#Hong Kong and its link to Offshore Jurisdictions

Posted on 06/30/2012 by CitiTrust

In 1984, people of Hong Kong were made aware of the concept “offshore jurisdiction” by the re-domicile of one of the biggest listed conglomerates in Hong Kong to Bermuda.

Since then, quite a number of offshore jurisdictions become well-known in the business community of Hong Kong. Businessmen now prefer to incorporate an offshore company i.e. a company incorporated in one of those offshore jurisdictions e.g. BVI, Cayman Islands, Bermuda, Mauritius, Barbados, Belize etc., for investment holding purpose. This choice helps minimize the administrative and compliance work involved in maintaining the company. Almost all offshore companies have very minimal corporate and tax filing requirements. Details of directors and shareholders remain anonymous to the general public. Company secretary is not mandatory in most jurisdictions. Annual compliance requirement is to pay the government and agent fees to ensure that the company is still in the register of companies. Preparation of audited accounts is, in most jurisdictions, on voluntary basis.

When compared to companies incorporated in Hong Kong, annual filing showing details of the directors, shareholders, company secretary, and registered office address and capital details have to be submitted to the Companies Registry. This information is public information. Audited accounts have to be prepared for adoption by members at general meetings held on an annual basis. Profits tax filing has to be done with the Inland Revenue Department. All these could be burdensome when the company is only a passive investment vehicle. Therefore, setting up an offshore company becomes a natural choice.

Besides being used for investment holding, it is also used as a vehicle for fund raising purpose. Lots of incubating businesses set up offshore companies for angel and strategic investors to fund their fledgling business operations. As reputable law firms from most offshore jurisdictions have set up offices here, obtaining legal opinion and arranging joint venture agreements, shareholder agreements and all other legal papers can be done without physical hindrance.

Subsequent transfers of shares amongst founder members and investors can be done without going through governmental approval. Unlike companies incorporated in Hong Kong, transfer of shares in most offshore companies can be done by the parties involved signing the necessary documents and obtaining board approval. There is no stamp duty payment for shares transfer.

Some people may have the misconception that the main purpose of using offshore company is to avoid paying stamp duty in Hong Kong. Stamp duty saving is one of the reasons but not the only reason when it comes to making the choice. In Hong Kong, when shares are transferred within a group, application for stamp duty relief can be made and if the Stamp Office is satisfied that all conditions are met, no stamp duty is payable. With proper corporate structure planning at the outset, stamp duty is not an issue in subsequent corporate changes. That is why stamp duty saving is not the only reason for having an offshore company. Administrative and compliance cost savings are more important in most cases.

As Hong Kong is one of the top IPO centers, one of the major reasons in having an offshore company is for listing purpose. In addition to the time saved in shares transfer, arranging share swap with another offshore company is also cost effective. The procedures involved are simpler. Currently, there are more than 20 jurisdictions being accepted by the Stock Exchange of Hong Kong (the ‘Exchange’) for listing. For those offshore jurisdictions, how to get the Exchange to put them on the approval list is important to promote themselves in Hong Kong.

Offshore jurisdictions have their networks of tax treaties. Investors sometimes have to choose a particular jurisdiction as a bridge for investing into their target country. Again, the more tax treaties, the more appeal to others in using them as a bridge. How to choose the right jurisdictions is a question for the professionals to answer. All the above explains why offshore companies are so commonly used in Hong Kong.

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We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.

Topics in this issue cover:

- Trusts.
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.

Download your complimentary copy of Cititrust’s EDGE eMagazine here.

We welcome your feedback and comments through our Twitter, LinkedIn and Facebook channels at www.cititrust.biz

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Posted in cititrust, Hong Kong, IRS, offshore banking, offshore companies, offshore company, offshore company formation, offshore foundations, Offshore investment, offshore investments, offshore trusts, Tax, Wealth Management | Tagged , , , , , , , | Comments Off

State Immunity in the Era of “Vulture Funds”

Posted on 06/29/2012 by CitiTrust

The recent decision by the Hong Kong Court of Final Appeal (“CFA”) and the subsequent interpretation by the Standing Committee of the National People’s Congress, Peoples Republic of China (“Standing Committee”) in the case of the Democratic Republic of Congo (“the DRC”) and ors v FG Hemisphere Associates LLC (“FG”), FACV Nos. 5, 6 & 7 of 2010 highlight salient issues which have taken center stage in international debates. First, it highlights the role that agreements to arbitrate play in contractual arrangements with foreign states. For our purpose, however, and by far most importantly, the case highlights the activities of “vulture funds” against foreign state victims.

In that case, the DRC and the Congolese state-owned electricity company, Société Nationale ď Electricité (“SNd’E”) entered into credit arrangements with Energoinvest DD (“Energoinvest”) to finance the construction of a hydro-electric facility and high-tension electric transmission lines in the DRC. The borrowers defaulted and Energoinvest commenced arbitrations against them in France and Switzerland. The arbitral tribunals each made substantial awards in favor of Energoinvest. Energoinvest subsequently assigned the two awards to FG. On learning that a Chinese consortium has agreed to pay the DRC US$221 million as part of the entry fees for a mining project in the DRC, FG sought to enforce the two awards in Hong Kong.

