Family Governance – how to turn the success of your family business into a family tradition

 

 

Family Governance – how to turn the success of your family business into a family

tradition

 

1. Successful generational transfer of a family business – the best option for the family members’ long-term wealth

 

Contrary to common perception, family businesses create an estimated 70 to 90% of global annual GDP in all countries. Studies show that the long-term returns of family-owned businesses with good corporate governance considerably outperform those of public, non-family controlled businesses. Amongst other reasons this has to do with the long-term approach of entrepreneurs, whereas CEOs of public companies are measured by the analysts, shareholders and the public on a quarterly basis.

One of the major risks that family businesses face is the generational transfer of ownership: Only roughly 30% of family-owned businesses survive into the second generation, 12% survive into the third generation and only 3% into the fourth generation. Interestingly enough this development often goes in parallel with the generational wealth development of the members of an entrepreneurial family. This is for example reflected by the proverbs “Father merchant, son gentleman, grandson beggar.” and “From shirtsleeves to shirtsleeves in three generations”. Given that this is a global phenomenon, similar proverbs exist in many other languages.

Over continents and time there is a strong correlation between the survival of the family business and the wealth development of the individual family members, which is one of several strong indicators that a successful generational transfer of a family business is the best guarantee for continued wealth of the individual family members.

 

2. Why exactly do a majority of generational transfers fail?

 

Given the importance of family businesses for the global economy, in recent years an increasing research effort has been directed to the topic of family businesses. Both surviving multigenerational family businesses and family businesses which disappeared have been analyzed. Some of the main findings why generational transfer fails are:

• Many founders (but often also subsequent generations) focus considerably more on creating wealth than on preparing a successful transfer of the business to the next generation(s). This often comes with a stronger focus towards short-term tactics rather than long-term strategies.
• Whereas many founders have a succession plan for the ownership of the business in place, a lack of the commitment required to achieve long-term survival and success of the family wealth results in few families enacting and subsequently implementing governance tools and processes (including education) to ensure a smooth generational transition during the founder’s lifetime.
• Only relatively few families implement their visions, tools and processes, but do so with a top down process and often plan for financial wealth but not with and around the existing social, human and intellectual capital of the family. The lack of involvement of and communication geared towards the future generation(s) results in considerably lower commitment of left out family members towards the joint long-term success of the family and its business.

 

3. Family Governance Tools

 

a) Family Protocol (also called family constitution)

 

The overriding family governance tool is the family protocol, a non-legally binding set of rules to which members of a family agree voluntarily. The family protocol outlines the principles of the family members to certain core values of the family, it defines the roles, composition and powers of governance bodies of the family and the business and the relationship between the family members and those governance bodies.

Whereas the family protocol itself is not legally binding, it often co-ordinates certain tools with legal enforceability such a wills, prenuptial agreements, trusts, shareholder agreements, etc., which are all legally binding in nature. Given the complexity and emotional nature of families, it will however not be possible to organize and cover each and every angle of a family with legally binding documents. Nor may it in many cases even be useful to try to cover them with unilateral legally binding documents, given that most of these documents by nature are not designed towards obtaining consensus of the family members, which however will be in one form or another the key to future cohesion and success of the family and its business. Therefore, in order to ensure commitment beyond the decease of the founder of the family business, it is crucial that all family members be involved in the process of the family protocol and subsequently consent to the final document. Typically upon completion a family protocol is signed by all members which generates additional (non-legally binding) commitment. The family protocol is dynamic and can be adjusted to the ongoing changing needs of the changing family.

Apart from topics specific to the family or its business a family protocol will typically address the following topics:

• Joint family values, mission statement, and vision.
• Family governance bodies, including the family assembly, the family council, the education committee, the family office, etc., which among others define how the family takes its decisions.
• Board of directors of the business (and possibly board of advisors).
• Senior management of the business.
• Authority, responsibility, and relationship among the family members, the family governance bodies, the board, and the senior management.
• Policies regarding important family issues such as family members’ employment, remuneration, transfer of shares, CEO succession, etc.
• Conflict-resolving protocols between family members.
• Process to amend the family protocol.

It is crucial that the family governance bodies be not only set-up, but also implemented and applied during the lifetime of the founder. This because trying to implement a new governance system from zero at a time of emotional and organizational stress and without guidance of the founder is a highly challenging undertaking which – even if it is finally implemented effectively – will create highly disruptive effects on the business.

 

b) Family Assembly

 

The function of the family assembly (sometimes also called family retreat) will usually consist of discussing, debating and issuing guidance and instructions to the family council on any financial or non-financial matters relevant to a family. It also elects the members of the family council. The exact role, function and process of family assembly meetings will normally be defined in the family protocol. The family protocol will usually also contain a definition as to which members of the family qualify to participate in a family assembly and in what role (for example: are in-laws considered part of the family and if so in a voting or non-voting capacity?). Family assemblies are normally held in an offsite format, and will normally be held at least once a year. An important part of the family assembly is no only the communication within the family but also between the members of the family and the family council, and often educational topics mainly targeted at younger generations will play an important role. Having said that, because the overall purpose of the family assembly is to create cohesion and bonds between the family members, there will normally also be a strong social element to them, which can include dinners, sporting events and others, with the aim of developing mutual, cross-generational understanding, stronger relationships, and better teamwork between family members. Members of the family assembly will often have their expenses covered in order to attend the meeting.

 

c) Family Council

 

The family council normally consists of an elected subgroup of the family assembly. It is the governing body of the family, it represents the family towards the outside world and serves as a communication link between the family and third parties, including the family business. The family protocol or the family assembly may also mandate the family council to be in charge of preserving order among the family members, to be in charge of a budget which may include a budget for the prevention or managing of externalities, for helping family members in need and/or education of amily members.

The family council may oversee committees of the family assembly and the chairperson of the family council may often serve on the family business’ board of directors. The family council will also often co-ordinate the family shareholders of the family business. Sometimes members of the family council can be compensated for their services.

 

d) Board of Directors

 

The members of the board of directors of a business are elected by the shareholders and owners and take decisions on behalf of the company, thereby owing fiduciary duties to the business and its shareholders. The functions of the board of directors are to recruit, supervise, retain, evaluate and compensate the senior management of the company. The board will provide the long-term vision and goals of the business together with a policy-based governance system. The board also has a monitoring and control function. Directors of the board may be held liable for the consequences of the business’ actions or inaction.

Family businesses will also often have an advisory board normally consisting of external, non-family member advisors. The advisory board and its members do not have legally binding decision-making authority on behalf of the company. The board of advisors normally provides strategic advice to the management team including the board members of a business. Businesses generally choose to have a board of advisors so they can benefit from the knowledge, network and advice of experienced outside professionals.

 

e) Chief Executive Officer and Senior Management

 

A company’s Chief Executive Officer (CEO) and senior management team run the day-to-day operations of the business. They implement the ideas of the owners and shareholders as well as the board under the direction of the board of directors. Often members of the family will be part of the staff or senior management of the family business. The general conditions for family members to be employed by the family business will normally be fixed in the family protocol.

 

4. Conclusion

 

Owners of family businesses should consider the following:

• Commit to and prepare for a successful transfer of the business to the next generation sufficiently early in order to prepare the next generation adequately.
• Jointly set-up and implement governance tools and processes ensuring a smooth generational transfer during the founder’s lifetime which plans with and around the existing social, human and intellectual capital of the family. Governance of a family business is an evolving process. The governance structure at all levels has to be adjusted regularly to the changing environment and needs of the family.

Governance of a family business is an evolving process. The governance structure at all levels has to be adjusted regularly to the changing environment and needs of the family. The proper governance structure for a family business must be adjusted to the needs of the family, the family business as well as to their mission and vision.

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, January 2021. All rights reserved.

 

Disclaimers:

 

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.

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Relocation for High Net-Worth Individuals

 

 

Relocation for High Net-worth Individuals

 

Recently we have seen an increasing number of high net-worth individual clients world-wide interested in relocating to a new domicile country, due to economic, political, physical, legal and tax uncertainty as well as world-wide exchange of information initiatives resulting in financial information reaching their domestic tax authorities. A trend which the COVID-19 pandemic has increased.

Some of the most frequently used schemes attracting interest from HNWI clients are:

 

Andorra

 

Andorra offers several residency by investment programs. The most popular one requires a permanent and minimum investment of EUR 400’000 (approximately USD 475’000) in either real estate, participation in a local company, debt issued by a local company, a public debt instrument from Andorra, or securities with the Andorran National Finance Institute.

Another investment program provides residency to investors in order to operate a business with a minimum of 85% of the business outside of the country. A business plan will be required and the headquarters has to be in Andorra and may only hire one employee (otherwise another program will have to be chosen).

For both programs, the investor will have to produce evidence of sufficient means by proving a yearly income of 300% of the minimum salary (currently about EUR 13’000 or approximately USD 15’000) plus an additional 100% for each family member. Residents are subject to worldwide income and capital gains taxes (only applicable for holdings of over 25% of a company) of up to 10%. There are no net worth or inheritance taxes in Andorra. There are no gift taxes in Andorra either, but capital gains taxes may be applicable to the donor when gifts are not to close family members.

 

Australia

 

Australia has a series of temporary and permanent residency programs which are currently under review. The streams of the Business Innovation and Investment Program offer permanent residence after four years, subject to attaining certain requirements on investments and business turnover.  Additionally a points-based test system will be used to assess eligibility. The streams are:

• The Business Innovation Stream requires investors to evidence a successful business career with a business turnover of at least AUD 500’000 (approximately USD 365’000), and net assets of AUD 800’000 (approximately USD 580’000). Substantial ownership and management of an Australian business must be demonstrated and maintained.

• The Investor Stream requires investors to demonstrate three years’ investment experience and commit to invest AUD 1.5 million in Australian state or territory bonds for four years, and own net assets of AUD 2.25 million.

• The Significant Investor Stream requires investors to commit at least AUD 5 million into a qualifying Australian investment for at least four years.

• The Entrepreneur Stream requires investors to have obtained a signed commitment to receive AUD 200’000 in venture capital funding from an Australian company in order to commercialize and/or develop a high-value business idea or product.

• The Business Talent Program includes the following streams and requires involvement in the business:

• The Significant Business History Stream requires investors to own parts of or a whole business with a turnover of at least AUD 3 million per year. Investors must further have a successful business career and have net assets of AUD 1.5 million. Investors must make a substantial contribution to a new or established business in Australia and take an active role in managing the business.

• The Venture Capital Entrepreneur Stream, where an investor must have obtained a written AUD 1 million commitment in venture capital funding for a start-up or product commercialization of a high-value business idea in Australia and must establish (or participate in) that business.

The Quality of Life Index rank is number 4 of 82 countries Quality of Life Index by Country 2021.

For permanent residents, personal income taxes in Australia are up to 45% and are applicable on worldwide income and capital gains (some exceptions on foreign income may apply to temporary residents). There are no wealth, inheritance or gift taxes. Capital gains taxes may be levied however on the transfer of assets to a beneficiary from the estate of a deceased person.

 

Bahamas

 

Permanent residency in the Bahamas can be obtained by purchasing real estate worth minimum BSD 750’000 (corresponds to USD 750’000).

There are no individual income, capital gains, wealth, gift or inheritance taxes in the Bahamas.

 

Bermuda

 

Individuals wishing to relocate to Bermuda can apply for a residential certificate if they possess valid health insurance coverage and have substantial means and/or have a continuous source of annual income without the need to engage in gainful occupation. Residential certificates do not hold a time limit but they are subject to revocation by the Minister of Home Affairs.

There are no income, capital gains, wealth or gift taxes in Bermuda. However there is a payroll tax of up to 8.75% for employees and a stamp duty of up to 20% applied to Bermudian real and personal property of estates. There is also an annual real property tax levied on the annual rental value of land. The value is fixed by the accountant general and the tax rate is progressive up to 50%. 

 

Canada

 

There are several (frequently changing) immigrant investor programs for Canada and its provinces. A federal immigrant investor program requires the immigrant investor to demonstrate relevant experience of managing a qualified business and to become majority shareholder in a business or to prepare starting an own business in Canada. A start-up program will require proof of willingness to invest CAD 200’000 in the start-up (approximately USD 153’000). In Quebec the program requires the investor and his/her spouse to evidence having attained a net worth of minimum CAD 2 million (about USD 1.53 million). The required volume of investment in Quebec is CAD 1.2 million for a period of five years with no interest. The investment is government guaranteed and will be repaid in full at the end of the investment period.

The Quality of Life Index rank is number 21 of 82 countries Quality of Life Index by Country 2021.

Depending on the province in which the immigrant takes up residency, income taxes are between 44.5 and 54%. Capital gains are taxed at half the income tax rate. There are no wealth, inheritance or gift taxes, but inheritance and gifts will be treated as sale, possibly resulting in capital gains taxes.

 

Cayman Islands

 

The Cayman Islands offer a series of residency programs. The Residency Certificate for Persons of Independent Means is for investors with a continuous source of income of normally at least KYD 120’000 (approximately USD 144’000) and with KYD 400’000 (approximately USD 480’000) in an Cayman registered bank as well as at least KYD 500’000 (approximately USD 600’000) of developed residential real estate in the Cayman Islands together with further local investments totaling KYD 1 million (approximately USD 1.2 million) on the islands. The renewable residency certificate is issued at a cost of KYD 20’000 (approximately USD 20’000) and is valid for 25 years.

