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Chance for offshore asset protection trust

Offshore trusts: Asset protection chances 

Let’s see how CIC rules affect the use of popular companies and structures in Malta, the UK, and Cyprus.

Case 1. Maltese Trust – for owning personal assets, investment portfolios and foreign companies

Malta provides an opportunity to create a trust as a special tool for owning real estate, personal family assets, protecting various assets from encroachment by lenders and raiders, as well as their subsequent transfer to the next generations of families without tax losses. Discover more information at https://offshorecitizen.net/asset-protection/.

In particular, a wealthy businessman can establish a trust – personally, or by transferring assets from companies owned by him to the trust. The ownership of the assets will go to the address of the trust (trust manager), which, as a rule, is a trusted lawyer of a businessman who is knowledgeable about family assets, its business and financial expectations. A trust is bound by a written assignment of a businessman (trust declaration) and is obliged to manage the assets received on the trust with the greatest benefit for the beneficiaries (beneficiaries), who are the persons identified by the founder.

From the point of view of the Russian rules, CFC Trust is a structure without forming a legal entity. We can say that this is a separate complex of property owned by the trust manager. Of course, with incorrectly “tuned” / created trust structures, various negative tax duties, consequences and risks in Russia can arise. However, with a balanced approach, they can still be avoided.

In particular, the tax resident of Russia will not be recognized as the controlling person of the trust if he is not entitled to receive the trust profit, cannot dispose of such profit and has not retained the rights to the property transferred to the trust, does not exercise control over the trust. Under the control is understood the ability to influence decisions made by the trust manager for the distribution of profit (income) of the trust.

Case 2. British Partnerships (UK LLP) – for international trade

A worthy and more respectable alternative to the classic “offshore” may be the British partnership, which is a legal entity. Partners are liable for its obligations only to the extent of the value of their contributions to the partnership (the rest of the property remains outside the risk zone from operating trading activities). The advantage of the partnership is that it is a tax-transparent structure.

The partnership itself is not obliged to pay income/income tax since the income comes from the partners, and not from the partnership itself. As a result, taxes should be paid only by partners in the country of their tax residency. In the case when the partners are non-residents of Great Britain, the income from activities is obtained from sources outside of Britain, such income and profits will not be taxed in “Foggy Albion”. By the way, partners can operate in countries with a territorial tax regime (for example, Hong Kong, Singapore), which excludes taxation of partners on such incomes and in the country of their incorporation.

These features make the British partnership a very interesting tool for running a trading business. It is important for Russian businessmen to take into account that the profit of active foreign companies does not equal the personal income of a shareholder as a controlling person in Russia. At the same time, an active company is a company, more than 80% of whose revenues are active (in particular, income from international trade in goods). It is required to notify about participation and control over such a partnership in Russia, but his profit will not be equated with the personal income of a Russian businessman.

Case 3. Cyprus Holding – for groups of companies from Russia and the European Union

Cyprus does not burden investors with a tax burden. Companies that are created and managed by Cyprus directors are considered tax residents of the Republic of Cyprus, and their operating income is subject to corporate tax at a rate of 12.5%. In addition, Cyprus boasts a good infrastructure, qualified personnel to conduct business, a pleasant location in the Mediterranean.

For contributions to the capital of a Cyprus company after 2015, a special regime is provided – “Notional Interest Deduction”. It provides an opportunity to reduce the company’s profit before tax by the amount of the deposit up to 80% of the profit. Thus, the current corporate tax burden, the rate of which is only 12.5%, is further reduced (up to a maximum of 2.5%).

Dividends received by a Cyprus company from abroad are exempt from corporate tax (provided that they are not recorded as expenses at the source of payment).

With respect to foreign incomes, a Cyprus company is granted the right to reduce the corporate tax on taxes paid/withheld abroad – on the basis of numerous bilateral agreements on avoidance of double taxation concluded by the Republic with many countries of the world. Even if there is no such agreement, the Cypriot state provides the right to offset foreign tax unilaterally. When paying a tax on dividends received from companies – residents of the European Union – you can also deduct the tax paid on the profits of the company – the payer of dividends (the so-called underlying tax).

The above-described international trends and tools to counter the use of offshore and foreign structures require reciprocal decisions and actions from wealthy citizens of Russia.

It is advisable to do this now, without delay. The tax authorities will test the norms of the tax legislation on the CIC on those structures whose owners have ignored the new trends and the wind of change. 

CICs were often created and used to save taxes in the shareholder’s country of residence. For a long time, this did not create problems for Russian businessmen.

Multinational companies, large and even medium-sized businesses around the world have been actively used by foreign companies and structures for hundreds of years to conduct business in other countries and for “covert” tax optimization by transferring profits from the source country to low tax (offshore) jurisdictions. 