On appeal, the CFA was faced with questions including whether the doctrine of absolute or restrictive immunity applied to suits involving foreign states in Hong Kong. The CFA, by a majority, held that the doctrine of state immunity practised in the Hong Kong Special Administrative Region, as in the rest of China, is a doctrine of absolute immunity. Thus, a foreign state is immune from suit and execution in Hong Kong unless waived by that state. The waiver is effective if made before a court at the time the forum state’s jurisdiction is invoked. Accordingly, waivers contained in written agreements of parties such as jurisdictional or arbitration clauses will not be effective. This decision has since been upheld by the Standing Committee.

Several commentators have tried to distinguish CFA’s ruling with many arguing that it is possible to establish advance waiver by states’ ratification of international treaties, such as where an impleaded state and forum state are both parties to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Others argue that the ruling does not affect foreign states’ agreements to arbitrate even in Hong Kong, so that a state which has agreed to arbitrate cannot subsequently claim immunity from the jurisdiction of the arbitral tribunal. The proponents of this argument, however, fail to recognize that courts in Hong Kong may be unable to exercise supervisory jurisdiction over such arbitrations in view of the absolute immunity doctrine.

From the African perspective however, the DRC case further illustrates the extent to which certain private investment firms and hedge funds, often described as “vulture funds” are willing to go to recover debts they purchased at deeply discounted rates. Lord Philips in the recent English Supreme Court decision in NML Capital Limited v. Republic of Argentina [2011] UKSC 31 pointed out that these funds characteristically feed on the debts of sovereign states that are in acute financial difficulty by purchasing sovereign debt at a discount to face value and then seeking to enforce it.

The DRC described FG as a vulture fund in the case under review. That description may seem apt when one considers that the debt arose from Energoinvest’s credit extensions of US$15.18 million and US$22.525 million in two agreements. Energoinvest subsequently obtained two arbitral awards in the sums of US$11.725 million and US$18.43 million, with interest. One year later, FG purchased the debts at a sum which though undisclosed was adjudged discounted. FG then claimed sums outstanding to the tune of US$125,924,407.72.

A somewhat similar situation occurred in Donegal International Ltd v Republic of Zambia [2007] EWHC 197 (Comm). Here, a 1979 debt of US$15 million from Romania, with serious renegotiation prospects which would have reduced the debt to about US$3 million, was bought for US$3.28 million by Donegal who in turn sued Zambia for the initial debt plus interest amounting to a sum in excess of US$55 million.

Whilst these sorts of transactions may be perfectly understood in a purely commercial realm, questions still abound. For instance, what is the justification for denying states the opportunity to make appropriate defenses in an area where there is currently no cap on the amount of interest a distressed debt fund can affix on debts and no requirement for full disclosure of the activities of the funds? It is instructive to note that even though FG revealed that interest on the DRC indebtedness accrue at approximately US$30,000.00 per day, it failed to disclose the amount it purchased the debt from Energoinvest.

Critics argue that states should not be immune to suits and execution when they engage in purely commercial transactions. Indeed, these arguments are perfectly credible. However, in his dissenting judgment at the Hong Kong Court of Appeal in the DRC case, Yeung JA cited Ernest K Bankas, The State Immunity Controversy in International Law (Springger 2005) pp 168 and 170 which argued that:

“…One credible or a logically grounded argument that has always been made by African countries and other developing states is that, given the fact that developing countries are poor and weak economically, and thus lacking private capital, it has become incumbent on governments of these countries to undertake or venture into commerce in order to promote economic development. These varied and diverse activities undertaken by these states are very important in the promotion of economic growth and political stability. Thus in the absence of such diverse activities, the economy of these countries would become stagnant which in turn creates poverty, instability and chaos”

Therefore, certain transactions of these developing nations should certainly not be used by the so called “vulture funds” as avenues for excessive profits, as that would be detrimental to the developmental efforts of the nations.

www.ainablankson.com

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We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.

Topics in this issue cover:

- Trusts.
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.

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The Austrian Holding Regime

Posted on 06/28/2012 by CitiTrust

Introduction

For more than 25 years Austria, located right in the center of Europe and at the cross-roads between East and West, serves as a perfect jurisdiction for establishing holding companies.

The large tax treaty network Austria has with currently 89 countries and the very friendly tax climate in Austria build the robust cornerstones for such a holding company.

General tax regulations

Austria does not know any debt-equity ratios or thin-cap rules, any interest payment is fully tax deductible
regardless whether paid to domestic or foreign lenders
no withholding tax is levied even if interest is paid to a lender in a non-treaty country, e.g. Mauritius, BVI, Panama, Cayman Islands, etc.

Austria does not know any CFC-legislation.

There is no necessity to establish a SPV to obtain tax-exempt foreign source dividends or tax exempt foreign source capital gains.

Losses of foreign subsidiaries, calculated according to Austrian rules, are deductible from the tax base of the Austrian parent.

Domestic holdings

The tax treatment of intercompany dividends is as follows:

Intercompany dividends are tax exempt
No minimum shareholding is required
No holding period is required
Capital gains resulting from the sale of shares of a domestic corporation are taxable
In case the shares of a subsidiary were acquired with the help of a loan any interest resulting from that loan is tax deductible from the capital gain

Foreign holdings

The Austrian Corporate Income Tax Act foresees that certain conditions have to be met to obtain foreign source dividends and foreign source capital gains tax exempt. These conditions are:

Minimum shareholding 10 %
Minimum holding period one year

If these conditions are met the foreign source dividends and foreign source capital gains are tax exempt regardless whether Austria has a tax treaty with the foreign country or not.

The foreign subsidiary can also be an off-shore jurisdiction or can even be tax exempt.

