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Abu Dhabi, Bahamas, Bahrain, British Virgin Islands, Cayman, China, Curaçao, Cyprus, Dubai, Gibraltar, Guernsey, Hong Kong, Isle of Man, Malta, Mauritius, Portugal, Seychelles, Singapore, South Africa, Switzerland, The Netherlands, Turks & Caicos Islands, United Kingdom.

About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

1. About Sovereign 1

2. The Sovereign Group Directory 3

3. Services 7 3.1 Company Formation and Management Services 3.2 International Tax Planning 3.3 Bank Introductions 3.4 Accounting and Auditing 3.5 Trust Creation and Trustee Services 3.6 Residency, Immigration and Citizenship 3.7 Foreign Property Ownership 3.8 Fund Formation and Administration 3.9 Wealth Management 3.10 China Entry and Growth Services 3.11 RegisterAYacht.com (RAY) 3.12 RegisterAnAircraft.com (RANA) 3.13 Pensions Services 3.14 Sovereign Insurance Services (SIS) 3.15 Sovereign Credit Cards 3.16 Trademark and IP Services 3.16 Offshore Gaming Licensing

4. Frequently Asked Questions 23

5. Case Studies 31 5.1 Purchasing a Trading Company 5.2 Structuring Patent Royalties 5.3 Purchasing Property 5.4 Holding Company for Dividends and CGT Planning 5.5 Personal Service Company 5.6 Estate Duty / Inheritance Tax (IHT) Planning 5.7 Obtaining UK Non-Domicile Status 5.8 The Serial Expat – FICs and QNUPS

6. Principles of Corporate and Tax Law 49 6.1 Introduction 6.2 Bases of Taxation 6.3 The Legal Framework 6.4 Confidentiality and International Initiatives 6.5 Death of the Client and Trusts 6.6 Special Types of Companies 6.7 Offshore Funds

7. Trusts and Trustee Services 67 7.1 Introduction 7.2 Advantages of a Trust 7.3 Which Jurisdiction? 7.4 Disadvantages and Solutions About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

6 1. ABOUT SOVEREIGN 1

SOVEREIGN’S CORE BUSINESS is setting up and managing companies, trusts, pensions, insurance and other structures to meet the specific personal or business needs of our clients. Typically these needs would include tax planning, wealth protection, property ownership and facilitating cross border business.

We currently manage over 9,000 structures for a wide variety of clients. We work with public companies, charities and professional law and accountancy firms, but the majority of our clients are individuals – expatriates, entrepreneurs, consultants, private investors, or high net worth individuals (HNWIs) and their families.

We have also developed a wide range of supporting services such as wealth management, specialist tax advice, yacht and aircraft registration, credit cards, fund formation, pension services, residence and citizenship applications, as well as trademark and intellectual property registration and protection. In short we operate like a family office.

The first Sovereign office opened in Gibraltar in 1987 and we now have offices or agents in all the major international finance centres. This global reach enables us to provide local expertise on an international scale and allows our clients access to a global service from a local point of delivery. It also means that, in most cases, business can be conducted in the client’s first language.

At a time when transparency and regulation have risen to the top of government agendas, Sovereign is committed to ensuring that its compliance and legal obligations – and those of its clients – are met. In all jurisdictions that require us to be licensed we have applied for, and been granted, the appropriate authorisation. To obtain these licences, Sovereign has had to demonstrate its financial stability and probity as well as professional competence and integrity and the robustness of its systems.

This brochure is intended as a general guide to the Group and the services that we offer. We would always encourage prospective clients to contact their most convenient Sovereign office for an initial consultation. This can be given without fee or commitment. Should you choose to proceed, we will provide accurate time and cost estimates before undertaking any work on your behalf.

Please also visit our website at SovereignGroup.com. You will find updates to this information together with many other items that may be of interest. You may also wish to subscribe to The Sovereign Report, our quarterly client newsletter that provides news and comment about international tax planning. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

2 2. THE SOVEREIGN GROUP DIRECTORY 3

Abu Dhabi China, Shanghai Sovereign Accounting Services Sovereign (Abu Dhabi) Limited Sovereign (China) Limited (Gibraltar) Limited Tel: +971 2 495 2785 Tel: +86 21 5211 0068 Tel: +350 200 48669 [email protected] [email protected] [email protected]

Bahamas Curaçao Sovereign Asset Management Sovereign (Bahamas) Limited Sovereign Trust (Netherlands Limited Tel: +1 242 322 5444 Antilles) Limited Tel: +350 200 41054 [email protected] Tel: +599 465 2698 [email protected]

Licensed as a Financial Corporate Service [email protected] Authorised by the Financial Services Commission Provider. Licence No. 153/ File No.157 of Gibraltar to conduct investment business

Cyprus Bahrain Sovereign Insurance Services Sovereign Trust (Cyprus) Limited Sovereign Trust Consultancy Limited Tel: +357 25 733 440 (Bahrain) W.L.L. Tel: +350 200 52908 [email protected] Tel: +973 17 1515 71 [email protected]

[email protected] Authorised by the Financial Services Commission Dubai of Gibraltar as a General Insurance Intermediary Sovereign Corporate Services JLT British Virgin Islands Tel: +971 4 448 6010 Guernsey Sovereign Corporate (BVI) Limited [email protected] Sovereign Trust (Channel Islands) Tel: +1 284 495 3232 Limited [email protected] Gibraltar Tel: +44 1481 729 965 Licensed by the British Virgin Islands Financial Sovereign Trust (Gibraltar) Limited Services Commission with a Class I Trust [email protected] Licence (No. CITL12004) Tel: +350 200 76173 Licensed under a Full Fiduciary Licence by [email protected] the Guernsey Financial Services Commission. Reference No: 2005108 Cayman Islands Licensed by the Financial Services Commission of Gibraltar as a Company Manager and Sovereign (Cayman) Limited Professional Trustee. Licence no. FSC 00143B Hong Kong Tel: +1 949 7555 Sovereign Trust (Hong Kong) [email protected] RegisterAnAircraft.com Limited Licensed by the Cayman Islands Monetary Tel: +350 200 76173 Authority with a Companies Management Tel: +852 2542 1177 Licence (No. 558456) [email protected] [email protected]

China, Beijing RegisterAYacht.com Sovereign (China) Limited Tel: +350 200 51870 Tel: +86 10 6582 0268 [email protected] [email protected] 4 5

Isle of Man Portugal Switzerland Sovereign Trust (Isle of Man) Sovereign - Consultoria Lda. Sovereign Trust (Switzerland) LLC Limited Tel: +351 282 340 480 Tel: +41 21 971 1485 Tel: +44 1624 699 800 port@SovereignGroup.com [email protected] [email protected]

Licensed by the Isle of Man Financial Supervision Seychelles Turks & Caicos Islands Commission as a Corporate Service Provider Sovereign Trust (Seychelles) Limited Sovereign Trust (TCI) Limited (Licence No. 43215) and as a Trust Service Provider (Licence No. 43521) Tel: +248 4321 000 Tel: +1 649 946 2050 [email protected] [email protected]

Malta Licensed by the Seychelles International Business Licensed by the Financial Services Commission Authority. Licence No. ICS056 of the Turks & Caicos Islands. Licence No. 029 Sovereign Trust (Malta) Limited Tel: +356 21 228 411 Singapore United Kingdom [email protected] Sovereign Trust (Singapore) Pte Ltd Sovereign (UK) Limited Licensed by the Malta Financial Services Authority WHAT DOES as a Trust Service Provider (Licence no. C26143) Tel: +65 6222 3209 Tel: +44 20 7389 0555 and as a Retirement Scheme Administrator [email protected] [email protected] under Sovereign Pension Services Limited. YOUR VEHICLE (Licence no. C56627) Regulated by the Monetary Authority of Singapore as a Trust Business Licence holder (No. TC 000020-1) Mauritius www.SovererignGroup.com SAY ABOUT YOU? Sovereign Trust (Mauritius) Limited South Africa, Cape Town Tel: +230 403 0813 The vehicle you drive is a reflection of your lifestyle, outlook and taste. A corporate vehicle Sovereign Trust (SA) Limited [email protected] also implies more about your life than you might think – and many owners are unaware of the Tel: +27 21 418 2170 impression they are creating. Licensed as a Management Company. [email protected] Licence No. Mc00006831 A simple offshore structure will rarely achieve any tax benefits, let alone more complex commercial or personal objectives; in fact it may lead to increased tax and restrictions. South Africa, Jo’burg The Netherlands Sovereign Trust (SA) Limited Sovereign Trust (Netherlands) BV Sovereign provides fully compliant international vehicles and structures that will deliver Tel: +27 11 305 7480 Tel: +31 20 428 1630 legitimate advantages to you, your family and your business. They offer genuine performance [email protected] [email protected] and don’t have to be hidden away, allowing you to drive anywhere with confidence.

Licensed as a Trust Company by De Nederlandsche Bank (DNB) [email protected]

Intelligent Offshore Tax Planning

Abu Dhabi, Bahamas, Bahrain, British Virgin Islands, Cayman, China, Curaçao, Cyprus, Dubai, Gibraltar, Guernsey, Hong Kong, Isle of Man, Malta, Mauritius, Portugal, Seychelles, Singapore, South Africa, Switzerland, The Netherlands, Turks & Caicos Islands, United Kingdom. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

6 3. SERVICES 7

First and foremost Sovereign needs to understand you – your personal circumstances, your asset holdings, your business affairs, your requirements and goals. We can then design a structure or structures that will be functional, cost effective and fully compliant. We will never advise our clients to undertake any type of planning that would not be effective if scrutinised by their home revenue authority. We provide progressive solutions that work on both a practical and a legal basis to achieve your personal or commercial objectives.

Sovereign provides the full range of “family office” services that includes, but is not limited to:

• Accounting & Auditing • Aircraft Registration • Asset Management • Banking Introductions • Company Formation & Management • Corporate Structuring & Restructuring • Credit Card Provision • Cross border Tax Planning • Foreign Direct Investment • Fund Formation & Administration • Residency, Immigration & Citizenship • Insurance & Reinsurance • Insurance-based Tax Planning • International Pensions Planning • Overseas Property Ownership • Private Wealth Planning • Ship & Yacht Registration • Trademarks & Intellectual Property Protection • Trust Creation • Trustee Services • VAT Structuring About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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All banks now undertake increased due diligence not just when opening accounts but also when operating them. Different banks require markedly different documentation. Even different branches of the same bank frequently have different procedures. The required documentation is generally voluminous and complicated and many documents require not just certification by the company secretary but notarisation in the jurisdiction of incorporation.

In short, it is increasingly difficult for clients to attend to account opening procedures on their own. It is therefore strongly recommended that Sovereign is asked to assist with a bank introduction and with the preparation and submission of the necessary paperwork. Of course, clients are free to choose their own banks but generally the account will be opened far more quickly, cheaply and efficiently if banks known to, and recommended by, Sovereign are used.

3.4 Accounting and Auditing

3.1 Company Formation and Management Services Companies incorporated in onshore jurisdictions will generally have to prepare and file accounts. Often these accounts must also be audited. In most offshore jurisdictions there is a requirement under local company legislation that directors The Sovereign Group can incorporate companies in most jurisdictions, both offshore and onshore. should prepare accounts and present them to the shareholders at the Annual General Meeting. However, where there is no tax to be assessed on the profits of the company, there is rarely a requirement to present the accounts to any After incorporation, a company will be required to maintain a minimum presence in the jurisdiction of incorporation. government authority or file them on the public register. A legal registered office will always be a necessity and all companies also require a resident company secretary and/or a resident agent. We generally provide these services for all our clients and describe them as “domiciliary services”. Even if the accounts do not need auditing it is good business practice for them to be prepared in accordance with the relevant companies law so that all shareholders and directors have access to – and can be seen to have access to For reasons explained in the Frequently Asked Questions section, we also provide directors for many of the companies – relevant financial information upon which proper business decisions can be made. that we incorporate in order to ensure that its affairs are properly managed and controlled from offshore. In all jurisdictions in which Sovereign operates, we either have in-house accounting services or can recommend a Sovereign is licensed as a corporate service provider in a variety of jurisdictions and our services in this area are range of accountancy firms that we work with closely. described in greater detail later in Section 6 of this brochure. 3.5 Trust Creation and Trustee Services 3.2 International Tax Planning The trust was originally a valuable tax and estate-planning tool available to a broad range of potential clients who, It is relatively straight forward to set up or purchase a company but it is vital to get proper advice on how to structure by transferring assets to trustees located in an offshore jurisdiction, could mitigate the burden of taxation in their the ownership of that company, how it should be administered and how to organise its commercial arrangements. country of domicile or residence. The company itself can be viewed as a commodity; the necessary advice – how to use it and how to ensure that it is structured correctly – most certainly is not. These opportunities have been progressively eroded by legislative measures introduced by many onshore jurisdictions, but they still exist – particularly for those moving their domicile, residence or even citizenship; those whose families Every case is different and a high level of expertise is required to ensure that the advice is up-to-date, effective and are resident abroad; those seeking asset protection; and those whose principal motivation is not to avoid taxation fully compliant. Failure to structure and manage the company correctly could mean that intended tax savings are not but to dispose of their estate on death freely and without recourse to a lengthy and expensive probate procedure. realised and, in some cases, could result in a net increase in the tax payable. The trust is also an increasingly appealing estate planning vehicle in civil law jurisdictions where the trust concept is relatively unknown. Once we have understood your personal and business requirements, Sovereign is in a unique position, through its global network of offices, to advise on a suitable structure which will meet those needs and should result in The lack of rigid formal requirements for the creation and operation of trusts, unlike companies, and the tremendous significant tax savings. flexibility of trust instruments make them a useful vehicle for many commercial purposes. Trusts have long been used in the context of pension funds, unit trusts, employee benefit structures or security trustee arrangements and are a 3.3 Bank Introductions core element of many other commercial arrangements.

Opening bank accounts is becoming increasingly onerous. Many banks will not open accounts for offshore companies. Sovereign is licensed as a provider of trustee services in a variety of jurisdictions and our services in this area are Others will only open accounts for companies that have been introduced to them by a recognised and licensed described in greater detail later in Section 7 of this brochure. service provider on their “approved list”. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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3.6 Residency, Immigration and Citizenship 3.7 Foreign Property Ownership

Countries that “sell their passports” are often frowned upon but the reality is that all countries encourage immigration Sovereign assists many of its clients with the acquisition of real estate worldwide. We advise on tax and structuring and by HNWIs either through granting residency that can lead to citizenship, or granting citizenship itself in return for can manage the transaction process and financing arrangements. With our regional knowledge of property ownership investment – it is just the price and timescale that differs. laws and regulations, along with our tax planning expertise, we can help you reduce any potential exposure.

Equally there are still many countries where the future, politically or economically, is uncertain, which encourages Most people who own or intend to own property abroad will not be fully conversant with local legal procedures their citizens either to emigrate or take out an alternative residency or citizenship as an insurance policy if things at or taxes – stamp duties, municipal and wealth taxes – and may not fully recognise the longer term implications in home take a turn for the worse. If these citizens have money to invest then it makes sense to do so in countries that terms of potential exposures to capital gains tax, inheritance tax or forced heirship rules. Substantial benefits may be will give them some kind of formal status in return. derived through the use of corporate, trust or foundation structures to address these issues.

If you are considering applying for a second residency or passport under any Immigrant Investor Programme (IIP) Issues that would-be buyers need to consider include: there are a number of factors to take into account: • The purpose of the property • The size of the investment required of an applicant to gain residency; • Who will live there? • The length of time it will take for an applicant to become eligible for citizenship; • The legal status of the owner. • The number of days, if any, that an applicant is required to physically reside in a country; • Whether eligibility for citizenship is also extended to an applicant’s spouse or other dependents; Sovereign has long experience in structuring foreign real estate ownership. We appreciate that each family presents • Whether either the proposed or current country prohibits dual citizenship; a unique set of circumstances and will work to balance their residence requirements with their estate planning needs • Whether the proposed country’s passport provides visa free entry to a significant number of other countries; and to structure ownership of real property to the family’s advantage. • Whether the proposed country has any requirements related to education, or management and work experience; • Whether the proposed country has any requirements for military or other service; Through our global office network we have built particularly close relationships, over many years, with lending • The costs of living in the proposed country – including tax rates and tax incidence; institutions, leading agents and foreign lawyers enabling us to offer our clients a seamless and consistently high-level • Whether the applicant’s existing country applies an exit tax or other penalties. service when acquiring real estate across the world.