Every year losing millions and billions of dollars, some states have passed legislation on controlled foreign companies, which equates the profits of a foreign company to the personal income of its shareholder. And regardless of whether the profit was distributed to the shareholder as dividends or remained in the accounts of the foreign company itself. This is done in order to demotivate shareholders from high-tax countries to create offshore companies and use them to accumulate capital as “wallets” without paying high taxes in their country of residence (tax residence).

There are quite a few countries that have adopted legislation on controlled foreign companies (or abbreviated to KIK): Australia, Argentina, Brazil, Great Britain, Hungary, Venezuela, Germany, Greece, Denmark, Egypt, Israel, Indonesia, Iceland, Spain, Italy, Canada , China, Korea, Lithuania, Mexico, New Zealand, Norway, Peru, Poland, Portugal, Russia, USA, Turkey, Uruguay, Finland, France, Sweden, Estonia, South Africa, Japan.

There is a group of countries in which the rules on CFC are not established, however, there are legal instruments that, to a certain extent, perform similar functions and are aimed at countering the use of offshore companies in business. Such “analogues” are in Austria, Latvia, the Netherlands, Slovenia, and Malta.

A number of countries, for various reasons, still do not have legislation on the CIC at all, without restricting their citizens and tax residents to use offshore companies, including to reduce taxes payable to the budget. For example, Belgium, Gibraltar, Hong Kong, Cyprus, Luxembourg, Singapore, Czech Republic, Switzerland.

72 states agreed to fight against the erosion of the tax base in their territories and to oppose the transfer of profits to low-tax jurisdictions. And in support of June 7, 2017, in Paris, they signed the Multilateral Convention – the so-called BEPS plan. The plan includes, among other things, recommendations on how to correctly pass laws aimed at effectively combating the use of foreign companies to reduce taxes.

This ensures that CFC rules will be actively developed in many countries around the world. However, this does not preclude the use of foreign, including offshore companies in the future.

Russian version of de-offshore

In 2015, CIC rules appeared in Russia. They obliged Russian residents to notify the tax inspectorate of participation in foreign companies with a share of more than 10%, to notify about control over them (with a share of more than 25% or above 10%, with the additional condition that all residents of Russia account for more than half of the company’s capital), to give financial statements / audit of the performance of such CFC. The rules also provide in some cases the obligation of a shareholder / controlling person to declare the profit of a foreign company as their personal income for tax purposes in Russia.

The December list of countries that have agreed to automatically send to Russia information on the accounts of tax residents of Russia and foreign companies controlled by them added oil to the fire.

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Why do I need a CIC and how are they used 

KIK has long been created by investors all over the world, including from Russia, for doing business in an international format, opening accounts in foreign banks, and also for the following reasons:

1. Owning assets through CFC is more confidential and secure.

2. Flexible management of foreign assets with minimal taxes.

3. Indirect sale of foreign assets through the sale of shares in the company that owns them – with minimal taxes.

4. International trade, the production of goods, the construction of real estate abroad – without taxes and without respecting the hard currency restrictions in Russia, etc.

Thus, in many cases, CICs were often created and used precisely to save taxes in the shareholder’s country of residence. For a long time, this did not create problems for Russian businessmen. Since the probability of obtaining by the tax authorities, the necessary information for additional taxation was illusory, and it could be safely neglected. In 2015, the tools appeared, which created a lot of questions on the further use of the CIC by businessmen from Russia.

When France converts to the trust

Thanks to the last amended budget law, the last tax locks – the development of the trust were lifted It is a highly anticipated modernization of French financing law. 

Little used since its creation, especially in view of fiscal uncertainties, the trust is likely to know incontestably a renewed interest since the fiscal clarification provided by the very recent 2014 amended finance law. This clarification should not only allow a renewal of the trust but also revolutionize the financing of companies in France.

Recall that the mechanism of the trust was introduced into French law by the law of February 19, 2007. Directly inspired by the Anglo-Saxon trust set up in the Middle Ages to protect the patrimony of the Crusaders in their absence, the trust devoted the notion of patrimony to the detriment of the sacrosanct principle according to which a person can have only one patrimony whose entirety constitutes the guarantee of his creditors.

The Civil Code provides that the trust is the contract by which a settlor transfers property, rights or security, present or future, to a trustee who, holding them separate from his own patrimony, acts for a specific purpose for the benefit of a beneficiary. It is understood from this definition that the actors of the trust are:

 – the constituent: any natural or legal person,

– the trustee: who is the person who receives and manages the assets, property, and rights by keeping them out of his patrimony.

– the beneficiary: he can be a legal or physical person. It can be the settlor or the trustee. He has the broadest powers over the heritage and is accountable to the grantor, the beneficiary and the third party protector if it has been established,

– the protecting third party: he is the person who, if the settlor decides to set it up, will be in charge of supervising the proper execution of the fiduciary’s mission.

 Trust-Management / Trust-Security

 The legislator has assigned two missions to the trust:

 – the management trust: it consists in transferring assets to the trustee with the mission of managing them on behalf of the settlor or a third party beneficiary. This transaction isolates an asset to face liability.