When investing at least KYD 1 million in any employment generating business (whether already existing or new) with substantial management control by an investor with a substantial business track record or background, the investor may also be granted residency. The same applies to investors who – directly or indirectly – own a minimum of ten percent of an approved category business with substantial business presence on the islands, or of which the investor will be employed in a senior management capacity requiring a yearly fee of at least KYD 21’000.

There are no income, capital gains, wealth, gift or inheritance taxes in the Cayman Islands.

 

Costa Rica 

 

Permanten residency in Costa Rica can be obtained by investing a minimum of USD 200’000 in real estate in Costa Rica. Alternatively for an entire family a regular monthly income of at least USD 2’500 certified by a local or foreign bank. Alternatively, a life-time pension plan, social security or government pension plan of USD 1’000 will enable the beneficiary to obtain a residency permit. A real estate transfer tax of 1.5% is applicable.

Income taxes of up to 25% on Costa Rican source income are applicable. A capital gains tax of 15% is applicable on real estate sales in Costa Rica which are not primary residence. A 30% capital gains tax for Costa Rican habitual source gains may be applicable. No inheritance or wealth taxes. There may be an obligation to contribute to the social security system.

 

Greece

 

Tax residency with an alternative tax regime can be obtained for a maximum duration of 15 years, upon investing EUR 500’000 in real estate, a business, or qualifying Greek securities. Additional family members qualify with an additional EUR 20’000 each. The alternative tax regime requires the investor to pay an annual fixed tax of EUR 100’000, irrespective of the volume of income earned abroad. Inheritance and gift taxes on property abroad are also exempt.

There is also an alternative tax regime available for foreign pensioners immigrating from a jurisdiction with an administrative tax co-operation agreement with Greece. The alternative tax regime for qualifying pensioners is 7% on the total income obtained abroad.

Regular personal income tax is up to 44% (plus applicable local taxes), income from real estate up to 45% and there is a special solidarity contribution of an additional 10%. The regular donation and inheritance taxes are up to 40% (depending on degree of kinship) and there are real estate ownership and transfer taxes.

The Quality of Life Index rank is number 41 of 82 countries Quality of Life Index by Country 2021.

Greek residency will provide the holder with the possibility of visa-free movement within the Schengen Area.

 

Israel

As per the Law of Return, Jews, their children and grandchildren (even in some cases where not qualifying as such as per Jewish law), are entitled to immigrate to Israel and subsequently receive citizenship and access to all social benefits.

Such immigrants are granted a 10 year tax exemption on foreign source income, as well as a reporting exemption on foreign income and wealth.

The Quality of Life Index rank is number 32 of 82 countries Quality of Life Index by Country 2021.

Ordinary taxation in Israel consists of income taxation up to 50%. Israel does not have any inheritance, gift or wealth taxes.

 

Italy

 

Citizens from the EU have the right to live in Italy. The fast-track investor visa for non-EU nationals requires an investment of EUR 1 million in a local company or EUR 2 million in Italian public bonds. The Quality of Life Index rank is number 36 of 82 countries Quality of Life Index by Country 2021.

Newly resident individuals may apply for a lump-sum substitute tax of EUR 100’000 and a tax of EUR 25’000 for relatives on all of their non-Italian source income, wealth abroad and inheritance and gift tax exemption on foreign assets. Such an agreement can be prolonged for up to 15 years. Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

Jersey

 

Citizens from the EU and EEA countries and Switzerland do not need a residency permit. For other citizens, in order to qualify as a high value resident an applicant will have to show a sustainable worldwide earning comfortably in excess of GBP 725’000 (approximately USD 940’000) per year and the minimum tax payable on income will be of GBP 145’000 (approximately USD 188’000) calculated on a sliding scale based on 20% of the first GBP 725’000 of worldwide income and 1% on all income thereafter. All of this however does not guarantee the residency status, because the residency will also have to benefit the island in some way (usually commercially or socially, for example by funding educational and sporting activities, cultural contribution and skills, creation of jobs and/or training residents).

For ordinary residents income taxation is at 20% on their worldwide income. There are no wealth, capital gains, inheritance, or gift taxes. Probate stamp duty of up to GBP 100’000 (approximately USD 129’000) is levied.

 

Malaysia

 

Applicants for residency below 50 years of age will have to demonstrate proof of bankable assets of at least MYR 500’000 (approximately USD 120’000) and proof of income of at least MYR 10’000 (approximately USD 2’500) per month. Once granted the conditional approval, they will have to deposit at least MYR 300’000 (approximately USD 72’000) in a bank account of which after one year, up to MYR 150,000 (approximately USD 36’000) may be withdrawn for approved expenses relating to real estate, education of children in Malaysia or medical purposes. Thereafter, under the program a minimum balance of MYR 150’000 (approximately USD 36’000) must be maintained throughout the rest of the stay.

Applicants above 50 years of age will have to demonstrate proof of bankable assets of at least MYR 350’000 (approximately USD 85’000) and proof of income of at least MYR 10’000 (approximately USD 2’500) per month. Once granted the conditional approval, they will have to deposit at least MYR 150’000 (approximately USD 36’000) in a bank account of which after one year, up to MYR 50’000 (approximately USD 12’000) may be withdrawn for approved expenses relating to real estate, education of children in Malaysia or medical purposes. Thereafter, under the program a minimum balance of MYR 100’000 (approximately USD 24’000) must be maintained throughout the rest of the stay.

The Quality of Life Index rank is number 51 of 82 countries Quality of Life Index by Country 2021.

Residents are taxed on any income accruing in or derived from Malaysia only, at a maximum tax rate of 30%. Real property gains taxes can be taxed up to 30%. There are no wealth, inheritance or gift taxes.

 

Malta

 

There are various residence programs in Malta. To qualify for the Global Residence Program a nonMaltese citizen from the EU, EEU or Switzerland will be subject to a one-time payment of EUR 30’000 government contribution and a real estate purchase of EUR 320’000 (or EUR 270’000 in South Malta or Gozo), which alternatively can also be a yearly real estate lease of EUR 12’000 (or EUR 10’000 when in South Malta or Gozo). There is a pensioners’ program covering those nationals purchasing real estate with very similar conditions and benefits.

Global residence permit holders pay a flat rate personal income tax of 15% on foreign source income remitted to Malta only – a yearly minimum tax of EUR 15’000 however applies. Local source income will be taxed at 35%. There are no wealth, inheritance or gift taxes in Malta.

Malta residency will provide holder with visa-free movement within the Schengen Area.

 

Mauritius

 

Permanent residence can be obtained by investing USD 350’000 in a qualifying real estate. There are also work visas available for business investors starting at USD 50’000 or for retired with a monthly income of at least USD 1’500.

Resident individuals are subject to income tax on their worldwide income from all sources. However, income derived from abroad is taxable only to the extent that it is received in Mauritius. Personal income tax is up to 15% and a solidarity tax of 5% is applicable to income above approximately USD 90’000. There are no wealth, inheritance or gift taxes.

 

Monaco

 

Non-EU nationals need to apply for a long-term visa before applying for the residence permit. For the residency permit, evidence concerning proof of wealth without gainful employment has to be provided. Requirement of opening a bank account in Monaco with a minimum EUR 500’000. During the first nine years requirement to spend at least three months per year in Monaco.

There are no income, capital gains or wealth taxes in Monaco, except for French nationals who have to pay French income taxes. There are however inheritance and gift taxes up to 16%, but only on assets situated in Monaco, and not for direct line heirs such as parents, spouse and children. Monaco is not part of the Schengen Zone. 

 

New Zealand

 

There are two investor programs in New Zealand. For the regular investor visa an experienced business-person under the age of 65 must invest a minimum of NZD 3 million (approximately USD 2 million) in qualifying assets for four years. Business experience and a points-based system to assess eligibility, as well as in certain cases an English language test are required. For the Investor Plus Visa, an investor must invest NZD 10 million (approximately USD 6.6 million) over a three-year period. There are no age limits, language or experience requirements.

The Quality of Life Index rank is number 8 of 82 countries Quality of Life Index by Country 2021.

In New Zealand income taxes on worldwide income are up to 33%. There are no general capital gains taxes, no wealth taxes, and no inheritance or gift taxes but local authorities impose a tax called “rates” on land.

 

Panama

 

Proof over an investment of a minimum of USD 500’000 in real estate or on the stock exchange in Panama have to be provided, plus USD 2’000 per additional dependent included in the visa. Alternatively persons with a lifetime annuity or pension of at least USD 1’000 per month.

The Quality of Life Index rank is number 57 of 82 countries Quality of Life Index by Country 2021.

Residents are taxed on their Panamanian source revenues only. Income taxes are up to 25%, and local capital gains are taxed at 10%. There are no inheritance or gift taxes in Panama. There are no wealth taxes, but a real estate tax of up to 1% p.a.

 

Portugal

 

Golden visa program for non-EU, EFTA and/or Swiss citizens. Amongst other requirements to qualify for the program, an investment of EUR 500’000 into any real estate, EUR 350’000 into a real estate more than 30 years old with the obligation of renovating it, transferring assets of EUR 1 million to Portugal, an investment of EUR 350’000 into a qualifying fund, or the creation of ten new full-time jobs are necessary.

The Quality of Life Index rank is number 18 of 82 countries Quality of Life Index by Country 2021.

Non-habitual resident status is available providing tax-exemptions for up to ten years. Exemptions from Portuguese taxation include most income from foreign sources, including revenues from nonPortuguese investments, and employment income. Incomes from foreign pensions however are taxed at a 10% flat rate.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

Singapore 

 

The Singapore Global Investor Program grants residency to foreign entrepreneurs who invest at least SGD 2.5 million (about 1.85 million USD) in an approved fund investing in Singapore-based companies, the expansion of or new business in Singapore, or a single family office in Singapore managing assets of at least SGD 200 million of which at least 50 million are to be invested domestically. Government will want to see a track record and business plan of the entrepreneur with quite high thresholds.

The Quality of Life Index rank is number 34 of 82 countries (Quality of Life Index by Country 2021.

Income is normally only taxed at a rate up to 22%, when it accrues or is derived from Singapore. There are no capital gains or inheritance taxes. The only wealth tax applicable is on real estate (property tax).

 

Spain

 

Currently there is a relatively easy immigration process for high net-worth individuals with a golden visa process requiring an investment in real estate worth at least EUR 500’000 (other programs with higher minimums available).

The Quality of Life Index rank is number 16 of 82 countriesQuality of Life Index by Country 2021.

Upon becoming tax resident: high taxes (income tax depending on the autonomous region, for example the maximum marginal tax rate of 43.5% for an individual resident in Madrid and 48% for a resident in Catalonia). Inheritance and wealth taxes according to the applicable autonomous region. Spanish tax residents and non-residents are subject to tax on dividends, interest and capital gains at a maximum rate of 23%.

Limited tax planning opportunities, for example by obtaining a special fiscal residence permit, paying 24% on local income as non-resident on the first EUR 600’000 income. Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

 

Switzerland

 

EU-28 nationals are entitled to a residence permit. For non-EU nationals some additional restrictions like minimum age of 55 may apply.

The Quality of Life Index rank is number 2 of 82 countries Quality of Life Index by Country 2021.

Based on a tax ruling, a so called lump sum taxation is available, which essentially fixes the tax base at 7 times the annual rent for accommodation, with a minimum base of CHF 400’000 for federal tax purposes. Depending on the place of residence within Switzerland this may generate yearly taxation starting at some CHF 140’000. Social security payments may be applicable. Depending on the Canton of residence, your estate may be subject to inheritance taxes.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union.

 

Thailand

 

There are several residency by investment program options in Thailand. The most popular one is a five year entry visa which can be obtained by a foreigner with a one-time THB 500’000 (approximately USD 16’000) fee. Another program is designed for two foreigners obtaining five year residence visas with a one-time THB 800’000 (approximately USD 26’000) fee for both visas. This visa includes certain VIP privileges such as airport transfers for international flights and a government concierge and it can be enhanced by paying an additional THB 300’000 (approximately SD 10’000) per dependent family member. Another program includes a 20 year visa for a one-time payment of THB 1 million (approximately USD 32’000) which also comes with VIP privileges. After three years permanent residency can be applied for.

The Quality of Life Index rank is number 69 of 82 countries Quality of Life Index by Country 2021.

Resident taxpayers staying more than 180 days per tax year will only be taxed on income from sources within Thailand and foreign sourced income which is remitted to Thailand in the same year it is earned. Personal income taxes are up to 35%, inheritance taxes are up to 10%, and there are no wealth taxes.

 

United Arab Emirates

 

Residency can be obtained by purchasing real estate worth at least AED 1 million (approximately USD 275’000) and having a monthly income of a least AED 10’000. Alternatively, a company can be set up or purchased with a value of at least AED 50’000. The company does not need to carry out any effective commercial activity in the United Arab Emirates, and it can be set up in a free zone where companies are tax exempt, but restricted to do business within the free zone or abroad. There are no income, capital gains, wealth, inheritance or gift taxes in the United Arab Emirates.

The Quality of Life Index rank is number 24 of 82 countries Quality of Life Index by Country 2021.

 

United Kingdom

 

Most citizens from the EU, EFTA and Switzerland have the right to live in the UK (some of this may be subject to change soon). For other citizens the investor (minimum investment of GBP 2 million) or entrepreneur (minimum investment of GBP 200’000) routes may be available. The Quality of Life Index rank is number 19 of 82 countries Quality of Life Index by Country 2021.