Many developed countries are refining their immigration policies in order to attract only the best and wealthiest 3.8 Fund Formation and Administration new citizens looking to relocate their families or invest abroad. Each country offers different financing requirements, immigration procedures and benefits to their investors in a bid to keep the market competitive. Recent years have seen a significant growth in demand for bespoke funds but setting up a mutual fund or collective investment scheme can be a time consuming and complex process. Contracting a prime broker or major law or Canada’s IIPs are considered to be the best-proven and well-established residence and citizenship programmes accountancy firm to provide this service can also be very expensive. We offer an alternative at a fraction of the cost. available, while the UK passport is ranked as the best passport to have in terms of visa restriction ratings because it permits a holder to visit the most countries worldwide without a visa. Sovereign can form and administer funds in most major offshore jurisdictions, including – but not limited to – the Bahamas, the British Virgin Islands, the Cayman Islands, Gibraltar, Isle of Man, Malta, Cyprus and Mauritius. In this One of the most recent IIPs developed for the international business elite in the last few years is the Bulgaria-EU capacity, we provide a “turnkey” service consisting of: Investor Programme for Residence and Citizenship, while a less well-known country that offers direct citizenship-by- investment is the Federation of St Kitts and Nevis in the West Indies. Neither of these programmes requires applicants • Formation and licensing of a fund; to physically reside in their country. • Formation and licensing of a fund management company; • Drafting a fund prospectus; Malta, Gibraltar, Spain, Portugal and Latvia all offer residency and visa free travel throughout the EU in return for a • Drafting of agreements between a fund and its management company and service providers (custodians, investment modest investment in property. In Dubai a legal right to residency can be established simply by forming a company. advisors, fund managers, bankers, registrars and company secretaries); • Advice on correct tax structure; Sovereign and its specialist external partners can guide clients through the best available IIPs in order to • Introductions to auditors, bankers and brokers; determine which one will suit them best. We keep up-to-date details on these schemes around the world, • Full fund administration services. with their financial conditions, required investments, financing options, government application fees and requirements for the programmes, time frame to obtain permanent residence and to maintain it, as well as In the Bahamas we are authorised by the Central Bank to license funds, so clients can have a fund up and running requirements for obtaining citizenship. in a matter of days. If required, we can also provide competitive in-house fund administration services through our office in the Bahamas, which is licensed by the Securities Commission of the Bahamas to administer funds, as well as Sometimes described as the “new alternative investment”, IIPs should be treated like an insurance policy – consider through our Gibraltar-based and licensed asset management company Sovereign Asset Management (SAM). acquiring it well in advance before you need it in an emergency. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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3.9 Wealth Management iii. Experienced Investor Funds SAM has wide experience in establishing funds worldwide and coordinating the full range of ancillary services Sovereign Asset Management (SAM) was formed as a stand-alone fully regulated asset management company. The necessary for ongoing fund management. It combines its own expertise with the requisite external licensed service firm is based in Gibraltar – a British overseas territory within the European Union – and regulated by the Gibraltar providers to organise a low cost, efficient fund set up service from start to finish. Financial Services Commission (GFSC). SAM is consequently authorised to passport its services into other EU countries. SAM will guide clients through the process, from establishing the fund through to reviewing documents, integrating SAM provides investment advice and other asset management services to Sovereign Group clients. As an independent trade, prime brokers and market data, establishing reporting formats and timelines, to final launch. SAM coordinates asset manager, SAM is not tied to any financial institution in terms of its products and services and can therefore issuing the prospectus and appoints the custodian, administrator, bankers and auditor. This extends to negotiating offer genuinely impartial advice, as well as enhanced levels of oversight and security, to its clients. the respective fees payable by the fund to such third parties and preparing any relevant contracts.

SAM’s primary role is to leverage the collective strength of its clients in order to access a carefully selected range of SAM also arranges for the provision of authorised directors, as required by local legislation and, as a fully licensed and approved banking and investment services. This ensures that all its clients receive the privileged access and favourable regulated entity, SAM can be appointed as the fund’s Investment Manager, if required. This provides extra comfort to terms that financial institutions would not generally extend to investors with their individual portfolio size. potential investors; it also avoids the need for the client to obtain a separate licence.

In this way SAM’s clients benefit from its expertise and experience to gain additional levels of service and access at iv. Universal Master Fund (UMF) no extra cost. Indeed in certain cases, due to SAM’s enhanced buying power, fees can be reduced in comparison to In addition to the provision of stand-alone fund structures, SAM has established the Universal Master Fund (UMF) – those quoted by banks and investment managers to individuals. a Gibraltar-registered umbrella structure approved by the GFSC – specifically to allow sub-funds to be created with reduced administration costs and regulatory requirements. SAM’s focus is on building strong, mutually beneficial relationships with its clients in order to offer a compelling and bespoke asset management service. SAM will first evaluate a client’s financial background, requirements and The UMF is a Protected Cell Company. This means that each sub-fund operates as an individual cell and is managed objectives before formulating appropriate investment and risk strategies. Its goal is to help you grow your wealth, separately from the other cells. There can be no claim on fund assets from other members of the protected cell enjoy it and pass it on to future generations. structure. Thus any number of fully stand-alone sub-funds can be created for our clients.

The full range of services provided by SAM can be segmented into the following areas: Using the UMF, formalities, documentation and costs are minimised such that the whole process is accelerated significantly and a new fund can be launched in just a few weeks. Initial set up costs can be amortised within the i. Private Clients fund and reimbursed to the client. Investment management and other fees are paid by the fund itself. In particular, SAM will leverage the collective strength of its clients to access the very best banking services and investment clients avoid the need to raise share capital thus considerably reducing their initial financial outlay. opportunities available – and to negotiate the lowest possible charges – on their behalf. • Advisory and Discretionary Asset Management A Gibraltar UMF operates under the Experienced Investor Fund (EIF) rules issued by the European Union and is • Investment Management designed for professional investors, which are defined as those wishing to invest a minimum of €100,000, or other • Private Banking Introductions currency equivalent. • Broker Accounts • Currency Deposits As the investment manager, SAM is able to call on the expertise of the individual client in an advisory capacity where appropriate. Thus a client is able to assist in defining the appropriate strategy, as well as advising on We live in an era when asset security is a fundamental priority. SAM never holds client money in its own name. Funds specific investments. are always lodged with universally recognised custodians. SAM will undertake due diligence on behalf of its clients and will continue to monitor ongoing strength and performance. v. Online Trading Fund Platforms SAM has developed strong relationships with reputable fund providers and maintains a close dialogue in order to SAM also offers a Summit Account service that is specifically targeted at clients who require both commercial banking monitor performance and investment strategies on an ongoing basis. Our Online Trading Fund Platforms offer a for their entrepreneurial activities and asset management and investment banking in order to preserve and grow carefully selected range of approved funds to ensure all SAM investors receive privileged access and favourable their wealth. terms, regardless of portfolio size. ii. Sovereign Family Office (SFO) • SAM Fund Platform (SFP) provides SAM clients with portfolio management and online trade execution tools on SFO has two strategic goals – to preserve existing wealth and to enhance future growth. Every HNW family is unique a platform offering over 5,000 Morningstar-rated Funds (equity, fixed income, multi-asset) in all major currencies but many family office issues are similar – asset structuring, investments, global custody, due diligence, reporting, tax and other products such as Bond Wrappers or Structured Notes. SFP is an execution only service. and succession planning, as well as family and corporate governance. We will consolidate the complexities of your family affairs and business interests into an integrated and well-regulated process that will assist all generations.

About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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3.10 China Entry and Growth Services With the expertise of in-house specialists in market research and consulting, corporate formation, and accounting combined with the management of HR and legal services, Sovereign China provides the tools and support to enable The Chinese Market clients to focus on making their China businesses a long-term success. With double-digit growth rates in the past three decades, the People’s Republic of China has become the world’s second largest economy after the United States. China’s Gross Domestic Product (GDP) reached nearly US$8.3 trillion i. Market Research and Consulting in 2012. It is also the world’s largest manufacturing economy, as well as the largest exporter and second largest Entry and/or growth in the China market can be significantly more challenging than in more developed countries importer of goods. China has become one of the key markets that foreign companies wish to penetrate. due to: • the size and diversity of the country – geographically China is equivalent in size to the US but with multiple cultures This rapid growth can be attributed to two factors in China’s recent history: the “open-door policy” implemented and languages; in 1978 that has drastically helped to promote foreign trade and set up the foundation for economic reforms; and • the lack of reliable official or centralised data – China is not a “free” society and information is carefully guarded; China’s acceptance into the World Trade Organisation (WTO), which led to a surge of trade and goods from US$509 • the constant and extremely rapid change – China’s economic system is not in equilibrium. billion in 2001 to US$3.7 trillion in 2012 – representing a Compound Annual Growth Rate (CAGR) of 20%. Sovereign China offers consultancy services both to companies considering market entry in China and to companies Despite the challenge of the 2008 global economic crisis, China has continued to exceed expectations. Although already established in China that are considering market expansion. Our methodology, including extensive primary China’s GDP growth rate has been slowing due to the government’s recent attempts to establish a more sustainable research, provides clients with the information on the market dynamics, future trends, customer or consumer economic growth model, its trade balance is still going strong. China remains one of the top destinations for Foreign preferences, and the competitive landscape that will enable them to make informed decisions and minimise the risk Direct Investment (FDI) in the world, with FDI inflows reaching US$112 billion in 2012. of conducting business in this rapidly changing market. Each engagement is customised for the specific needs and objectives of the client to help develop optimal solutions for entry and growth in the China market. With more than 1.3 billion people – representing 20% of the world’s population – China is the world’s most populous country. As the Chinese economy continues modernising, there has been a developing urbanisation With hundreds of consulting assignments successfully executed across multiple industries, Sovereign China is phenomenon in China with an estimated urban population of 690 million. The urbanisation rate is predicted to positioned to help its clients accelerate their time to market and to mitigate many of the risks of operating in an grow by 1% for the next two decades, which is equivalent to urbanising 300 million people in 20 years. As a result, emerging market. China’s emerging middle-class with an annual salary of over US$8,000 is fast expanding and is projected to exceed 400 million people by 2020. ii. Company Formation Sovereign China has extensive experience across the entire spectrum of business entities in China, from simple The Chinese market is highly fragmented with 34 administrative units, including 23 provinces, five autonomous representative offices to more complex foreign investment enterprises such as Wholly Foreign Owned Enterprises regions, four municipalities – Beijing, Chongqing, Shanghai and Tianjin – directly under the jurisdiction of the central (WFOEs) and joint ventures. We have served clients across a wide range of industry sectors that includes logistics, government, as well as two special administrative regions (SARs) – Hong Kong and Macau – that are both semi- trading and distribution, ICT-Internet, communication and technology, automotive, aerospace and marine, industrial autonomous and self-governing. China’s cities are informally ranked into a tier system according to population, and manufacturing, as well as financial and investment. Our consultants have developed an extensive network of historical status and levels of economic development and infrastructure. Beijing, Shanghai, Guangzhou and local connections to expedite business registration projects and to negotiate favourable incentives for large Foreign Shenzhen, are generally considered to be the “first tier” cities because their economies are the most advanced and Direct Investment (FDI) projects. are saturated with major international companies. However there are still significant growth opportunities in second tier cities such as Nanjing, Chongqing and Tianjin, third tier cities such as Suzhou, Qingdao and Dalian, as well as Nobody understands your business better than you do. Sovereign China does not just provide candid advice, we fourth tier cities such as Tangshan and Yangzhou. ensure that our clients are well briefed on China’s regulatory and business environment so that they can make informed decisions. We are also aware of the questions that clients may not, but should, be asking in the context of The Chinese market is highly fragmented and most industries are underdeveloped, with inconsistent or non-existent China, enabling us to provide all the answers that clients need for market entry. regulations. China’s business environment also lacks independent institutions, which means there is low transparency in both state and local government operations. Foreign companies often find it difficult to operate in an environment iii. Accounting and Back Office Outsourcing where foreign invested companies are held to a higher standard than locally invested firms. It is therefore vital for Sovereign China also provides a wide range of business support services tailored to the needs of representative foreign companies to conduct adequate market research and analysis to assess their entry strategies in China and offices and newly established foreign invested companies in China. Sovereign China can assist companies of all sizes choose the best option to ensure smooth corporate set up procedures. Companies should also adopt and update with their accounting needs. market strategy as the business and regulatory environment evolves if they are to maintain a long-term successful business presence in the market. Due to China’s unique and complex labour regulations, managing back office administrative processes can be a daunting task for any company. Our clients work with us because we provide a seamless integration with their China Sovereign China operations – from a full back-office outsourcing solution to standard tax and regulatory compliance. As clients’ needs Sovereign China was created by the merger of Sovereign’s existing China operations with the JLJ Group in 2013. It change, our services will adapt accordingly. Sovereign China provides clients the freedom to focus on their business has offices in Shanghai and Beijing. The JLJ Group was established in 2003 to accelerate international clients’ ability objectives while we take care of their administrative needs. We work exclusively with foreign invested enterprises so to understand and operate in the China market and has successfully assisted more than 500 companies from over 50 our bilingual accountants understand our clients’ needs – often before they do. countries with their China market entry. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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3.11 RegisterAYacht.com (RAY) 3.12 RegisterAnAircraft.com (RANA)

RegisterAYacht.Com (RAY) is a Gibraltar-based company, formed in 2000, to provide marine corporate and RegisterAnAircraft.com (RANA) is the aviation division of The Sovereign Group. Combining the experience acquired administration services to yacht owners, as well as to maritime law firms, yacht managers and brokers and other over 20 years in the field of aircraft registration and offshore company management, Gibraltar-based RANA offers a professional firms involved in the yachting industry. complete range of professional and highly tailored services to aircraft owners and operators worldwide.

As the marine division of The Sovereign Group, RAY combines the expertise of a dedicated team focused on Aircraft can be registered in the name of the owner, but registering an aircraft in the name of a company or special meeting the needs of yacht owners together with Sovereign’s 25-years of experience in the provision of corporate purpose vehicle (SPV) provides a number of distinct advantages. Access to corporate limited liability and enhanced management and financial services. levels of confidentiality may be the most immediate, but a company structure also offers significant potential benefits in respect of inheritance tax and succession issues, as well as reducing transfer fees in any future sale of the asset. Initially established to register vessels under the British Red Ensign, RAY is now registering, administering and managing yachts – both pleasure and commercial – on a worldwide basis. All such corporate structures must comply with the current legislation in the home country of the beneficial owner and with international standards. With over 25 years experience in the field, Sovereign is well placed to advise on Registration is the principal test of a vessel’s nationality. In these days of ever more complex regulations, yacht these issues. owners must give careful consideration to selecting the most suitable Port of Registry to ensure that it reflects their profile and needs. Each Port of Registry has different regulations in place, offering their own advantages and, in Whether a client is purchasing a new or a used aircraft, or simply re-registering an existing aviation asset, some cases, disadvantages. RAY can assist yacht owners to make the right decision. RegisterAnAircraft.com will liaise with aircraft manufacturers, dealers and brokers at all stages of the process.

As part of the registration process, we can also apply for and assist with radio licensing and the registration of RANA is able to advise on the most appropriate registry for your aircraft. Issues such as the proposed use and EPIRB devices or any satellite equipment installed on board. RAY is a fully accredited Accounting Authority as part operating base of the aircraft, the cost of registration, customer service and ease of process, geographical location of the Sovereign Group, which owns and operates GK21, a Gibraltar-registered and internationally recognised and language will all need to be considered. In addition to its comprehensive knowledge base, RANA benefits from Accounting Authority. its established contacts with aircraft registries in Europe, the Caribbean, the US and elsewhere.

Registration of a yacht in the name of a company can provide enhanced confidentiality of ownership, as well as a RANA’s comprehensive range of aviation-related services includes: means to pass assets on to heirs without liability to estate duties or inheritance tax. • Private and corporate aircraft registration worldwide • Corporate ownership and more complex structuring, as required Generally some form of legitimate mitigation of potential VAT liabilities is available both for pleasure and commercial • Client representation throughout the purchase and registration process yachts, particularly when the yacht is purchased through a corporate structure. The options will depend on a • Tax planning, including VAT and customs duties comprehensive assessment of a yacht’s ownership, the operational requirements, as well as the personal financial • Liaison with finance houses and brokers circumstances of the owner. RAY is able to assist and guide owners as to the most suitable options and, if required, • Liaison with insurance firms and brokers obtain sound VAT advice from independent and reputable advisors within the yacht industry. • Crew payroll and pension services • Bespoke aviation consultancy covering both the corporate and commercial airline sectors For buying or selling a yacht, RAY can liaise on behalf of a client with agents and brokers and will arrange for all the • Aviation photography necessary documentation to transfer the title and successfully complete the purchase or sale. 3.13 Pension Services RAY also offers full yacht management services including: • Yacht Insurance Sovereign Group subsidiaries hold licences to act as pension trustees in Gibraltar, Isle of Man, Guernsey and Malta. • Yacht Finance Each company provides a complete range of professional and highly tailored pension services to private individuals • Accounting and companies. • Crew Administration • Payrolls, Foreign Exchange and International Payments The pension plans we manage are established so that the underlying investments are not subject to tax; with careful • Banking and Card Facilities planning the pension fund can therefore be continued until retirement on a tax free basis.

