WEALTH MANAGEMENT WORKSHOP MUNICH 15 APRIL 2015 PLANNING STRATEGIES FOR THE LIVES AND TAXES OF THE MOBILE WORKING RICH

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2 15 APRIL 2015 PLANNING STRATEGIES FOR THE LIVES AND TAXES OF THE MOBILE WORKING RICH

3 Overview Panel objective is to explore ways in which countries offer certain taxpayers various means to defer or minimize taxes. Might be done to benefit domestic taxpayers investing in certain businesses or economic sectors a country wishes to develop. Might also be done to attract investors or certain categories of immigrants, again to further country s economic planning. Countries employ various strategies and means to achieve these goals. We have identified four general categories of tax structures or strategies that some countries utilize for these purposes: 1. Domestic or host country tax holidays and incentives. These might include special tax regimes for certain categories of resident taxpayers, e.g., remittance basis taxation for non-domiciled residents. Might also include limited territorial taxation for, e.g., short-term (usually 5-6 years) immigrant or seconded employees. Might also include rate reductions or credits for certain economic activities country (or political sub-division thereof) wishes to attract or encourage. At extreme, might include tax rulings tied to taxpayer s expenditure (e.g., Swiss Cantons lump-sum or forfait regimes). In some countries, the schemes perceived to be directed at high net worth individuals ( HNWI s ) are under political attack on basis fairness grounds.

4 Overview 2. Deferred company tax for new/offshore businesses; deferred compensation schemes. Many countries have corporate tax provisions that permit deferral or exclusion of certain active offshore business income (so-called CFC provisions). Encourages development of export markets and new products produced in lower cost countries. At same time, many countries penalize attempted use of offshore structures to defer tax on passive or portfolio-type income, including non-active real estate income. Most countries have pension or retirement plan regimes that permit deferral of income from employment and self-employment. In some countries, qualified plans permit current employer deduction for contributions while plan beneficiary s tax deferred. Nonqualified plans generally defer employer deduction until beneficiary taxed. There are also variety of other deferred compensation regimes, frequently employing equity or synthetic equity. Planning generally plays off timing differences on deduction and income realization, and in best of all worlds, when former employee changes residence income not subject to tax in either former country of residence or new residence country.

5 Overview 3. Insurance products, trust, usufructs, etc. Many countries, especially in Europe, provide benefits for use of funded insurance products, which are frequently the basis for retirement planning. In some countries, insurance wraps permit deferral of investment income and might even be used to remove insurance proceeds from a decedent s estate for tax purposes. Most Civil Law countries permit usufructs to be used to minimize otherwise high inheritance tax costs. In Common Law countries, usufructs generally treated as life estates and not often used. Until fairly recently, trusts were generally a creature of Common Law countries and are used for variety of income tax and estate planning purposes. Many Civil Law countries permit use of family foundations, which are, for most purposes, akin to trusts. Relying on Hague Convention on Trusts, some Civil Law countries are now becoming more familiar with trusts and even permit creation of trusts under laws of Common Law countries (e.g., Italy). Some Civil Law countries now creating trusts by statute.

6 Overview 4. Residence and expatriation planning. Most countries impose tax on the basis of residence, generally on a resident taxpayer s worldwide income. By comparison, nonresidents are generally taxed by countries only on certain income or gains considered to be sourced in such countries or connected with a business there. Some countries also have special rules for taxpayers who are resident but not domiciled in such countries (e.g., U.K. and Ireland). The United States is the only major country that taxes its citizens on their worldwide income and gains, wherever they actually reside. Residence is defined by different countries by reference to many different factors. Days of presence in a country are frequently a factor, but other factors like having a permanent home or living with a family might also be relevant factors. Having a certain immigration status might also be considered. Taxpayers and their representatives can frequently manipulate the relevant factors to establish or break residence at opportune times for tax planning purposes. Some countries have special look-back or similar rules to try to catch transactions by persons trying to play with a country s residence rules.

7 Overview Finally, expatriation rules appear to be proliferating. These are rules that generally are intended to permit a country to tax a departing individual s accretions to wealth if the individual has a certain status or has resided in a country over a substantial number of years. (In the case of the United States, these taxes are also imposed when a U.S. citizen renounces or relinquishes that status.) This might be accomplished via a deemed disposition when such an individual breaks residence or by imposing tax on income or gains sourced in the country over an ensuing period. Thus, they are not regimes designed to attract investors or workers but quite the opposite. However, their proliferation is interesting and a matter that must be considered by mobile executives, investors and other HNWI s. The balance of the presentation will examine tax regimes in the countries of the panelists that fall into one or another of these favorable tax planning categories.