Investors may apply for a UK resident non-domiciled status, enabling them to opt to apply a remittance basis during the first 15 years, taxing their UK income and gains as well as foreign income and gains of GBP 2’000 or more per year which they bring back to the UK. For the first six years of UK residency the claiming remittance basis is free, from the seventh year onward, a basic charge of GBP 30’000 is applicable which will be increased to GBP 60’000 after 12 years. Maximum income taxes for taxable income are up to 45% for incomes over GBP 150’000; maximum capital gains tax  rates are 28%; the inheritance tax rate above GBP 325’000 is 40%. Trusts may offer capital gains tax and inheritance tax opportunities.

The United Kingdom is not part of the Schengen Zone.

 

United States of America

 

EB-5 Investors’ visa available for an investment of minimum USD 1.8 million, or USD 900’000 for investments in target employment areas. The Quality of Life Index rank is number 15 of 82 countries Quality of Life Index by Country 2021.

High taxes [federal income tax up to 37%, US estate (inheritance) tax of currently up to 40%], capital gains taxes up to 20%.

Limited tax planning opportunities for individuals setting up irrevocable trusts 5 years before migrating to the US may exempt the trust assets from US estate taxes upon the death of the settlor and subsequent US beneficiaries. 

 

Uruguay

 

Residency permit may be granted by making a real estate investment of more than UYU 3.5 million (approx. USD 380’000 which are indexed), requiring a minimum presence of 60 days per year. Alternatively a residence permit with no minimum presence can be obtained by investing UYU 15 million (approx. USD 1.6 million).

The Quality of Life Index rank is number 47 of 82 countries Quality of Life Index by Country 2021.

Income of resident individuals from employment is taxed up to 36%. New residents may opt for a tax holiday during the first ten years of obtaining residency from foreign passive income (instead of a tax rate of 12%) or alternatively having it taxed at 7% (instead of 12%) indefinitely. There is an annual personal net-wealth tax on assets situated in Uruguay of up to 0.6%. There are no gift or inheritance taxes.

 

Vanuatu

 

Residency for families can be obtained by investors entering into a leasehold (there is no freehold in Vanuatu) of a real estate (residential lease agreements are possible for up to 50 years) with a value over VUV 10 million (approximately USD 88’000) and obtaining a local bank certification of receipt of monthly income over at least VUV 250’000 (approximately USD 2’200) per person included in the application. The visa is valid for one year, and if the requirements are still met thereafter it is renewable. Investors will be required to pay an annual fee of VUV 20,000. After ten years of holding a residence visa, investors are eligible for citizenship by naturalization.

An Individual and his/her partner obtaining a local bank certification of receipt of a monthly income over at least VUV 250’000 (approximately USD 2’200) per person included in the application, can be granted residency.

There is also a foreign investor program (which can include family members) if the investor obtains an approval certificate by the Vanuatu Investment and Promotion Authority indicating that the investor will operate a business in Vanuatu.

There are no income, capital gains, gift, inheritance or wealth taxes in Vanuatu, but there is a tax on rental income of 12.5%.

 

Further comments 

 

Some additional points have to be taken into consideration when planning a relocation: The current country of residence may impose an exit tax on your leaving the country. Lately quite a number of countries have enacted laws trying to deter individuals or companies from leaving their tax jurisdiction. In many cases the tax authorities of the jurisdiction which is being left will also monitor or even audit the individual leaving or his family as to the substance of the relocation, i.e. check whether the center of vital interest as such has really moved away from their jurisdiction or not. The enter of vital interest includes establishing where the family of the individual in question is, where the social ties including club memberships are, the positions held, participation in political and cultural events, places of business and management of the family wealth, including where the pets are kept. They may also check whether the personal and economic relations to the new jurisdictions are in fact closer than to the jurisdictions being left. If the tax authorities come to the conclusion that the relocation does not have enough substance, i.e. that the center of vital interest and/or the personal and economic relations to the new jurisdiction are less than to their own jurisdiction, they may try to continue to tax the individual leaving as if he/she still remained resident. 

Entrepreneurs may also encounter the following issues: If there are participations in the jurisdictions being left, dividend distributions may be subject to a withholding tax. Depending on a potential double tax treaty with the new jurisdiction, the impact of this withholding may however be reduced. Further, if the individual relocating to the new jurisdiction remains in full control, the new jurisdiction may want to tax the company as a local company due to place of effective management rules: The place of effective management is the place where key management and commercial decisions of a business are effectively made. The place of effective management will usually be where the most senior person or group of persons (for example a board of directors)takes its decisions.

Many jurisdictions also have non-residency or temporary residence programs with a minimum number of days per year to be spent in that jurisdiction, but under the condition of not staying more than roughly half the year in the jurisdiction or any other jurisdiction, as well as not having any other tax residence. Some of those jurisdictions even issue tax residence confirmations for qualifying non-residents. This article has not reflected any of these programs given the increased risk that other jurisdictions, especially the one of the last tax residence of the taxpayer, will not accept such a non-residency program as a regular new tax residence. The risk is even higher when considerable economic substance of an investor remains in the jurisdiction he/she is leaving. When this is the case, such jurisdictions may continue to tax the taxpayer fully, as if he/she had never left.

Whereas many of these relocation programs provide considerable tax advantages, careful prerelocation tax planning based on tax advice obtained in the old and the new jurisdiction is strongly recommended.

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, September 2020. All rights reserved.

 

Disclaimers: 

 

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.

This publication was produced by Global Wealth Management Consulting GmbH. It is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any products or specific services. Although all information and opinions expressed in this document were obtained from sources we believe to be reliable, Global Wealth Management Consulting GmbH expressly disclaims any liability, express or implied, for false or incomplete information. To the extent permitted by law, neither Global Wealth Management Consulting GmbH nor any of its managers, employees or agents may be held liable for any losses or damages whatsoever that might arise from the use of this publication or be connected therewith. All information and opinions indicated are subject to change without notice. Global Wealth Management Consulting GmbH retains the right to change the range of services, the products and the prices at any time without prior notice. Certain services and products are subject to legal provisions and cannot therefore be offered worldwide on an unrestricted basis. The content of this publication has not been adapted to the specific needs and investment objectives of a particular client or recipient and is not tailored to their personal or financial situation. In principle, Global Wealth Management Consulting GmbH does not provide legal or tax advice and this publication does not constitute such advice. Global Wealth Management Consulting GmbH recommends that all persons considering the products or services described herein obtain appropriate independent legal, tax and other professional advice. The products and services mentioned herein may require agreements to be signed. Please note that the terms and conditions of such specific agreements described in the corresponding agreements apply to these products and services. We kindly ask you to carefully read such agreements and to contact your Global Wealth Management Consulting GmbH client advisor or Wealth Planner should you have any questions. This document may not be reproduced or distributed without the prior consent of Global Wealth Management Consulting GmbH.

 

Building and Transferring Family Wealth over Generations – Basics of Wealth Planning

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Building and Transferring Family Wealth over Generations – Basics of Wealth Planning

 

Wealth planning defines and implements the wealth strategy across life cycles and generations. A comprehensive and holistic wealth planning strategy will, among others, take care of tax and succession planning, asset protection, liquidity planning, and sometimes even wealth growth strategies of the total wealth of a family. This article will provide an overview and guidance on the process together with an overview of the most frequently used tools to implement a comprehensive wealth planning strategy, in order to build and transfer family wealth over generations.

 

1. Establish an Inventory

 

The first step towards implementing a comprehensive wealth planning strategy is to establish an inventory of all assets and liabilities of a family in order to analyze the situation properly and discuss the detailed needs with the family members. The inventory will give an overview of the assets located in the domicile country(ies) of the family members and abroad. All asset classes are relevant, such as bank accounts, real estate holdings, participations in businesses, intellectual property, cryptocurrency, pension funds, commodities, etc. Some of these assets may come with liabilities such as Lombard loans, mortgages, pledges and the like. There may however also be stand-alone liabilities such as uncovered loans.

It is important to have a etailed overview of each and every asset and liability in terms of ownership: who is the owner, how is the ownership structure (i.e. are bank accounts or real estate held via a structure), are there any restrictions on the ownership such as co-ownership or other contractual restrictions, restrictions from matrimonial property law, usufruct, etc.?

This may be a good opportunity to ensure that all assets are formally and properly registered where applicable and that all legal documents and titles are kept and filed adequately. Recently electronic wealth platforms have been created which enable the electronic records to be kept and ensure tailored availability together with regularly updated values of the assets for the family members, and even for their service providers if required.

 

2. Some Tools

 

a) Wills

 

For most assets, globally the laws of the last legal residency of the deceased will be applicable to the estate of the deceased. Real estate held abroad is the most frequent exception, however if held directly by a deceased foreigner, local laws will usually refer to the laws of the last residency of the deceased person. As international inheritance processes can be very cumbersome, expensive and time-consuming, many individuals prefer to avoid them by establishing structures to avoid them, such as trusts, family foundations, insurance contracts and the like. A will can also avoid legal disputes after death, as it generates additional legal certainty.

If it is considered that the succession laws of the jurisdictions of domicile are complete enough, there is no need to prepare a will. For high net-worth families however a will is almost always strongly recommendable, given the choices available to adapt the inheritance process to the individual needs of the family and the international exposure in terms of assets and often also family members. Likewise it is advisable for families with complex situations, because if family life is complex now, how will it look when there is wealth to be distributed? A will will also enable individuals to tailor their succession to their needs in terms of distribution of wealth, taking care of minors and/or other vulnerable family members, for example with an incapacity or elderly family members. Depending on the jurisdiction, a testator may choose his own executor, and/or a guardian for minor heirs. A will may also reduce the risk of legal claims, and will often reduce the estate administration costs when drafted accordingly. In the case of transferring a business, a will may give the opportunity to address business continuity topics such as choice of future management, for example when the testator owns and runs the family business at the same time. Finally in certain jurisdictions testators may have tax advantages by stipulating the set-up of a testamentary trust in their will. Depending on the testator’s jurisdiction, forced heirship rules may be applicable to the estate. In some of those jurisdictions it may however also be possible to plan around some of those forced heirship restrictions through the use of trusts, foundations or life insurance contracts. In certain other jurisdictions again, testamentary contracts may be another succession planning tool which may even provide certain tax planning opportunities, for example in connection with repurchase agreements.

 

b) Power of Appointment

 

A power of appointment is issued by a testator or the settlor of a trust and permits a power holder to direct where his or her interest in an estate or trust may go to. A general power of appointment enables the power holder to direct his or her share in a will or trust to any individual or legal entity, including to the power holder him- or herself, his or her estate or even creditors of the power holder and/or his or her estate. A limited power of appointment permits a power holder to direct his or her share to a specific class of beneficiaries such as his descendants, but not to the power holder him- or herself, his or her estate or his or her creditors or the ones of his or her estate.

 

c) Living Will or lasting Power of Attorney

 

A living will is made to take care of an individual and his/her family’s needs, when the person becomes incapacitated. Usually a power of attorney is broader than a living will. Depending on the laws applicable to the document, it may contain advance decisions on possible types of medical treatments, but also on how the principal would want his or her financial affairs to be treated during incapacity, including management continuity of the family held businesses.

 

d) Prenuptial and matrimonial Agreements

 

Prenuptial agreements are an asset protection tool normally ensuring separation of pre-matrimonial assets. In some cases it can also be used for tax planning or even to provide for certain family members in the future. Matrimonial agreements will, inter alia, normally define the rights of the parties concerning the assets of the couple. There can also be cohabitation agreements and –following a divorce – post-nuptial agreements.

 

e) Usufruct

 

In many – normally civil law – jurisdictions there is the legal mechanism of usufruct. The right to usufruct normally consists of using an asset or the right to the profits derived from an asset, whereby the ownership of the property itself is with somebody else. Usufruct can be a way to partially transfer property during lifetime to the next generation and a tool for tax planning when the usufructuary for example lives in a jurisdiction where usufruct is not taxed.

 

f) Buy-Sell Agreements

 

A buy-sell agreement often is a contract between co-owners of a closely held business setting out how and when equity interests are to be transferred to the remaining co-owners if and when a certain event such as death or divorce occurs. This can be a stand-alone agreement or it can be integrated into a shareholder agreement.

Then again, a spouse may hold interests in a closely held family business and a buy-sell agreement may provide agreements in connection to passing or divorce of that spouse. The agreement would then provide a mechanism to buy out the other spouse. Here again the agreement can be a standalone or it can be integrated into a prenuptial agreement.

Buy-sell agreements are regularly used in asset protection, and from time to time in tax planning.

 

g) Double Tax Treaties

 

Double tax treaties are agreements between two countries to prevent the double taxation of private individuals and legal entities with an international nexus concerning taxation of income and capital. They will regularly be applicable in cases where individuals hold assets in a different jurisdiction than the one in which they are domiciled. They may also be applicable when an heir lives in a different jurisdiction than the deceased. By holding foreign investments through legal entities of third countries with more favorable double tax treaties with the omicile country and the country of the investment, the overall taxation may be reduced.

 

h) Investment Protection Treaties

 

Investment protection treaties can be an important asset protection tool. The purpose is to generate international law protection against non-commercial (for example political and/or legal) risks associated with investments for individuals and corporate investors. The contracting parties are countries and most of the agreements are bilateral. Depending on the applicable agreement, the protection includes state discrimination against foreign investors, unlawful expropriation or unjustified restrictions on payments and capital flows. There may also be an obligation of jurisdictions to treat investments made by investors of the contracting jurisdiction ‘fairly and equitably‘.