Sovereign Group’s comprehensive range of pensions services includes pension trustee provision for: • Qualifying Recognised Overseas Pension Schemes (QROPS) • Qualifying Non-UK Pension Schemes (QNUPS) • International Individual Pension Plans • International Company Pension Schemes • “White labelling” schemes for specific firms are available where appropriate. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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The principal benefit in transferring a UK Pension to a QROPS is that the UK requirements in later life are avoided. SIS has the capability to provide bespoke insurance products to suit a client’s requirements. The company is licensed by The member can therefore use the pension fund during their lifetime; any unused assets within the scheme at the the Gibraltar Financial Services Commission to act as an insurance intermediary for general insurance business within time of the death can then be passed on to the member’s estate or named beneficiaries. the European Economic Area (EEA) but also has strategic partnership arrangements with a series of underwriters and brokers throughout the international insurance community so as to be able to meet a client’s insurance requirements The principal benefits of using a QNUPS include: anywhere in the world. • No UK inheritance tax is levied on the underlying investments in the pension plan. With careful planning such taxes may also be avoided in the member’s current country of residence and forced heirship issues may be eliminated. 3.15 Sovereign Credit Cards • No limit on the amount that can be contributed into a QNUPS. This is attractive to high rate taxpayers whose pension contributions are capped in the UK. A credit card is a convenient way to pay business expenses incurred in relation to an offshore company but it is • No age limit for a member who wishes to set up a QNUPS; some benefits must be taken if the member is 75-years generally quite difficult to obtain a credit or debit card for an offshore company account. old or above but, if planned carefully, this is itself an opportunity for potential tax savings. • You may benefit from a QNUPS even if you are UK resident and/or domiciled. Some banks are willing to provide cards, but only if a deposit is lodged with the bank that is often up to three times greater than the available monthly credit limit. For this reason Sovereign now offers the Sovereign MasterCard, which 3.14 Sovereign Insurance Services (SIS) is secured by a deposit corresponding to 125% of the monthly credit limit. All transactions are processed offshore.

Insurance is one of the most effective ways to manage any risks that could diminish the lifestyle that you’ve built for 3.16 Trademark and IP Services yourself and your family. Developing an insurance portfolio that will not only protect your assets but also provide liquidity is a vital part of the wealth management process. Sovereign Insurance Services (SIS) provides the insurance The Intellectual Property (IP) associated with a business name or system can be one of its most valuable assets – but component of the Sovereign Group’s product menu. only if it is properly protected. Any business that wishes to establish a national or international identity should take steps to protect the use of its name, logo or other IP. This is preferably done at the outset when it can be done more SIS was initially established to provide a retail insurance broker service capability to the Group. Following a merger quickly, easily and cheaply. with Quest Insurance Services, SIS has now evolved further to provide retail, international and reinsurance broking services to the expanding international client base of the Sovereign Group. For instance, many people do not realise that simply registering a company or Internet domain name gives no monopoly on that name and does not prevent others from registering similar names in the same jurisdiction and Based in Gibraltar but with a presence in London – the centre of the international insurance industry – SIS is in a identical names in other jurisdictions. position to provide the full range of insurance broking services that any Sovereign client may require. Its role is to work for the Sovereign client, not the insurer, and to provide the most suitable insurance products for your needs at The only effective way to guard against this happening is to register a trademark or service mark in each jurisdiction the most competitive pricing levels available in the international insurance markets. in which one wishes to be protected or intends to carry on business.

SIS can advise on all types of general or life insurance but, based on our clients’ profiles, we aim to provide a wide Some short cuts are available – registering a trademark in the European Union provides cover in all EU member range of insurance products including (but not limited to): countries, while registering under the Madrid Protocol covers a number of other countries. Generally the starting point is to register a trademark within one country that is a party to an international convention. This then gives the • Home and Contents Insurance for primary residence or secondary homes applicant a six-month window in which to file in other countries and gain priority, e.g. the same verification date as • High Value Home Contents and/or Personal Effects Insurance for items such as jewellery, artworks and antiques. the date of filing in the first country. This allows other registrations to progress when time and available funds allow. • Private Yacht Insurance for sailboats, motor yachts and other watercraft. • Private and Corporate Aircraft Insurance. Given the importance of trademarks, and intellectual property generally, to modern businesses, Sovereign has • Motor Insurance. established an intellectual property division that offers the following services: • Private Medical Insurance. • Travel Insurance. • Registration of trademarks anywhere in the world and advice on a suitable trademark programme. • Life Insurance for whole of life or term life. • Monitoring service to advise when others attempt to register similar marks. • Key Man Insurance to compensate a business for the financial loss on the death or critical illness of a key employee. • Advice in relation to all aspects of intellectual property registration including designs, patents and copyright. • Personal Accident/Illness and Income Protection/Disability Insurance. • Advice and proactive assistance to protect intellectual property rights from infringement and other abuse. • Major Illness (Trauma) Insurance. • Patent and petty patent registration. • Business Insurances for Office Pack Insurance, Public Liability and Professional Indemnity. • Domain name registration and escrow services • Directors & Officers Insurance. • Tax Insurance. • Kidnap and Ransom Insurance. 20 21

3.17 Online Gaming Licensing

Applying for and obtaining an online gaming licence is a complex process due to the volume of legal and regulatory documentation that must be assembled, prepared and filed. Sovereign has developed unrivalled expertise in licensing online casinos worldwide.

A dedicated Gaming Licence team, including a number of in-house international barristers and corporate lawyers, has been established to assist with applications to most reputable online gaming jurisdictions. We can steer clients through the entire licence application process, providing them with a “one-stop-shop” advisory service, including:

• Online casino company incorporation • Online gambling licence application • Online gambling software registration • Bank account opening and administration services • Book-keeping, accounting and external auditing services • Bank accounts • Payment Systems • Web hosting and co-location • Data protection audits ‘Witness from Baghdad’ by Halim Al-Karim, 2010 Sovereign Asian Art Prize finalist • Website terms and technology contracts • Branding and trademarks

Sovereign also benefits from its extensive links with regulators in key jurisdictions – including Malta, Gibraltar, Cyprus THE ART OF TAX PLANNING and Curaçao – where stringent standards are in place to protect both operators and their customers. Sovereign is proud to be sponsoring The Sovereign Art Foundation for the 10th consecutive year - helping it to make the world a better and more artistic place.

Sovereign offers charity to its clients too. We form charities and foundations to help our clients with their charitable aims. And to ensure they have more to give we offer a comprehensive family office service including wealth management, tax planning, asset protection, company and trust formation.

Contact us for an exploratory conversation. [email protected]

www.SovereignGroup.com

Abu Dhabi, Bahamas, Bahrain, British Virgin Islands, Cayman, China, Curaçao, Cyprus, Dubai, Gibraltar, Guernsey, Hong Kong, Isle of Man, Malta, Mauritius, Portugal, Seychelles, Singapore, South Africa, Switzerland, The Netherlands, Turks & Caicos Islands, United Kingdom. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

22 4. FREQUENTLY ASKED QUESTIONS 23

Q. What can Sovereign do for me? A. Sovereign provides specialised tax advice with an emphasis on international opportunities. Our services will be of use to anyone wishing to minimise current or future tax liabilities, for themselves, their family or their business. To assist with this, Sovereign establishes and administers secure and efficient corporate and trust structures for expatriates, businesses, entrepreneurs, private individuals and families.

Q. What is the difference between tax avoidance and tax evasion? A. Tax avoidance is doing everything possible within the law to reduce your tax bill. Learned Hand, an American judge, once said in a US Court of Appeals case: “There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible – nobody owes any public duty to pay more than the law demands.”

Tax evasion means paying less tax than you are legally obliged to – normally by concealing the true facts or failing to complete your tax return correctly. There may be a thin line between the two but, as former UK chancellor Denis Healey put it: “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”

Q. What are the benefits of using offshore structures? A. Offshore structures can be used to defer or save tax, increase confidentiality and help preserve assets. International Financial Centres (IFCs) were traditionally characterised by low or no taxes, less onerous compliance requirements, and secrecy. Recent initiatives, led by the Organisation for Economic Cooperation and Development (OECD) against financial secrecy and by the Financial Action Task Force (FATF) against money laundering have obliged all IFCs to increase transparency and regulation, and to permit the exchange of information for both criminal and fiscal matters. This means that, under certain prescribed circumstances, the beneficial ownership of an IFC structure can and must be revealed upon request by an inquiring tax authority. But confidentiality will not be of paramount importance to anyone undertaking legitimate tax mitigation rather than illegitimate tax evasion.

None of this means that offshore structures are any less useful but it is absolutely critical to arrange the ownership and management of an offshore structure correctly if they are to be effective. For instance, it is usually imperative that entities are administered by a board of directors that is based offshore. By using a combination of offshore companies, life insurance contracts and offshore trusts, Sovereign is able to create structures that legitimately and legally defer or avoid tax in the taxpayer’s home country. Legal opinions confirming the effectiveness of these structures can be obtained on behalf of clients and are available upon request.

Q. Can I act as a director of an offshore company? A. Yes, but this will generally make the offshore company liable to tax on its worldwide income in the owner’s home country because the company would then be “managed and controlled” in the owner’s home country rather than in the IFC. For example, an offshore company with UK resident directors will be subject to UK tax on its worldwide income because it is managed and controlled in the UK and the directors would be duty bound to inform the UK tax authority. That’s the law in the UK and the same principle is applied in most high tax countries.

Q. Can I “instruct” the directors of an offshore company? A. Yes, but by doing so you may be acting as a “shadow director” and the directors would be duty bound to inform the UK tax authority that the company was managed and controlled from the UK. This risk was emphasised in two recent UK Court of Appeal decisions – R v Dimsey and R v Allen – involving a Jersey-based accountant who acted as director of a number of Jersey companies that were beneficially owned by a person resident in the UK. The beneficial owner regularly issued instructions to the Jersey accountant and effectively made decisions on the management of the company. The courts therefore found that the UK person was a “shadow director” and, as a result, that the companies were resident in the UK for tax purposes. It followed that both the accountant in Jersey and the UK resident had failed in their duty to declare the liability of the Jersey companies to UK tax. The beneficial owner was jailed for tax evasion and the Jersey accountant was jailed for collusion for his part in “rubber stamping” the transactions of the companies. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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Q. Can Sovereign provide directors? A. Yes, but you should be aware that there is no such thing as a “nominee” director. Directors provided by Sovereign will consider (and may agree to) commercial suggestions that would be of benefit to the company but they will not act in any way that is improper, illegal or immoral. It is not sufficient for professional directors merely to appear to manage and control the affairs of the company from offshore; they must be able to demonstrate clearly that they do so. Should they delegate their authority back to the beneficial owner, or anyone else for that matter, it would have tax consequences for the company and create potential liabilities for the directors.

This danger was highlighted by the Weavering judgment in the Cayman Islands in 2011 when the Grand Court found two directors (who just happened to be the younger brother and stepfather of the investment manager) of a failed hedge fund guilty of “wilful neglect or default” in exercising their supervisory powers as directors. It said they “went through the motions of appearing to hold regular quarterly board meetings” and “provided an ‘administrative service’ in that they signed documents or took responsibility for documents when asked to do so (by the investment manager) without making any enquiry or attempt to understand their content.” In its decision Q. Can I hold shares in an offshore company anonymously? the court held, for the first time, that the two directors (who were fully indemnified in respect of corporate A. Shares can be issued to nominee shareholders provided by Sovereign and this would certainly increase the level losses, except as a result of “wilful neglect or default”) should be personally liable for the resultant corporate of confidentiality. However this does not relieve the beneficial owner of their duty to report their interest, if so losses. They were ordered to pay $111 million each in damages to the fund’s liquidators. required, to their home tax authority. The OECD now requires all IFCs to implement exchange of information procedures so that details of the beneficial ownership of offshore companies may be revealed to an onshore tax Q. Will I lose control of my assets? authority upon request. These procedures were implemented by 2003 in relation to criminal tax matters and A. You will give up direct control of your assets by placing them in the company and, for the reasons explained in the by 2005 for civil tax matters. Identifying the beneficial owners of legal persons (companies) and arrangements previous answers, this company must be managed and controlled by the offshore directors. But you will retain (trusts) are also key Recommendations of the Financial Action Task Force. the ability to regain control whenever you wish because the agreement with Sovereign will state that all officers provided by Sovereign will resign upon request. Q. So is there any confidentiality left offshore? A. All professionals and directors who are entrusted with somebody’s personal or private matters owe a duty of Q. What other safeguards do I have where Sovereign provides directors? confidentiality to that person. Where professional directors and nominee shareholders are employed, information A. You must have a certain level of trust in your service provider and for that reason you should only use companies about beneficial ownership is not available for public inspection. This is the case both onshore and offshore. that can demonstrate a good track record of providing fiduciary services. They should also be properly licensed What has changed in recent years – particularly since the 2001 World Trade Center attack and the 2008 financial in well-regulated jurisdictions, have professional indemnity insurance, appropriate levels of expertise, integrity crisis – is that barriers to the exchange of information in criminal and fiscal matters are in the process of being and an unblemished reputation. Sovereign can meet all these criteria. dismantled and information regarding beneficial ownership must be passed to any requesting authority to assist that authority “to collect the correct amount of tax from its residents”. Q. Can I be a shareholder in an offshore company? A. Yes, but this will also almost certainly have tax consequences. Controlled Foreign Corporation (CFC) rules and This process has been accelerated by the Financial Action Task Force’s (FATF) Recommendations on anti-money other anti-avoidance legislation common to most “onshore” jurisdictions mean that the income and capital gains laundering and terrorist financing, the OECD’s initiative on exchange of information, the US FATCA regime of an offshore company may be attributed to a shareholder, who will then be taxed on the proportion of profits and the EU Savings Tax Directive (see section 6.4). It has also been assisted by the purchase, by various OECD of the company equal to their percentage shareholding regardless of whether they actually receive any money. governments, of stolen account information from banks in Switzerland and Liechtenstein, together with US legal There is a duty to declare the shareholding and account for the tax due. For most shareholders, therefore, actions against Swiss banks, particularly the landmark UBS agreement. offshore companies on their own will be ineffective in reducing tax, but an offshore company that forms part of a more complex structure can often be extremely effective. Q. If there is no anonymity, why set up an offshore structure? A. Offshore structures that rely purely on secrecy are probably being used for illegal tax evasion rather than legal tax Q. What if the shares in the offshore company are held by an offshore trust? avoidance. There is nothing illegitimate or immoral in setting up an offshore structure but failure to make the A. This may be effective, but in sophisticated jurisdictions the same sort of anti-avoidance legislation will often also correct reporting to the home country tax authority is illegal and the onshore world is demonstrating a growing apply to offshore trusts thereby rendering them ineffective for deferring or reducing income and capital gains intolerance of those who evade tax by failing to make the reports required by law. There are many ways in tax. There will generally be a way of structuring an offshore company to be highly effective in reducing tax, but which an offshore structure can still help to mitigate or avoid tax but proper advice and correct implementation it will rarely be simple. If it were simple, nobody would pay tax! is essential. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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Q. How might going offshore affect my beneficiaries? Q. Will I have to travel regularly to an International Finance Centre? A. Positively. If you are able to arrange your affairs in a tax efficient way, then beneficiaries under a trust (or a A. No. There should be no need to travel regularly to your IFC so the choice need not be limited by geographical will) stand to receive more than would otherwise be the case. Provided that the planning you undertake is considerations. As explained earlier, to be effective for residents of most countries the offshore structure will legitimate and compliant with your local tax laws, then large savings in tax can be made to the advantage of almost certainly have to be managed offshore. For example, a Hong Kong company could have a bank account your beneficiaries. in the Isle of Man and directors based in Monaco. The beneficial owner of the company could, subject to relevant anti-avoidance legislation, be resident anywhere in the world and need never actually travel to Monaco, the Isle Q. Can I protect my assets from creditors? of Man or Hong Kong. It would however be prudent to visit the service provider that is going to have control A. Yes. A properly structured trust will provide some protection from creditors but only if the trust is set up over the affairs of your company to make sure that you are compatible and to satisfy yourself that it has the before both the debt has arisen and the facts and circumstances that would give rise to the debt are known. expertise and infrastructure to ensure that your company is run smoothly and effectively. In other words, if you have done something that is likely to lead a creditor to make a claim, it is already too late to set up an asset protection structure. Such structures should be set up well in advance of any creditor Q. Is there less regulation offshore? claim being contemplated. A. No. Quite the opposite. IFCs, certainly the reputable ones, are more heavily regulated than onshore jurisdictions. For example, a company in the UK that sets up and manages UK companies is not required to have any form Q. Will the costs be prohibitive? of licence or authorisation. The same is not true offshore. Corporate service providers based in IFCs are heavily A. No. The fees paid should be a small fraction of the tax savings that will result. The fees you will pay for setting regulated and are required to obtain a licence before commencing business and to renew that licence every year. up a particular structure will vary considerably depending on which service provider you use. It is unlikely that The conditions under which licences can be obtained and retained are increasingly onerous. the cheapest service provider will be the best but the most expensive may not be the best either. You need to select a service provider that holds professional licences, has professional indemnity insurance, has a proven track Q. Why do I have to explain the source of my assets? record of setting up and administering offshore structures correctly, and which can demonstrate that it has the A. For many years the leading industrial countries, acting largely through supranational organisations such as the necessary expertise and resources to provide an efficient and solid service. You must also take into account that OECD and the FATF, have been trying to combat money laundering, particularly in relation to drug trafficking. there are likely to be two costs involved – the cost of the structure itself and the cost of the advice that leads to This process was accelerated and refocused after 9/11, with the major objective being to prevent terrorists from the structure being set up and subsequently used. You would be unwise to set up an offshore structure without receiving funds. All financial institutions of any description, both onshore and offshore, now have to identify receiving comprehensive advice about the implications in respect of tax or other matters. their clients, monitor their transactions, understand their business and know where, when and how a client has accumulated wealth. Q. Does it matter where I live? A. Yes, it matters greatly. Anti-avoidance legislation varies enormously from country to country. It is essential to Q. Why do I have to give proof of my identity? understand this legislation and how it may affect you and any structure you might set up. Not surprisingly, a A. For the same reason that you must prove the source of your assets. It is part of the due diligence required before structure that is effective, compliant and legal for a resident of the UK may be completely different to a structure any regulated operator is allowed to take you on as a client. Criminal activities and terrorist financing can only that achieves the same result for a resident of South Africa. It is vitally important to understand the legislation in function by having access to untraceable funds. The need to provide due diligence is a source of irritation to your country of residence and how it affects any offshore structure you may be contemplating. many clients (and represents a major cost to the service provider). Unfortunately, there is no way round this. It is a legal requirement to obtain and verify this information before doing business. Q. What do I have to tell my home tax authority? A. This will vary depending on your country of residence. Sometimes it is possible to create a structure in such a way that your interest in it does not have to be reported. Sometimes it is possible to create a structure that has to be reported but which is still effective. And sometimes it is possible to create a structure that doesn’t have to be reported, but which would be still be effective if it were. The latter is the ideal solution but any of the three possibilities should assist in legally mitigating tax.