 -the trust-security: it allows a debtor to transfer property to the trustee as security for the payment of a debt. If the debtor settles the debt, the trustee transfers the collateral back to the debtor. Otherwise, the creditor becomes the beneficiary of this property.

 It can not be used for successions

In both cases above, the grantor may continue to use the property, although transferred, in the event that an agreement of provision and enjoyment will be put in place. It should be noted that the trust can not be used for purposes of transferring grantor rights free of charge. The trust is not a tool of inheritance law, unlike the trust under English law.

 An efficient and flexible mechanism but little used

 The trust has mainly been used since 2007 by companies, either to organize their shareholding and secure shareholders’ pacts, or to manage a complex heritage or an activity in difficulty by isolating it, or, finally and most often, to guaranteeing a financial creditor a significant asset such as a factory, social security, etc … It is indeed as security that the trust has had its greatest success.

What better guarantee for the creditor than the possibility of becoming, by contract, the owner of the assets concerned by the trust? In comparison with the pledge, the pledge or a mortgage that allows the debtor to remain the owner, the trust-security involves the transfer of ownership to a trustee who may be the creditor himself.

A test of Bankruptcy

 In addition, and this is undoubtedly one of the essential strengths of the mechanism, since the assets transferred out of the borrower’s assets, the rights of the beneficiary are in principle not in competition with those of the other creditors of the grantor. The importance of this benefit is measured as soon as the settlor is in bankruptcy.

Collective proceedings law has indeed been favorable to the trust by providing that the assets, property, and rights can be validly transferred in suspicious period if the transfer acts as security for a debt contracted concomitantly. Similarly, throughout the duration of the class action (court safeguard, reorganization or liquidation) no one may impose on a trust a debt waiver or a capital conversion.

The trust contract is also not subject to the current contracts and can not be challenged by the legal agent. In the event of safeguarding and recovery and in the absence of an agreement of enjoyment and making available, the creditor beneficiary may also obtain the transfer of ownership for his benefit.

The grantor thus escapes the rule of bringing individual proceedings to an end as well as that of the prohibition of the payment of debts arising prior to the opening of the insolvency proceedings. Finally, in the event of an assignment under the authority of the Bankruptcy Court, the assets concerned by the trust will escape the procedure so that the beneficiary can then be disinterested in the transfer of these assets.

In the event of a judicial liquidation, the beneficiary will be able to ascertain the effectiveness of its guarantee without any reservations or conditions.

Towards the end of “double Luxco” and the French exception to “debt buyback”?

 This favorable reception by the law of the insolvency proceedings undoubtedly marked a turning point in the French legal tradition unfavorable to the financial creditors of companies in difficulty. This tradition led lawyers to resort to complex assemblies baptized by the “double Luxco” practitioners whose principle was to create, before acquisition or acquisition of a French target, several holding companies, two of which were superimposed in Luxembourg, the aim being to to circumvent the French law of collective proceedings in favor of Luxembourg law more favorable to creditors.

Thus, the international financial circles spoke of French exception to the “buyout of companies by the debt”.

 Lack of clarity on the part of the administration

However, despite all its remarkable assets (including the crucial one of favoring the financing of the companies in difficulty), the trust suffered from the beginning of a lack of craze more particularly due, in spite of the principle of fiscal neutrality wanted by the legislator, a lack of clarity by the Administration, traditionally hostile to the trust.

It still lacked a complete tax component that would complete this indisputable modernization of French law.

 The 2014 amending law: tax uncertainties finally lifted

It should be remembered that the transfer of the securities in trust means that the settlor is no longer a freehold holder. This condition of detention is normally a condition for the application of favorable mother-daughter and tax-integration regimes. This situation penalized the financing of companies that intended to use the trust-security of their equity securities.

Measures adopted in this way include the maintenance, under certain conditions relating to the exercise of the right to vote, of the dividend exemption scheme (mother-daughter scheme) and tax consolidation in the company set up in trust the securities of its subsidiaries. In particular, with respect to tax consolidation, the subsidiary whose securities are transferred to a trust may remain within the scope of consolidation since its securities are taken into account to assess whether it is controlled directly or indirectly by the company, head of the company. group.

In addition, the settlor determines the result of the trust by applying the rules specific to the group plan. In particular, the capital gains on the sale of fixed assets between the trust and a company in the tax perimeter remain neutralized for the establishment of the overall result as well as the dividends paid to companies of the group not having the status of the parent company.

Lastly, the minimum holding period for 2-year securities is not interrupted by the placing in trust.

 Make “debt buyback” possible

Given the decisive role played by groups of companies in LBO-type acquisition or restructuring transactions, it is certain that these few measures will definitely put the trust at the heart of the takeover and funding. This legal tool, perfectible but matured now, will also have the merit of greatly favoring the financial fortunes of companies in difficulty and incidentally to make financial arrangements simpler and safer.

The trust finally makes possible the “buyout of business by debt”. Let us pay homage to this aggiornamento of French law.