thatmember state would also be obliged to extend thebenefits of the parent-subsidiary directive to the residentwith an interest in the entity.

Sovereign comment. One of the major barriersto using this directive for tax planning purposes is thecondition that the recipient company must not be exemptfrom tax in its country of tax residence. This still leavesconsiderable scope for tax planning. Locating a holdingcompany in the Netherlands, Luxembourg, Denmark,Spain, UK or other EU member states can be extremelyadvantageous and reduce both withholding and corporationtaxes. Other jurisdictions such as Malta and Cyprus mayalso be useful when they become full EU members.

     

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profile

16profilethe current assessed value of the property.If the property has been owned for a longtime, or the declared price was very low,then the resulting tax may be extremely highand may make this option very painful. Asa result, unless the property was purchasedrecently and the full price was declared onthe purchase deed, a transfer back to indi-vidual ownership may be prohibitivelyexpensive.

The alternative would be to re-domicile thecompany into a jurisdiction that is not on theblacklist. It is not possible to re-domicile acompany unless the legislation of the placeof incorporation allows a company to be re-domiciled out and the legislation of thejurisdiction into which you are attempting tore-domicile the company allows for re-domi-ciling in. Although there are many countriesthat are not on the Portuguese blacklist, thislimitation means that in practice the onlysuitable jurisdictions into which a companycan be redomiciled are Malta, Delaware andNew Zealand.

We believe that Malta is the best of these.Delaware is cheaper and may seem attrac-tive but we doubt the wisdom of re-domicilinga company into the USA – one of the harsh-est tax environments in the world. For manyclients, New Zealand will seem too remote.Malta has the advantage of having recentlybeen removed from the Portuguese blacklistas a result of recent changes to its tax sys-tem. It also has a tax treaty with Portugaland is due to become a full member of theEuropean Union as of 1 May 2004.

In our opinion, this makes it extremely un-likely that Malta will be blacklisted again by

DEADLINE LOOMS FORPORTUGUESE PROPERTY OWNERSIf you own property in Portugal through an offshore company structure, newPortuguese legislation intended to reform the property tax system may havea significant – and costly – impact.

“Many property owners

are failing to react to

warnings and are doing

nothing. This could be

a big mistake.”

For many years purchasing Portuguese pro-perty through an offshore company has beenfavoured as the most effective way to ownhigh-value property. But the Reforma do Patri-monio, which was passed on 30 July andcomes into force on 1 January 2004, introducesa large tax increase for property owned bycompanies incorporated or domiciled inoffshore jurisdictions which appear on a Portu-guese government blacklist.

This blacklist covers most of the traditionalOffshore Financial Centres (OFCs), includingGibraltar, Isle of Man and British Virgin Islands– all favoured jurisdictions for Portugueseproperty holding.

The new proposals introduce a municipal taxequal to 5% of the tax department or rateablevalue of any property held by a company in ablacklisted jurisdiction. Further, under legislationintroduced in 2002, such companies will be assu-med to be receiving a notional rent equal to1/15th of the tax department value of the property,irrespective of whether they are actually in receiptof rent or not. This assumed rent will be taxedin Portugal at the standard rate of 25%.

Clearly, these new taxes make offshoreownership of Portuguese property veryunattractive.

SOLUTIONS TO THE PROBLEMExisting offshore property owners have twopossible options: pay capital gains tax andpurchase tax to bring the property onshore, ortransfer the domicile of the offshore companyto an acceptable – non-blacklisted – location.A number of factors – not least the currentvalue of the property and the price registeredin the purchase deed – will influence the bestcourse of action.

Many owners are considering winding up theiroffshore company and transferring the propertyinto their individual ownership, but this will betreated as a sale and therefore the usual taxespayable on resale will apply. The transfer taxesand associated expenses can be considerablebut the bigger bill may well be capital gainstax. Capital gains tax will be payable at a rateof 25% on the difference between the priceregistered in the property purchase deed and

Portugal. Significantly, the Maltese govern-ment also believes this possibility to be veryremote. In recent discussions with the relevantMalta authorities they indicated to us that theywould strenuously challenge any move todiscriminate against Maltese companies inthis way.