Although the Austrian holding can obtain tax exempt dividends and tax exempt capital gains any interest paid for a loan effectively connected with the acquisition of the foreign shares is fully tax deductible.

Check-the-box

The Austrian holding company has the opportunity to make capital gains, resulting from the sale of foreign shares, which normally would be tax exempt, taxable. This can be done for each participation separately. The benefit of doing so is, that in those cases, where the foreign jurisdiction has the right to levy taxes upon capital gains achieved by an Austrian company by selling shares in the foreign company, these foreign taxes then can be credited against the Austrian corporate income tax.

This will be the case when the assets of the foreign subsidiary constitute of more than 50 % of real estate and where the treaty foresees, that in such a case the right to levy taxes upon capital gains is allocated to the country where this real estate is located.

Foreign subsidiary achieves passive income

What is seen as passive income ?

Interest income
Royalty income
Capital gains resulting from the sale of less than 10 % shareholdings in other corporations

Rental income achieved by a foreign subsidiary is seen as active income as well as profits resulting from trading in assets and securities managed off-shore are considered as active income and therefore lead to tax exempt dividends and tax exempt capital gains in the hands of the Austrian parent company.

Provided that subsidiary achieves passive income and the overall tax burden of the subsidiary is not more than 15 % only then dividends and the capital gains received by the Austrian company are taxable and will be exposed to the statutory flat 25 % corporate income.

Any foreign taxes which were levied upon such income will be credited against the Austrian corporate income tax.

Since Austria does not have any CFC-legislation the mere holding of such subsidiaries does not trigger any taxes in Austria.

The following example may illustrate how tax efficient the Austrian holding regime is and how it can support entrepreneurial activities abroad.

New improvement of the Austrian Holding Regime

Portfolio dividend exemption

The year 2009 showed a further improvement of the Austrian Holding Regime. Since the domestic holding regime does not require any holding period or minimum shareholding whereas foreign source dividends and foreign source capital gains are only tax exempt if at least 10 % of the shares of the foreign subsidiary are held for at least one year an amendment had to be made especially in regard of foreign subsidiaries of an Austrian parent company located within the European Union or the European Economic Area, which is the European Union plus Iceland, Liechtenstein and Norway.

The amendment of the Austrian Corporate Income Tax Act foresees, that provided that the foreign subsidiary is located either in the European Union or in the European Economic Area and is conducting an active business and the local tax burden is 15 % or more than no minimum shareholding is necessary and the dividends paid by the foreign subsidiary to the Austrian parent are tax exempt in the hands of the Austrian parent company. In regard of capital gains the amendment foresees, that if the shareholding in the foreign subsidiary is 10 % or more then capital gains stay tax exempt, if the shareholding is less than 10 % the capital gains will be taxable in the hands of the Austrian parent company but foreign underlying taxes will be credited against the Austrian corporate income tax.

Provided that the foreign subsidiary located in the European Union or the European Economic Area is conducting an active business but the local tax is less than 15 % dividends received by the Austrian parent company are taxable with a foreign tax credit.

Capital gains resulting from the alienation of shares in such a foreign subsidiary stay tax exempt provided that 10 % or more of the shares were held.

No more withholding tax on outgoing dividends

A further improvement was made in 2009 from which the taxpayer can benefit tremendously. There is no more withholding tax on outgoing dividends.

The new regulations foresee that a corporate shareholder with its seat within the EU / EEA can file for reimbursement of withholding taxes levied upon dividends from Austrian sources which could not be credited totally or partially against domestic income taxes in the country of residence of the corporate shareholder provided that

o the tax treaty Austria has with the relevant country includes a clause foreseeing a comprehensive administrative corporation

o the taxpayer has to give written proof that the Austrian withholding tax was not credited against his domestic tax
Such proof can be inter alia, the copy of the tax assessment note from his home country

Conclusion

A liberal tax climate, a solid economic development and a perfect geographical location make Austria a perfect place for not only establishing an Austrian Holding Company but also to take Austria as a robust base for entrepreneurial activities in East and West.

We would like to invite to you to go the Austrian Way, it really pays off !

Erich Baier, MBA, LL.M. (Int’l Tax Law) TEP
Certified Tax Advisor

Bilanz-Data Wirtschaftstreuhand GmbH
Schwarzenbergstraße 1-3/14a
1010 Vienna, Austria
Phone: (+43 1) 516 12 0
Fax: (+43 1) 516 12 14
Email: baier@austrian-taxes.com

—————

Wiki Offshore is an online global repository where you can find, collaborate and contribute to information on all things related to offshore investment.

Have something to add? Contributing to Wiki offshore is easy. To add and share your content with others please go here.

Wiki Offshore

We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.

Topics in this issue cover:

- Trusts.
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.

Download your complimentary copy of Cititrust’s EDGE eMagazine here.

We welcome your feedback and comments through our Twitter, LinkedIn and Facebook channels at www.cititrust.biz

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The British Virgin Islands – A Leading Jurisdiction For Trust Structures

Posted on 06/27/2012 by CitiTrust

As many of the readers of the publication will be aware, the trust is a key common law concept, which has evolved over the centuries into the flexible vehicle which is now commonly used for a wide variety of reasons by High Net Worth families and individuals around the world. Such reasons include succession planning, asset protection, to promote confidentiality or for philanthropic giving.