 

i) Companies

 

Domestic companies may be useful to limit liability and generate tax planning effects. Foreign companies (such as holding structures, but also private investment companies) may also limit liability and generate access to favorable double tax treaty jurisdictions as well as other tax planning opportunities.

 

j) Trusts

 

A trust is a structure whereby a person (the ‘settlor’) transfers the enjoyment of assets to a group of individuals (the ‘beneficiaries’) if required also himself, while the control and decisions on the administration of those assets lie with others (the ‘trustees’). Because trusts can generate higher flexibility than wills (for example staggered distributions) but also avoid often cumbersome, expensive and time-consuming probate procedures, trusts are often used for succession planning, especially in cases of families with minors, disabilities and when transferring family businesses. Trusts can also be structured to obtain important tax planning and/or asset protection effects. There are different structures available for planning, such as domestic trusts (in many countries) and offshore trusts. In order to obtain certai n specific planning effects, trusts may be irrevocable, for pure succession planning however they may also be revocable.

 

k) Family Foundations (also called Private Interest Foundations)

 

Family foundations are legal entities holding funds normally dedicated to take care of and to transfer assets to members of a specific family. Compared to a simple will, a foundation will enable the founder to pass the assets to the next generation with more flexibility, such as staggered distributions. Given this purpose, the legal framework in jurisdictions regulating amily foundations will usually provide them with a high level of confidentiality. 

 

l) Charitable Foundation 

 

Charitable foundations are legal entities holding funds normally dedicated to take care of one or more specific non-profitable purpose(s). Some jurisdictions provide a considerable level of control to the founder or his/her family over the management of these charitable foundations, as well as high levels of confidentiality. Other jurisdictions position themselves as being more intrusive in terms of transparency but provide state control ensuring that the statutes of the foundations are meticulously followed. The amount of tax deduction achieved by a founder will regularly also be a major factor when choosing the jurisdiction of a charitable foundation.

 

m) Private Placement Funds, Umbrella Funds

 

A private placement fund is a collective investment scheme set-up for and owned by a pre-selected group of investors (often a family), whereby their shares are not available on the open market. An umbrella fund is also a collective investment scheme set-up for and owned by a pre-selected group of investors (often a family), whereby their shares are not available on the open market, and the respective sub-funds of the umbrella fund will normally have segregated liability. Both private placement funds and umbrella funds may be used for limiting liability but also for tax planning. 

 

n) Private Placement Life Insurance

 

Private placement life insurance is a life insurance contract based on which a life insurance company usually holds a segregated investment portfolio at a bank (or broker-dealer) for a specific life insurance relationship. Upon the death of the insured person the portfolio (plus proceeds) are distributed to the beneficiaries together with the amount of insurance coverage which can be a fixed amount or a percentage of the value of the portfolio at the moment of death of the insured. Private placement life insurance contracts are regularly used for succession planning but may also have uses in tax planning and have certain asset protection features.

 

o) Universal Life Insurance 

 

Universal life insurance will often combine a savings component with a (lifelong) death benefit to be paid out to the beneficiaries. The savings growth will in many jurisdictions have a tax-preferred treatment. Universal life contracts are regularly used for liquidity planning (for example to ensure payment of inheritance taxes without having to sell participations of a company or a real estate), for succession planning, for tax planning and for asset protection.

 

p) Local Investments with foreign Investment Exposure 

 

A number of jurisdictions have generated tax planning opportunities when investing into local investments with foreign investment exposure, instead of doing so directly. This can for example consist of the jurisdiction permitting the issue of local certificates representing foreign investments, a second registration of the foreign investments in the domestic market, etc. Often those local investments can be booked offshore without the local tax resident losing the respective tax advantages. 

 

q) Residency Planning 

 

More and more high net-worth families are trying to escape economic, political, physical, legal and tax uncertainty as well as world-wide exchange of information systems transmitting financial information to their domestic tax authorities, by relocating family members or the complete family to a different jurisdiction. Exit taxes may be applicable, and families will be well advised to create substance at the new jurisdiction by effectively moving their center of vital interest and ensuring closer economic ties to the new jurisdiction.

 

r) Pension Funds 

 

Participating in pension plans can be an interesting tax planning, asset protection and/or liquidity planning tool.

 

s) Family Protocol

 

For families controlling complex assets such as family businesses, family governance can set rules on how a family wants to treat the family business over generations and sets up rules and processes on how the family members interact between themselves. The overriding family governance tool is the family protocol (sometimes also called family charter). The main objective of the family protocol is that ownership of a family business transferred to the next generations by some of the tools outlined above will be kept and run within the family for future generations, thereby substantially increasing the probability of the enterprise surviving and staying within the family for the next generations. The family protocol is a dynamic, non-legally binding document based on joint consent of the family members. In order to ensure that certain parts of the family protocol become legally binding several of the tools above can be used, as well as the shareholder agreement.

 

t) Shareholder Agreements

 

For families owning a family business, shareholder agreements between the shareholders will provide a legally binding way to maintain control within the family. 

 

3. Tax Planning 

 

a) Income and/or Capital Gains Tax Planning

 

As outlined above, there are many tools which – depending on the applicable tax laws and the specific needs of the family – may be used for tax planning. For income tax planning, companies with the use of double tax treaties, usufruct, trusts, charitable foundations, private placement life insurance, universal life insurance, local investments with foreign investment content, relocation as well as pension funds may generate a positive tax impact if and when structured properly. Because tax law is complex and changes regularly it is important to obtain local tax advice in the respective jurisdiction(s).

b) Wealth Tax Planning

 

Not all jurisdictions have wealth taxes. Usufruct, use of companies benefiting of double tax treaties, trusts, charitable foundations, private placement life insurance, universal life insurance, local investments with foreign investment content, relocation as well as pension funds may all be used to partially or totally reduce wealth taxes depending on the involved jurisdiction(s).

 

c) Inheritance Tax Planning 

 

Not all jurisdictions have inheritance taxes (philosophy of law would suggest that inheritance taxes should not be applicable when wealth taxes are in place and vice-versa). Depending on the jurisdiction, usufruct, trusts, private placement life insurance, universal life insurance, relocation as well as pension funds may be used to reduce inheritance tax exposure.

 

d) Other Taxes

 

When structuring a wealth plan it is important not to trigger unwanted tax events such as gift taxes and/or other transfer taxes. Careful consideration has to be given when using one of the above mentioned tools as to what (if any) the tax implications are for the involved parties and within the tool, upon entering into the tool, what they are during the lifetime of the tool, and once the tool is exited and/or terminated. Given that tax laws are complex and change frequently, it is stronglyadvised that local tax advice be obtained in the involved jurisdiction(s) when executing a wealth plan.

4. Succession Planning

 

Given that the worldwide legal framework caters for wealth to be transferred to legal heirs, it is not mandatory to proactively plan one’s succession. There are however many reasons suggesting that tailor-made planning has considerable advantages. It will enable the distribution of assets to be tailored in terms of amounts and time-lines (deferral of distributions or taking care of minor, incapacitated family members, for example by using a trust). It however may also be able to support the heirs by nominating an executor, guardian or trustee who assists heirs and beneficiaries to ensure smooth transfer of the assets, reducing costs and administrative complexity for example in the case of assets abroad. Planning of domestic assets will therefore often be implemented through a will and maybe a domestic trust or foundation. The generational transfer of foreign assets then again may often be planned by using offshore trusts, family foundations or life insurance contracts. Liquidity to pay inheritance tax without having to sell parts of the estate may be generated by using a universal life insurance policy.

If set up properly, the trusts may partially also reduce inheritance tax exposure. In certain countries life-time gifts, usufruct or re-purchase agreements may reduce inheritance tax exposure. 

Individuals wanting to plan their succession will be well advised to do so in good time, in order to ensure that the plan stands in case of unforeseeable events like accidents, but also in case of incapacity which normally will also render future planning impossible. Succession plans will have to be reviewed regularly, in order to ensure that they still fit the changing needs of the family, but also to adjust them to legal and tax changes in the applicable jurisdictions of the family members and assets.

When transferring family businesses or participations thereof, it will almost always be essential not only to transfer ownership, but also to ensure management continuity. Tools to ensure this are for example living wills, a family protocol and shareholder agreements. Due to the additional complexity, planning for management continuity will require considerably more time than planning the succession of ownership. As a matter of best practice a business continuity plan for family businesses should always be in place and regularly be reviewed. It should be coordinated with the succession plan of ownership of the family business.

 

5. Asset Protection

 

In order to limit losses from claims of professional malpractice (for example medical staff, architects, lawyers), business disputes, injuries against owners of rented out real estate, when investing into foreign markets with potentially unpredictable political and legal systems, but also for divorce cases, it may be advisable to enter into certain asset protection schemes. Depending on the type of risk to be mitigated, adequate tools may be establishing domestic or foreign irrevocable trusts, spendthrift trusts for the next generation, life insurance contracts (both private placement life insurance as well as universal life insurance contracts), buy-sell agreements, and/or pension fund investments.

It is important to note that asset protection schemes will only work out if they are implemented before a specific problem arises. These schemes will usually not generate the desired impact if they deliberately intend to frustrate a specific, known creditor, as the transaction will almost certainly be challenged as a fraudulent transfer and, if successful, will be voided by a court. Depending on the case, in some countries even criminal liability may arise when not done well in advance and without wanting to prevent payment of a specific obligation.

Another issue to take into consideration is that whereas the structures of an irrevocable trust, and life insurance contracts will hardly be able to be attacked, the transfer into the scheme may be more vulnerable to legal contestation, for example by arguing the case of fraudulent conveyance (actio pauliana).

Another tool limiting liability can be the use of limited liability companies (LLCs), prenuptial and matrimonial agreements, but also asset protection treaties when investing into counties with higher political and legal risks.

A rather basic asset protection scheme can be to transfer assets to a family member with lower risk exposure. This however can backfire strongly when the family member turns out to be a poorer risk than the potential creditors. Careful consideration also has to be taken to avoid potential gift and other transfer taxes. In some jurisdictions joint holdings may provide some asset protection features (for example small homestead exemptions).

 

6. Conclusion

 

Establishing a comprehensive and holistic wealth plan for a family with assets and family members in different jurisdictions is a highly complex endeavor and will require a strong legal – if possible civil and common law – background with a strong international focus. Broad and longstanding international financial sector experience will likewise be indispensable, given the nature, sophistication, and complexity of many of the tools. Creating such a wealth plan requires cocoordinating a highly skilled, multi-disciplinary, international group of professionals such as domestic and international accountants, lawyers, tax lawyers, product providers, family officers and bankers.

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, September 2020. All rights reserved.

 

Disclaimers:

 

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement. 

This publication was produced by Global Wealth Management Consulting GmbH. It is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any products or specific services. Although all information and opinions expressed in this document were obtained from sources we believe to be reliable, Global Wealth Management Consulting GmbH expressly disclaims any liability, express or implied, for false or incomplete information. To the extent permitted by law, neither Global Wealth Management Consulting GmbH nor any of its managers, employees or agents may be held liable for any losses or damages whatsoever that might arise from the use of this publication or be connected therewith. All information and pinions indicated are subject to change without notice. Global Wealth Management Consulting GmbH retains the right to change the range of services, the products and the prices at any time without prior notice. Certain services and products are subject to legal provisions and cannot therefore be offered worldwide on an unrestricted basis. The content of this publication has not been adapted to the specific needs and investment objectives of a particular client or recipient and is not tailored to their personal or financial situation. In principle, Global Wealth Management Consulting GmbH does not provide legal or tax advice and this publication does not constitute such advice. Global Wealth Management Consulting GmbH recommends that all persons considering the products or services described herein obtain appropriate independent legal, tax and other professional advice. The products and services mentioned herein may require agreements to be signed. Please note that the terms and conditions of such specific agreements described in the corresponding agreements apply to these products and services. We kindly ask you to carefully read such agreements and to contact your Global Wealth Management Consulting GmbH client advisor or Wealth Planner should you have any questions. This document may not be reproduced or distributed without the prior consent of Global Wealth Management Consulting GmbH.

 

Why holding undeclared assets in Switzerland, the United Kingdom or the United States is inadvisable

  

 

 

Why holding undeclared assets in Switzerland, the United Kingdom or the United States is inadvisable

 

This article will show that global exchange of information mechanisms are far more complete and functional for Switzerland, the United Kingdom and the United States than commonly assumed. It also makes the point that taxpayers using these (and most other) jurisdictions to hold their undeclared assets are risking to be subject to seizure of their assets and harsh criminal liabilities in the respective jurisdiction. This in addition to tax liabilities for the (already seized) unpaid taxes, back-taxes and penalties as well as possible criminal liability in their domicile country.

In the current times of crisis with economic, political, legal, financial and fiscal risks, it is more important than ever to hold a portfolio of asset classes that is well-diversified over different jurisdictions and currencies. Often, the most efficient way of doing so in terms of diversification and liquidity will be to hold a portfolio of securities booked in one of the major international financial centers. Many of these financial centers have historically also strongly promoted the legal confidentiality framework of their financial sector as a possibility to shelter taxpayer’s assets not only from all kind of uncertainties in taxpayer’s domicile countries, but also from the taxpayer’s domestic tax authorities. This article will show that while this may have been a successful strategy for certain jurisdictions in the past, this certainly is not the case anymore today. The article will focus on three of the most important financial centers, Switzerland, the United Kingdom and the United States. Although only three are discussed here, most of the mechanisms described are based on global initiatives and will therefore apply to most financial centers per analogy.