Q. What is the best International Finance Centre (IFC) for me? A. The answer to this will vary considerably depending on a number of different factors: • Your country of residence; • Your nationality; • The purpose for which you are setting up the structure; • The location of your customers or anybody who deals with your entity; • The changing perceptions of public opinion and foreign governments – for example, an IFC with a very good reputation may not keep that reputation.

Sovereign has offices or agents in all major IFCs and is therefore well placed to advise on this aspect without partiality. REGISTERAYACHT.COM

Yachts can be registered in many different jurisdictions around the world and using a variety of different ownership structures. Making the right choice will minimise your costs and enhance the enjoyment and the value of your vessel. Making the wrong choice could mean extra taxes and costs – and could seriously limit your options for financing, sailing or chartering out. PROTECT YOUR ASSETS! RegisterAYacht.com (RAY) is dedicated to getting it right. Our team of in-house lawyers can provide all the necessary legal expertise and we have associate offices in all the major shipping jurisdictions.

We cannot promise you fair winds but we can guarantee you plain sailing. Your UK pension could be one of your most valuable assets but it’s taxable in the UK.

Imagine if you could take control, save tax and invest in whatever you choose.

Ask your financial adviser about Sovereign’s Gibraltar, Isle of Man and Malta-based HMRC

GIBRALTAR recognised pension schemes. Tel: +350 200 51870 [email protected] [email protected]

Providers of Intelligent Offshore Planning since 1987

Abu Dhabi, Bahamas, Bahrain, British Virgin Islands, China, Curaçao, Cyprus, Dubai, Gibraltar, Guernsey, Hong Kong, Isle of Man, Malta, Mauritius, Portugal, Seychelles, Singapore, South Africa, Switzerland, The Netherlands, Turks & Caicos Islands, United Kingdom. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

30 5. CASE STUDIES 31

The following case studies are designed to demonstrate how offshore companies, onshore companies and offshore trusts can be used to structure your affairs so as to maximise your assets and minimise your fiscal liabilities:

5.1 Purchasing a Trading Company 5.2 Structuring Patent Royalties 5.3 Purchasing Property 5.4 Holding Company for Dividends and CGT Planning 5.5 Personal Service Company 5.6 Estate Duty / Inheritance Tax (IHT) Planning 5.7 Obtaining UK Non-Domicile Status 5.8 The Serial Expat – FICs and QNUPS About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.1 Purchasing a Trading Company 5.1 Purchasing a Trading Company

The Situation Three investors wish to purchase one third each of a profitable UK trading company. One investor is tax resident in the US, one in Canada and one in Australia. They wish to structure their affairs to be as tax efficient as possible whilst not interfering with the existing operations of the UK company.

The Problem Each investor would be liable to pay full rates of local tax on dividends received from the UK company, as well as full rates of capital gains tax from any subsequent sale of shares in that company.

Incorporating an offshore company, or one company for each investor, to hold the shares in the UK trading company might, in theory, provide a way of deferring tax on the income and capital gains pending distribution. But in practice, US, Canadian and Australian anti-avoidance legislation would attribute the undistributed income and capital gains of an offshore company to the beneficial owner and tax them as though all income received by the offshore companies had been received directly by their beneficial owners.

In other words, US, Canada and Australia all require the interest in the offshore company to be reported, rendering the offshore structure ineffective.

The Solution Each investor should incorporate a hybrid company, structured specifically to take into account the anti-avoidance legislation of his country of residence, and use such a company to hold his shareholding in the UK trading company.

Hybrid companies are limited both by shares and by guarantee and can therefore be effective in deferring payment of tax on the underlying income and capital gains until actual distribution. By using these vehicles tax can be deferred indefinitely.

In the case of the Canadian and Australian investors, distribution could be delayed until such time as the investor has moved to a low or zero tax country when it would no longer be liable to Australian or Canadian tax. The US investor could not employ such a technique because, irrespective of his country of residence, he would still be subject to US tax. But considerable advantage could still be obtained for the US person by deferring the tax and being able to reinvest out of the untaxed funds. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.2 Structuring Patent Royalties 5.2 Structuring Patent Royalties

The Situation A Hong Kong resident, Mr K, has developed software that he wishes to sell throughout the world. Generally, Mr K’s income stream will consist of royalties.

The Problem Most high tax countries require tax to be withheld at source on a royalty before payment. Hong Kong has few tax treaties so generally tax would have to be deducted by the payer from the royalties paid.

The Solution Mr K should set up an intermediate licensing company in a country that does have tax treaties with the countries from which payments emanate. The Netherlands is generally considered the country of choice, but other jurisdictions with tax treaties, such as Malta, Cyprus or the UK, may also be suitable. In this example, Mr K would license a Dutch company to exploit his software, which would in turn sublicense the end user. Royalty payments would be made to the Netherlands rather than directly to Hong Kong, thereby reducing or eliminating the withholding tax because the Netherlands has a treaty with the country of payment.

The Dutch company would receive the royalty income but also has a duty to pay out royalty income under the master licence agreement with Hong Kong. Only the margin between the two would be profit subject to tax in the Netherlands. The amount of the margin that is required to be held in the Netherlands will vary from case to case and specialist advice will be needed to determine the correct amount.

Notes Many tax treaties now contain “limitation of benefits” clauses which provide that, if the recipient company is not majority-owned by Dutch residents, then the tax treaty cannot apply. In such cases, using a collection service can be highly effective. In other words Dutch residents would beneficially own the Netherlands company and their fees would be the margin that must be held in the Netherlands. Sovereign can provide this service.

A number of other high tax countries might be used as a base for the intermediary licensing company.

All businesses have Intellectual Property (IP), whether it is their brand, logo, know-how, systems or products. This IP is often the most valuable assets of the business so it is a mistake not to protect it by holding it in a separate company and by taking steps to register it where possible.

Remember the general rule is “trademark it or lose it”. Registering into the name of an offshore structure gives great protection and tremendous tax planning opportunities because that offshore entity can then license its own group of companies, enabling the group to extract pretax profits from high tax areas. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.3 Purchasing Property 5.3 Purchasing Property

The Situation These notes will necessarily be general because the correct structure to purchase a property will differ from country to country depending on the local tax system in the country where the property is situated. However certain general principles apply in most, if not all, countries.

The Problems Irrespective of the nationality, domicile, place of residence and personal circumstances of the owner most countries will apply the following taxes: (a) Estate Duty: local estate duty is normally charged on the value of the property upon the death of the owner because the asset is situated within their borders. Most countries levy some form of estate duty or an equivalent tax on the death of the owner of that property.

(b) Capital Gains Tax: on resale of the property most countries charge a tax based upon the difference between the acquisition price and the resale price.

(c) Income Tax: all countries charge local taxes on income generated from the exploitation of the property e.g. any rent received from the occupation of that property. The tax would apply irrespective of who rents the property and how the rental is paid and local tax returns must be filed detailing that income.

(d) Stamp Duty: most countries charge a sales tax based upon the total value of the property upon any subsequent transfer. The rate of this transfer tax can vary from a negligible figure to amounts as high as 15% and this can often be the highest cost incurred when selling property.

The Solution As a general rule, estate duty would be avoided if the property were to be owned by a company. This occurs because a company, unlike an individual, cannot “die” – thereby eradicating the estate duty that would be payable on the death of an individual. But many countries now charge estate duty on the worldwide assets of the owner. In this case the value of the shares – which would be equal to the value of the property – would be included in the estate of the deceased owner. In other words, although local estate duty may be avoided by corporate ownership, worldwide estate duty may not.

Even when loans are taken out against the value of the property, thereby reducing the value of the shares by the amount of the loan, either the loan itself or the assets that it has been used to purchase, may fall within the estate of the deceased. One way or another, the total value of the property is generally going to be “within the estate”. Further planning may therefore be necessary to minimise or eradicate the worldwide estate duty on the owner’s estate. Separate advice on this aspect will be needed.

If a company owns the property, then transferring the shares in the company may effect a transfer of ownership whilst leaving the title to the property unaltered. Some countries have initiated anti-avoidance legislation that treats the transfer of the shares in the property owning company as equivalent to a transfer in the property, and tax is charged accordingly. Those situations are rare and generally a sale of the shares will eradicate capital gains on the property. Again, the owner may be subject to capital gains on a worldwide basis, so further planning may be necessary to eradicate worldwide capital gains.

Income tax is charged on rental income but, generally, expenses incurred in producing the rent can be offset against the tax. Thus the maintenance costs of the property and the costs of any loan used to purchase the property, but not interest on loans raised against the property later – the interest payments – can be deducted from the rent before 38 39 tax. The interest on a loan is usually by far and away the biggest allowable expense and, with careful planning, this A 40% return - guaranteed! can be used to minimise or totally eradicate local taxes on rental income. But note that all loans must be at arm’s length terms for the interest to be allowable. Does that sound too good to be true? Well it is true but it isn’t good… unless you’re the taxman. Corporate ownership also allows stamp duty, or other transfer taxes that would normally apply in the country where The worldwide estates of most British citizens will be subject to UK the property is situated, to be avoided. This is because a transfer of shares in an offshore company could generally inheritance tax at 40% – even if you have lived abroad for many years. be made without attracting such charges. Corporate ownership also allows easy division of the equity in a property, which enables the ownership to be rearranged without cost or expense. Many expatriates do not realise this. Living abroad is not enough to lose your UK domicile and hence your liability to UK inheritance tax. It is common in many countries for property to change hands by way of a share transfer in the property owning company, so the vendor should readily find a buyer who will be comfortable with effecting the acquisition by way of a share transfer. But don’t panic. Sovereign can advise you on effective strategies to eliminate or mitigate this tax. It should be noted that any purchaser of shares in a company would, if subsequently obliged to sell the property out of the company, become liable to capital gains tax on the difference between the original purchase price and the Contact us now. You can’t take your wealth with you, but you can ensure current sale price. There is therefore a potential disadvantage in purchasing property through a transfer of shares, it goes where you want. but generally it should be possible to calculate the potential worst case scenario, and for the buyer and seller to then agree an equitable deduction in the purchase price by way of compensation. [email protected] In short, corporate ownership is a flexible way of owning property, which offers large potential tax savings in all of SovereignGroup.com the above-mentioned areas. However, careful planning and specialist advice are needed to avoid potential pitfalls and tax traps brought about by fast changing tax legislation in this area. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.4 Holding Company for Dividends and CGT Planning 5.4 Holding Company for Dividends and CGT Planning

The Situation Mr D is purchasing the majority of the shares in two successful companies, located in Russia and Germany respectively. Both businesses may require loan finance to be made from the holding company and both businesses are generating good dividends. There is also a five-year exit strategy that is likely to result in a large capital gain that would be taxable for Mr D in his home country.

The Problem Dividends paid out of Russia and Germany would normally be subject to withholding tax. Interest paid out of Russia and Germany would also generally attract a withholding tax. Mr D’s home country would charge capital gains tax upon the resale of the shares in the Russian and German companies.

The Solution The shares in the Russian and German companies should be purchased using a Dutch company. The Netherlands has a tax treaty with Russia that reduces the withholding tax from the usual 15% to 5%.

The Netherlands also has a tax treaty with Germany but it is simpler to rely instead on EU Directive 90/435, which applies when a dividend is paid by a subsidiary located in one EU member state to a holding company located in another EU member state. Subject to certain conditions, this EU Directive requires that no tax should be withheld on the dividend at source. As both the Netherlands and Germany are full members of the EU, dividends can flow from Germany to the Netherlands free of withholding tax.

A Dutch company can benefit from the “participation exemption” which means that dividends received in the Netherlands are exempt from Dutch tax. Interest can be paid, from either Russia or Germany, to the Netherlands at reduced levels of withholding tax due to the respective treaty or the EU Directive on royalties and interest.

A Dutch participation exemption company is exempt from capital gains tax on the resale of the shares in the German or Russian company.

Dividends paid out of the Netherlands would be subject to Dutch withholding tax; so a tax efficient exit is required. To achieve this, the Dutch company should be wholly owned by another tax efficient EU holding company, such as a UK company. Under EU Directive 90/435, no withholding tax would apply to dividends paid between the Netherlands and the UK. The UK company would not incur any charge to tax on dividends received in the UK nor would tax be withheld on dividends paid out of the UK to the ultimate owner. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.5 Personal Service Company 5.5 Personal Service Company

The Situation Mr C is a highly paid IT consultant who works throughout the world. Each project normally lasts at least six months and requires Mr C to travel to a foreign country to carry out his duties.

The Problem Mr C is likely to spend more than six months in each country in which he undertakes a project and is therefore likely to become tax resident in that country and subject to that country’s full rate of tax on the income generated from the project. Mr C is normally resident in a low tax country and is therefore unwilling to pay higher levels of tax. Mr C also finds it difficult to be competitive when he quotes for a project unless he is tax efficient in the way that he works.

The Solution Mr C should set up a personal service company. This company, rather than Mr C in a personal capacity, should enter into contracts with clients. If Mr C’s company is located in a jurisdiction that has a tax treaty with the country in which he carries out the work, payments can usually be made free of both withholding tax and tax at source. Mr C’s company can then pay him a moderate salary, leaving the balance of the contract value to be taxed at the company’s low rate.

Notes Employment income may be taxable at source without the use of a tax treaty as described above. It is therefore important to select a jurisdiction that has low effective rates of tax but still manages to reduce any withholding tax or tax at source on the income paid. Malta, Cyprus and Mauritius may all provide planning opportunities here. Alternatively, structures using high tax countries such as UK Limited Liability Partnerships (LLPs) or US Limited Liability Companies (LLCs) may also provide a solution. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.6 Estate Duty / Inheritance Tax (IHT) Planning 5.6 Estate Duty / Inheritance Tax (IHT) Planning

The Situation Mr X lives in a country which charges IHT only on assets situated within the country but he has a large portfolio of foreign investments, which includes: • shares in a valuable UK trading company; • a holiday villa in Portugal; • an apartment in New York; • a large art collection in his home country.