However, some features of a classic trust are considered by some as inherent restrictions and in recent years there has been a demand for more sophisticated and user-friendly trust solutions. The leading offshore jurisdictions, such as the BVI, have sought to meet this demand through innovative modern trust structures via specific legislative amendments to classic trust principles.

The BVI is a dependant territory of the United Kingdom. The general principles of BVI trust law are derived from the principles of English common law and equity, which are supplemented by domestic statutory legislation. Such statutes are again in the main based on English statutory law, but there are some key additional provisions which have been enacted so as to make the BVI an attractive jurisdiction for establishing trusts.

Demand for Control

The reasons for such additional legislative provisions mainly stem from a demand for the person establishing the trust, known as the settlor, to be able to retain an element of control once the trust has been constituted. A trust is not itself a separate legal entity and it is simply that the trustee is the legal owner of the trust assets which he holds not for himself, but for the benefit of beneficiaries or for the furtherance of a purpose. The trustee holds a fiduciary position and “has the power and duty in respect of which he is accountable to manage, employ or dispose of the assets in accordance with the terms of the trust and special duties imposed on him by law”.

Leap of Faith?

It is the fact that the establishment of a trust requires a settlor to transfer legal title to the assets to a third party trustee which is very much a leap of faith for individuals, especially those from civil law jurisdictions unfamiliar with the basic concept of a trust. Furthermore, the trustee’s duties will be to act in the best interests of the beneficiaries and not in the best interests of the settlor. Consequently, the trustee is required to act prudently in relation to the trust assets and this creates a potential clash of investment approach between that of a conservative corporate trustee and that of a risk-taking settlor who may have built up his wealth over time through entrepreneurial flair.

Prudent Investor Problem

This Prudent Investor Problem was keenly felt in the BVI because BVI trusts are commonly used to hold shares in a BVI company, which itself is a holding vehicle for a family business. A BVI trust may typically be used in such a scenario for succession planning reasons and thus it is of great discomfort to the settlor that the trustee may have a duty to alter the make-up of the trust assets (i.e. by seeking to reinvest away from the family business) because the trust was specifically established as a succession vehicle for that family business.

Retention of Control Options

The retention of control options for settlors in BVI trust structures can be broken down into three categories:

a) Reserved Power Trusts

The BVI was the first offshore jurisdiction to introduce legislation for Reserved Power trusts , which enables a settlor to reserve trust powers to himself or another, typically a protector, or to require that the trustee obtain the settlor’s consent before exercising a trust power. For example, a settlor may reserve himself (or to a protector) the power to add or exclude beneficiaries from the trust or require that the trustee obtain his consent (or that of the protector) before making a distribution to a beneficiary.

b) VISTA Trusts

The Virgin Islands Special Trusts Act 2003 (“VISTA”) was specifically enacted to solve the Prudent Investor Problem in relation to BVI companies held in trust. The key conditions of a VISTA trust are that the trust must only hold shares in a BVI company (or companies), the sole trustee must be a BVI licenced trust corporation and the trustee cannot be a director of the underlying BVI company. If these conditions are satisfied and it is expressly provided in the trust instrument that VISTA will apply to the trust, the result is that the trustee is prohibited in interfering in the management of the BVI company (except in extreme circumstances known as intervention calls). There is a restriction on the trustee’s ability to sell the BVI company shares, which must be retained indefinitely, thereby solving the Prudent Investor Problem. Except when acting or being required to act on intervention call, a trustee of a VISTA trust “shall have no fiduciary responsibility or duty of care” in respect of the BVI company shares or “the conduct of the affairs of” the BVI company.

A settlor can thereby transfer shares in a BVI company into a VISTA trust safe in the knowledge that the trustee will not have a duty to sell those shares or intervene in the running of the company.

c) Private Trust Companies

Since 2007 in the BVI it has been permitted to establish unlicenced Private Trust Companies (“PTCs”), although conditions are attached to the activities of the PTC, such as a prohibition on soliciting business from the public. The PTC must either carry out “unremunerated trust business” or “related trust business” (where beneficiaries of a trust must be “connected to the settlor).

It is thus possible for a High Net Worth individuals or families to establish their own corporate trustee in the BVI to be trustee of one or more family trusts. The PTC will potentially be more responsive and efficient than an external trust corporation, but the office of trustee remains a fiduciary position and trustee duties must still be discharged to the requisite standard of care.

Careful consideration must be given to the make up of the board of directors of the PTC, but typically the directors might be a combination of family members, trusted advisors (e.g. the family lawyer) and industry experts if the underlying trust assets include an operating business.

Conclusion

The introduction of legislation in the BVI concerning Reserved Power trusts, VISTA trusts and PTCs has enabled settlors of BVI trusts to establish a structure where they are able to retain a satisfactory level of control over the administration of the trust and more importantly, the management of the underlying trust assets. This inherent flexibility, which is appreciated especially by those unfamiliar with trusts, has caused the BVI to remain an attractive and popular jurisdiction for the establishment of trusts for High Net Worth families all over the globe.

For more information of any issue raised in this article, please contact Henry Mander.

Henry Mander is a senior associate in the trusts team at Harneys. He practises both BVI and Cayman trust law.

Wiki Offshore is an online global repository where you can find, collaborate and contribute to information on all things related to offshore investment.

Have something to add? Contributing to Wiki offshore is easy. To add and share your content with others please go here.

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We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.

Topics in this issue cover:

- Trusts.
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.

Download your complimentary copy of Cititrust’s EDGE eMagazine here.