 

I. International Co-operation on Legal Assistance

 

International co-operation on Legal Assistance has a long tradition. Initially it was used to investigate coordinated international crimes like drug trafficking, money laundering and terrorism. In the US for example letters rogatory were forwarded to a court in the receiving country via diplomatic channels.

The US then signed Mutual Legal Assistance Treaties (see below) for example with Switzerland in 1977, upgraded with an addendum permitting information sharing related to US stock trading offenses.

 

II. Exchange of Tax Information

 

Exchange of financial information among separate sovereign government authorities can take place automatically or upon request, usually based on some kind of bilateral and/or multilateral agreement between two or more jurisdictions. It can also be exchanged spontaneously (without any request), sometimes based on a treaty, or, depending on the laws of the providing jurisdiction, even without a treaty. This article will only focus on the most frequently used ways of exchanging tax information.

 

1. Tax Information Exchange Treaties (TIEAs) and Double Tax Treaties (DTTs)

 

Both Tax Information Exchange Treaties and Double Tax Treaties are agreements made between (normally) two jurisdictions. Under the links below, you can find a list of tax information exchange agreements entered into by Switzerland, the UK, and the US.

 

a) Tax Information Exchange Agreements (TIEAs)

 

The purpose of Tax Information Exchange Agreements is to promote international co-operation between (two or more) countries in tax matters and enhance tax compliance of taxpayers through exchange of tax-relevant information. Information can be exchanged upon request, or for treaties based on the OECD model of 2015 also automatically. There is also a Multilateral Competent Authority Agreement (MCAA) on Automatic Exchange of Information (AEOI) which may also permit spontaneous exchange of information. Switzerland and the UK have signed up to this multilateral treaty – the full list of signatories can be found here.

  1. Page 8f.:Swire.docx
  2. For example:Oecd releases guidance on the spontaneous exchange by no or onlynominal tax jurisdictions.
  3. Informations austausch aufersuchen.
  4. Tax treaties (TIEAs below)
  5. The tools on page 2 and 3: EOICUP_20.1_01R.pdf
  6. Some tools per country as per 2018: update-ustreaties-status-tmij.pdf
  7. Treaties
  8. Tax information exchange agreement stieas.
  9. MCAA-Signatories.pdf

 

b) Double Tax Treaties (DTTs)

 

Double tax treaties (DTTs) prevent or mitigate the double taxation of income for individuals and legal entities with an international nexus in the area of taxes. Whereas most of the provisions of a DTT have the purpose of avoiding or mitigating double taxation, DTTs also contain rules relating to the exchange of tax-relevant information upon request.

 

c) Privacy and actual cases based on Tax Information Exchange Treaties and Double Tax Treaties

 

i. Switzerland

 

In Switzerland, historically individual financial privacy rights have enjoyed strong legal protection since the 18th century. This specifically also applies to banking secrecy which has a long tradition, especially in the French speaking part from where bankers traveled to France during World War I to advertise banking secrecy. The following years of political and economic instability and increased taxation for financing the recent world war then led to capital movements into Switzerland as well as pressure from foreign governments on Swiss banks to disclose information of their clients.Therefore in 1934 it became a criminal offense in Switzerland to violate banking secrecy. In 2009 however, Switzerland decided to apply the standards of the (then) OECD model information exchange agreements into its double tax treaties, thereby keeping the strict rules of banking secrecy, but not applying them to financial information exchanged with foreign countries for tax purposes. Since then, there are numerous cases of successful exchange of information from Switzerland to other countries based on TIEAs and/or Double Tax Treaties for specifically identified individuals or companies. One of the most striking leading cases extending government access to private information decided by the Supreme Court in Switzerland was when group information was granted to the Netherlands based on a double tax treaty because the request (among others) included a detailed description of the group of affected taxpayers. This decision triggered a series of group requests from the Netherlands and also from other jurisdictions having a Double Tax Treaty with Switzerland.

 

ii. United Kingdom

 

A successful court decision in the UK on exchange of information based on a double tax treaty for example is Kotton v. FTT (TC) HMRC, where the High Court approved the exchange of

  1. Urteil vom 12. September 2016.
  2. Exchange of information: disputes multiply.
  3. England and Wales High Court (Administrative Court) Decisions.
  4. Kotton v First-tier Tribunal (Tax Chamber) & Ors [2019] BTC 16

Information on spending of the claimants credit card to assist the Swedish Tax Authority (STA) to check whether the claimant was resident in Sweden. The process on how exchange of tax information can be requested in the UK is outlined in the homepage of the UK’s Revenue website16.

 

iii. United States

 

The US historically also provided a high level of privacy in financial matters. After 9/11 however the patriot act was passed which grants government rights to monitor phone and e-mail communications, collect bank and credit reporting records, and track activity of individuals and corporates on the Internet.

In the US the IRS issuance of summons at the request of foreign authorities has been repeatedly upheld by courts. This based on exchange of information clauses of international treaties and the Internal Revenue Manual of the IRS. Such a summons may be issued to obtain information from individuals and entities within the United States, relating to the foreign tax liability of a foreign citizen. An example for an actual court case ordering exchange of information based on the USMexico Tax Information Exchange Agreement effective January 18th, 1990 and the US-Mexican Double Tax Treaty effective January 1st, 1994 is outlined in this Link.

Based on a newer Double Tax Treaty containing collection provisions with Denmark, a US court concluded that the IRS was even required to collect the Danish taxes as if they were taxes owed to the US.

For many years the US were criticized because their compliance rules did not foresee that foreign beneficial owners of US Limited Liability Companies (LLCs) be registered, and therefore the beneficial owner information was not available to be shared with other jurisdictions. This changed in 2016 for foreign-owned, single-member LLC who now have to be reported to the Internal Revenue Service of the US. Likewise all beneficial owners of any legal entity accounts opened on or after May 11, 2018 have to be identified within banks now, which means that now the beneficial owners of these structures are not only subject, but also potentially available to exchange of information requests. For accounts above USD 1 million with one or more non-US 

  1. International Exchange of Information Manual.
  2. Surveillance Under The Patriot Act.
  3. Morvillo.pdf
  4. US court orders IRS summons enforced under US-Mexico income tax treaty.
  5. 31 CFR § 1010.230 – Beneficial ownership requirements for legal entity customers.
  6. Tackling the Challenges of Complying With FinCEN’s New Customer Due Diligence Rule.
  7. 13 Points of Clarification for FinCEN Final Rule (CDD)
  8. Fincen’s customer due diligence rule becomes effective; fincen and finra guidance provides interpretive color for firms working to comply.

Persons as direct or beneficial owners however all nominal and beneficial owners have to be identified.

In a court case based on the double tax treaty with Finland, the IRS requested and subsequently was ordered to obtain US bank information on Finnish Residents with US Bank Accounts and payment cards. Should some of these accounts or payment cards be held by structures such as a Limited Liability Company (LLC) or Trust, a second request of the contracting jurisdiction of a double tax treaty would normally result in obtaining the information of the beneficial owners (“clients”) behind the structures.

 

2. Automatic Exchange of Information Mechanisms

 

a) Common Reporting Standard (CRS)

 

The Common Reporting Standard (CRS), developed in response to a G20 request and approved by the OECD in 2014, requires jurisdictions to obtain information from their financial institutions and thereafter automatically exchange that information with other jurisdictions on an annual basis. Based on CRS in 2019 information on some 84 million accounts worldwide were exchanged.

In general terms, the information collected and exchanged is: name, address, taxpayer identification number, date and place of birth of each reportable person, account number, name and identifying number of the reporting financial institution, account balance or value at the end of the relevant calendar year (or other appropriate reporting period) or at its closure if the account was closed, capital gains, income depending on the type of the account (dividends, interest, gross proceeds/redemptions, other).

As per August 2020, some 114 jurisdictions have committed to automatic information exchange, including Switzerland and the UK. The UK’s schedule of exchanging tax information is listed on common reporting standard

  1. USA: Anti-money-laundering-laws-and-regulations.
  2. 31 CFR § 1010.620 – Due diligence programs for private banking accounts.
  3. IRS to Obtain US Bank Information on Finnish Residents with US Bank Accounts.
  4. Court Authorizes Service of John Doe Summonses Seeking Information About Finnish Residents Using Bank of America, Charles Schwab, and TD Bank Payment Cards Linked to Non-Finnish Bank Accounts
  5. DOJ and IRS Seek Information on Finnish Individuals Using U.S. Payment Cards.
  6. The automatic exchange of information
  7. International community reaches important milestone in fight against tax evasion.
  8. How to report Automatic Exchange of Information.
  9. AEOI-commitments.pdf
  10. CRS by jurisdiction.

 

The UK Revenue’s website, the Swiss schedule is published on the websit of the State Secretariat for International Finance (SIF).

The US have currently not signed up to the Common Reporting Standard model, as they operate anexchange of information scheme under the Foreign Account Tax Compliance Act (FATCA).

Whereas the legal basis of this information exchange will often be a bilateral agreement between two jurisdictions, there is also a multilateral Convention on Mutual Administrative Assistance in Tax Matters has been signed by 137 countries including Switzerland, the UK and the US, whereby the entry into force in the US is still outstanding. The convention covers all forms of tax co-operation to tackle tax evasion and avoidance.

 

b) US Foreign Account Tax Compliance Act (FATCA)

 

FATCA was designed to prevent tax evasion by US taxable persons using foreign banks and ways of financial structuring.

Since 2015 the US have entered into intergovernmental agreements (IGAs) with other jurisdictions based on which they have undertaken automatic information exchanges pursuant to FATCA. The model 1 IGA with other jurisdictions are reciprocal and foresee exchange of tax information both ways, unlike the model 2 agreements which only foresee exchange towards the US.

However, foreign financial institutions subject to a reciprocal Model 1 IGA are required to look through entities wherever they are domiciled and report information on US beneficial owners, but no such look-through requirement is imposed on US financial institutions subject to that IGA. Likewise US financial institutions are not required to report accounts held by entities that are not resident in the FATCA partner jurisdiction, and there is only reporting on non-cash US accounts with US source income subject to withholding in the US.

The list of the currently 113 jurisdictions having signed up to FATCA can be found on the US Treasury webpage.

  1. HMRC internal manual.
  2. Financial accounts.
  3. AEOI-commitments.pdf
  4. Convention on Mutual Administrative Assistance in Tax Matters.
  5. Status_of_convention.pdf
  6. FATCA (Foreign Account Tax Compliance Act)
  7. long-arm-of-the-law-june2017.pd_.pdf
  8. Foreign Account Tax Compliance Act.

 

3. Other relevant Co-operation Agreements

 

a) Mutual Legal Assistance Treaties (MLATs)

 

These normally bilateral treaties will ensure mutual legal assistance such as obtaining evidencelocated in the US on foreign tax evasion, including summons of information held by third parties, or, as mentioned above, sharing information related to US stock trading offenses.

 

b) Simultaneous Criminal Investigation Programs (SCIPs)

 

The US has entered into Simultaneous Criminal Investigation Programs (SCIPs) with Australia, Canada, France, Italy, Japan, Mexico and South Korea. Simultaneous Criminal Investigation Programs conduct investigations on individuals and/or companies involved in substantial tax violations in the US or in the respective contracting jurisdictions. The programs come with broad tax
information exchange clauses.

 

III. Other important Topics to take into Consideration when dealing with Confidentiality

 

1. Holding the Bank Account via a Private Investment Company and/or Trust

 

In the US, non-resident clients will often hold their account via a Private Investment Company (sometimes also called Offshore or Domiciliary Company) or a Trust, thereby avoiding US estate taxes upon their decease of currently up to 40% applicable to US situts assets54 booked in their US accounts. The use of a foreign Private Investment Company and (often or if not properly planned) the trust however will in many cases trigger negative tax effects in the domicile country of the client. Alternatively, it could deprive the taxpayer of certain tax planning opportunities concerning investments issued in his domicile country which he could hold in his US account and would generate tax advantages only if held in his own name. 

  1. No77_07VE_Gossin.pdf
  2. Guidance Mutual legal assistance
  3. 07003060029Morvillo.pdf
  4. Swire.docx
  5. irm_09-004-002
  6. SCIP–Exchanging Information
  7. South Korea and the United States Enter Into Simultaneous Criminal Investigation Program (“SCIP”)
  8. US estate and gift tax: 8 factors to consider as a non-US person.

 

2. Possible criminal Consequences of abusing Confidentiality Features for Tax Evasion and/or Tax Fraud in the international financial Center 

 

Some taxpayers may be tempted to use confidentiality mechanisms to hold undeclared funds in the respective international financial centers. Besides the point made above that all larger financial centers nowadays frequently exchange information with most other jurisdictions and that the international mechanisms for information exchange are increasing at considerable speed both in quality and in quantity, there will often also be criminal impact in the international financial center in addition to the possible criminal impact in the domicile country.

 

3. Qualification of foreign Tax Evasion as criminal Offense in the international financial Center a) Is foreign tax evasion a domestic crime in the international financial center?

 

Besides the information exchange schemes described above, governments of international financial centers also have further tools available to deal with foreign tax evasion: Foreign tax crimes can be charged according to local criminal laws, for example in Switzerland, the UK, and the US.