8 Spain 1. Domestic or host country holidays and incentives Applicable to Spanish tax resident individuals who: Come to Spain by reason of employment (except professional sportspersons) Come to Spain to become a company director or Member of the Board of a Spanish company (shareholding not > 25%) Have not been tax resident in Spain 10 years prior to impatriation Term: 6 years Individuals may retain employment abroad but provided no Permanent Establishment in Spain

9 Spain Income tax limited to Spanish source income and gains only, as well as employment income worldwide (but full exemption of non-spanish source professional or business income) Income tax rates: 24% on taxable regular income up to 600K, 47% on the balance (45% 2016 onwards) Spanish source investment income and gains: 24% marginal rate on income and gains > 50K (23% 2016 onwards) Wealth tax: Net Spanish situs assets only No 720 Foreign Asset Information returns Spouse and children not covered. IHT not covered. Mostly no Treaty benefits Grants Spanish domestic tax residence but not tax residence for Treaty purposes

10 Germany 1. Domestic or host country holidays and incentives Keine Extrawürste! Strict constitutional equal treatment principle No differentation between domicile and residence No exceptions from world-wide income or inheritance / gift taxation for German tax residents German living place constitutes German tax residence; no day-count!

11 Netherlands 1. Domestic or host country holidays and incentives Applicable to Dutch tax resident individuals who come to the Netherlands for employment reasons (special rules apply for professional sportspersons) Meant for employees with a specific expertise Specific expertise is deemed to exist when a gross salary of at least (2015) is earned Can be employed by your own company Term: maximum of 8 years

12 Netherlands Tax free remuneration of 30% of the taxable income Income tax limited to Dutch source income, as well as employment income worldwide (but full exemption of non-dutch source professional or business income) Spouse covered for the period they qualify as fiscal partners. Children covered till the age of 18 No exemption for inheritance and gift tax

13 U.S.A. 1. Domestic or host country holidays and incentives US foreign earned income exclusion US persons who are bona fide residents of a foreign country or meet a foreign presence test entitled to exclude up to $100,800 of compensation earned for services performed outside US in 2015; can also exclude certain foreign housing expenses No foreign tax credit on excluded income, but exclusion available even if no foreign taxes Adjustments if taxpayer engages in certain businesses where both services and capital are material

14 U.S.A. Puerto Rico US citizens resident in Puerto Rico and companies formed under Puerto Rican law subject to US federal income tax only on: (i) US source income; and (ii) income effectively connected with a US trade or business. Note that Puerto Rican residents are subject to Puerto Rican tax on their worldwide income, but such residents benefit from several tax exemptions discussed below.

15 U.S.A. Puerto Rico Economic Incentives Act of 2008 Certain entities engaged in business in Puerto Rico qualify for a fixed income tax rate (from 1%-12%) and other economic incentives, tax exemptions and tax credits. Entities qualify for these benefits if they are engaged in certain designated activities in Puerto Rico, including the development of licensed or patented software, the development of sustainable communities, and the performance of laboratory research and development activities.

16 U.S.A. An Act to Promote Exportation of Services of 2012 Certain companies that maintain a bona fide office in Puerto Rico qualify for the following benefits for 20 years: reduced corporate income tax rate of 4%; no tax on dividends paid to Puerto Rican residents; no withholding tax on dividends paid to nonresidents; and exemptions on local real estate and municipal taxes. The goal of the Act is to stimulate the Puerto Rican economy by helping to create companies in Puerto Rico that will export services internationally.

17 U.S.A. An Act to Promote the Relocation of Individual Investors of 2012 Certain new residents of Puerto Rico (who have not resided in Puerto Rico for the past 15 years) are exempt from Puerto Rican taxes on interest, dividends and capital gains. Note that capital gains on properties that the individual owned when he became a resident are subject to 10% tax if realized within 10 years of becoming resident, and 5% tax if realized thereafter. The benefits under this Act are set to expire in 2035.