We welcome your feedback and comments through our Twitter, LinkedIn and Facebook channels at www.cititrust.biz

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#HongKong – How to Establish a Corporate Bank Account

Posted on 06/26/2012 by CitiTrust

After incorporating your offshore company, we can assist you with opening a bank account. All reputable banks require detailed personal/business information on the owner/s, controlling officers and authorized signatories to an account.

Requirements:

a) Photo Identification – a clear certified passport copy and a copy of a second photo I.D.

b) References – A bankers and/or professional reference

c) Verification of actual owner/s, controlling officers and authorized signatories residential addresses; their occupations and business operation location

d) Company documents – Apostille set of the complete company documents to include:
Articles of Incorporation (in Chinese)
Official English Translation of Articles of Incorporation
Resident Agent
Resident Office
Optional Nominee Directors
Nominee director resignation letters
First Minutes of the Board (whereby the subscribers renounce their legal rights to one share each)
Share Certificates

Due Diligence: By law all banks are required to know their clients in full detail. There is no such thing as “anonymity”.

Privacy/Confidentiality: While the due diligence requirement is paramount in the opening of account procedures, the banking secrecy regulations stipulate that such information must remain strictly confidential and can only be divulged if so demanded by a Hong Kong Court of law and in such cases, only if there is a criminal element involved and under investigation in Hong Kong.

Unauthorized disclosure of confidential banking information of any kind by either bankers or registered agents is strictly prohibited and subject to severe financial and criminal penalties.

Offshore Company – Bank Account

An offshore company is not required to hold its bank account in the country of incorporation and in many cases chooses not to. We work with banks in many countries and jurisdictions including:

a) Belize

b) Seychelles

c) Panama

The banks we work with include:

a) Heritage International Bank & Trust of Belize Limited

b) Choice Bank Limited

c) (AOB) Antigua Overseas Bank

If you would like further information or want to discuss any aspect of offshore banking please Contact Us

For further inquiries use our fast and confidential Live Chat service.

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Reform of the Cyprus International Trusts Law of 1992

Posted on 06/25/2012 by CitiTrust

The long-awaited reform of the Cyprus International Trusts Law, a much-needed initiative, has finally become reality with the enactment of the International Trust (Amending) Law of 2011.
When it came into force in 1992, the Cyprus International Trusts Law gave Cyprus a “state of the art” international trusts regime, with excellent tax mitigation and asset protection features.

However, the world has changed considerably in the intervening 20 years, and a number of restrictions and limitations contained in the original law are no longer necessary. New opportunities and investment practices have emerged, which the original law did not anticipate. As a result, while the basic structure provided by the International Trusts Law remained sound, it required updating to adapt it to the needs of investors today and in the coming years.

The amending law makes numerous changes to the original law, many of which are of a relatively technical nature. The key changes are outlined in the following paragraphs.

Clarifying the provisions on residence

When the 1992 law was drafted, the availability of international trusts was restricted to non-resident settlors in order to prevent tax avoidance by Cyprus residents. It was not clear whether settlors could relocate to Cyprus after establishing a Cyprus International Trust, and the resultant uncertainty undoubtedly discouraged many of them from doing so. The amending law provides only that the settlor may not be a Cyprus tax resident for the year preceding the year in which the trust is created. It also removes the prohibition on resident beneficiaries and on ownership of immovable property in Cyprus, thus avoiding difficulties that might otherwise arise if the settlor or any beneficiary were subsequently to take up residence in Cyprus.

Exclusion of overseas law

The law as amended explicitly provides that any question relating to the validity or administration of an international trust or a disposition to an international trust will be determined by the laws of Cyprus without reference to the law of any other jurisdiction, and that the law relating to inheritance or succession in force in Cyprus or any other country will not in any way affect the validity of the international trust or any transfer or disposition of property to it. It also makes clear that the powers and duties of trustees and any protectors of the trusts are governed exclusively by Cyprus law. Furthermore, it provides that dispositions to a trust may not be challenged on the grounds that they are inconsistent with the laws of another jurisdiction.
These provisions further reinforce the already formidable asset protection features of the Cyprus International Trust.

Reserved powers and interests

A new section of the law allows the settlor of a trust to reserve powers, to retain a beneficial interest in trust property, or to act as the protector or enforcer of the trust, without affecting the validity of the trust. The powers which may be reserved are extensive, and include the power to revoke, vary or amend the terms of the trust and to appoint or remove any trustee, enforcer, protector or beneficiary. These new provisions, which are similar to the corresponding provisions of Jersey and Guernsey law, give settlors great flexibility to adapt to changes in circumstances or objectives.

Abolition of restrictions on duration of trusts

The 1992 law restricted the maximum life of international trusts apart from charitable trusts and non-charitable purpose trusts to 100 years. In recent years this restriction came to be seen as a disadvantage of trusts compared with foundations and several jurisdictions have removed any restriction on the duration of trusts.
The amended law provides that from the date the amendment takes effect and subject to the terms of the trust, there will be no limit on the period for which a trust may continue to be valid and enforceable, and no rule against perpetuities or remoteness of vesting or the like will apply to a trust or to any advancement or application of property from a trust.

Extension of trustees’ investment powers

Trustees’ investment powers under the 1992 law were wide, and the amending law extends them further, by giving trustees the same investment powers as those of an absolute owner, allowing them to invest in a broader range of investments for the best interests of the beneficiaries.

