Expats warned to avoid tax dangers
Tax and its implications could not be more important for those looking to set up a trust in an offshore jurisdiction. But it's not just the tax regime that matters. Of equal importance is the domicile of the person creating the trust because that may have implications for the type of trust that can be established.
Onshore tax regimes in Britain and the United States are under frequent amendment, including provisions dealing with their expatriate citizens' ability to create offshore trusts. But the past 12 to 18 months have also seen a greater emphasis by both governments on tax compliance. Both are stressing the accurate, timely and complete reporting of income, including income from offshore trusts.
In the US, for example, the 2010 Hiring Incentives to Restore Employment (Hire) Act has several provisions in it dealing with income reporting requirements, including, potentially, the trustees of offshore trusts, according to Marcus Leese, partner in the Hong Kong office at global offshore law firm Ogier.
'These are all either reporting requirements or withholding tax requirements and are focused on the tax compliance side,' he says. 'A great deal of that tax compliance is falling on offshore trustees, so it is absolutely crucial that those who are onshore as settlers or beneficiaries are confident that their offshore trustees are aware of their obligations, and have the expertise, experience and systems necessary to be able to comply.'
In brief, Hire presumes that where a US person transfers property to a foreign trust, that trust has a US beneficiary. Failure to report certain foreign trusts will result in a minimum US$10,000 penalty and, where a foreign trust permits a US beneficiary to use certain trust property, that use is treated as a distribution from the trust.
What this means in the broader sense is that several factors other than low or no taxes should come into play when selecting a particular jurisdiction as trust domicile, according to Katherine Chiu, deputy managing director of Intertrust Hong Kong.
'Political stability, a jurisdiction's popularity as a trust centre and whether it is on the Organisation for Economic Co-operation and Development's grey or blacklist of countries designated as tax havens are all factors to note,' she says.
The trust law in a jurisdiction is also important. For example, is there specific legislation, is it modern and clearly drafted, and does it provide suitable powers for the trustee to act, and offer suitable protection for beneficiaries?
Another essential factor is regulation. Does the offshore jurisdiction license and regulate professional trustees so as to provide protection for beneficiaries from unscrupulous or unprofessional trustees?
What is the system and the quality of the courts in the offshore jurisdiction?
Do they have a long tradition of dealing with trust disputes and the knowledge and ability to do so in a professional and certain fashion?
Is there a significant body of trustees who are confident, capable, experienced and have expertise at dealing with high-value transactions?
Location is everything in an industry where there is a need to communicate regularly and directly with trustees.