18 U.S.A. US Virgin Islands US citizen who is tax resident of US Virgin Islands ( USVI ) is not required to file US federal income tax return or pay US federal income tax so long as he files properly completed USVI income tax return and pays income tax liability in full to USVI (taking into account the tax discounts and incentives available under the IIP, as discussed on the next slide). USVI income tax laws generally mirror US federal income tax laws, so individual s USVI income tax liability (absent application of any IIP benefits) generally mirrors US federal income tax liability.

19 U.S.A. USVI s Economic Development Council s Industrial Incentive Program ( IIP ) Certain bona fide residents of the USVI may qualify for a 90% reduction in the US federal income tax they would otherwise owe with respect to post-move fee income and accruals on capital assets derived from the business or industry for which an IIP certificate is granted. An individual may receive these benefits for a maximum of 10 years.

20 United Kingdom 1. Domestic or host country holidays and incentives Continues to be a highly attractive jurisdiction for non-uk domiciliaries with capital The remittance basis, notwithstanding the 2008 changes, continues to be an excellent system But for employees, in respect of their earnings, the position is more mixed: the UK is not an employee tax haven

21 United Kingdom The remittance basis: Applies to non-uk domiciliaries subject in the case of long term UK residents to the payment of a fee ( 30/50/90k) Distinguishes between UK and non-uk source income and UK and non-uk capital gains The basic rule: invest in non-uk assets and do not remit, then there is no tax (subject to the payment of the fee)

22 United Kingdom Employees (i): Remittance basis applies to employment income in two broad circumstances Overseas Workday Relief (OWR) dual contract structure Absent qualifying under either of these headings, the remittance basis is of limited applicability

23 United Kingdom Employees (ii): OWR: applies for the first three tax years of residence day count basis requirement to pay earnings into a non-uk account the remittance basis applies in respect of overseas work days

24 United Kingdom Employees (iii): dual contracts: common before 6 April 2014; but now of theoretical application only UK employer/foreign employer remittance basis for foreign earnings but now severely restricted, to the extent that it hardly ever applies

25 Spain 2. Deferred company tax for new or offshore activities; deferred compensation schemes Spanish income tax law: deferred compensation defined as non-regular employment income Non-regular employment income: 30% reduction, max 300K. Current marginal rate: 47% for income > 60K (45% 2016 onwards) but subject to regional variations Individual must not have benefitted from this reduction in previous 5 years (except severance payments). All income must become due and payable in the same year

26 Spain Taxability of deferred compensation: generally, when it becomes due and payable to employee: Stock options: taxable at exercise (not grant). Taxable income: difference between MV of shares at exercise and option price Deferred bonus schemes: taxable when bonus becomes due and payable Generally, no claw-back/exit tax on changes of residence before deferred compensation becomes due

27 Germany 2. Deferred company tax for new or offshore activities; deferred compensation schemes Strict CFC rules; passive income of CFCs taxable at level of German resident shareholder Stock options taxable upon exercise

28 Netherlands 2. Deferred company tax for new or offshore activities; deferred compensation schemes Deferral of personal income tax through investments via companies Investments via corporate income tax exempt investment company Pension (and similar insurances) contributions under conditions - deductible and received pension payments taxable (mostly lower tax rate) Exemption for shares in an active company for IHT and gift tax (under conditions) Research and development incentives

29 U.S.A. 2. Deferred company tax for new or offshore activities; deferred compensation schemes US controlled foreign corporation ( CFC ) regime permits US taxpayers to defer taxation of profits from most active foreign business operations until profits repatriated Important incentive to allow US companies to develop foreign export markets or new products at generally lower costs (especially labor) CFC regime increasingly unpopular politically as seen as exporting jobs abroad Complex rules continually tightened, and Congress may in future offer another tax reduction on repatriation of long-deferred foreign profits to increase US investment and jobs

30 U.S.A. US retirement plan rules extremely complex and detailed, and Treasury/IRS officials reluctant to relax rules to accommodate increasing executive mobility Provisions offering comparable treatment of US and foreign retirement plans as to deductibility of contributions and taxing point have only been added to handful of US bilateral income tax treaties. Rules regarding non-qualified deferred compensation plans have continued to be tightened, and since the introduction of IRC section 409A in 2004, the use of foreign trusts or placing of plan assets outside the United States generally will not defer taxation of compensation. Individuals moving to United States who are participants in non US retirement or deferred compensation plans well advised to obtain US tax advice before commencing US tax residence, lest they be surprised by tax consequences at serious variance with those available in their prior residence country.