The amending law also removes any doubt regarding trustees’ ability to invest in Cyprus by including a new section explicitly empowering trustees to invest in movable and immovable property in Cyprus and overseas. The abolition of the prohibition on investment in Cyprus will remove an obstacle to inward investment and provide a boost to the real estate market.

Public policy

The amending law entrenches jurisdictional protection by providing that an international trust containing a choice of law clause in favour of Cyprus law is fully protected from unfounded foreign judicial claims as a matter of public policy and order.

Other amendments

A number of further amendments of a technical and detailed nature have been made, including a redefinition of charitable purposes, the introduction of powers for the trustees and others to apply to the Cyprus court for directions, and clarification and amendment of the rules regarding choice of law, jurisdiction and foreign law trusts.

Conclusions

The amendments address a number of perceived deficiencies in the trust regime in Cyprus, bringing it back to the “cutting edge” internationally. They have been welcomed by practitioners and business leaders in Cyprus and abroad, and have received extensive positive comment in the local and international professional press. The International Trusts Law as amended ensures that settlors and beneficiaries enjoy the highest possible degree of protection, by reason of the clarity of the new provisions and the removal of any ambiguities.

The reform of the International Trusts Law will give Cyprus the most modern and favourable trust regime in Europe and restore it to the “premier league” of trust jurisdictions

Wiki Offshore is an online global repository where you can find, collaborate and contribute to information on all things related to offshore investment.

Have something to add? Contributing to Wiki offshore is easy. To add and share your content with others please go here.

Wiki Offshore

We also invite you to review the 2nd Quarter Edition of Cititrust EDGE eMagazine for the year 2012.

Topics in this issue cover:

- Trusts.
- The Offshore Debate.
- Bribery Acts.
- IRS continued scrutiny of foreign insurance subsidiaries.
- Also more from Russia, Austria, Japan, Estonia, India and other jurisdictions.

Download your complimentary copy of Cititrust’s EDGE eMagazine here.

We welcome your feedback and comments through our Twitter, LinkedIn and Facebook channels at www.cititrust.biz

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Cayman Islands Resilient Offshore Investment Jurisdiction

Posted on 06/24/2012 by CitiTrust

Cayman’s Resilience Demonstrates Continued Relevance for Offshore Leaders

The global financial crisis undoubtedly had a significant impact on business and activity for offshore financial centres, just as the repercussions were felt in onshore economies. For the Cayman Islands, three years on from the crisis, normal service has now been resumed in many ways and Cayman’s financial services sector demonstrated its resilience through the downturn.

Certainly with its traditional strengths in investment funds, structured finance, banking and trust work, the Cayman Islands provides an interesting starting point, from both a Caribbean and a global perspective, from which to examine how these sectors responded to the challenges and how they stand today.

As the world’s largest offshore centre for hedge funds, with an estimated 67% market share of offshore domiciled hedge funds, according to a report by International Financial Services, London, industry performance in the Cayman Islands is extremely closely watched. The good news is that after a period in which the total number of funds fell, amidst an unprecedented global liquidity squeeze which left many funds in a state of distress, new registrations are now firmly on the uptrend, following the restructuring work which dominated the preceding two years. The return to focus for new fund formation, which had been anticipated in 2010, materialised in 2011, with an average of just over 80 new funds formed each month during the first half of the year.

For Walkers’ Cayman Islands office there have been some clear trends taking shape. Notably investors are paying much greater attention to conducting thorough due diligence on the investment manager of the funds they are looking to invest in.

Additionally, investors are also examining closely the service providers and the directors associated with the funds and these enhanced levels of due diligence can only be good for all concerned in the industry. The trend to appoint more independent directors to funds has continued and filtered through to a move for independence for all service providers in a fund structure. In terms of the funds being formed, we have seen an influx of funds established by start-up managers, including spin outs from banks and other institutions, as well as an increase in Latin American fund work, as managers connected with the region look to capitalise on the high degree of investor appetite for Latin America at this time.

Structured finance and securitisation work was one of the areas most seriously affected by the downturn, with a complete shut-down in primary market activity – which has traditionally been routed through the Cayman Islands since the inception of the asset class. Again a significant number of deals required the expertise of Cayman professionals on the restructuring side and securitisation technology was employed by many of the worlds’ leading investment banks looking to gain relief from balance sheets stricken by so called toxic assets. The US government also utilised similar techniques and Cayman SPVs to engineer its Troubled Asset Relief Program (TARP).

Dealflow returned to structured markets in mid-2010, when CLO (Collateralised Loan Obligation) transactions started to appear in the primary market and Walkers in the Cayman Islands was delighted to reopen the market in May 2010 with COA Tempus CLO, the first public CLO to close since 2007 and also showcasing the new merger provisions under the Cayman Islands Companies Law. Since then, a number of US CLOs have made it to market and although the activity is not anywhere near the level it was before the crisis, it is nevertheless very encouraging, as investors have demonstrated their appetite for these securities. CLOs actually performed very well during the financial crisis, while for CDOs (Collateralised Debt Obligations) it was more a case of the assets within them doing very poorly although the structures were sound.

In the offshore private equity world, 2011 has seen a return to fund formation, amid a strong global rebound with emerging markets seeing particular attention, such as China and Latin America. We are seeing a greater number of fund launches although sizes remain modest as fundraising is still a challenge. Dominating the attention of investors at this time are due diligence, both at the commitment phase and with regard to portfolio investments, as well as greater use of advisory committees. Investors are also asking questions about how managers are deploying their management fees as well as the succession plans that are in place.

