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In the realm of wealth structuring for high-net-worth individuals and families, private trust companies (PTCs) have gained significant traction.
A rising trend among private clients is the establishment of their own PTCs to act as trustees for trusts, as opposed to entrusting these responsibilities to professional trustee companies provided by offshore service providers.
Lets look at Cayman PTCS a bit more closely.
Central to the regulation of Cayman’s trust company industry is the Banks and Trust Companies Act (BTC Act), which mandates licensing by the Cayman Islands Monetary Authority (CIMA) for any company engaging in “trust business” within or from the Cayman Islands.
“Trust business” includes acting as a trustee for express trusts on a professional basis, as well as acting as an executor or administrator.
Since 2008, Cayman PTCs that meet specific criteria have been exempted from the licensing requirement under the BTC Act.
These PTCs must register with CIMA, demonstrating their eligibility for unlicensed status, as outlined in the Private Trust Companies Regulations (PTC Regs).
The scope of “connected trust business” hinges on the relationship between the settlors/contributors of the trusts in question.
PTCs acting as trustees for family trusts, for instance, typically meet this criterion seamlessly.
Unlicensed PTCs are required to maintain certain documents at their registered office in Cayman, including copies of trust terms, trustee and beneficiary details, settlor and protector information, and financial records related to their connected trust business.
The combined government incorporation fees and disbursements total around US$900 for an exempted company.
Registered office service providers charge additional fees, which vary among providers.
If the service provider also serves as the trustee for orphaning the PTC, an extra fee applies.
The CIMA application fee for PTC registration is approximately US$4,200.
PTCs can be owned in various ways, influenced by tax considerations and client circumstances.
Common ownership structures include individual ownership, purpose trusts, or charitable/non-charitable purpose trusts such as STAR Trusts.
At least one director must be an individual, but beyond this requirement, the board composition can align with the settlor’s preferences.
Control mechanisms may be established through the constitutional documentation of the PTC and the terms of the purpose trust, influencing the appointment or removal of directors.
Settlor involvement can take various forms, such as serving as a protector, a board member, or an advisor. The settlor’s role can be pivotal in key decisions related to the underlying trusts and businesses.
The PTC’s board must ensure alignment with the trust terms, seek professional advice as necessary, and maintain proper records.
For orphaned PTCs, funding strategies should be devised to ensure self-sufficiency or rely on invoicing for trustee services.
Cayman’s legal and regulatory environment positions it as an excellent choice for establishing PTCs.
These flexible structures enable bespoke trustee services and offer a platform for family members’ active participation in trust administration and business management.
If you have any queries about Cayman Islands Private Trust Companies, or other Cayman matters, then please do get in touch.
The Central Board of Direct Taxes (CBDT) announced changes to the so-called Angel Tax provisions.
It did this through a notification dated 25 September 2023.
The notice has made amendments to Rule 11UA of the Income-tax Rules, 1962, which outline the methodology for calculating the fair market value (FMV) of unlisted equity shares and compulsorily convertible preference shares (CCPS) under Section 56(2)(viib) of the Income-tax Act, 1961.
Section 56(2)(viib) is commonly known as the “Angel Tax” provision.
The Angel Tax provisions apply when a company not substantially owned by the public (private or unlisted public company) issues shares at a premium that exceeding the FMV of the shares.
The excess amount received is treated as income from other sources.
Prior to April 1, 2023, Angel Tax applied only to shares issued to Indian tax residents but now extends to shares issued to non-residents.
The amendments introduce flexibility in valuation methods and incentivize venture capital investments, with the following notable provisions:
The issuer company can choose from various valuation methods, including new methods for non-resident investors and venture capital investments
Five new valuation methods (e.g., Comparable Company Multiple Method) have been introduced for shares issued to non-resident investors.
These methods must be computed by a Category I merchant banker registered with the Securities and Exchange Board of India (SEBI).
The FMV of equity shares issued to venture capital investors can be used as a benchmark for shares issued to other investors within a specific period.
The valuation method for unquoted equity shares issued to Notified Investors is used as a benchmark for shares issued to other investors within a set period. Notified Investors are specified in Notification No. 29/2023 dated May 24, 2023.
The FMV of CCPS can be determined using the DCF method or new valuation methods based on the type of investor or FMV of unlisted equity shares.
The valuation date allows the use of a valuation report issued up to 90 days before the date of share issuance.
