Having been in the US for the past couple of weeks, I witnessed at first hand Barack Obama’s impressive acceptance speech, and what a momentous occasion the November 2008 election has been right across America, and probably well beyond its shores. I remember where I was when the news of the 6th February 1958 Munich air disaster was announced in the school playground, on Friday, 22nd November 1963 when Kennedy was assassinated, and on 21st July 1969 when I saw Neil Armstrong as the first man to ever walk on the moon saying “One giant leap for mankind”. Last Tuesday, 4th November 2008 could be a similarly momentous occasion at a time when a giant leap for mankind is truly necessary.
Taxation was a major issue in the Presidential election, but it was not clear exactly what Joe the Plumber had to say about it! In any event, US fiscal policy must be used wisely to re-generate the economy so that excessive tax burdens on business are unlikely in the current climate. In fact, Obama has vowed to abolish capital gains tax for small entrepreneurial businesses, and that Joe the Plumber would be better off from an income tax viewpoint.
Commentators have said that a recession is one way of regulating excesses in the economy, and we have certainly seen unacceptable excesses in corporate America and corporate UK, as well as many other western economies. The aboriginals in Australia burn down large swathes of forest in order to generate new growth, and call it “creative destruction”. Maybe the recession will provide the basis on which new economic growth can be achieved, and we all hope that Obama can lead America and the world through the current problems.
I feel slightly embarrassed to report that we at IFS are extremely busy. Some of our work is in fact creative deconstruction and creative reconstruction for some of our entrepreneurial clients who are adapting to the current climate. Many of our clients are still extremely active in the emerging markets of Eastern Europe, China, India and Africa, and this has been keeping IFS busy in recent months.
Finally, I hope that by now you have received our invitation for the IFS Landmark Reception on 4th December 2008 to be held at the Landmark Hotel on Marylebone Road, London NW1. Our Landmark Reception is going to celebrate the 25th year of the publication of “International Tax Systems and Planning Techniques” which is now on its 55th release, published by Sweet & Maxwell who are kindly part sponsoring the reception. Having recently moved offices to Regent’s Park, and creatively reconstructed IFS to adapt to the current economic climate, I also feel that this is a landmark worth celebrating. And after four years of developing the Opus group of companies, and since IFS is helping Opus to launch its deferred compensation message, Opus is the other sponsor for this landmark reception. In case you have not received an invitation and would like to join me and the rest of the team on Thursday, 4th December, please click here.
Since the directors of the Opus Group will join IFS in our Landmark celebration party and paying part of the cost!, I have agreed to write an article on deferred compensation arrangements, this being the core business model of Opus.
In very simple terms, if you are employed in the US, there is a maximum amount that you can put aside into a pension scheme which is tax deductible, and deferred compensation arrangements are being continously legislated against, even within the last month. In the UK, the maximum tax deductible amount is quite generous, although there is a lifetime cap of £1.65 mn for 2008. By contrast in Germany, the maximum annual payment which is deductible against taxable income is just €20,000! In Italy it is even less! Thus although every country recognises the need to plan for retirement, the amounts which may be set aside annually as genuine deferred compensation out of otherwise taxable employment income are limited.
These limits of annual deferred compensation amounts may be adequate for those who are in continued employment throughout their lives. But what about those who have relatively short-term income potential where the annual amounts allowed are of limited consequence over such a short term? Individuals who come readily to mind are sports personalities who may enjoy their sporting career over, say, a 5 to 10 year period, entertainers who may earn large amounts of income but only during a relatively brief term of their popularity, and perhaps expatriate executives who are asked to work abroad for a few years only on behalf of their international employer and are offered an extremely attractive package to do so. Why cannot they be allowed to defer compensation on which they pay tax until they eventually receive this income, by utilising pension and other arrangements to receive a major part of their short-term income?
The Opus Group is established in both Switzerland and Cyprus to create deferred compensation arrangements which have no limit. By employing the individuals through Opus and providing their services to third parties, gross income is received by Opus and can, without limitation, be paid into deferred compensation arrangements.
The Opus Group make it very clear that these arrangements are only valid if individuals do not require the income immediately. It does not believe in ‘rinky dinky’ structures whereby the deferred compensation entities ‘lend’ money back to the relevant individuals in the hope that this is not treated as earned income. Having never promoted tax schemes, I have always advised Opus of the concept of ‘constructive receipt of income’. This is where ultimately the same employment income is received in another manner as described above, yet the pound, euro or dollar notes are just the same!
Werner Berger is Non-Executive Chairman of the Opus Group of Companies who is based in Zurich, and he will be present with his co-director Marina Pittalis at the Landmark Hotel at 6.30pm on Thursday 4th December. Werner and Marina would be more than happy to discuss Opus with any reader who would like to attend the IFS landmark celebration.
Single premium offshore bonds are well understood and commonly used to good effect as investment wrappers within clients’ wealth planning structures – however, the investments to which the value of the bonds are linked tends to be restricted to collective investment schemes.
Recently, there has been increasing interest in the use of insurance bonds whose value can be linked to other assets such as private company shares. In the UK, such bonds are known as ‘Personal’ Portfolio Bonds (PPBs) or highly personalised bonds.