The Problem The UK, Portugal, USA and Mr X’s home country all charge IHT on assets physically located in their state.

The Solution Mr X’s country of residence permits him to set up a trust structure to hold the assets. But particular attention needs to be paid to the way in which these assets are owned.

The UK assets are probably the most straightforward. There would be no charge to tax (stamp duty excepted) if the shares in the UK company are transferred to the trustees because this would be a sale by a non-resident and would therefore be exempt from UK capital gains tax. When the shares in the UK company are held by the trust, the death of Mr X would not represent a taxable event in the UK and UK IHT would therefore be eliminated.

If the Portuguese property were to be held directly by the trustees, an annual tax charge would be levied on the value of the property. This can be avoided by having the property transferred to a Maltese company (to avoid the annual tax on property owned by “blacklisted” countries), which in turn is owned by the trust.

On the death of Mr X, the US Revenue would make a charge to IHT based on the value of his New York apartment. That charge can be avoided by transferring the apartment to an offshore company whose shares are owned by an offshore trust. Careful consideration must be given to certain US anti-avoidance legislation to avoid the presumption that there has been a change of ownership and the consequent application of transfer or death taxes upon the death of Mr X.

The art collection can be transferred directly to the trustees. Care would have to be taken to ensure that Mr X does not retain benefit by having the use and enjoyment of the art collection throughout his life, whilst purporting to have divested himself of those assets. If this were the case, then the transfer to the trust might be ineffective in avoiding local IHT. But, if Mr X were to pay an annual fee for the use and enjoyment of the art, then local IHT should be eliminated.

Notes If Mr X were living in a high tax country that levied IHT on a worldwide basis, then the foreign assets may be subject to IHT in their country of situation and also in Mr X’s home country. Credit may be given for capital taxes paid in one jurisdiction against capital taxes due in another but often there is a double charge to tax so the need for proper IHT planning is even greater.

In many countries the transfer into a trust attracts some form of transfer/gift tax, but with care that can be eliminated or reduced by making a sale of the assets, even if the purchase price is left outstanding. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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5.7 Obtaining UK Non-Domicile Status is relatively straightforward and, even if the Counsel decides that you are still UK domiciled, it will be helpful in deciding what to do next. Planning without certainty on the domicile issue can be a disaster. The Situation An elderly UK national, Mr Q, has been living in Australia for 20 years and has a worldwide estate (mostly sited in 5.8 The Serial Expat – FICs and QNUPS Australia) valued at £1 million. The Situation The Problem Mr T is a single expat man in his mid-40s with no dependants and no UK commitments. Having worked overseas for Many UK nationals live under the misapprehension that because they live outside the UK they are no longer subject the past 15 years, never staying any longer than four years in any country, he has been posted to Hong Kong for two to UK Inheritance Tax (IHT). Wrong! Any UK domiciled individual, generally someone born in the UK, will retain years by his UK parent company. His annual income is £130,000 and his investments and savings total £2 million, plus their UK domicile – known as domicile of origin – irrespective of their residence, until death or until the UK Revenue various company pension schemes. He intends to remain working abroad until his planned retirement to Malaysia – agrees otherwise. The rate of IHT is 40% of the amount by which the total value of their worldwide estate exceeds where he owns a holiday property but is not yet resident – in about 10 years. the nil rate band (2013 – £325,000). The Problem The Solution Although Mr T has been out of the UK for 15 years, because he has not yet established any permanent links in Mr Q considers himself to be Australian but he has retained his UK nationality and passport for sentimental reasons. Malaysia (or elsewhere), he remains UK-domiciled and subject to UK inheritance tax (IHT) at 40% on his worldwide Certainly he is tax resident in Australia, and neither resident, nor ordinarily tax resident, in the UK. But Mr Q may well estate after allowances of approximately £325,000. still be subject to 40% UK IHT. At the current valuation of £1 million, and after subtracting the first £325,000 (which would be exempt from UK IHT), Mr Q’s estate would be subject to a £240,000 tax demand. The Solution If he prefers to leave his money to his relatives rather than the UK tax authority, he could set up a family investment To avoid this possibility, Mr Q should take steps to convince the UK Revenue that he is not domiciled in the UK. company (FIC). Such companies are relatively inexpensive and easy to start and can be hugely advantageous. They Legally, Mr Q must satisfy the UK Revenue that he has left the UK, has no intention of returning to the UK to live utilise the principle of the potentially exempt transfer (PET). Under the PET regime, gifts made from one UK-domiciled (temporary visits are not a problem) and has established a permanent home abroad. The UK Revenue will want to individual are not subject to UK IHT as long as they are made at least seven years before death. If made between see evidence, which should include: three and seven years before death, there is also a discount on the normal 40% rate. • purchase of a house in the new country; • taking steps to become a national and/or permanent resident of the new country; Most people are reluctant to give away their capital early because they may need it or at least need the income from • a long period (seven to ten years) of residency abroad; it. The FIC solves this problem by being incorporated with three different classes of shares. One class carries the right • establishment of a business and other financial ties with the new country; to votes only; one carries the right to income only; and the third carries the right to capital only. An individual can • severance of business ties with the UK. therefore transfer assets to the FIC, retain the control and income by keeping those respective classes of shares. But he can progressively give away the capital shares to his chosen heirs. This type of planning is highly effective. This is not an exhaustive list and other indicators would assist. Alternatively Mr T could transfer a significant proportion of his spare cash into a qualifying non-UK pension scheme The UK HMRC will not give advance rulings. It used to be possible to test a UK domicile by filing a relevant return in the UK. For or QNUPS. This would put it outside the scope of UK IHT but it comes with restrictions that are appropriate to persons resident outside the UK, this was achieved by making a “chargeable transfer”. This was most easily done by setting up a pension funds. However a mix of QNUPS and FIC may work. discretionary trust and transferring into it an amount in excess of the lifetime and annual exemptions. HMRC will no longer rule on such transfers unless “substantial amounts of tax” are at stake so now the standard procedure is to obtain a QC’s opinion. If any of his pensions were based in the UK, they would generally be subject to tax at source on drawdown. This is undesirable and possibly unnecessary. UK pensions could be transferred to a qualifying registered offshore pension Notes scheme (QROPS). New schemes have recently started in Gibraltar and Malta. There are generally substantial tax People who have lived abroad for many years often decide not to make an application, either because they believe advantages in transferring a pension offshore but those advantages will depend upon the scheme. themselves to be safe from tax or because they believe that the UK Revenue will not trouble their heirs or their estate upon their death on the grounds that they will not be aware that they have died. While Mr T is in Hong Kong he will only be subject to local tax on his Hong Kong income. His salary will be Hong Kong-source income so will be taxable at a very lenient rate of 16% after allowances. With planning, tax breaks are This is not prudent. In these days of increasing exchange of information, it is unlikely that anybody of substantial allowed. The biggest of these is that if his employer provides him with accommodation, he is taxed only on the cash wealth can pass away abroad without his or her home country or country of origin getting to hear about it. Failure value of the accommodation or 10% of his salary whichever is the lower. This can work out very advantageously. If to take steps to mitigate UK IHT will greatly impact on the value left to the heirs. he were paid US$500,000 per annum, he would pay tax on the whole US$500,000. If, however, his employer pays him US$350,000 and an accommodation allowance of US$150,000 he would only be taxed on US$385,000 (the full Even if the deceased is subject to IHT in his new country of residence, without appropriate planning he may also pay amount of the salary plus another 10% of the salary in accommodation benefits). IHT on the same assets back in the UK. A double charge to IHT could wipe out the entire estate. The income generated on his savings would not be taxable in Hong Kong, so it would normally be advantageous to Getting an opinion on domicile is an insurance policy. You may think you are not UK domiciled but if the UK tax lodge his investments in an offshore jurisdiction. authority disagrees, you will not be around to argue the point, and your estate and heirs may lose out. The procedure About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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6.1 Introduction

i. Why Incorporate? The primary attraction of incorporation is to limit the liability of the investor. First introduced in the nineteenth century, limited liability enabled shareholders to form companies in which their potential losses were limited to the amount of the share capital that they had either paid for or had undertaken to pay for. Because the company was a distinct legal entity, creditors were only able to make a claim against the assets of the company and not the personal assets of the shareholders.

ii. Using Companies to Mitigate Tax Profits received by a company are taxed at the corporate income tax rate rather than the personal rate applicable to its shareholders. So a resident of a high tax country may set up a company in a jurisdiction with a low or zero rate of corporate tax and arrange for profits to be booked into the name of that company. This generates a saving equal to the difference between the corporate rate of tax and the shareholders’ personal tax rate. Anti-avoidance legislation in the shareholder’s country of residence may seek to reduce or nullify the effectiveness of such arrangements but skillful structuring may make that anti-avoidance legislation inapplicable.

If the company makes a distribution of profits, usually in the form of dividends or royalties, then these distributions are generally taxable in the hands of the recipient. Accordingly, the greatest advantage is achieved by letting the profits roll up within the company account so that potential tax can be deferred or avoided. If profits can remain untaxed offshore, then tax is saved both on the original profit and the investment income generated by reinvesting those profits, so the benefit is cumulative and substantive. And if distribution of the profits can be delayed until such time as the recipient has moved to a jurisdiction with a lower, even zero, tax rate then any potential tax liability can be avoided completely.

iii. Where to Incorporate? The answer depends upon the intended use of the company and upon a client’s own personal or business circumstances. A number of factors must be considered: the tax regime, political and economic stability, reputation, communications, language, legal system, confidentiality, exchange controls, banking facilities and, most importantly, cost – in terms of both incorporation and management fees.

It is particularly important to remember that the tax and other benefits obtained will depend not only upon the tax legislation in the country of residence – and possibly the domicile – of the beneficial owner, but also upon any relevant anti-avoidance legislation in any country in which the client intends to do business. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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b. Transfer Pricing Legislation All arrangements between companies that have any sort of common ownership must be at “arms length”, or open market, prices. If this is not the case, transfer pricing legislation enables the local revenue to adjust those prices. For example, if an offshore trading company was set up to buy goods from China and sell those goods to an associated company in the USA, then the price at which the goods were sold on must be the same price as the US company would be likely to pay on the open market. If the US company paid a higher than open market price to an associated company in a low tax jurisdiction – thereby artificially shifting profit to that company and reducing the US tax bill – then the US tax authority, the IRS, would be entitled to adjust the taxable profit to reflect the lower, open market price.

c. General Anti-Avoidance Rule (GAAR) Most countries have introduced GAAR legislation – or have equivalent rules or case law – which states that if the primary purpose of an arrangement is to reduce tax then the domestic tax authority can ignore it and remove any 6.2 Bases of Taxation tax advantage obtained. Thus, any arrangements that confer a tax advantage should also have a demonstrable commercial purpose and be set up, at least in part, for reasons other than tax planning. i. Tax Residency It is a common misconception that either a company or an individual can only be tax resident in one jurisdiction at d. Anti-Treaty Shopping Provisions any one time. Most countries will tax an individual who spends six months within their borders. As a simple example, Treaties can be used to reduce withholding tax on dividends, interest and royalties but certain treaties may prevent an individual who spends six months in the UK and the other six months in the USA may be considered tax resident in non-residents of the treaty partner from benefitting. For example, the US withholds tax on royalties paid to non- both the US and the UK and therefore subject to tax on his worldwide income in both countries. Happily, the US and residents at a rate of 30%. The USA/Netherlands treaty reduces the withholding tax on royalties to zero but the UK have signed a tax treaty to eliminate double taxation, such that credit will be given for tax paid in one country treaty contains provisions that render the treaty inapplicable unless the beneficial owner of the recipient company against the tax due on the same income in the other. However the individual would still be subject to the highest is a bona fide resident of the Netherlands. A Hong Kong resident wishing to reduce withholding tax in the US could level of taxation applicable in either country. not therefore achieve this by setting up a Netherlands company to receive the income and then pay it on to Hong Kong because the beneficial owner would be a Hong Kong resident rather than a resident of the Netherlands. A similar position can arise in respect of companies. Most countries consider any company that is incorporated within their jurisdiction to be tax resident there. Most countries also consider any company that is managed and controlled In September 2013, the G20 leaders agreed to adopt an OECD Action Plan for the prevention of base erosion and within their jurisdiction to be locally tax resident, even if it is incorporated abroad. A company is generally considered profit shifting (BEPS). The move is intended to close the gaps between national tax systems by re-examining existing to be “managed and controlled” wherever its directors habitually meet and reside. Thus a company incorporated in international tax rules on tax treaties, permanent establishment and transfer pricing. All non-OECD G20 countries the US that has a board of directors who meet and reside in the UK, could be deemed subject to both US and UK tax have now signed up to a BEPS project, through which they will develop proposals and recommendations for tackling on its worldwide income. This “management and control” test means that it will rarely be the case that an individual the issues identified by the OECD (see section 6.4). residing onshore can safely act as the director of an offshore company without making that company liable to tax in his home jurisdiction. For this reason Sovereign often provides directors who manage the affairs of the offshore However, there will always be products or structures – such as life insurance or pensions – that are specifically company from offshore. provided for by statute and which can deliver great tax advantages. Likewise there will always be ways in which an operation may be structured so as to prevent it falling foul of anti-avoidance legislation. Simple offshore structures ii. Anti-Avoidance Legislation will rarely work. In most situations a more sophisticated structure will be needed, and the ongoing administration In simple terms, offshore companies can be extremely effective in avoiding tax if they are used to collect income. will have to be handled accurately and with skill if later problems are to be averted. But sadly things are not always that simple. Many countries have enacted “anti-avoidance legislation” designed to reduce or eliminate the effectiveness of offshore structures in avoiding taxation. Each country has its own specific 6.3 The Legal Framework rules in this area but such legislation can be broadly categorised as follows: These general notes are written with reference to United Kingdom companies and companies incorporated in a. Controlled Foreign Corporation Legislation jurisdictions which follow UK law. Controlled Foreign Corporation (CFC) legislation seeks to tax the profits of a foreign company as though they had been paid out to domestic shareholders, regardless of whether or not such profits are actually paid out. Where an i. Company Name owner holds only a portion of a foreign company then the percentage of the company’s profits allocated to him or The Registrar has the power to refuse registration of any name that he considers undesirable, confusing, offensive her is equal to the percentage of shares held. If, for example, a UK resident owned 50% of an offshore company then or too similar to that of an existing company. Certain words – such as trust, investment, bank, and insurance – may they would be liable to declare their interest in the company on their year-end tax form. They would be taxed as be regarded as being sensitive and can only be used if the company is specifically licensed to undertake the indicated though they had received 50% of the profits of that company calculated in accordance with UK rules, whether they activity. The criteria for name selection vary from jurisdiction to jurisdiction but broadly follow these guidelines. had actually received them or not. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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ii. Authorised Share Capital As mentioned earlier, Sovereign frequently provides directors who reside and meet offshore to prevent a company The amount of the authorised capital – the maximum capital available to be issued – can be as high as is desired. being considered as resident in the high tax country where the owners reside. Such directors will carefully consider and In most jurisdictions the fee payable on incorporation increases in line with the authorised capital. Generally, a will generally carry out the wishes of the ultimate owner. But they should not blindly follow his or her directions (or company would be incorporated with the highest authorised capital for which the minimum registration fees apply. those of any other third party) because this would mean that the control and management rests with the instructing party rather than with the directors. In this case, the company could then be considered as tax resident wherever the iii. Issued Share Capital instructing party resides. If the tax status of the company is not to be prejudiced, it must be clearly demonstrated that The issued share capital – the capital actually taken up by shareholders – may be paid, partly paid or issued for the directors exercise independent mind and management. a consideration other than cash. When shares have been wholly paid, the shareholder has no further liability to the company. If the shareholder does not pay for his shares or pays only in part then he can be called upon to pay Clients may naturally be nervous about giving over control of “their business” to a third party, so it is vital that such the balance outstanding at any time and would always be subject to a “call” if the company cannot otherwise control is given only to organisations of the highest integrity and experience. Sovereign meets these criteria. We pay its debts. employ professionally qualified staff, hold appropriate government licences and have successfully managed many thousands of companies. The importance of these factors and this track record cannot be overstated. If nominee or trustee shareholders hold shares, they would normally be fully paid up so as to avoid liability for the professional shareholders. ix. Registered or Bearer Shares? Bearer shares are shares that are transferred simply by delivery without the need for registration of any change iv. Registered Office and other Domiciliary Requirements of ownership. They are therefore “anonymous” in practice. In response to international demands for increased All companies must have a registered office within the country of incorporation, but this does not have to be the transparency and “know your customer” procedures, most reputable IFCs have now either prohibited bearer shares place where the company carries on business or keeps its books of account. Many jurisdictions require all companies or require them to be “immobilised” by being lodged with a licensed practitioner (usually locally) to the order of a to appoint a resident agent to receive official notices and legal papers. Some also require companies to have a locally specified beneficial owner. Additionally, most banks are no longer happy to open accounts for companies that issue resident company secretary or director. bearer shares. In short, bearer shares are no longer an option that will be of any appeal to most clients because they will not increase confidentiality but will increase costs. We therefore strongly recommend the issue of registered v. Company Secretary shares only. It is usually the responsibility of the Company Secretary to make sure that a company is in good standing and make the necessary returns to the Registrar and government. This requires a thorough knowledge of local company law 6.4 Confidentiality and International Initiatives and practice, so it is strongly recommended that a locally based professional be appointed, even if there is no strict legal requirement to do so. The degree of disclosure varies between different jurisdictions. In some jurisdictions there is a requirement to file details of the directors, shareholders and secretary on a public register, but nominee shareholders and professional vi. Memorandum of Association directors can be employed to increase confidentiality. In other jurisdictions only minimal public disclosure is required. Historically the objects of the company would be set out in the Memorandum of Association. As companies were not permitted to undertake activities that were not authorised by their Memoranda, normal practice was to draft Generally, in the jurisdictions that follow English common law there is an implied duty for management companies, extremely wide powers for a company, with care being taken to ensure that all the proposed and future activities bankers and other professionals to keep their clients’ affairs confidential. In some jurisdictions this common law of the company were fully set out. In most jurisdictions nowadays this “ultra vires” rule has been abolished so duty may be supplemented by local legislation that imposes criminal penalties on those who breach confidentiality companies may undertake any lawful business that is not specifically proscribed or licensable. The Memoranda of or attempt to get others to do so. For example, the Confidential Relationships (Preservation) Ordinance of the Turks companies incorporated in these jurisdictions may simply state that the objects are unlimited. and Caicos Islands imposes a maximum penalty of a fine of USD50,000 and/or a three-year prison sentence on those who reveal confidential information about a TCI company or its business dealings. vii. Articles of Association The Articles of Association (often called “Bye-Laws”) represent a contract between the shareholders and the company. In all reputable International Financial Centres (IFCs), details of beneficial ownership must now be made available upon They provide detailed rules for the management of the company’s affairs and for the conduct of its business. request to “competent authorities”, including foreign tax departments around the world. As a result “anonymity” no longer exists offshore but this will not concern those who engage in legitimate tax planning. viii. Shareholders, Directors and Secretaries Shareholders are the legal owners of the company but responsibility for the day-to-day management of the company i. Know Your Customer Principles / Due Diligence rests with its directors and, to a limited extent, with the company secretary. The shareholders would normally retain The Financial Action Task Force (FATF) is an inter-governmental body that was established in 1989 to set standards and the power to remove a director from office and elect a replacement but should not interfere with the management promote effective implementation of legal, regulatory and operational measures for combating money laundering, of the company and do not have power to do so. In private companies it is quite common for the shareholders to terrorist financing and other related threats to the integrity of the international financial system. also act as the directors of the company. The FATF developed a series of Recommendations that are recognised as the international standard for anti-money In jurisdictions that require for a public record of the details of the shareholders to be maintained, the shareholders laundering (AML) and combating the financing of terrorism (CFT). First issued in 1990, the FATF Recommendations of record will frequently be nominees or trustees who will hold the shares on behalf of the beneficial owner, thereby were revised in 1996, 2001, 2003 and most recently in 2012 to ensure that they remain up to date and relevant, and preserving their anonymity. they are intended to be of universal application. 54 55