PROCEDURE TO REDOMICILERe-domiciling a company will involve payinga one-off fee to prepare the documentationrequired by both the outgoing and incomingjurisdiction. This fee would normally be in theregion of £2,000 to £3,500. Higher chargeswill be incurred in the case of Channel Islandcompanies where documentation and legalfees are more expensive. Increased annualrunning costs for the redomiciled companyare also likely to be incurred but the total costsinvolved may well be insignificant whencompared to the taxes payable for transfer ofthe property to the individual owner or thecosts of doing nothing and becoming liableto pay the 5% annual tax.

DON’T DELAYMany property owners are failing to react towarnings and are doing nothing. This couldbe a big mistake. Any property which is stillowned by a company incorporated in a black-listed jurisdiction on 31 December 2004 willbe subject to the first 5% annual tax. Failureto pay may result in the Portuguese govern-ment placing a charge against the Portugueseproperty with the possibility of an eventualforced sale of the property to recover the taxesdue. Doing nothing is not really an option.

Sovereign’s Portuguese office has consider-able expertise in this area and is currentlybeing deluged with enquiries from both pro-fessional firms, our own clients and clients ofother organisations. We strongly advise alloffshore Portuguese property owners totake urgent action and seek expert advice.

contacts + info

page 10

information

Germany: Dr Norbert BuchbinderTel: +49 (0)911 92668–30Fax: +49 (0)911 92668–39de@SovereignGroup.com

Denmark: Jan EriksenTel: +45 44920127Fax: +45 43690127dk@SovereignGroup.com

Cyprus:Vassos HadjivassiliouTel: +357 22676519Fax: +357 22679079cy@SovereignGroup.com

British Virgin Islands:Susannah MusgroveTel: +1 284 495 3232Fax: +1 284 495 3230bvi@SovereignGroup.com

Bahamas: Alan ColeTel: +1 242 322 5444Fax: +1 242 325 8445bh@SovereignGroup.com

Gibraltar: Mike JonesTel: +350 76173Fax: +350 70158gib@SovereignGroup.com

Portugal: Nigel Anteney-Hoare United Kingdom: Simon DentonTel: +44 (0)20 7389 0555Fax: +44 (0)20 7930 1151uk@SovereignGroup.com

Sovereign Group Partners LLPGerry Scanlon, Neil Pidgeon

Tel:& Hugh de Lusignan

Sovereign Accounting Services

+44 (0)20 7389 0655

capital@SovereignGroup.com

Stephen BarberTel: +44 (0)20 7389 0644Fax: +44 (0)20 7930 4749sas@SovereignGroup.com

United States of America:William H. ByrnesTel: +1 305 579 5344Fax: +1 305 579 5345usa@SovereignGroup.com

Fax: +44 (0)20 7930 0502

Sovereign EducationWilliam H. ByrnesTel: +1 305 474 2468Fax: +1 305 474 2469edu@SovereignGroup.com

Uruguay: Walter OteroTel: +598-2 900 3081Fax: +598-2 900 1932uy@SovereignGroup.com

Tel: +351 282 340480Fax: +351 282 342259port@SovereignGroup.com

South Africa, Cape Town:Timothy MertensTel: +27 21 418 4237Fax: +27 21 418 2196sact@SovereignGroup.com

South Africa, Johannesburg:Alex BurgerTel: +27 11 886 7728Fax: +27 11 781 3083sajb@SovereignGroup.com

Spain: Richard MeltonTel: +34 952 764168Fax: +34 952 825637spain@SovereignGroup.com

Turks & Caicos Islands:Tennille DarvilleTel: +1 649 946 2050Fax: +1 649 946 1593tci@SovereignGroup.com

United Arab Emirates:Kevin O’Farrell & Cecilia D’CunhaTel: +971 4 3976552Fax: +971 4 3978355dubai@SovereignGroup.com

Hong Kong: Stuart StobieTel: +852 2542 1177Fax: +852 2545 0550hk@SovereignGroup.com

Tel: +44 1624 699800Fax: +44 1624 699801iom@SovereignGroup.com

Malta: Mark MiggianiTel: +356 21 339 218Fax: +356 21 322 531ml@SovereignGroup.com

Mauritius: Ben LimTel: +230 208 1747Fax: +230 208 1736mu@SovereignGroup.com

Tel: +31 (0)20 428 1630Fax: +31 (0)20 620 8046nl@SovereignGroup.com

Isle of Man: Paul Brennock

Netherlands: Susan Redelaar

Sovereign Asset Management LtdChris LabrowTel: +350 41054Fax: +350 41036sam@SovereignGroup.com

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