31 Spain 3. Insurance products, trusts, usufructs, etc. Employer contributions in favour of employees to promoters of pension plans under EU Directive 2003/41 and similar instruments certain collective insurance policies and Business Retirement Funds ( Sistemas de Previsión Social Alternativos ) are taxable benefits in kind: Taxable basis: benefit + withholding tax (if not borne by employee) Employee may reduce its taxable income by the lower of: The yearly contributions made 8,000 per annum Overall limit: 30% of net taxable employment + business income

32 Spain Contributions to certain collective insurance policies covering retirement, death and disability: Taxable benefit in kind limited to the amount of the premium relating to retirement and disability, provided yearly premium < 100K per employee and employer

33 Germany 3. Insurance products, trusts, usufructs, etc. General acceptance of insurance structures, tax-efficient insurance products available General distrust towards trusts; trust structures not efficient for German tax residents EU/EEA foundations as suitable pre-immigration planning tool

34 Netherlands 3. Insurance products, trusts, usufructs, etc. Trust and foundations for private interest are transparent for personal income tax and inheritance and gift tax purposes For nonresident a Netherlands foundation can be used like a trust or for separation economic interest and ownership.

35 U.S.A. 3. Insurance products, trusts, usufructs, etc. Certain insurance products are available that allow an individual to turn otherwise taxable earnings into tax-deferred or tax-free investments by purchasing such investments through a life insurance policy. Similarly, several types of trusts may be used to defer or avoid the imposition of US income, estate and gift tax on certain assets and earnings.

36 U.S.A. Private Placement Life Insurance ( PPLI ) An individual may defer or avoid US income, gift and estate tax by holding investment accounts inside a life insurance policy. Must be qualified US life policy; non-us policies disregarded for wrap purposes but may still provide non-taxable death benefit. Thus, intending residents should have foreign insurance products reviewed prior to assuming US tax residence. Investment options with a PPLI are personalized and can be tailored to the individual s specific needs. PPLIs may also offer creditor protection.

37 U.S.A. Foreign Grantor Trusts Non-US assets held in a grantor trust with non-us grantor can grow free of US income tax and may be held in perpetuity without the imposition of US gift, estate, or generation-skipping transfer taxes. A step-up in the income tax basis of the trust assets may also be available upon the death of the non-us grantor. The non-us grantor may retain the ability to revoke or amend the trust during his or her lifetime, permitting some flexibility.

38 U.S.A. Asset Protection Trusts An asset protection trust may help protect an individual s assets from creditor claims in the event of divorce, bankruptcy or other legal claims. An individual will typically transfer assets to an irrevocable trust, relinquishing ownership of the assets, and the individual will be a discretionary beneficiary of the trust. It is important that the trust meet the specific requirements of the state under whose laws the trust is governed.

39 U.S.A. Irrevocable Life Insurance Trust ( ILIT ) By transferring ownership of an individual s life insurance policies to an ILIT, the life insurance policies are excluded from the individual s estate for US estate tax purposes. The ILIT is named as the beneficiary of the life insurance policies, and upon the individual s death the proceeds are distributed to the ILIT to be held for the benefit of the individual s spouse and/or children.

40 United Kingdom 3. Insurance products, trusts, usufructs, etc. Non-domiciled resident can avoid UK inheritance tax on non-uk situs property by contributing such property to excluded property trust prior to becoming deemed domiciled. That status arises when non-domiciled resident has been resident for income tax purposes in 17 of 20 years of assessment. Thus, must establish trust and transfer property prior to close of 16 th year of tax residence.