A safe harbour provision permits a tolerance limit of 10% between the issue price and FMV.
If the difference does not exceed 10%, the issue price is considered the FMV.
The Angel Tax provisions also apply to startups receiving investments from non-residents, with exceptions based on specified conditions.
While these measures are welcomed, Indian companies continue to face scrutiny regarding share premiums and valuation methods.
An observation is that Indian tax authorities often challenge valuation methodologies and assumptions, focusing on increasing the tax base by treating undervalued share issuances as income from other sources.
If you have any queries about the Angel Tax Rules, or any other Indian tax matters, then please get in touch
This is a dramatic week on the Israeli judicial front. Two massive amendments to the Judgement basic law passed their first reading in the Knesset. First, it is proposed to prohibit judicial review of the reasonableness of government decisions. Second, it is proposed to abolish the Israeli Bar Association (i.e. the Law Society). Many people are out demonstrating. But how will this impact the Israeli business scene? We briefly review these proposals.
A bill which passed its first reading in the Knesset on July 11, 2023, proposes to ban the Israeli High Court of Justice (“Bagatz”) from discussing or giving injunctions concerning the reasonableness of decisions of the government, the prime minister or any other minister. This would also apply to decisions of others “chosen by the public” as determined in any law. (Proposed Basic Law: Judgment (Amendment 5)(Reasonableness Standard)).
Why? The Commentary to the bill explains that the reasonableness standard currently enables the High Court to disqualify a governmental decision that does not give sufficient weight to different interests that ought to be considered…amounting to material or extreme unreasonableness. The Commentary says elected representatives of the public should consider this, not a Court. The Commentary also says the proposal would not stop the Court considering and issuing injunctions on other grounds, such as proportionality (presumably against a disproportionate decision).
Another bill which passed its first reading in the Knesset on July 5, 2023, proposes to wind up the Israel Bar Association and replace it with a quite different Israeli Lawyers Council (Draft Law Israeli Lawyers’ Council, 2022).
Currently the Israeli Bar Association is an autonomous body whose leaders are democratically elected by lawyers in Israel. It admits new lawyers, administers disciplinary matters and promotes other professional matters. This is all legal, pursuant to the Bar Association Law, 1961.
According to the latest Bill, the Israeli Lawyers Council would be an appointed body with the following members: a Chairman (District Court judge) appointed by the Justice Minister; 4 private lawyers appointed by the Knesset Constitution and Law Committee; a District Court judge appointed by the Supreme Court President; 3 public sector lawyers appointed by the Justice Minister; 2 representatives of the Finance Minister; 1 academic appointed by the Knesset Constitution and Law Committee.
The Lawyers’ Council would largely take over the Bar Association’s functions according to detailed provisions in the proposed bill. Note that the Justice Minister would issue ethical rules for lawyers. This would be after consulting the Lawyers’ Council and the Knesset Constitution and Law Committee.
According to the latest Bill (Section 67), the Lawyers’ Council would not take over the Bar Association’s function of appointing two representatives to the Judges’ Appointment Committee….
Currently, Israeli judges are appointed by the President based on the selection of the Judges’ Appointment Committee which has 9 members: the Supreme Court president; 2 other Supreme Court judges appointed by the Supreme Court; the Justice Minister; another Minister; 2 Knesset Members; and 2 members of the Bar Association. According to the proposed Bill, the last 2 would drop out leaving 7 members on the Judges’ Appointment Committee.
Why? The Commentary to this Bill says the interests of all citizens should be promoted, not just the welfare of the legal profession.
These are controversial proposals which the government may or may not refine before they are finally enacted. Regrettably, no written constitution is yet proposed to lay down separation of powers or checks and balances, not even a second Knesset chamber. A simple majority of the Knesset would be sufficient. All this is different from the situation in many other Western democratic countries.
Start-ups in Israel often now set up US parent companies which own intellectual property (IP) and Israeli limited scope subsidiary companies. This benefits the US treasury and puts the Israeli hitech economy and tax revenues on borrowed time.
Whenever an exit deal occurs, the US IRS would collect capital gains tax.
On the legal side, Israeli attorney Gidon Cohen, based in Ramat Gan, commented to us that judges must be seen to be impartial, professional and free from political influence. Otherwise, commercial disputes won’t be heard in Israel and Israel won’t be the forum for litigation. A left-wing liberal businessman will not want a biased right-wing judge, and vice versa. Impartiality is absolutely vital. Loss of faith in the Israeli legal system to enforce rights would reinforce the need to register IP abroad among other things.