Specialist private equity funds, with less exposure to global macro events, have been notable, with infrastructure and agriculture funds in Brazil and real estate, biopharma and life sciences popular in China. In traditional markets it has been mezzanine finance funds, commodity based investments and science based venture capital funds capturing the attention, as well as energy and natural resources in Canada.

The next focus for offshore private equity professionals in the Cayman Islands will be the revised Exempted Limited Partnership Law, with the majority of Cayman private equity funds formed using that vehicle. The revised ELP law is anticipated to be implemented by the end of 2011 and will generally defer to a greater extent to partners’ commercial intentions as set out in the provisions of the limited partnership agreement.

Within the trust industry, which has provided steady and reliable growth to Cayman over the past few decades, the outlook has remained comparatively upbeat. The overall value of underlying trust assets may have fallen since the crisis began, however new business has remained steady and there were no significant moves to terminate any trusts.

On a jurisdictional level, the Cayman Islands has significantly increased the number of Tax Information Exchange Agreements which it has entered into and currently has 26 such agreements in place, including agreements with the UK, the US, Canada and most recently China. This process gathered pace at the time the OECD Global Forum published its progress report on the internationally agreed standards of tax and information exchange in April 2009 and the Cayman Islands is a member of the White List of countries which have substantially implemented the agreed standards.

As the debate regarding offshore financial centres has moved from an initial focus on tax avoidance to a more meaningful discussion on transparency, anti-money laundering and managing systemic risk, we have also seen a greater appreciation of the benefits that offshore financial centres in terms of providing liquidity and encouraging investment in both developed and developing countries. At the same time, the resilience and recovery that the Cayman Islands has demonstrated since the financial crisis points to its continuing relevance and importance to the global economy.

Andrew Miller is a partner with Walkers in the Cayman Islands where he heads up the firm’s Global Trusts Group.

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Cayman Islands Funds

Posted on 06/23/2012 by CitiTrust

Duties of Directors – Cayman Islands Funds

Weavering v. Peterson

A director of a Cayman Islands company owes certain fiduciary duties to the company. While these duties, as a matter of theory, are well understood, it is sometimes difficult to describe, in very practical terms, what exactly a director should and should not do in order to fulfil them. The Grand Court of the Cayman Islands (Financial Services Division) recently had cause, in Weavering v. Peterson, to consider how these general principles ought to play out in the context of an investment fund company and its directors.

The Weavering decision represents the application of already well-established principles to a particular set of facts. While the guidance provided by the Court in Weavering is instructive, it should be noted that the circumstances in that case were particularly egregious and the Court’s advice must be considered within that context. The directors in Weavering essentially did nothing except sign what the promoter put before them. There was a complete absence of meaningful consideration.

Supervisory Duties

The management structure of a typical Cayman fund works on the basis that investment management, administration and accounting functions will all be delegated to professional service providers but this structure does not absolve the directors of their obligation to supervise in a professional and businesslike manner. Directors must still satisfy themselves on a continuing basis that:

• the investment manager’s strategy is accurately described in the offering document;
• the investment manager is complying with any investment restrictions;
• there is an appropriate division of function and responsibility between the investment manager and the administrator (barring which division the directors would have increased responsibility to supervise);
• the various service providers are performing their functions in accordance with their contracts and that no functions that ought to be performed are not done.

Operational Structure

Directors must satisfy themselves that a fund’s operational structure is consistent with Cayman industry standards. They must read and understand the proposed service providers’ contracts, particularly the terms dealing with the calculation of net asset value, remuneration, limitation of liability and the nature and scope of work to be performed, for the purpose of determining whether the proposed terms are industry standard.

Offering Documents

The directors are responsible for the accuracy of the offering document and must ensure that the offering document complies with the requirements of the Mutual Funds Law. They cannot simply rely on the investment manager’s or promoter’s lawyers to get it right and ought to make enquiries to gain a proper understanding if in doubt. The directors must be seen to have taken positive steps to satisfy themselves that the offering document is accurate and complete.

Skills and Experience

Any descriptions of the directors’ skills and experience should be a fair and accurate statement of what the director brings to the table for the company. The investors are entitled to rely on the director to actually employ such skills in the conduct of the company’s business.

Independent Judgment

Directors have a duty to exercise an independent judgment on the matters within the scope of their supervision. This duty cannot be delegated away. Directors are expected to be able to read a balance sheet and to have an understanding of the audit process.

Side Letters

Side letters present difficult management issues and must be considered very carefully. While the entry into a side letter does not, of itself, expose the directors to claims of breach of duty, directors must not just accept the investment manager’s recommendations to enter into a side letter without making an independent judgment on the issue. Directors must turn their minds to, and make enquiries into, the nature and impact of a side letter and satisfy themselves that it is in the best interests of the company. It is advisable for the directors to take legal advice on a side letter if there is any question as to whether it could adversely effect the fund.

Documenting the Decision Making Process

Board minutes must be maintained that accurately and completely reflect the outcome of the decision making process. The record must demonstrate that the directors are aware of any issues and acted in accordance with their duties. Care should be taken to record what efforts were made to investigate and verify information, what questions were raised and settled, and what decisions were ultimately made. Directors who have recorded such efforts will be well equipped to defend against an accusation that they failed to meet the standards imposed on them under the law.