As a result, all corporate and trust service providers and financial institutions now have a statutory duty to implement “Know Your Customer” (KYC) procedures for all their clients, new and old. For instance, the controls for banks undertaking KYC monitoring for AML and checks relating to CFT would typically include: Why not move to Portugal? • Collection and analysis of basic customer identity information (CIP); • Name matching against lists of known parties (such as “politically exposed persons”); No wealth tax! • Determination of the customer’s risk in terms of their propensity to commit money laundering or identity theft; • Creation of an expectation of a customer’s transactional behaviour; Tax free pension income! • Monitoring of a customer’s transactions against their expected behaviour and recorded profile, as well as that of the customer’s peers. Same sun!

All countries worldwide are introducing higher standards for due diligence and “KYC” principles, and financial Contact : institutions are being ever more diligent and careful about the business they take on and the way that that business is monitored. Customers of any financial institution or financial services provider (including ourselves) must expect Sovereign - Consultoria Lda, to supply proof of identity, proof of residential address and references before they will be taken on as customers, Parque Empresarial Algarve, 8400-431 Lagoa, Algarve and to explain the source and business purpose for any substantial movement of funds. Compliance with these Tel: +351 282 340480 Fax: +351 282 342259 requirements brings additional costs and inconvenience but is entirely unavoidable and has now become an absolute Email: [email protected] requirement imposed by local and international regulations and/or laws. ii. Exchange of Information and Harmful Taxation In May 1996, the Organisation for Economic Cooperation & Development (OECD) called for its members to “develop measures to counter the distorting effect of harmful tax competition”. Two years later it listed 41 jurisdictions as “tax havens” and called on them to make commitments to end harmful tax practices. The identifying criteria for blacklisting were: low or no income taxes; ring fencing between resident and non-resident tax regimes; lack of transparency; and failure to exchange information.

In 2001, following criticism from non-OECD countries and a shift in US government policy, the OECD modified its campaign by removing the criterion relating to low or no income taxes. Instead jurisdictions were asked to increase transparency and to facilitate exchange of information. iii. Exchange of Information on Request In 2001, the OECD formed the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) to provide a multilateral framework within which work in the area of transparency and exchange of information could be carried out by both OECD and non-OECD member countries with the aim of developing international standards and establishing a global level playing field.

An internationally agreed standard, developed by the OECD’s Global Forum and endorsed by G20 Finance Ministers in 2004, required: • Exchange of information on request where it is “foreseeably relevant” to the administration and enforcement of the domestic laws of the treaty partner. • No restrictions on exchange caused by bank secrecy or domestic tax interest requirements. • Availability of reliable information and powers to obtain it. • Respect for taxpayers’ rights. • Strict confidentiality of information exchanged.

New provisions for the exchange of information between national tax authorities were agreed for the OECD’s Model Tax Convention on Income and on Capital. Article 26 was changed to clarify that Contracting States should obtain and exchange information and to prevent bank secrecy from being used as a basis for a refusal. The Global Forum also developed a Model Agreement on Information Exchange on Tax Matters that countries could use to guide bi­lateral negotiations for Tax Information Exchange Agreements (TIEAs). 56 57

The first bilateral Tax Information Exchange Agreement (TIEA) was signed between the US and Antigua and Barbuda In April 2013, five Member States – France, Germany, Italy, Spain and the UK – announced their intention to develop on 6 December 2000. The US subsequently signed a further eight TIEAs over the next two years with major IFCs – the and pilot a multilateral agreement for information exchange. This will be based on the model Intergovernmental Cayman Islands, the Bahamas, British Virgin Islands, Netherlands Antilles, Guernsey, Isle of Man, Jersey and Aruba. Agreement (IGA) for the implementation of the US Foreign Account Tax Compliance Act (FATCA) – see below.

These agreements required the contracting states to exchange information, upon request, that was relevant to the The UK Treasury announced, on 2 May 2013, that its Overseas Territories – Anguilla, Bermuda, the British Virgin assessment and collection of tax and enforcement of tax claims or the investigation or prosecution of tax crimes. Only Islands, Montserrat and the Turks and Caicos Islands – had followed the Cayman Islands and its Crown Dependencies a further 18 TIEAs were signed worldwide until the global financial crisis in September 2008. – the Isle of Man, Guernsey and Jersey – by agreeing to share information automatically with the UK. Under the new agreements they will automatically provide names, addresses, dates of birth, account numbers, account balances and In 2009 the G20 Leaders called on the Global Forum to ensure rapid implementation of the international standard details of payments, not just in respect of UK taxpayers but in respect of its EU partners as well. of transparency and exchange of information. The Global Forum reported that 78 jurisdictions had committed to its internationally agreed tax standard. Since then, the number of jurisdictions that have committed to implement At a summit in Brussels in May 2013, European Union leaders agreed to the adoption of the revised Savings Tax the OECD standard and have joined the Global Forum has grown to 119 and more than 1,100 new exchange of Directive covering a wider range of taxable income by the end of 2013 after Austria and Luxembourg dropped information relationships to the standard – either through bilateral and multilateral TIEAs or through double tax their opposition to automatic exchange of bank data. They also agreed to negotiate with five non-EU nations – treaties incorporating Article 26 – have been put in place. Switzerland, Liechtenstein, Monaco, Andorra and San Marino – for their participation.

The Global Forum has also completed 113 peer reviews covering 98 jurisdictions and issued over 650 recommendations b. Foreign Account Tax Compliance Act (FATCA) for improvement, more than 400 of which are being acted upon. The reviews of jurisdictions laws’ (Phase 1 reviews) On 18 March 2010, the US passed the Hire Act, which included the Foreign Account Tax Compliance Act (FATCA) have been completed for Global Forum member jurisdictions and the focus has now shifted to the Phase 2 reviews of provisions. These are due to come into effect on 1 July 2014. Under FATCA, US taxpayers with specified foreign practical implementation. The reviews of practice will lead to the Global Forum issuing ratings both for a jurisdiction’s financial assets that exceed certain thresholds must report those assets to the IRS. FATCA will also require foreign compliance with each element of its terms of reference as well as an overall rating. The first ratings (for as many as financial institutions (FFIs) to report directly to the IRS information about financial accounts held by US taxpayers, or 50 jurisdictions) were scheduled to be finalised by the Global Forum in November 2013. held by foreign entities in which US taxpayers hold a substantial ownership interest. iv. Automatic Exchange of Information On 8 February 2012, the five largest European countries – Germany, France, Spain, Italy and the UK – signed an IGA a. European Union Savings Tax Directive (STD) “regarding an intergovernmental approach to improving international tax compliance and implementing FATCA”. The EU Savings Tax Directive (STD) came into effect on 1 July 2005. It applied to all 27 EU member states, together with They undertook to collect client account information from banks within their borders and pass it on to the US tax their associated and dependent territories, and was also extended by agreement to key “third” countries. It applied authorities on the banks’ behalf. In return the US committed itself to collect information on US bank accounts only to bank interest, bond interest and income from bond funds, money-market funds, loans and mortgages. It also operated by European residents and automatically pass it to the relevant national tax authority. This so-called only applied to individual account holders and did not affect companies, discretionary trusts, foundations, stiftungs, “reciprocity” arrangement would be based on the countries’ existing bilateral tax treaties. anstalts or investment funds. The US Treasury is in discussions with more than 80 countries – including all the major IFCs – to establish At the outset, 24 EU member states elected to share information automatically about interest payments to a resident intergovernmental agreements (IGAs) in a bid to mitigate some of the more costly aspects of the new law. FATCA of another EU state or any territory under the control of a EU member. Anguilla, Aruba, the Cayman Islands and compliance may differ significantly depending on whether or not an FFI is in a country with an IGA. There will be Montserrat also agreed to automatic exchange of information. further differences according to the type of IGA – Model 1 or Model 2 – and whether the IGA has provisions requiring US reciprocity in reporting US financial institution information. To preserve their bank secrecy legislation, Austria, Belgium and Luxembourg instead chose to impose a withholding tax on interest income during a transitional period. The withholding tax rate was set at 15% until 2008, 20% until c. G20 2011 and 35% afterwards. The UK and Dutch territories of the British Virgin Islands, Guernsey, the Isle of Man, Jersey, At the G20 summit in St Petersburg on 6 September 2013, the leaders of the world’s 20 largest economies endorsed the Netherlands Antilles, the Turks & Caicos Islands and Gibraltar also chose to apply the withholding tax and the plans to exchange tax information automatically between themselves by the end of 2015 and called “on all other EU subsequently agreed equivalent withholding tax arrangements with key third countries – Andorra, Liechtenstein, jurisdictions to join us by the earliest possible date”. Monaco, San Marino and Switzerland. In the official declaration issued at the conclusion of the summit the G20 leaders formally abandoned the “on Belgium decided to discontinue applying the transitional withholding tax as of 1 January 2010 and exchange request” standard for exchanging confidential taxpayer information in favour of a new model of international tax information automatically. Guernsey, the Isle of Man and the British Virgin Islands also moved to automatic exchange co-operation based on automatic exchange of information in accordance with the OECD Convention on Mutual of information. Administrative Assistance in Tax Matters.

In March 2012, the European Commission adopted a report on the performance of the STD, which stated that it must In August 2013, China became the 56th signatory to the Convention and the final G20 member country to fulfil the be amended to prevent the use of intermediary jurisdictions and “loophole” financial products. The implementation commitment made at the 2011 G20 Summit in Cannes to move to automatic exchange of information as the new of “look-through” and “paying agent upon receipt” provisions for certain legal structures located in IFCs was justified global standard. and necessary. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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In September 2013, the G20 mandated the OECD to create a single global standard for the automatic exchange e. Beneficial Ownership of information. The aim is for the OECD to unveil the new standard, together with a Model Competent Authority At the G8 summit in June 2013, participants made further commitments to develop new measures to ensure Agreement, in February 2014 and to finalise technical procedures for effective automatic exchange of information that information about the beneficial ownership of companies and trusts would be made accessible to the by mid-2014. relevant authorities.

It cannot be over emphasised that all confidentiality has now disappeared. Any “high tax” nation can currently request The UK has already published its own Action Plan aimed at counteracting misuse of companies, trusts and other legal the information it requires from any IFC via TIEAs and tax treaties. Those procedures will now be radically enhanced by arrangements and designed to enhance transparency. This incorporates the following principles: automatic exchange of information. This does not mean that offshore structures can no longer provide tax advantages. • to ensure that companies hold accurate information on their beneficial ownership and, by amendment to the They can. But it does mean that the days of simply failing to declare income or capital gains are over. Legitimate Companies Act 2006, to make sure the information is available to the authorities through a central registry at planning that utilises compliant structures has always been and remains effective. Expert advice is essential not just to Companies House; there is to be a consultation on whether this information should be publicly available; get the planning right but also to demonstrate that you have taken care to achieve tax compliance. • to review corporate transparency including issues relating to bearer shares and nominee directors; • to ensure that trustees of express trusts are obliged to hold accurate information on beneficial ownership of d. Base erosion and profit shifting (BEPS) the trust, that the relevant authorities have access to this and that mechanisms are in place to share it with The G20 leaders also agreed, at the St Petersburg summit on 6 September 2013, to adopt an OECD Action Plan for the other jurisdictions; prevention of base erosion and profit shifting (BEPS). The move is intended to close the gaps between national tax • to support the Crown Dependencies and the Overseas Territories in publishing their own Action Plans systems by re-examining existing international tax rules on tax treaties, permanent establishment and transfer pricing. on Transparency.