Also, businesses don’t like surprises – the proposed Israeli judicial reform was scarcely mentioned in the last Israeli general election, it was mainly about personalities. The Shekel is fluctuating and international credit rating agencies have expressed reservations.
The next Israeli election is 3 years away. Market forces are here now.
It remains to be seen how things develop. One possibility is that compromise talks might perhaps resume at the residence of President Herzog, a lawyer, before the Knesset passes the proposals…..
If you would like more information about this issue or Israeli tax matters in general then please get in touch. The content of this article is provided for educational and information purposes only.
It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
A recent court judgment has held that non resident hedge funds should be treated like residents in Spain if they meet certain requirements.
Under the Non-resident Income Tax Law, hedge funds resident in Spain are taxed at a lower rate of 1%, while those resident in other countries are taxed at a higher rate of 19%, unless there is a relevant double tax treaty.
The Supreme Court ruled that this different treatment is discriminatory and goes against the free movement of capital regulated in article 63 of the Treaty on the Functioning of the European Union.
The court held that non-resident hedge funds should be treated like residents if they can prove that they are open-ended entities, that they have relevant authorization, and that they are managed by an authorized management company pursuant to the terms of Directive 2011/61/EU.
The nonresident hedge fund has the burden to prove these requirements, but a certain flexibility should be allowed due to the lack of specific regulations in Spain in this regard. If the Spanish authorities have reservations about the documentation provided by the fund, they must initiate an exchange of information procedure with its State of residence.
The Court also concluded that the restriction on the free movement of capital could only be considered neutralized by the provisions of a double tax treaty if the treaty permits the hedge fund (not its members) to deduct the total amount of Spanish tax withheld in excess. However, given the way hedge funds operate and are taxed, that neutralization is impossible in practice.
This judgment is significant as it removes discrimination against nonresident hedge funds and brings Spain in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union.
The decision clarifies the requirements that nonresident hedge funds must meet to be treated like residents and offers some flexibility in terms of providing documentation. It also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
In conclusion, the recent Supreme Court judgment in Spain has removed discrimination against nonresident hedge funds and clarified the requirements for them to be treated like residents.
This decision is in line with the free movement of capital provisions of the Treaty on the Functioning of the European Union and offers some flexibility in terms of providing documentation.
However, the decision also highlights the difficulty in neutralizing restrictions on the free movement of capital through double tax treaties in practice.
If you have any queries about issues around Spain non-resident hedge funds, or Spanish tax matters in general, then please do get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Over a year ago, we wrote an article called “She sells corporate shells” about the EU Commission’s proposal for a directive imposing new rules to prevent the misuse of shell entities for tax purposes.
In January 2023, the European Parliament approved the European Commission’s draft directive known as ATAD 3 to prevent the misuse of shell entities for tax purposes.
The directive includes several indicators of minimum substance to assess if an entity has no or minimal economic activity, which could result in the denial of certain tax benefits based on treaties or EU directives.
Unlike Pillar 2, ATAD 3 is not limited to international or domestic groups with global revenues exceeding EUR 750 million, meaning it will impact many small and medium-sized enterprises with an EU presence, increasing the administrative burden.
The European Council is not bound by the amended text and may still amend or decide not to issue the directive.
The Council will have the final vote, and ATAD 3 will be on the agenda of the European Council Ecofin meeting of 16 May 2023.
Member States are meant to transpose ATAD 3 into domestic law by 30 June 2023, and the directive would apply as of 1 January 2024, although the European Commission may relax the timeframe in light of the short timeframe for final adoption and implementation.
ATAD 3 targets passive undertakings that are tax resident in an EU Member State and deemed not to have minimum substance.
The directive aims to bring more entities into scope by lowering some gateway thresholds but clarifies that the intra-group outsourcing of the administration of day-to-day operations and decision-making on significant functions is not considered a gateway.
Certain entities, including UCITS, AIFs, AIFMs, and certain domestic holding companies, will benefit from a carve-out and be exempt from reporting obligations. However, entities owned by regulated financial undertakings that have as their object the holding of assets or the investment of funds did not retain the proposed amendment to introduce a carve-out.