Conclusion

Whilst delegation to professional service providers is, in itself, entirely appropriate, the directors of a Cayman hedge fund must:

• exercise their powers independently without subordinating those powers to the will of others;
• honour their continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business;
• perform a high level supervisory role;
• act in a professional, businesslike manner;
• satisfy themselves (on a continuing basis) that the investment manager is complying with the investment criteria and restrictions adopted by the fund; and
• when asked to sign financial statements and accompanying management representation letters addressed to the auditors, exercise an independent judgment by conducting a review in an inquisitorial manner.

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This advisory is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.

About Conyers Dill & Pearman

Conyers Dill & Pearman advises on the laws of Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Mauritius. Conyers’ lawyers specialise in company and commercial law, commercial litigation and private client matters. Conyers’ structure, culture and expertise enable responsive, timely and thorough service. Conyers provides clients with the highest quality legal advice from strategic global locations including offices in the world’s leading financial centres in Europe, Asia, the Middle East and South America. Founded in 1928, Conyers comprises 550 staff including 150 lawyers. Affiliated companies (Codan) provide a range of trust, corporate secretarial, accounting and management services.

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Sharing Wealth, Sharing Cost…

Posted on 06/22/2012 by CitiTrust

The Increasing Difficulty of Running a “Lite” International Business Structure due to Increased Banking Regulation

In the nineties and noughties companies increasingly adopted international business structures that minimized bricks, mortar and personnel located “onshore”. This was not just “offshoring” in the sense of locating manufacturing in countries with low wage costs; it meant a minimization of structure in those countries, with high local costs, tax rates and social benefit costs, where the end-user for the service was located.

Whether the structure was a commissionaire sales structure with subsidiaries being small and acting as sales facilitator but not biller, or a re-invoicing centre, or using shared service centre in a low-cost location, the principle was to detach the cost base of delivery from the revenue potential of the end-user market.

Put another way, it involved billing into a country as a non-resident, maintaining a low in-country tax base, but nevertheless enjoying a sharing of the wealth of that country.

Now, via various means, the principle is under attack, under the banner “if you want to share in the wealth of this country, you need to share in the costs as well”. These various means are barriers erected in the way of running a “lite” business structure.

On a very public level, countries such as the US, Germany and France (which have relatively high public costs, public debt and tax rates) have sifted other countries into lists of black, grey and white countries as a crude measure of tax rate disparity. As an example of this process in action, the current discussions about anew fiscal discipline treaty for the Eurozone put the Irish Republic’s 12.5% mainstream corporation tax rate firmly in the crosshairs.

To be continued –

By Bob Lyddon, Managing Director, IBOS Association

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Singapore as a Holding Domicile for Your China Operations

Posted on 06/21/2012 by CitiTrust

Both Hong Kong and Singapore provide viable domiciles for a holding company…But what are the differences?

Singapore doesn’t usually come onto the radar for most folks when it comes to holding China investments, but in the changing dynamics of emerging Asia, that is beginning to change. While the use of holding companies to own foreign-invested China businesses has long been corporate practice, these have tended to concentrate on Hong Kong and, in the past, other offshore jurisdictions such as the British Virgin Islands or similar exotic domiciles. In fact, 15 years ago, the practice was endemic. The reasoning behind this was as follows:

1. Tax advantages. Offshore jurisdictions provide tax benefits to companies based there as normally they do not levy income tax on transactions made externally from their territory. Quite simply, you do business in China, and you can bring those profits back to say the BVIs without further tax. Hong Kong is slightly different as a rate of tax is levied, however for years it provided (and still does) a useful tool to hold a China operation. Its documentation is bilingual (English and Chinese), it’s inexpensive to set up such companies, and inexpensive to maintain them.

2. Secrecy. Or, in professional parlance, “non-disclosure.” Many offshore jurisdictions keep the identity of the directors and shareholders (the beneficial owners) secret. Hong Kong doesn’t, however the practice is advantageous for certain businesspeople who like to keep the extent of the value of their business and involvement with it private. More recently, this mechanism has come under fire, especially from the U.S. IRS, who suspect – and quite rightly in many cases – that the non-disclosure path leads to tax evasion, now illegal in many countries.

3. Keeping China at arm’s length. Having a company sited between the main China operations and the foreign investor directly would, it was thought, limit any fallout from China if things went bad. Should business in China turn turtle, the subsidiary would take the rap and contain the financial damage without it reaching the ultimate parent.

While the use of offshore jurisdictions in remote island states has probably had its peak, Hong Kong remains a viable destination for holding a business investment into China. It is largely considered a trustworthy destination to hold a business as Hong Kong company records are available for public inspection and there is no secrecy. It does however, levy a 16.5 percent income tax rate on business conducted within its borders, and the profits sourced outside Hong Kong might obtain tax exemption under the tax authority’s approval. Although the tax authorities in Hong Kong are taking a more aggressive position on such tax exemption applications – which makes the whole process more complicated to handle for tax payers – that 16.5 percent rate is still attractive when compared with many Western countries even if the tax exemption fails. Furthermore, Hong Kong’s ease of banking, its status as a financial center, and its excellent administration and infrastructure make the running of a Hong Kong company inexpensive and easy to maintain. An annual audit, some annual filing fees, and it’s done without the need to be physically present. Hong Kong’s distinct advantage is its being the gateway to China. It enjoys proximity in terms of geographical location, while the sharing of resources is readily possible between a Hong Kong holding company and a PRC subsidiary – translating to significant cost savings.

Story continues Monday with “The tax advantages of ASEAN membership”

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