 

i. Switzerland

 

As of January 1, 2016, the Swiss Criminal Code has been amended so that felony or qualified tax fraud (as per the Swiss definition usually involving falsification of documents) of indirect taxes (such as customs duties, withholding tax, stamp duties, VAT, etc.) exceeding the sum of CHF 300’000 per tax period qualifies as predicate offense to money laundering if and when it is committed
commercially or in co-operation with third parties and causes a significant unlawful advantage or significant damage. Evasion of direct taxes does not qualify as a felony in Switzerland. Given that the assets involved have to originate from a predicate offense which could be forfeited, many law experts in Switzerland consider this new offense of money laundering in tax matters to be dysfunctional, given that this kind of behavior in Switzerland does not trigger foreclosure of assets , which is one of the preconditions. 

  1. Tax Fraud as Predicate Offense to Money Laundering in Switzerland.
  2. 314584_0_Keneally_TurningtheTide_SeptemberOctober_20161.pdf
  3. Tax Fraud as Predicate Offense to Money Laundering in Switzerland.
  4. Switzerland: Anti money laundering laws and regulations

 

ii. United Kingdom

 

According to the UK Proceeds of Crime Act 2002 tax evasion is a criminal offense and money laundering of the proceeds of foreign crimes is punishable. This includes removing property from
the jurisdiction (England and Wales or Scotland or Northern Ireland).

 

iii. United States

 

A leading Supreme Court case in the US is Pasquantino v. United States, where a conviction of the defendants to the criminal offense of wire fraud based on carrying out a scheme to evade Canadian taxes64,65 was confirmed. The same is applicable for other violations of foreign law, like reportingviolations or foreign exchange violations.

A wire transfer from a non-US citizen into the US from abroad may satisfy Section 1956 (f) of the US money laundering regulations and an international transfer of funds itself can represent money laundering when there is either intent, knowledge that the transaction intends to conceal the proceeds, or it is designed to avoid a transaction reporting requirement.

In United States v. Yusuf the court held that “unpaid taxes, which are unlawfully disguised and retained by means of the filing of false tax returns, constitute ‘proceeds’ of mail fraud for purposes of supporting a charge of federal money laundering”. Prosecutors in the US may therefore charge money laundering based on underlying mail or wire fraud violations, which again rest on alleged violations of foreign tax laws. A foreign person who structures a transaction in which funds that have evaded foreign taxes are used therefore risks prosecution under the money laundering statute.

Furthermore, a court in the Eastern District of New York held that, under Yusuf, sales on which no excise taxes had been paid constitute the “proceeds” of a specified unlawful activity, because unpaid taxes disguised and retained through mail fraud can represent specified unlawful activity proceeds. An actual case in the US consists of a Mexican Businessman who was sentenced to 75.

 

  1. United Kingdom: Anti money laundering laws and regulations.
  2. Proceeds of Crime Act 2002.
  3. Oyez: Pasquantino v. United States.
  4. Pasquantino v. United States, 544 U.S. 349 (2005).
  5. long-arm-of-the-law-june2017.pd_.pdf
  6. 18 U.S. Code § 1956 – Laundering of monetary instruments
  7. USA: Anti money laundering laws and regulations.
  8. 18522_hIs_the_United_States_Still_a_Tax_Haven.pdf
  9. Yusuf V. United States – Opposition
  10. 314584_0_Keneally_TurningtheTide_SeptemberOctober_20161.pd

 

Months in prison for orchestrating a fraud scheme against the Mexican Government thereby obtaining over USD 20 Million. In addition to the prison term he was ordered to three years of supervised release and ordered to forfeit and pay restitution in the amount of USD 21 million.

 

iv. International Co-operation

 

International co-operation focusing on tax evasion is increasing considerably, for example the tax enforcement initiative of the Joint Chiefs of Global Tax Enforcement (known as the J5), an initiative of Australia, Canada, the Netherlands, the UK, and the US. The level of co-operation can also be deduced from the fact that for example the US IRS’ Criminal Investigation Division has staff located in ten countries.

 

b) Is there a legal obligation to report the domestic crimes?

 

Financial Intermediaries in Switzerland are obliged to notify the Money Laundering Reporting Office Switzerland (MROS) once they know or have reasonable grounds to suspect that assets involved in a business relationship are among others related to a criminal offense of money laundering and/or are proceeds of a felony or a qualified tax offense.

Based on the Proceeds of Crime Act 2002 in the UK there is an obligation for a person who knows, suspects or has reasonable grounds to know or suspect that another person is or has engaged in a money laundering offense to file a Suspicious Activity Report (SAR). In 2017 the corporate offense of “failure to prevent the facilitation of foreign tax evasion” was introduced in the UK. This enables the prosecution of UK based operations in UK courts concerning tax evasion on taxes due abroad when facilitation has taken place by a UK organization.

The US financial institution who knows, suspects or has reason to suspect that a transaction involves money laundering, tax evasion, evasion of any Bank Secrecy Act (BSA) regulation, has no apparent lawful purpose or is suspected of violation of federal criminal law must file a Suspicious Activity Report (SAR) to the Financial Crimes Enforcement Network (FinCEN) of the US within 30 days.

  1. Mexican Businessman Sentenced To 75 Months In Prison For Orchestrating Fraud Scheme Against The Mexican Government To Obtain Over $20 Million
  2. Joint Chiefs of Global Tax Enforcement
  3. Domestic-Hot-Topics-in-Criminal-Tax-Enforcement-FBA-2019-pdf.pdf
  4. Art. 9 AMLA – Duty to report reasonable suspicion
  5. Switzerland: Anti money laundering laws and regulations
  6. UK: Anti money laundering laws and regulations
  7. corporate-criminal-offences-failure-to-prevent-facilitation-of-tax-evasion.pdf
  8. U.S. Reimposes Sanctions on Myanmar (Burma) in Response to Military Coup.
  9. USA: Anti money laundering laws and regulations
  10. 31 CFR § 1023.320 – Reports by brokers or dealers in securities of suspicious transactions.

 

In 2019 alone 5,596,620 SARs have been filed with FinCEN.

 

c) What are the possible criminal and legal consequences of the qualification as a domestic crime?

 

i. Switzerland

 

Supposing that tax fraud as predicate of money laundering (see reservation of law experts above) has been established, the question arises wether the offender can be convicted of laundering the proceeds of his own tax frauds. In Switzerland based on a decision on the Supreme Court, law experts came to the conclusion this should be the case. The maximal sentence for the underlying fraud is up to 5 years imprisonment or a monetary penalty, and if acting for commercial gain up to 10 years or a monetary penalty of not less than 90 daily penalty units. The maximum criminal sentence for money laundering is three years imprisonment and if actions were taken as a member of a criminal organization or an organization formed to conduct continued money laundering, or a large turnover or substantial profit was achieved, the maximum sentence can be up to five years imprisonment with maximum monetary penalties of 500 daily penalty units of up to CHF 3’000 each. The court can order forfeiture of assets that have been obtained through criminal offenses. Forfeiture of illegal tax savings can also be applicable towards a person who is not accused.

 

ii. United Kingdom

 

In the UK, tax evasion is a criminal offense and money laundering of the proceeds of foreign crimes is punishable with up to 14 years imprisonment and/or an unlimited fine. Confiscation can take place except when disproportionate, which courts will generally only find in cases clearly amounting to double-counting. Law enforcement can also use other civil and summary processes to recover assets alleged to be proceeds of crime without criminal convictions, such as unexplained wealth orders, which among others may also be used by the HMRC (the UK tax authorities) in

  1. SAR Stats | FinCEN.gov
  2. BGE 124 IV 274
  3. Konkurrenz zwischen Vermögensdelikt und Geldwäscherei
  4. Uebungen_Strafrecht_II_FS2017_Graf_Fall_6.pdf
  5. Vortaten zur Geldwäscherei
  6. Swiss Criminal Code
  7. Switzerland: Anti money laundering laws and regulations
  8. UK: Anti money laundering laws and regulations

 

investigations. The Unexplained Wealth Order was introduced to the Proceeds of Crimes Act in 2017 and is designed to confiscate the proceeds of serious crimes (such as fraud, money laundering and others) through the use of civil powers instead of criminal powers. An important feature is that it reverses the burden of proof, that the standard of proof for suspicion is “reasonable grounds” (unlike criminal standard of “beyond all reasonable doubt”), and that it is a criminal offense to knowingly make a false statement responding to an Unexplained Wealth Order.

 

iii. United States

 

In the US, the criminal offense of mail or wire fraud carries a maximum sentence of 20 years and 30 years when mail or wire fraud affect a financial institution. Money laundering maximal penalties are fines up to USD 500’000 or double the amount of assets involved, whichever is greater for each violation and imprisonment up to 20 years for each violation. Government does not have to prove knowledge of the offender that the proceeds were from a specified form of illegal activity. There is both criminal and civil forfeiture against the assets involved in, or when traceable to, money laundering or criminal conduct. Civil forfeiture actions can be brought even if nobody has been convicted for money laundering. In civil forfeiture cases the government has the lower standard of proof “preponderance of evidence” and not “beyond reasonable doubt”. Even the proceeds of any predicate offense to money laundering, including wire and mail fraud, are subject to confiscation, irrespective of whether the government prevails on the money laundering charge. 18 U.S.C. Section 1957, with a maximum sentence of 10 years finally only requires government to show that a defendant engaged or attempted to engage in a monetary transaction with property derived from specified unlawful activity with knowledge of the property being derived from specified unlawful activity worth a minimum of USD 10’000. Finally, many US states have parallel criminal money laundering provisions.

 

  1. HMRC and Unexplained Wealth Orders.
  2. Serious Crime Act 2007.
  3. Unexplained Wealth Orders: what you need to know.
  4. AML and Tax: Adapting to the changing environment.
  5. The Unexplained Wealth Order Imperative: Always Keep Your Financial House in Order.
  6. Unexplained Wealth Orders (and remainder of the Criminal Finances Act) come into force.
  7. Unexplained wealth orders – Effective weapon or window dressing?
  8. long-arm-of-the-law-june2017.pd_.pdf
  9. USA: Anti money laundering laws and regulations 2020

 

4. Unlawful Leaks

 

An increasing risk consists of financial information of High Net-Worth Individuals and Ultra High-NetWorth Individuals being shared unlawfully with the public, such as the FinCEN files, whereSARs filed to a US regulator, the Financial Crimes Enforcement Network, were leaked. In most cases however individuals working for service providers of the financial sector are responsible for the leaks, as in the last few years for example the accounting firm Price Waterhouse Coopers (2014), the bank HSBC (2015), the law firm Mossack Fonseca (2016), the service providers Appleby and Estera (2017). Tax authorities worldwide have and still are using the information provided by these and other leaks to investigate and prosecute their taxpayers who appear in those leaks. For example in operation Atlantis it would appear that the tax enforcement agencies of Australia, Canada, the Netherlands, the UK and the US (the so called J5) jointly are systematically targeting parts of the client base of a bank in Puerto Rico for tax fraud based on information obtained from the Panama papers. 

 

An other leak was created by Morgan Stanley in the US when they failed to take proper precautions in wiping sensitive customer data when closing two wealth management data centers in 2016. Morgan Stanley was subsequently fined with USD 60 million and some of the bank’s current and former clients have filed class actions suits claiming that their encrypted private financial data remained on the decommissioned computers.

 

IV. Conclusion

 

As outlined above the different tools on information exchange applicable to Switzerland, the UK and the US are very broad and are improving quickly. So is international co-operation in matters of crossborder tax fraud. Non-tax-compliant individuals can run, but they cannot hide in these internationalfinancial centers. 

The potential criminal and seizure implications of holding non-tax-compliant assets offshore are often strongly underestimated. In the worst case, offenders may find themselves in the situation that they have been sentenced to various years of imprisonment in the offshore jurisdiction of the international financial center, their assets in the international financial center have been seized, and their domestic tax authorities are knocking on their door for unpaid taxes (plus back-taxes and penalties) on the seized assets, and they are subject to a criminal investigation in their domicile country for tax evasion and/or fraud (and maybe money laundering) at the same time.

  1. FinCEN Files.
  2. Statement by FinCEN Regarding Unlawfully Disclosed Suspicious Activity Reports.
  3. An ex-FinCEN official pleaded guilty to leaking documents to a reporter. Reports say she is a Trump supporter.
  4. FinCEN Files: All you need to know about the documents leak.
  5. Anti-money laundering laws must cover lawyers and accountants.
  6. OCC Assesses $60 Million Civil Money Penalty Against Morgan Stanley.
  7. Morgan Stanley Fined $60 Million for Data Protection Mishaps.

 

Non-compliant taxpayers holding their assets offshore in international financial centers may therefore reconsider their situation and are well advised to get professional advice from a tax lawyer in their domicile country and (where available) take part in tax amnesties or voluntary disclosure schemes.

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, August 2020. All rights reserved.

 

Disclaimers:

 

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.