G20 leaders called on members to examine how their own tax systems contribute to BEPS asserting “profits should be These Action Plans, when implemented, will see “anonymity” disappear completely. There are still many taxpayers taxed where economic activities deriving the profits are performed and value is created” and “international and our whose offshore arrangements would not bear scrutiny by their home tax authorities but hiding money offshore or own tax rules [should] not allow or encourage multinational enterprises to reduce overall taxes paid by artificially in the major banking centres is no longer a feasible option. Fortunately there are still many compliant structures shifting profits to low-tax jurisdictions.” and arrangements that can be highly effective in protecting assets and saving tax. Anyone with concerns over their existing arrangements would be well advised to contact their nearest Sovereign office for an expert review. The need to address BEPS was raised at the G20’s 2012 Summit and the OECD was asked to report on what action could be taken. All non-OECD G20 countries have now signed up to a BEPS project, through which they will develop 6.5 Death of the Client and Trusts proposals and recommendations for tackling the issues identified by the OECD. An offshore company can own assets of all descriptions, including bank accounts, safely and confidentially. In a “Tax Annex” to the leaders’ declaration, the G20 reiterated the general and specific action steps set forth in the Transferring assets into a corporate structure means that the underlying assets can be removed from the estate of the OECD plan required to address BEPS: client and instead the estate becomes the owner of a single asset – the shares in the company. This is advantageous • identify the “main difficulties that the digital economy poses for the application of existing international rules and because, on the client’s death, only the shares of the company need to be transferred to the heirs, rather than develop detailed options to address these difficulties”; each underlying asset. Normally assets are transferred on death by means of a will, but this can be an expensive • develop treaty provisions and recommendations for neutralising the effect of hybrid instruments and entities; and lengthy procedure. Even a simple estate can take over a year to wind up and the costs could be as high as 6% • strengthen existing controlled foreign corporation (CFC) rules; of the value of the estate. Creating a trust can be used as an alternative to a will and has a host of advantages. A • limit base erosion via interest deductions and other financial payments; comprehensive explanation on the workings and advantages of trust structures is contained within the trusts section • counter harmful tax practices more effectively, taking into account transparency and substance; in this brochure. (See section 7) • prevent treaty abuse; • prevent the artificial avoidance of permanent establishment (PE) status; 6.6 Special Types of Companies • ensure that transfer pricing outcomes are in line with value creation in respect of intangibles, risks and capital, and other high-risk transactions; i. Guarantee Company • establish methodologies to collect and analyse data on BEPS and the actions to address it; A guarantee company is a company that is limited only by guarantee and therefore does not usually have a share • require taxpayers to disclose their aggressive tax planning arrangements; capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to • re-examine transfer pricing documentation; contribute a specific – often nominal – amount in the event of the winding up of the company. • improve dispute resolution mechanisms; • develop a multilateral instrument to assist in implementing measures developed in the course of the work on BEPS. As a result, common uses of guarantee companies include clubs, membership organisations and non-governmental organisations (NGOs). However, guarantee memberships can be issued on whatever terms the directors decide The timeline for BEPS is ambitious, aiming for completion by December 2015, and will integrate a number of related and, depending on the provisions of the Articles of Association, a guarantee company can distribute its profits on-going OECD projects on fundamental tax issues, among them the definition of permanent establishment and the to its members. transfer pricing of intangibles. Multinational groups should assess their existing and planned structures, considering the increased focus on “substance” and the potential for more public transparency in respect of their tax return information and allocation of profits. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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The most significant feature of a guarantee company is the facility for a guarantee membership to extinguish upon the death of a Guarantee Member. Guarantee companies can therefore form the basis of a personal holding company that allows for a smooth succession of title to the underlying assets through the guarantee membership structure.

However, in a guarantee company it is the Guarantee Members, rather than the shareholders, who hold the voting rights and control so it may not be as easy to sidestep the anti-avoidance legislation or Exchange Control regulations put in place by certain onshore countries. In such cases a “hybrid company” (see below) may have an advantage.

Guarantee companies can be formed in most IFCs as well as onshore jurisdictions that follow the English legal system.

ii. Hybrid Companies The term “hybrid company” is used to describe a company that is limited both by shares and by guarantee and therefore has two classes of member – Shareholders and Guarantee Members. The directors elect a Guarantee Member into membership of the company on condition that the member undertakes to contribute to the debts of the company up to a certain specified maximum amount, typically US$100 or less. As such a Guarantee Member holds a contingent liability. This contrasts with the position of the shareholder who holds an asset – the shares.

The rights and obligations which attach to each class of membership can be laid down in the Articles of Association of the company or by the directors in board meetings, thereby keeping the terms and conditions of membership confidential. The arrangements that can be made are infinite and flexible. Skillful drafting can be used to attach different rights and obligations to each class of membership and create structures that are precisely tailored to the different needs of the client.

Hybrid companies are often used as “quasi trusts”, particularly by persons resident in Civil Law countries where trusts are not recognised. Typically the company will be structured so that the shares are issued on terms that each carries one vote but no rights to dividends or to participate in the capital or income of the company. The Guarantee Memberships would be issued on terms that they carry no rights to vote but all the rights to participate in the income and capital of the company. Thus all control rests with the shareholders but all benefits flow to the Guarantee Members. The shares can be issued to professional managers but, unlike normal shareholders, they cannot receive financial benefit from holding the shares and therefore must act as quasi trustees. All financial benefits flow to the [email protected] Guarantee Members who are therefore in a position not unlike the beneficiaries of a trust.

A Guarantee Member’s interest can be extinguished on death thereby avoiding any succession problems and the need to obtain probate. There will generally not be any inheritance tax or stamp duty implications.

The anti-avoidance legislation enacted by many onshore countries aims to tax the undistributed or untaxed profits of low tax paying companies as though those profits have been received by the shareholders. Although the legislation differs by country, it generally focuses on the percentage of shares held or the control of the company if that control is achieved other than through the ownership of shares. Under the arrangements outlined above, the Guarantee Members would not own shares or have control of the company so it may be that this type of anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. It will generally also be the case that a Abu Dhabi, Bahamas, Bahrain, British Virgin Islands, China, Curaçao, Cyprus, Dubai, Gibraltar, Guernsey, Hong hybrid structure does not entail any reporting requirement for the Guarantee Members so that, on a practical level, Kong, Isle of Man, Malta, Mauritius, Portugal, Seychelles, Singapore, South Africa, Switzerland, The Netherlands, Turks & Caicos Islands, United Kingdom. unwanted attention from onshore revenue authorities can be avoided.

A hybrid company may also provide a means of bypassing Exchange Controls. A Guarantee Member would normally be issued with a membership certificate, but this does not constitute a share, stock or security. Most Exchange Control regulations refer to securities and therefore the holding of a Guarantee Membership may not require Exchange Control approval. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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There are a number of IFCs where it is possible to form hybrid companies. The structures offered by the Isle of Man lose tax credits in the country in which they are investing which would be available if they made a direct investment. and Gibraltar have been the subject of much recent interest, but the Turks & Caicos Islands (TCI) hybrid company is The same criteria would not generally apply to a non-US person or corporation. The offshore LLC may therefore perhaps the most flexible. be structured so that the income attributable to the US corporation flows through complete with tax credits still attached, whereas the income attributed to the non-US person or corporation may be rolled up offshore. iii. Anglo-Saxon Foundations Traditionally, the Liechtenstein foundation has been the preferred vehicle for residents of Civil Law jurisdictions who Most IFCs now allow for the incorporation of an LLC, but the Bahamas, Cayman Islands, Isle of Man and TCI companies wish to protect family assets and pass them on to future generations. English Common Law does not specifically are particularly suitable. In all cases the relevant local legislation seeks to create a vehicle that has corporate form but recognise the concept of the foundation but a guarantee company may be structured to mirror a Liechtenstein entity. which will be characterised as a partnership by the US Internal Revenue Service, thereby creating an offshore entity Such an entity may conveniently be described as an “Anglo-Saxon Common Law Foundation”, but in many ways this which is tax neutral for US persons but may have tax advantages for non-US persons. structure is more sophisticated and flexible than the more expensive Liechtenstein equivalent. Moreover, because such an entity is formed under an English Common Law system, it is also more intelligible to a wider audience and v. Private Trust Companies (PTCs) will be better accepted by the major onshore jurisdictions. Trusts offer many substantial advantages but often potential settlors, particularly those resident in Civil Law countries where trusts are not recognised, do not wish to lose control of their assets by transferring ownership to Trustees An “Anglo-Saxon Foundation” is created by the founder, who may be elected as the founding member, transferring or do not want to rely on family members to maintain them. Private Trust Companies (PTCs) however, if properly assets to the guarantee company as a subscription. The company elects members and appoints directors. Membership structured, can provide all the advantages of a trust without necessitating complete loss of control over the assets. is not transferable and ceases upon death or resignation, but the directors may then elect new members. For further information on PTCs. (see section 7.4)

Frequently there are two classes of directors – founder directors and general directors. The founder directors can vi. Family Investment Companies (FICs) only be drawn from a designated class, which would normally be the founder member and his or her family. They A Family Investment Company is another trust alternative that allows the control of assets to be retained whilst their are the only persons who have the power to elect new members and the members are the only persons who may value, or most of it, is transferred away from the direct control of a potential settlor. An FIC should avoid liability to benefit from the company. In this way control of the financial benefits remains with the family acting in its capacity inheritance tax and might also provide substantial income and capital gains tax advantages. as founder directors. As we have seen, a standard company is limited by shares but it is also possible for a company to be limited by The general directors would typically be professional advisors who manage the day-to-day affairs of the company guarantee (Guarantee Companies) or by both shares and guarantee (Hybrid Companies). Generally a share or but are unable to benefit in any way other than by payment of an agreed fee for their services. They cannot have membership carries three rights: to vote; to receive income in the form of dividends; and to own the underlying any control over who may be elected as members and how those members may benefit. assets or capital. It is, however, possible to create shares or memberships that carry only one or two of these three rights and thereby to create an FIC. iv. Limited Liability Companies (LLCs) The Limited Liability Company is another hybrid business entity, which combines the features of a partnership with Although the structure of the FIC has unlimited variations, typically it might involve the head of a family transferring those of a corporation. A relatively new structure, the LLC was first created by the US state of Wyoming under the assets into the FIC in return for its shares which might be divided into three different classes: Wyoming Limited Liability Act of 1977. Wyoming’s example was followed by Florida in 1982 and all US states have since enacted LLC legislation. The state of Delaware is usually considered as the preferred domicile for a US LLC • Class A shares, which carry votes but no right to capital or income; because of a comparative lack of regulations and bureaucracy. • Class B shares, which carry rights to income but no votes and no right to capital; • Class C shares, which carry no votes and no right to income but all rights to capital. An LLC has corporate form and personality but is categorised as a partnership under the US Internal Revenue Code. As such, an LLC is not independently taxable but rather its income is taken to “flow through” to its members who The family head transfers assets to the FIC and initially holds all three different classes of shares. The assets are taxed according to US principles as though they had received the income directly. Non-US persons are only taxed have simply been exchanged for the shares so there is no resulting loss to the estate and therefore there is no on US-source income or income connected with the conduct of a US trade or business. If the LLC earns only income chargeable transfer. which falls outside this definition and the members of the LLC are non-US persons with no US presence, then no tax would be payable either by the LLC or by its members. The Class C capital shares can then be gifted to family members in proportions decided upon by the family head, thereby avoiding liability to inheritance tax. The Class B income shares can be retained by the family head. They will Having non-US individuals or companies as the members can therefore create a non-taxable structure. If an LLC has have an assessable value but it will be minor or insignificant when compared to the value in the Class C capital shares. individual members, those members would most probably be taxed on profits received from the LLC in their country The Class A voting shares have no assessable value but allow the holder to control the FIC and thereby dictate what of residence, hence the recommended structure is to have two offshore companies (we recommend TCI companies) happens to the assets owned by the FIC, the way those assets are invested, the timing of any income distributions as the members. and everything else to do with the company.

Following the US lead, many IFCs have passed legislation enabling the incorporation of LLC structures. These are In this way, an FIC therefore allows the family head to continue to administer the assets without interference and primarily used to structure joint ventures between US and non-US corporations or persons. A non-US corporation or to enjoy the income, but they will have given away the substantial value that is largely in the Class C capital shares. person may gain a considerable tax advantage by structuring their affairs offshore, whereas a US corporation may About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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With care it might also be possible to structure a FIC with the capital rights attaching to memberships rather than PCCs (or SPCs) first originated in Guernsey and Delaware, but a number of other jurisdictions followed, and they can shares and with a Members Committee, controlled by the family head, having the right to allow new persons to now be formed in Bermuda, the British Virgin Islands, the Cayman Islands, Anguilla, Ireland, Mauritius, Jersey, the become members and to expel existing members. This structure would provide great flexibility and allow the family Isle of Man, Malta, and Gibraltar. head to make changes as circumstances change, similar to the way that they might rewrite a will. 6.7 Offshore Funds vii. Protected Cell Companies (PCCs) Protected Cell Companies – sometimes referred to as Segregated Portfolio Companies (SPCs) – are a form of company Offshore funds – variously known as collective investment schemes or mutual funds – are vehicles, registered or that segregates the assets and liabilities of different classes of shares from each other and from the general assets of domiciled in IFCs, that are designed to allow investment in a fund without being exposed to the burdens of onshore the PCC. Only the assets of each protected cell are available to meet liabilities to creditors in respect of that protected tax or regulation. They offer eligible investors significant benefits in terms of tax neutrality, speed, flexibility and cell; where there are liabilities arising from a matter attributable to a particular protected cell, the creditor may only pragmatic regulation in comparison to most onshore jurisdictions. have recourse to the assets attributable to that protected cell. IFCs are generally considered investor-friendly, well regulated and financially secure. Many IFCs offer a zero-tax PCCs were originally most commonly used in the formation of collective investment schemes as umbrella funds and regime for investment funds that are domiciled there, enabling the fund to reinvest that part of its investment for the formation of captive insurance companies, but are increasingly also being used for other purposes – for group portfolio’s gains that would otherwise have been lost to tax. Most onshore funds operate at a tax disadvantage to holding structures, Private Trust Companies (PTCs), family governance and succession planning, asset holding, private non-resident investors because dividends are often subject to high rates of withholding and taxes – commonly as investment funds, real estate, intellectual property and royalty ownership. high as 30%.

As PTCs, PCCs allows family or professional advisers to extend further their participation on the PTC board through An offshore fund can be managed similarly to an onshore fund and when income is repatriated to a high tax cellular companies. Assets can be segregated according to risk or ownership participation, assisting in the management jurisdiction it is usually taxed at normal rates as foreign sourced or arising income. and enjoyment of the required assets. PCCs can act as corporate trustee with underlying cells cradling the assets with common or differing legal and beneficial interests. This extends to Family Offices and the separation of roles and In addition, the regulatory regime in IFCs is deliberately light, with emphasis placed on the importance of balancing functions through cells. effective regulation for the benefit of the protection of investors on the one hand, with the establishment of a regime in which the conduct of investment business is fast and simple. For family governance and succession planning, different assets and beneficial interests can be apportioned between cells to help segregate entitlements whilst preserving the advantages of the pooled cellular framework. Different Typically, IFCs take a two-tier approach, making a distinction between funds that are offered generally to members share classes can be issued to suit the type of benefit to be given. Ultimately, either the core or underlying cells can be of the public – which require a high degree of regulation – and private or professional funds where investors can be gifted during the owner’s lifetime or on death. Ownership via a PCC can avoid the requirement for foreign probate assumed to be sophisticated or expert investors because of the nature of the offering. formalities. Coupled with the use of trusts, a family’s wealth can be apportioned and succession can be managed. Generally there is a high minimum initial investment, often US$100,000 or a requirement that investors establish that As a structure a PCC can hold and manage a diverse range of assets, contracts and interests under single or multiple they are “professional investors”. Alternatively a fund will be designed for a small and select group of investors and ownership by separating out risks and potential cross-asset liabilities. A PCC can contract for services through one the constitutional documents will restrict the number of investors, often to a maximum of 50. cell and manage a portfolio of assets in another, together, enjoying the same administrative framework but isolating their respective interests. For an entrepreneur with diverse affairs, the cellular multi-purpose vehicle approach offers Although most IFCs permit funds to obtain licences to operate as public funds, the onerous regulatory requirements a flexible administrative hub. associated with such licences usually mean that only a small minority of offshore funds is available for subscription by the general public. For private investment funds, the ability to hold separate family investments in different cells but as part of the same corporate structure will allow investment managers greater freedom in managing their mandate, and in Offshore structures are typically used to pool investments for private equity funds, venture capital funds, distressed particular with regard to risk. The cellular approach can be used to create private collective investment vehicles opportunities funds, real estate funds, mezzanine funds, funds of funds and hedge funds. for a single family with different investment requirements or for unrelated clients each investing through one or more dedicated cell. The relative absence of regulation relating to leveraging and investment strategies in IFCs encourages higher risk funds, such as hedge funds, to form themselves in those jurisdictions. The vast majority of the world’s hedge funds For real estate ownership, protected cells allow easier risk, financial and estate management. The ability to group are formed in IFCs, particularly the Cayman Islands, British Virgin Islands, Luxembourg or the Bahamas. cells can enable varied property interests to be consolidated or segregated, which will assist bank funding and collateralisation or even securitisation of rental streams. Cells can be migrated or sold rather than the property itself, enhancing the possibility of tax savings.

PCCs can also offer a flexible way to exploit intellectual property portfolios. Income and royalties can be segregated, as can different contracts. Jurisdictional franchises can be undertaken from different cells and IP owners can separate out their offering between different cells – foreign earnings, trademark rights, branding and product development. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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7.1 Introduction

Although most people prefer not to think about their death, failure to plan in advance can mean that they leave their estate in disorder. This will then have to be sorted out by their successors – often at great expense and inconvenience, and at a time when they may be emotionally vulnerable.

Many people seek to order their affairs by making a will. Under this arrangement the executors named in the will apply for a grant of probate, take possession of the assets of the deceased and then distribute those assets according to the terms of the will. Such arrangements are perfectly in order but result in high administration costs (often around 4% to 6% of the total value of the estate), long time delays (even a simple estate would normally take at least one year to be wound up) and, very often, a large tax bill.