41 Spain 4. Residence and expatriantion planning Residence tests under Spanish domestic law: 183-day rule. Sporadic absences Center of economic interests and activities Presumption of residence: spouse and dependent minors Transfers of residence to tax havens No split residence provisions Residence tests under Treaties: OECD model based Note new provisions in revised Spanish-UK Treaty (June 2014)

42 Spain 2015: introduction of exit tax: Applicable to individuals who move abroad if Spanish tax resident 10 out of the last 15 years prior to year of expatriation and: Own shares and stocks (whether quoted, unquoted, investment funds, UCITs etc) with market value > 4m, or Own > 25% of shares in companies with a market value > 1m Individuals under Special Impatriation regime: the 10/15 year rule will kick in after the regime expires

43 Spain Exit tax: deemed taxable gain arising on 31 December of the last year of Spanish tax residence prior to expatriation, taxable as investment income (2016: 23% marginal rate) Special rules for: Transfers of residence by reason of employment (requires financial guarantee) Transfers of residence to EU/EEE jurisdictions No exit tax for pre-july 2015 expatriations

44 Germany 4. Residence and expatriation planning Extensive exit tax regime Exit tax applies to individuals who have been German tax residents for 10 years and hold at least one percent of a German or foreign corporation Exit tax applies if shareholder gives up German residence or (among other) if shares are transferred as a gift or by way of inheritance to non-residents Potential double taxation with exit tax and gift/inheritance tax? Suspension of exit tax as long as the old/new shareholder stays in the EU/EEA Step-up in basis only granted if shares were subject to exit tax in former country of residence Avoidance of German situs assets as planning tool for temporary tax residents

45 Netherlands 4. Residence and expatriation planning Residency is based on centre of vital interest Exit tax on emigration of an individual with a substantial shareholding (exemption for individuals who lived for less than 8 out of 25 years in the Netherlands) Exit tax is waived after ten years living outside the Netherlands Inheritance and gift tax for Dutch nationals during ten years after leaving the Netherlands For non Dutch nationals a one year period for gifts

46 U.S.A. 4. Residence and expatriation planning Since 1984, residence for U.S. income tax purposes determined under two objective tests: individuals are residents if they: obtain a lawful permanent resident visa (i.e., a green card ) are physically present in the United States on 183 days or more under a threeyear weighted formula ( Substantial Presence Test ) Most important exception is for individual present in United States less than 183 days in current tax who can show a closer connection to another country in which he has a tax home Relevant factors for determining closer connection are similar to factors considered in determining existence of center of vital interests under the standard OECD residence tie-breaker provision.

47 U.S.A. Detailed rules for determining an individual s residency starting and termination dates, so that an individual might be able to plan to attain or shed residency to accommodate an anticipated revenue or loss event Residence tax planning opportunities arise by virtue of some of other exceptions to residence definition, including those for students and certain special visa holders, particularly teachers and trainees Most flexible visa is treaty trader/treaty investor ( E visa) under FCN treaties Depending upon an individual s visa status, it may also be possible to break residence for a suitable period to, e.g., recognize a transactional gain and then resume residence after an appropriate period Must be done with due regard provisions of IRC section 7701(b)(10) If absence of less than 3 calendar years, US source income taxable under former expatriation rules

48 U.S.A. US has had expatriation tax provisions since Until 1996, imposed only on expatriating citizens. Since 1996, also imposed on certain long-term lawful permanent residents (i.e., green card holders) Until 2004 conditioned on finding of principal tax avoidance motive. Now, based on 5-year average net US income tax liability or net worth at expatriation ($2 million threshold) Until 2008 alternative tax on US source income, as defined, for 10 tax years post expatriation

49 U.S.A. In 2008 US enacted mark-to-market (or exit ) tax on gains from deemed sale of worldwide assets on day before expatriation Can exclude $600,000 of gain (indexed) and can defer tax payment by posting adequate collateral and paying interest on deferred tax Also special taxes on deferred compensation and interests in non-grantor trusts at expatriation date Finally, also succession/inheritance tax on gifts/bequests from covered expatriate to US person, excluding spouse or US charity. No guidance yet on latter tax Complex regime but persons moving to US for indefinite period must consider visa choices

50 Thank You! Michael G. Pfeifer (co-chair) Firm: Caplin & Drysdale, Chartered, Washington Gerd Kostrzewa (co-chair) Firm: Heuking Kühn Lüer Wojtek, Düsseldorf Nathalie Idsinga Firm: Arcagna, Amsterdam Patricia Garcia Mediero Firm: Avantia Asesoramiento Fiscal y Legal, Bilbao patricia.garcia@avantia-fo.com E. von Sanborn Firm: Withers Bergman LLP, New York von.sanborn@withersworldwide.com Sebastian Prichard Jones Firm: Macfarlanes LLP, London Sebastian.PrichardJones@macfarlanes.com