This publication was produced by Global Wealth Management Consulting GmbH. It is for your information only and isnot intended as an offer, or a solicitation of an offer, to buy or sell any products or specific services. Although all information and opinions expressed in this document were obtained from sources we believe to be reliable, Global Wealth Management Consulting GmbH expressly disclaims any liability, express or implied, for false or incomplete information. To the extent permitted by law, neither Global Wealth Management Consulting GmbH nor any of its managers, employees or agents may be held liable for any losses or damages whatsoever that might arise from the use of this publication or be connected therewith. All information and opinions indicated are subject to change without notice. Global Wealth Management Consulting GmbH retains the right to change the range of services, the products and the prices at any time without prior notice. Certain services and products are subject to legal provisions and cannot therefore be offered worldwide on an unrestricted basis. The content of this publication has not been adapted to the specific needs and investment objectives of a particular client or recipient and is not tailored to their personal or financial situation. In principle, Global Wealth Management Consulting GmbH does not provide legal or tax advice and this publication does not constitute such advice. Global Wealth Management Consulting GmbH recommends that all persons considering the products or services described herein obtain appropriate independent legal, tax and other professional advice. The products and services mentioned herein may require agreements to be signed. Please note that the terms and conditions of such specific agreements described in the corresponding agreements apply to these products and services. We kindly ask you to carefully read such agreements and to contact your Global Wealth Management Consulting GmbH client advisor or Wealth Planner should you have any questions. This document may not be reproduced or distributed without the prior consent of Global Wealth Management Consulting GmbH.

 

 

Reubicación para individuos de alto poder adquisitivo en Latinoamérica – Buscando seguridad y certidumbre

Reubicación para individuos de alto poder adquisitivo en Latinoamérica – Buscando seguridad y certidumbre

Recientemente hemos visto un número cada vez mayor de clientes individuales de alto poder adquisitivo que viven en varios países de América Latina interesados en mudarse a un nuevo país de residencia, debido a la incertidumbre económica, política, física, jurídica y fiscal, así como iniciativas de intercambio de información a nivel mundial que han dado lugar a que la información financiera llegue a sus autoridades fiscales nacionales (véase también: Millionaires in Latin America Weigh Moving to Sidestep Tax Grab y https://www.willkie.com/-/media/files/publications/2023/the_current_state_of_taxes_on_wealth_in_latin_american_countries.pdf). Una tendencia que con la pandemia del COVID-19 se esta acelarando.

Según nuestra experiencia, los esquemas de mayor interés para los clientes de América Latina son:

Costa Rica:

Una inversión mínima de 200.000 USD en bienes raíces en Costa Rica.Alternativamente, para una familia entera, un ingreso mensual regular de al menos 2’500 USD certificado por un banco local o extranjero. Como alternativa, un plan de pensión de por vida, seguro social o plan de pensiones del gobierno de 1’000.- USD permitirá al beneficiario obtener un permiso de residencia. Se aplica un impuesto de transferencia de bienes raíces del 1,5%.

Se aplica un impuesto sobre la renta de hasta el 25% sobre los ingresos de fuente costarricense. Se aplica un impuesto sobre las ganancias de capital del 15% a las ventas de bienes raíces en Costa Rica que no sean la residencia principal. Puede aplicarse un impuesto sobre la ganancia de capital del 30% para las ganancias de fuente habitual costarricense. No hay impuestos de herencia o patrimonio. Puede haber una obligación de contribuir al sistema de seguridad social.

España:

Actualmente es un proceso de inmigración relativamente fácil para personas de alto poder adquisitivo con un proceso de visa dorada que requiere una inversión en bienes raíces por un valor mínimo de 500’000.- € (otros programas con mínimos más altos disponibles).

El Índice de Calidad de Vida ocupa el puesto 16 de 82 Quality of Life Index by Country 2021

Al convertirse en residente fiscal: impuestos elevados (impuesto sobre la renta según la comunidad autónoma, por ejemplo, el máximo impuesto marginal del 43,5% para una persona física residente en Madrid y del 48% para una persona física residente en Cataluña). Impuestos sobre donaciones y sucessiones tal como al patrimonio sona aplicables según la región autónoma. Los residentes y no residentes fiscales españoles están sujetos al impuesto sobre los dividendos, los intereses y las ganancias de capital a un tipo máximo del 23%

Oportunidades limitadas de planificación fiscal, por ejemplo, mediante la obtención de un permiso especial de residencia fiscal, pagando el 24% sobre la renta local como no residente sobre los primeros 600’000.- € de renta.

Parte de la zona Schengen, permitiendo a los residentes viajar libremente a la mayor parte de la Unión Europea y Suiza.

Italia:

Los ciudadanos de la Unión Europea tienen derecho a vivir en Italia. El visado de inversión rápida para los no ciudadanos de la Unión Europea requiere una inversión de 1 millón de € en una empresa local o 2 millones de € en bonos públicos italianos.

El Índice de Calidad de Vida ocupa el puesto 36 de 82 Quality of Life Index by Country 2021.

Las nuevas personas residentes pueden solicitar un impuesto sustitutivo global de 100’000 € y un impuesto de 25’000 € para los familiares sobre todos sus ingresos de origen no italiano, su patrimonio en el extranjero y la exención del impuesto de sucesiones y donaciones sobre los activos extranjeros. Este acuerdo puede prolongarse hasta 15 años.

Parte de la zona Schengen, que permite a los residentes viajar libremente a la mayoría de los países de la Unión Europea y Suiza.

Los Estados Unidos de América:

Visado de inversionista EB-5 disponible para una inversión mínima de 1,8 millones de USD, o 900’000 USD, para inversiones en áreas de empleo específicas.

El índice de calidad de vida ocupa el puesto 15 de 82 Quality of Life Index by Country 2021.

Impuestos áltos (impuesto federal sobre la renta hasta del 37%, impuesto de sucesión en EE.UU. actualmente hasta del 40%), impuestos sobre las ganancias de capital hasta del 20%.

Oportunidades limitadas de planificación de impuestos para individuos que establezcan fideicomisos irrevocables 5 años antes de emigrar a los EE.UU. pueden excluir los activos del fideicomiso de los impuestos de sucesión de los EE.UU. a la muerte del fideicomitente y los subsiguientes beneficiarios de los EE.UU.

Mónaco:

Los nacionales de países no pertenecientes a la Unión Europea deben solicitar un visado de larga duración antes de solicitar el permiso de residencia. Para obtener el permiso de residencia, es necesario presentar un comprobante de patrimonio sin empleo asalariado. Abrir una cuenta bancaria en Mónaco con un mínimo de 500’000 €. Durante los primeros nueve años se requiere pasar por lo menos tres meses al año en Mónaco.

No hay impuestos sobre la renta, las ganancias de capital o el patrimonio en Mónaco, excepto para los franceses que tienen que pagar impuestos sobre las rentas franceses. Sin embargo, hay impuestos de sucesión y donaciones hasta del 16%, pero sólo sobre los activos situados en Mónaco, pero no para los herederos directos como padres, cónyuge e hijos.

No forma parte de la zona Schengen.

Panamá:

Una inversión mínima de 500.000 USD en bienes raíces o en papeles de la bolsa de valores en Panamá, además de 2.000 USD por cada dependiente adicional incluido en la visa. Alternativamente, las personas con una pensión de por vida o una pensión de por lo menos 1.000 USD al mes.

El Índice de Calidad de Vida ocupa el puesto 57 de 82 Quality of Life Index by Country 2021.

Los residentes son gravados sólo por sus ingresos de fuente panameña. Los impuestos sobre la renta son de hasta el 25%, y las ganancias de capital locales son gravadas con el 10%. No hay impuestos de herencia o donación en Panamá. No hay impuestos sobre el patrimonio, pero sí un impuesto de inmueble de hasta el 1% anual.

Portugal:

Programa de visados dorados para ciudadanos no pertenecientes a la Unión Europea, la Asociación Europea de Libre Comercio (AELC) y/o a Suiza. Entre otros requisitos para calificar al programa es necesaria una inversión de 500’000.- € en cualquier inmueble, 350’000.- € en un inmueble de más de 30 años con la obligación de renovarlo, transferir activos de 1 millón de € a Portugal, una inversión de 350’000.- € en un fondo que califique, o la creación de diez nuevos puestos de trabajo a tiempo completo.

El Índice de Calidad de Vida ocupa el puesto 18 de 82 (Quality of Life Index by Country 2021.

Se dispone de la condición de residente no habitual que permite excepciones fiscales por un máximo de diez años. Las excepciones a la fiscalidad portuguesa incluyen la mayoría de los ingresos de fuentes extranjeras, incluidos los ingresos de inversiones no portuguesas, y los ingresos por empleo. Sin embargo, los ingresos de las pensiones extranjeras están gravados con un 10% de tasa fija.

Parte de la zona Schengen, que permite a los residentes viajar libremente a la mayoría de los países de la Unión Europea y Suiza.

Reino Unido:

La mayoría de los ciudadanos de la Unión Europea, la Asociación Europea de Libre Comercio (AELC) y Suiza tienen derecho a vivir en el Reino Unido. Para los demás ciudadanos se pueden utilizar las rutas del inversionista (inversión mínima de 2 millones de £) o del empresario (inversión mínima de 200’000 £).

El Índice de Calidad de Vida ocupa el puesto 19 de 82 Quality of Life Index by Country 2021.

Puede solicitar un estatus de residente no domiciliado en el Reino Unido, lo que le permite optar por aplicar una base de remesas durante los primeros 15 años, gravando sus ingresos y ganancias en el Reino Unido y sus ingresos y ganancias en el extranjero de 2’000 £ o más por año que traiga de vuelta al Reino Unido. Durante los primeros seis años de residencia en el Reino Unido la base de la remesa es gratuita, a partir del séptimo año, se aplica un cargo básico de 30.000 £ que se incrementará a 60.000 £ después de 12 años. El impuesto máximo sobre la renta para la renta sujeta a mpuestos es de hasta el 45% para ingresos superiores a 150.000 £; las tasas máximas del impuesto sobre las ganancias de capital son del 28%; la tasa del impuesto sobre la herencia por encima de 325.000 £ es del 40%. Los fideicomisos pueden ofrecer oportunidades para el impuesto sobre las ganancias de capital y el impuesto sucesión.

No forma parte de la zona Schengen.

Suiza:

Los ciudadanos de la Unión Europea-28 tienen derecho a un permiso de residencia. Para los nacionales de países no pertenecientes a la Unión Europea pueden aplicarse algunas restricciones adicionales, como la edad mínima de 55 años.

El Índice de Calidad de Vida ocupa el puesto número 2 de 82 (Quality of Life Index by Country 2021.

En base a una normativa fiscal, se dispone de un llamado impuesto de suma global,que esencialmente fija la base imponible en 7 veces el alquiler anual de la vivienda, con una base mínima de 400’000 CHF a efectos de impuestos federales. Dependiendo del lugar de residencia en Suiza, esto puede generar un impuesto anual a partir de unos 140’000 CHF. Se pueden aplicar los pagos de la seguridad social. Dependiendo del Cantón de residencia, su patrimonio puede estar sujeto a impuestos de sucesión.

Parte de la zona Schengen, que permite a los residentes viajar libremente a la mayor parte de la Unión Europea.

Uruguay:

El permiso de residencia puede ser concedido haciendo una inversión inmobiliaria de más de 3,5 millones de UYU (aprox. 380.000 USD que están indexados), requiriendo una presencia mínima de 60 días por año. Alternativamente, se puede obtener un permiso de residencia sin presencia mínima invirtiendo 15 millones de UYU (aprox. 1,6 millones de USD).

El Índice de Calidad de Vida ocupa el puesto 47 de 82 (Quality of Life Index by Country 2021.

Los ingresos de capital estan gravados hasta al 12%. Existe un impuesto al patrimonio sobre el valor neto de los bienes situados en Uruguay de hasta el 1.5%. No hay impuestos sobre donaciones o herencias.

El impuesto sobre la renta de las personas residentes de un empleo está gravado hasta el 36%. Los nuevos residentes pueden optar por una exención fiscal durante los primeros diez años de obtención de la residencia de los ingresos pasivos extranjeros o se les aplica un impuesto del 7% (en lugar del 12%) sin restricción de tiempo. Existe un impuesto anual al patrimonio personal neto sobre los activos situados en Uruguay de hasta el 0,6%. No hay impuestos sobre donaciones y herencias.

Hay que tener en cuenta algunos puntos adicionales cuando se planifica un traslado: El país de residencia actual puede imponer un impuesto de salida al salir del país. Últimamente, varios países han promulgado leyes que tratan de evitar que las personas o empresas abandonen su jurisdicción fiscal. En muchos casos, las autoridades fiscales de la jurisdicción que se está dejando también vigilarán o incluso auditarán al individuo que se va o a su familia en cuanto a la naturaleza de la re-ubicación, es decir, comprobarán si el centro de interés vital como tal se ha alejado realmente de su jurisdicción o no. El centro de interés vital incluye la determinación del lugar donde se encuentra la familia del individuo en cuestión, los vínculos sociales, incluidas las afiliaciones a clubes, los cargos que ocupa, la participación en eventos políticos y culturales, los lugares de negocios y la gestión del patrimonio familiar, incluyendo el lugar donde se guardan las mascotas. También pueden comprobar si las relaciones personales y económicas con las nuevas jurisdicciones son de hecho más cercanas que con las jurisdicciones que se dejan. Si las autoridades fiscales llegan a la conclusión de que el traslado no tiene suficiente fundamento, es decir, que el centro de interés vital y/o las relaciones personales y económicas con la nueva jurisdicción son menores que con su propia jurisdicción, pueden intentar seguir tributando al individuo que se va como si siguiera residiendo en ella.