The only real alternative to a will is for the individual to set up a trust during their lifetime. With careful planning, this can eradicate delays, administration costs and tax liabilities, as well as bestowing a large number of additional benefits. For these reasons the use of trusts is increasing dramatically.

The purpose of this section is to provide an explanation of how trusts can be used to advantage and to dispel some of the most common misconceptions about them.

i. Trust Concept A trust is an arrangement whereby property is transferred­ from one person (the Settlor) to another person or corporate body (the Trustee) to hold the property for the benefit of a specified list or class of persons (the Beneficiaries). A trust can be created solely by verbal agreement but it is normal for a written document (the Trust Deed) to be prepared. This evidences the creation of the trust, sets out the terms and conditions upon which the Trustees hold the trust assets and outlines the rights of the Beneficiaries. In essence, a trust is not dissimilar to a will except that assets are transferred to the Trustees during the Settlor’s lifetime rather than to executors upon the death of the owner. The trust deed is therefore similar to the will.

Those unfamiliar with the trust concept usually express concern at the idea of transferring ownership of their property to a Trustee. This concern can be alleviated if the trust concept and the distinction between legal and beneficial ownership is properly understood, and provided that the trust is governed by a reliable trust law that can be en­forced in a reputable jurisdiction.

ii. Legal and Beneficial Ownership The practical advantages of a trust are derived from the fact that a distinction is drawn between the formal or legal owner of property and the person who has the use or benefit of the property – the Beneficial Owner. For formal legal purposes the Trustee is recognised as the owner whereas the persons who have the use or benefit of the property are the Beneficiaries. It is possible for the Settlor to retain an interest in the trust and to be an actual or potential Beneficiary but this can have estate duty and tax disadvantages. It is vital that the Trustee remains inde­pendent and exercises proper control over the trust property. The trust may be invalid if the Settlor continues to exercise control over the trust assets by retaining benefit or control, or by giving directions to the Trustees.

iii. Accountability of Trustees Trust law imposes strict obligations and rules on Trustees. There is a basic rule that a Trustee may not derive any advantage, directly or indirectly, from a trust unless expressly permitted by the trust – for example, where he is a professional Trustee and the trust provides for a right to charge for his services. Full disclosure of the basis and amount of charges is required. A professional Trustee who derives some indirect commercial advantage that is not fully disclosed and approved will be acting in breach of trust and will have to account to the Beneficiaries for the advantage gained. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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iv. Duty of Trustee to Obey Trust Document ii. Tax Planning Trustees must follow the Trust Deed and are subject to very strict rules governing the way in which their powers and Assets transferred into trust are no longer considered as belonging to the Settlor, so the income and capital gains discretion may be exercised. generated by those assets are taxed according to the rules governing the legal owner – the Trustee. Inheritance tax would be eliminated because the Trustee would continue in existence despite the death of the Settlor. Anti- v. Fiduciary Relationship of Trustee avoidance legislation in the home country of the Settlor, or in the location of the trust assets, may seek to counteract The courts regard a trust as creating a special relationship that places serious and onerous obligations on the Trustee. this outcome but a correctly structured and administered trust should produce substantial tax savings. Trustees are therefore subject to the following rules: iii. Confidentiality a. No Private Advantage Proving a will is a public procedure. The tax authorities will need to receive a complete list of all the property owned A Trustee is not permitted to use or deal with trust property for private direct or indirect advantage. The court will by the deceased in order to assess the amount of estate duty payable before the property can be transferred to the hold them liable to account for any profits made in breach of this obligation. executors who may then distribute to the legal heirs according to the will. This procedure is entirely unsuitable for those who wish to keep details of their assets confidential. The only other legal form of transfer is via a trust and this b. Best Interests of Beneficiaries would generally save estate duty and keep the trust assets confidential. Trustees must exercise all their powers in the best interests of the Beneficiaries of the trust, and disregard the interests of others, including the Settlor. iv. Avoiding Forced Heirship Many continental European countries, civil law jurisdictions and countries of Islamic tradition have “forced heirship” c. Act Prudently provisions, which prevent the deceased from leaving his property to whomever he wishes. Typically one-third of Whether or not a Trustee is remunerated, he must act prudently in the management of trust property and will the estate must be left to children, one-third to the spouse and the other third is the free estate that may be left to be liable for breach of trust if – by failing to exercise proper care – the trust fund suffers loss. In the case of a anyone else. If that course of action doesn’t appeal, a trust will frequently be the answer because it will allow a wider professional Trustee, the standard of care that the law imposes is higher. Professional Trustees hold themselves or different distribution of the estate. out as having special expertise and the courts will expect them to exercise a high standard of competence. Failure to exercise the requisite level of care will constitute a breach of trust for which the Trustees will be liable to v. Estate Planning compensate the Beneficiaries. This duty can extend to supervising the activities of a company in which the Trustees Many people do not want their assets to pass outright to their heirs, whether chosen by them or as prescribed by law, hold a controlling shareholding. and prefer to make more complex arrangements. These might involve providing a source of income, but not capital, for a spouse for life, making provision for the education of children but not letting them have access to capital until 7.2 Advantages of a Trust later in life, or providing a fund to protect members of the family in the event of sudden illness or other calamities. A trust is probably the most satisfactory and flexible way of making arrangements of this kind. Trusts are an important tax planning tool but they also have other uses that are of equal, if not greater, importance. A properly drafted and managed trust can confer advantages under any or all of the following heads: vi. Protecting the Weak A trust provides a vehicle by which a person can provide for those who may be unable to manage their own affairs i. Asset Protection such as infant children, the aged, the disabled or persons suffering from illness. Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a trust no longer form part of the Settlor’s property, so the trust assets cannot be seized if a Settlor gets into financial difficulties. This is an oversimplification of the law. Under certain circumstances, the transfer into trust may be set aside and a court may order the trust assets to be transferred back to the Settlor.

The rules of many onshore jurisdictions make this possible if a creditor of the Settlor, who cannot otherwise get paid, can show that the Settlor transferred assets into trust with the intention of avoiding a current or future liability, or if the liability owed to the creditor arose within a certain statutory period after the transfer into trust. For these reasons it has not been possible to be certain that assets transferred into trust are completely safe from creditor attack.

To overcome this problem many offshore jurisdictions amended their trust or bankruptcy laws to create what is now commonly referred to as the “Asset Protection Trust” (APT). This legislation gives protection to assets transferred into the trust structure from all forms of creditor attack, provided the Settlor can show that he was solvent at the time of the transfer and did not become insolvent as a result of that transfer. By choosing an offshore jurisdiction­ which has enacted APT legislation it is possible to gain a degree of additional asset protection over and above that inherent in a normal trust structure. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

Have your cake... and eat it! 70 71 There are substantial benefits to putting assets into trust but many people dislike the resulting loss of control. Fortunately there is a solution.

A Private Trust Company allows family members to continue to participate in decisions relating to the management of assets, without invalidating the trust. vii. Preserving Family Assets Preserving the family assets, or increasing them, is often a motive for setting up a trust. An individual may wish to This means you can plan for the future, without compromising the present. ensure that wealth accumulated over a lifetime is not divided up amongst the heirs, but is retained as one fund to Sovereign advises clients worldwide on their succession strategies. accumulate further, with provision for payments to members of the family as the need arises while preserving some assets for later generations. This can be achieved through a trust. Do not delay. Contact us now to make sure that your family, and not the taxman, can enjoy your cake. viii. Continuing a Family Business [email protected] An entrepreneur who has built up a business will often be concerned to ensure that it continues after their death. If the shares in the company are transferred to Trustees prior to death, a trust can be used to prevent the unnecessary SovereignGroup.com liquidation of a family company and to ensure that the individual’s wishes are observed. These might include provision for payments to be made to members of the family from dividend income, with the Trustees retaining the shares and keeping the company running except in special circumstances justifying sale of control or liquidation. This may be particularly advantageous where family members have little business experience of their own or where they are unlikely to agree on the correct way to manage the business.

ix. Gaining Flexibility The best-laid plans can rapidly become obsolete but a Discretionary Trust can provide a system of management of property that is capable of adapting as circumstances demand. No Beneficiary has any fixed or absolute interest in the trust assets under a Discretionary Trust. Instead, the Settlor can simply nominate a class of Beneficiaries and the Trustee is given wide discretionary powers in terms of whether, and to whom, he distributes trust assets. Beneficiaries only have a contingent interest and avoid any tax liability until such time as a distribution is made to them.

7.3 Which Jurisdiction?

There are many jurisdictions, both onshore and offshore, in which it is possible to set up a trust. When choosing the best jurisdiction it is important that it offers: • a strong tradition of enforcing trusts; • an English Common Law system; • an established reputation for trust business; • modern legislation including contemporary trust concepts – particularly Asset Protection Trusts; • low or no taxation for trusts.

In the light of these requirements, the onshore jurisdictions such as the UK, USA and Australia are unsuitable because of high tax. Some jurisdictions are not recommended because of political uncertainties, or because they have only recently started to attract trust business with the result that their courts and professionals have limited trust experience. Other jurisdictions, whilst being noted for their expertise, have not kept pace with the modern trends in legislation that bring additional benefits and additional protection to trust assets. Some of the more traditional trust jurisdictions, such as Jersey and Guernsey, fall into this category.

There is a very wide choice of jurisdiction but only a small number are able to offer all the important elements. Although there are other jurisdictions which offer similar advantages, we believe that Gibraltar, the Turks & Caicos Islands and the Isle of Man are amongst the best available. Gibraltar and the Turks & Caicos Islands, in particular, have initiated strong asset protection legislation. Sovereign Trust (Isle of Man) Limited, Sovereign Trust (Gibraltar) Limited and Sovereign Trust (TCI) Limited are fully licensed to act as Professional Trustees in their respective jurisdictions. About The Sovereign Services Frequently Asked Case Studies Principles of Corporate Trusts and Sovereign Group Directory Questions and Tax Law Trustee Services

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7.4 Disadvantages and Solutions vi. Joint Trustees There is no reason why a trust cannot be structured so that there are joint Trustees, with the agreement of both i. Irrevocability being required to take any action. The second Trustee may be the Settlor himself or a company controlled by the It is incorrect to assume that trusts cannot be revoked. Trusts can be made revocable but this usually has tax, estate Settlor. Again, there may be negative tax or other consequences resulting from such a structure if the Settlor is duty, asset protection and stamp duty consequences. Revocability is a matter to be discussed when the terms of the resident anywhere other than a low tax jurisdiction. Alternatively, a check and balance may be obtained by having trust are considered. two different professional trust corporations acting as joint Trustees. This can be cumbersome and expensive but may be suitable for certain trusts. ii. Loss of Control of Property Many potential Settlors are reluctant to transfer property to Trustees because they fear loss of control over that vii. Private Trust Companies property. For those who wish to continue to exercise effective control over the trust assets after the transfer, careful A Private Trust Company (PTC) is a company formed for the specific purpose of acting as Trustee of a single trust, or planning – together with an understanding of the fundamental legal requirements of a trust – is required if the trust a group of related trusts. Family members can participate in the management of the company and therefore in the is to remain valid. If a Settlor retains too much control over the assets there is a risk that the trust will not be effective decisions that need to be taken by the PTC as Trustee, including decisions relating to the control and management and the Settlor will continue to be regarded by the law as the owner. If this happens all the advantages of having of companies owned by the Trustee. Such participation would not be possible if the Trustee was a third party the assets held in trust may be lost. In particular, a court may force a Settlor to exercise any control he retains in a professional trust company. particular manner thereby negating any asset protection advantage that would otherwise have existed. Despite this, there are devices that may be used to give comfort to a Settlor. A third party professional trust company will often not be in a position to offer the Settlor the degree of flexibility and the speed of response that they require – and its employees cannot be expected to be as familiar with the iii. Memorandum of Wishes business of companies owned by the trust as the family members themselves. Decisions may have to be referred When setting up a discretionary trust it is common for the Settlor to indicate to the Trustees how the Settlor would internally or external advice obtained before they can be put into effect. If a change of Trustee is desired it can be a have dealt with those assets if he had retained ownership. The Trustees will then make a comprehensive note of those lengthy and expensive process. But with the PTC structure, these problems can be largely avoided. Directors familiar wishes in a written memorandum, to which they would refer before dealing with the trust property. The wishes of with the business make the decisions and, if a change of direction is desired for the management of the trust, this the Settlor will not be binding on the Trustees but, in practice, most reputable Trustees would be reluctant to deal can be achieved by changing the board of the PTC. A PTC can therefore provide greater comfort for the Settlor that with the trust property in any way other than that suggested by the Settlor except, for example, where a change in his or her objectives in creating the trust will be met. circumstance or other matters suggests it is clearly disadvantageous to the Beneficiaries to act in that manner. It is usual and advisable to have at least one director who is a trust expert because running a trust company is iv. Protector complicated and is also very different from running a normal company. To avoid arguments that a trust is a sham, we It is possible to appoint a Protector to exercise some de­gree of control over the trust property. In our view, it is unwise believe it is vital to have expertise on the board to add substance and credibility to the PTC and to ensure that the for a Protector to be given anything other than negative powers – that is, the Protector’s powers should be limited to PTC – and any trusts that it administers – is run correctly. vetoing the decisions or actions of the Trustees rather than having power to force the Trustees to act in any particular way. If the latter, a Protector could be found to be a “quasi Trustee” and negative consequences may ensue, especially The directors of the PTC must remember that all decisions that they take in relation to the trust must be in the if the Protector were to be resident in a high tax country. It is usual for a trusted friend, family relative or professional interests of the Beneficiaries as a whole. They should not be unduly influenced by their personal circumstances advisor of the Settlor to be appointed as Protector but it is also becoming increasingly common to use the services or desires. of a professional trust company. For this reason Sovereign is able to serve as a professional Protector where we are not retained to act as Trustees. Generally an offshore trust will only be subject to the offshore tax regime if it is administered by a trust company that is managed and controlled offshore. To achieve this, it will generally be necessary to have at least a majority of v. Two-Tier Company and Trust Structure dir­ec­tors residing offshore. If the Settlor is an on­shore resident, then they could be one of the directors, but on­shore Greater flexibility can sometimes be achieved by having the underlying assets owned by a company whose shares are family members should not form a majority on the board. then owned by a suitable trust, rather than the underlying assets being owned directly by the trust. The Settlor, or an appointee of the Settlor, may act as the director of the company and may therefore exercise day-to-day control More important than the constitution of the board will be the ultimate ownership of the PTC because this will, if over the underlying assets with minimal interference or need to refer to the Trustees. This two-tier structure can be the owners feel it necessary, allow them to remove directors and replace them. In this way the aim of having more used to good effect in certain circumstances but may have tax and other disadvantages where the director of the control over the affairs of a trust would not be compromised, even if no family members were represented on the company is resident in a high tax country. board, provided that ownership is in the hands of the Settlor or his family.

For this reason a PTC is best set up as a company limited by guarantee whose members can be appointed and removed, or cease to be members, upon death or the attainment of a certain age. As a result, the ultimate control of the PTC can rest with the family irrespective of the constitution of the board of directors, thereby giving the Settlor added comfort, while also avoiding any problems associated with having to transfer shares on the death of a member. 74

All the principal offshore locations now have in place licensing regimes for professional Trustees but many jurisdictions specifically exempt PTCs from the requirement to be licensed and regulated, provided that the PTC acts as Trustee solely of a specific trust or group of trusts, and does not solicit from, or provide trust company business to, the public. In most cases there is also no requirement to submit any reports or accounts to any statutory body of either the PTC itself or of the trusts for which it acts as Trustee.

Although the costs of establishing both a PTC and the trust or trusts of which it is to act as Trustee, are generally higher than the cost of simply establishing a trust, the ongoing costs may be less than the Trustee fees that would be charged by an independent third party Trustee. This is particularly the case where the trust assets are very substantial because independent Trustees will often charge fees based on a percentage of the assets. viii. Costs ARTWORK FOR CHILDREN IN NEED It is often assumed that the costs of running a trust are prohibitive. It is true that many of the major banks and other financial institutions charge hefty fees for setting up a trust and also charge a percentage of the trust assets in annual Supporting disadvantaged children using the arts as administration fees. The fees charged by smaller, independent trust companies are generally more reasonable and rehabilitation, education and therapy since 2003. make trusts affordable to relatively modest estates. Independent trust companies offer a more personalised service and also benefit from the fact that they are truly independent. They can therefore select the best investments for the trust without being under pressure to place trust money with their own in-house investment advisors. Contact us to find out how you can help. [email protected] © The Sovereign Group 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Sovereign Group. The information provided in this report does not constitute advice and no responsibility will be accepted for any loss occasioned directly or indirectly as a result of persons acting, or refraining from acting, wholly or partially in reliance upon it. SovereignGroup.com