If an entity passes all three gateways, it will have to report certain information regarding indicators of minimum substance through its annual tax return.
Failure to comply with the reporting obligation triggers a penalty of at least 2% of the entity’s revenue, and for false declarations, an additional penalty of at least 4% of the entity’s revenue would be due.
If an entity lacks substance in one of the indicators or fails to provide adequate supporting documentation, that entity is presumed to be a shell entity. However, an entity has the right to rebut this presumption.
If the entity cannot rebut the presumption, it will not receive a certificate of tax residence from its EU Member State of residence, resulting in the disallowance of any tax advantage gained through bilateral tax treaties of the entity’s resident jurisdiction or through EU Directives.
Regardless of whether the entity is classified as a shell, the reported information will be exchanged automatically.
Additionally, the European Commission is working on a new taxation package, including the Securing the Activity Framework of Enablers initiative and the FASTER proposal, aiming to introduce a new EU-wide system for withholding tax to prevent tax abuse in the field of withholding taxes.
The implementation of ATAD 3 and other initiatives to restrain the use of shell entities and aggressive tax planning may have an important impact on existing structures, and entities should be carefully checked on a case-by-case basis before the relevant date of entry into force.
If you have any queries about this article, or the matters discussed more generally, then please do not hesitate to get in touch
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Norway has seen a rise in the number of its billionaires leaving the country, in response to increased taxes.
The Norwegian government has implemented stricter rules for taxing its citizens, including the abolition of the five-year period for exit taxation of unrealized gains on shares and other assets.
This means that any gains on assets such as shares will be taxed immediately upon transfer or sale, rather than being taxed over a five-year period.
Additionally, the rules will be extended to include transfers of shares to close family members living abroad.
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As a result, many of Norway’s wealthiest individuals, whose net worth exceeds 1 billion Norwegian kroner (approximately 100 million euros), have reportedly relocated to countries such as Switzerland.
One of the main reasons for this trend is the significant difference in tax rates between Norway and other countries.
According to an analysis by the Heritage Foundation, the top tax rate in Norway is 47.8%, while the country’s total tax burden is 39.9% of total domestic income.
In comparison, Switzerland has a top income tax rate of only between approx. 25% to 40%, and its total tax burden is 28.8% of total domestic income.
Moreover, corporate profits are taxed at 28% in Norway, and dividends are taxed again at 28% income tax rate, leading to a de facto tax of 48.16% on company profits.
In contrast, Switzerland has lower profit taxes (between approx. 12% and 20%), lower income taxes (dividend privilege; between approx. 13% and 30%), lower wealth tax (0.1% to just under 1%), and certain cantons have regulations defining the maximum tax burden to prevent confiscatory taxation in special cases (especially in the case of large non-income-producing assets).
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The Swiss tax system is generally considered advantageous for high-net-worth individuals compared to other countries for several reasons.
First, Switzerland’s federal, cantonal, and municipal tax system allows for relatively low tax rates, especially for high-income earners.
In addition, Switzerland has favorable tax treatment for certain types of income, such as dividends and capital gains.
Dividends from significant shareholdings (10% or more) held as part of an individual’s private assets are subject to preferential taxation.
Capital gains from the sale of private assets are generally tax-free, with an exception on capital gains on Swiss real estate, which are taxed under a special regime.
The Swiss tax system is also decentralized, with each canton having the power to set its own tax rates, leading to a high degree of tax competition between the cantons. This can result in lower overall tax rates for individuals and companies.
Additionally, Switzerland has strict banking secrecy laws that provide wealthy individuals with a high degree of privacy and discretion in their financial affairs, and an extensive network of double taxation treaties that help avoid or significantly reduce double taxation and foreign withholding taxes on dividends.
Switzerland is also known for its high standard of living, excellent infrastructure, and high-quality health and education systems, making it an attractive location for wealthy individuals seeking a stable and prosperous environment.
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In conclusion, the increase in taxes in Norway has led to a rise in the number of billionaires leaving the country.
Switzerland has become a popular destination due to its advantageous tax system, which allows for relatively low tax rates, tax competition between cantons, strict banking secrecy laws, an extensive network of double taxation treaties, and a stable and prosperous environment.
Facing higher taxes in Norway? Don’t wait – see how relocating to Switzerland could dramatically reduce your tax burden and protect your wealth. Get in touch with an expert and take control of your finances now!
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.