Los empresarios también pueden encontrarse con los siguientes problemas: Si hay participaciones en las jurisdicciones que quedan, la distribución de dividendos puede estar sujeta a una retención de la tasa. Sin embargo, dependiendo de un posible tratado de doble tributación con la nueva jurisdicción, el impacto de esta retención puede reducirse. Además, si la persona que se traslada a la nueva jurisdicción sigue teniendo el control total, la nueva jurisdicción puede querer tributar a la empresa como una empresa local debido al lugar de las normas de gestión efectivas: El lugar de gestión efectiva es el lugar donde se toman efectivamente las decisiones clave de gestión y comerciales de una empresa. El lugar de la gestión eficaz será normalmente el lugar donde la persona o grupo de personas de mayor rango (por ejemplo, una junta directiva) toma sus decisiones.

Mientras que muchos de estos programas de re-ubicación proporcionan considerables ventajas fiscales, se recomienda firmemente una cuidadosa planificación fiscal previa a la reubicación, basada en el asesoramiento fiscal adquirido en la antigua y en la nueva jurisdicción.

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, August 2020. All rights reserved.

Disclaimers:

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.

This publication was produced by Global Wealth Management Consulting GmbH. It is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any products or specific services. Although all information and opinions expressed in this document were obtained from sources we believe to be reliable, Global Wealth Management Consulting GmbH expressly disclaims any liability, express or implied, for false or incomplete information. To the extent permitted by law, neither Global Wealth Management Consulting GmbH nor any of its managers, employees or agents may be held liable for any losses or damages whatsoever that might arise from the use of this publication or be connected therewith. All information and opinions indicated are subject to change without notice. Global Wealth Management Consulting GmbH retains the right to change the range of services, the products and the prices at any time without prior notice. Certain services and products are subject to legal provisions and cannot therefore be offered worldwide on an unrestricted basis. The content of this publication has not been adapted to the specific needs and investment objectives of a particular client or recipient and is not tailored to their personal or financial situation. In principle, Global Wealth Management Consulting GmbH does not provide legal or tax advice and this publication does not constitute such advice. Global Wealth Management Consulting GmbH recommends that all persons considering the products or services described herein obtain appropriate independent legal, tax and other professional advice. The products and services mentioned herein may require agreements to be signed. Please note that the terms and conditions of such specific agreements described in the corresponding agreements apply to these products and services. We kindly ask you to carefully read such agreements and to contact your Global Wealth Management Consulting GmbH client advisor or Wealth Planner should you have any questions. This document may not be reproduced or distributed without the prior consent of Global Wealth Management Consulting GmbH.

Relocation for Latin American High Net-Worth Individuals – Searching for security and certainty

 

 

Relocation for Latin American High Net-worth Individuals – Searching for security and certainty 

 

Recently we have seen an increasing number of high net-worth individual clients resident in various Latin American countries interested in relocating to a new domicile country, due to economic, political, legal and tax uncertainty as well as world-wide exchange of information initiative resulting in financial information reaching their domestic tax authorities (see also: Millionaires in Latin America Weigh Moving to Sidestep Tax Grab and https://www.willkie.com/-/media/files/publications/2023/the_current_state_of_taxes_on_wealth_in_latin_american_countries.pdf). A trend which the COVID-19 pandemic has increased.

According to our experience the most frequently used schemes attracting interest from HNWI  clients in Latin America are:

 

Costa Rica:

An investment of minimum USD 200’000.- in real estate in Costa Rica. Alternatively for an entire family a regular monthly income of at least USD 2’500.- certified by a local or foreign bank. Alternatively, a life-time pension plan, social security or government pension plan of USD 1’000.- will enable the beneficiary to obtain a residency permit. A real estate ransfer ax of 1.5% is applicable.

Income taxes of up to 25% on Costa Rican source income are applicable. A capital gains tax of 15% is applicable on real estate sales in Costa Rica which are not primary residence. A 0% capital gains tax for Costa Rican habitual source gains may be applicable. No inheritance or wealth taxes. There may be an obligation to contribute to the social security system.

 

Italy:

Citizens from the EU have the right to live in Italy. The fast-track investor investment visa for non-EU nationals requires an investment of EUR 1 million in a local Company or EUR 2 million in Italian public bonds.

Quality of Life Index ranked number 36 of 82 Quality of Life Index by Country 2021.

New resident individuals may apply for a lump-sum substitute tax of EUR 100’000.- and a tax of EUR 25’000.- for relatives on all of their non-Italian source income, wealth abroad and inheritance and gift tax exemption on foreign assets. Such an agreement can be prolonged for up to 15 years.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

Monaco:

Non-EU nationals need to apply for a long-term visa before applying for the residence permit. For residency permit, proof of wealth without gainful employment. Open a bank account in onaco with a minimum EUR 500’000.–. During the first nine years requirement to spend at least three months per year in Monaco.

There are no income, capital gains or wealth taxes in Monaco, except for French nationals who have to pay French income taxes. There are however inheritance and gift taxes up to 16%, but only on assets situated in Monaco, but not for direct line heirs such as parents, spouse and children.

Not part of the Schengen Zone.

 

Panama:

An investment of minimum USD 300’000.- in real estate or time deposit in a bank in Panama, plus USD 2’000.- per additional dependent included in the visa. Alternatively persons with a lifetime annuity or pension of at least USD 1’000.- per month.

Quality of Life Index ranked number 57 of 82 Quality of Life Index by Country 2021

Residents are taxed on their Panamanian source revenues only. Income taxes are up to 25%, and local capital gains are taxed at 10%. There are no inheritance or gift taxes in Panama. There are no wealth taxes, but a real estate tax of up to 1% p.a.

 

Portugal:

Golden visa program for non-EU, EFTA and/or Swiss citizens. Amongst other requirements to qualify for the program, an investment of EUR 500’000.- into any real estate, EUR 350’000 into a real estate more than 30 years old with the obligation of renovating it, transferring assets of EUR 1 million to Portugal, an investment of EUR 350’000.- into a qualifying fund, or the reation of ten new full-time jobs are necessary.

Quality of Life Index ranked number 18 of 82 Quality of Life Index by Country 2021.

Non-habitual resident status available providing tax-exemptions for up to ten years. Exemptions from Portuguese taxation include most income from foreign sources, including revenues from non-Portuguese investments, and employment income. Incomes from foreign pensions however are taxed at a 10% flat rate.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

Spain:

Currently relatively easy immigration process for high net-worth individuals with a golden visa process requiring an investment in real estate worth at least EUR 500’000.- (other programs with higher minimums available).

Quality of Life Index ranked number 16 of 82 Quality of Life Index by Country 2021.

Upon becoming tax resident: high taxes (income tax depending on the autonomous region, for example the maximum marginal tax rate of 43.5% for an individual resident in Madrid and 48% for a resident in Catalonia). Inheritance and wealth taxes according to the applicable autonomous region. Spanish tax residents and non-residents are subject to tax on dividends, interest and apital gains at a maximum rate of 23%.

Limited tax planning opportunities, for example by obtaining a special fiscal residence permit, paying 24% on local income as non-resident on the first EUR 600’000.- income.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union and Switzerland.

 

Switzerland:

EU-28 nationals are entitled to a residence permit. For non-EU nationals some additional restrictions like minimum age of 55 may apply.

Quality of Life Index ranked number 2 of 82 Quality of Life Index by Country 2021.

Based on a tax ruling, a so called lump sum taxation is available, which essentially fixes the tax base at 7 times annual rent for accommodation, with a minimum base of CHF 400’000.- for federal tax purposes. Depending on the place of residence within Switzerland this may generate yearly taxation starting at some CHF 140’000.-. Social security payments may be applicable. Depending on the Canton of residence, your estate may be subject to inheritance taxes.

Part of the Schengen Zone, permitting residents to travel freely to most parts of the European Union.

 

United Kingdom:

Most citizens from the EU, EFTA and Switzerland have the right to live in the UK. For other citizens the investor (minimum investment of GBP 2 million) or entrepreneur (minimum investment of GBP 200’000.-) routes may be available.

Quality of Life Index ranked number 19 of 82 Quality of Life Index by Country 2021).

You may apply for a UK resident non-domiciled status, enabling you to opt to apply a remittance basis druing the first 15 years, taxing your UK income and gains and your foreign income and gains of GBP 2’000 or more per year that you bring back to the UK. For the first six years of UK residency the claiming remittance basis is free, from the seventh year onward, a basic charge of GBP 30’000.- is applicable which will be increased to GBP 60’000.- after 12 years. Maximum income taxes for taxable income are up to 45% for incomes over GBP 150’000.-; maximum capital gains tax rates are 28%; the inheritance tax rate above GBP 325’000.- is 40%. Trusts may offer capital gains tax and inheritance tax opportunities.

Not part of the Schengen Zone.

 

United States of America:

EB-5 Investors’ visa available for an investment of minimum USD 1.8 million, or USD 900’000.- for investments in target employment areas.

Quality of Life Index ranked number 15 of 82 Quality of Life Index by Country 2021.

High taxes [federal income tax up to 37%, US estate (inheritance) tax of currently up to 40%], capital gains taxes up to 20%.

Limited tax planning opportunities for individuals setting up irrevocable trusts 5 years before migrating to the US may exempt the trust assets from US estate taxes upon the death of the settlor and subsequent US beneficiaries.

 

Uruguay:

Residency permit may be granted by making a real estate investment of more than UYU 3.5 million (approx. USD 380’000 which are indexed), requiring a minimum presence of 60 days (per year?). Alternatively a residence permit with no minimum presence can be obtained by investing UYU 15 million (approx. USD 1.6 million).

Quality of Life Index ranked number 47 of 82 Quality of Life Index by Country 2021.

Income tax on resident individuals from employment is taxed up to 36%, however new residents may opt for a tax holiday during the first ten years of obtaining residency from foreign passive income and thereafter having it taxed at 7% (instead of 12%). There is an annual personal net-wealth tax on assets situated in Uruguay of up to 0.6%. There are no gift or inheritance taxes.

Some additional points have to be taken into consideration when planning a relocation: The current country of residence may impose an exit tax on your leaving the country. Lately quite a number of countries have enacted laws trying to deter individuals or companies from leaving their tax jurisdiction. In many cases the tax authorities of the jurisdiction which is being left will also monitor or even audit the individual leaving or his family as to the substance of the relocation, i.e. check whether the center of vital interest as such has really moved away from their jurisdiction or not. The center of vital interest includes establishing where the family of the individual in question is, where the social ties including club memberships are, the positions held, participation in political and cultural events, places of business and management of the family wealth, including where the pets are kept. They may also check whether the personal and economic relations to the new  jurisdictions are in fact closer than to the jurisdictions being left. If the tax authorities come to the conclusion that the relocation does not have enough substance, i.e. that the center of vital interest and/or the personal and economic relations to the new jurisdiction are less than to their own jurisdiction, they may try to continue to tax the individual leaving as if he still remained resident.

Entrepreneurs may also encounter the following issues: If there are participations in the jurisdictions being left, dividend distributions may be subject to a withholding tax. Depending on a potential double tax treaty with the new jurisdiction, the impact of this withholding may however be reduced. Further, if the individual relocating to the new jurisdiction remains in full control, the new jurisdiction may want to tax the company as a local company due to place of effective management rules: The place of effective management is the place where key management and commercial decisions of a business are effectively made. The place of effective management will usually be where the most senior person or group of persons (for example a board of directors) takes its decisions.

Whereas many of these relocation programs provide considerable tax advantages, careful prerelocation tax planning based on tax advice obtained in the old and the new jurisdiction is strongly recommended.

 

Copyright by René M. La Barre, Global Wealth Management Consulting GmbH, www.gwmc.ch, July 2020. All rights reserved.

 

Disclaimers:

This report is provided for informational and educational purposes only. Providing you with this information is not to be considered a solicitation on our part with respect to the purchase or sale of any securities, investments, strategies or products that may be mentioned. In addition, the information is current as of the date indicated and is subject to change without notice. Insurance products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of Global Wealth Management Consulting GmbH. Neither Global Wealth Management Consulting GmbH nor its employees (including its staff members) provide tax or legal advice. You should consult with your legal counsel and/or your accountant or tax professional regarding the legal or tax implications of a particular suggestion, strategy or investment, including any estate planning strategies, before you invest or implement.

This publication was produced by Global Wealth Management Consulting GmbH. It is for your information only and is not intended as an offer, or a solicitation of an offer, to buy or sell any products or specific services. Although all information and opinions expressed in this document were obtained from sources we believe to be reliable, Global Wealth Management Consulting GmbH expressly disclaims any liability, express or implied, for false or incomplete information. To the extent permitted by law, neither Global Wealth Management Consulting GmbH nor any of its managers, employees or agents may be held liable for any losses or damages whatsoever that might arise from the use of this publication or be connected therewith. All information and opinions indicated are subject to change without notice. Global Wealth Management Consulting GmbH retains the right to change the range of services, the products and the prices at any time without prior notice. Certain services and products are subject to legal provisions and cannot therefore be offered worldwide on an unrestricted basis. The content of this publication has not been adapted to the specific needs and investment objectives of a particular client or recipient and is not tailored to their personal or financial situation. In principle, UBS does not provide legal or tax advice and this publication does not constitute such advice.  Global Wealth Management Consulting GmbH recommends that all persons considering the products or services described herein obtain appropriate independent legal, tax and other professional advice. The products and services mentioned herein may require agreements to be signed. Please note that the terms and conditions of such specific agreements described in the corresponding agreements apply to these products and services. We kindly ask you to carefully read such agreements and to contact your Global Wealth Management Consulting GmbH client advisor or Wealth Planner should you have any questions. This document may not be reproduced or distributed without the prior consent of Global Wealth Management Consulting GmbH.

 

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