One reason for this is that, as a general principle, Governments encourage life insurance and therefore such arrangements are often afforded beneficial tax treatment.
Additionally insurance arrangements are accepted and understood world-wide as a truly commercial arm’s length transaction, whether the premium is paid in a single instalment or over a period of time.
Such arrangements are worth consideration when planning structures for entrepreneurial clients with private company investments.
To date, the use of highly personalized bonds in most countries has been fairly limited. This is because historically there has been difficulty in finding an insurance carrier prepared to take personalized assets onto its balance sheet at a reasonable cost. Most insurance carriers are understandably very fond of their traditional asset based fee arrangement, and unquoted assets are difficult to value.
This is now changing. There is a growing selection of insurance carriers participating in this market place – and cost effectively. We are aware of half a dozen insurance providers who will write highly personalized bonds.
The UK is one jurisdiction where the use of highly personalized bonds is very popular. Because of their commercial nature, UK authorities have only attacked highly personalised bonds from a tax perspective with a rather ineffectual notional tax based on premiums, even through the bulk of the funds required could be contributed by way of loans.
Other than notional annual tax on the premium, the taxation of a highly personalized bond in the UK is similar to that of any other offshore bond. Which means that, all UK tax on income and gains on assets connected with the bond may be deferred indefinitely and any withdrawal or surrender is treated as income for UK tax purposes. This allows a UK resident bond holder to sell and switch any investments owned within the bond (which could consist of investment assets as diverse as land or private company shares), without triggering any immediate liability to UK tax.
Unwinding the bonds whilst UK resident will attract a potential 40% tax charge upon surrender in the hands of UK residents, however, this can be mitigated entirely if the bond is surrendered while the bond holder enjoys a full tax year sabbatical in a suitable territory. Alternatively the bond could be owned via an offshore company, the shares of which could be disposed of for cash thus resulting in an 18% capital gains tax charge.
The benefits of highly personalized bond structures are worth investigating for clients from a number of other countries. Certainly, we have seen bonds used in structures for clients from Hong Kong, Ireland, Estonia, Italy and South Africa as well as the UK although, of course, the tax treatment of the bonds differs in each territory.
Overall, the potential applications of highly personalized bonds for both UK and overseas residents would seem to be expanding.
IFS would like to thank Martin Katz of Middleton Katz Chartered Secretaries LLC for the above artcile. Should you require any further information, please go to www.middletonkatz.com.
The Austrian Holding Company
Austria is famous for its Austrian Holding Company Regime and the far reaching tax benefits of such a holding company. What are the key features of this Austrian Holding Regime?
Intercompany dividends are tax exempt whereas capital gains resulting from the sale of shares in an Austrian corporation are taxable at the standard flat corporate tax of 25%. Financing costs effectively connected with the acquisition of the shares held are fully tax deductible.
Provided that the Austrian company holds at least 10% of the shares of a foreign corporate entity, comparable to an Austrian GmbH, for at least one year, any dividends received by the Austrian company and any capital gains resulting from the sale of the shares of the foreign corporation are tax exempt in Austria, regardless of whether Austria has a treaty with that foreign country or not.
Austrian law does not know any CFC-legislation or thin capitalization rules or debt equity ratios. Interest is fully tax deductible and can compensate any other income which is achieved by the Austrian corporation; moreover there is no withholding tax levied upon interest paid to foreign lenders.
If the Austrian corporation holds shares in a foreign entity which receives passive income, the sale of such a participation and the dividends distributed to the Austrian company will be taxable with a foreign tax credit granted. However, in the absence of CFC legislation, the mere holding of shares in such corporations does not trigger any taxes in Austria.
The Austrian tax authorities categorize income as passive, and therefore taxable when distributed, if the following income is achieved by the foreign subsidiary and, at the same time, the overall tax burden of this subsidiary is not more than 15%:-
– interest income
– royalty income
– capital gains achieved by selling shareholdings of less than 10% in other corporations
However, foreign rental income is considered to be active income, so that the participation exemption will be available as above in such situations.
As foreseen in the New Group Taxation Regime, losses suffered by foreign subsidiaries can be set off from the domestic tax base of the Austrian company, provided that the Austrian company holds more than 50% of the shares of the foreign subsidiaries.
Although losses from the foreign subsidiary can be set off from the tax base of the Austrian parent company, dividends paid by such a foreign entity are still tax exempt. Also; indirect participations via partnerships lead to tax exempt income for the Austrian Holding Company.
Taking into consideration that Austria has a far reaching treaty network (more than 80 treaties) including countries like Barbados, Belize, Cyprus, Estonia, Liechtenstein, Luxembourg, Malta, San Marino, Switzerland, Singapore and the UAE just to name a few of those, which also have very interesting tax regimes, it is of course a fact that these very interesting tax treaties open great tax planning opportunities coupled with the Austrian holding company regime.
Together with a generally friendly tax climate and the willingness of the Austrian tax administration to give written rulings, the Austrian Holding Company serves as an excellent tool for tax planning purposes and as a suitable platform for investments into treaty or non-treaty countries.
IFS would like to thank Erich Baier for the above article, should you require any further information on Austrian Holding Companies, please contact Erich by email on firstname.lastname@example.org.