Paulo and South America

Very often GFOS clients want to compare jurisdictions once they have their sights on setting up a Family Headquarter offshore; all the usual names appear on our comparison tables - Bahamas, Switzerland, Jersey, Monaco etc.

Monaco is very special for Brits - the weather, security and to be surrounded by like-minded people. But it is not as easy as it used to be to become a non-UK tax resident.

The law changed in 2013 (Finance Act 2013 Schedule 43) and the statutory residence test is about as complicated as the UK Treasury could possibly make it.

Let’s take Paulo. He came to the UK from Central America twenty-eight years ago, and has lived in Belgravia ever since. His first child was born before he and his wife immigrated and she is now 31. Paulo then had a further two children. His business is food imports to Europe from his home country and he travels extensively, in particular to Central America, where he has a home.

His eldest is now married and living in Notting hill Gate with two young children, Emily and Francis. His second child is pregnant and due to get married this year and will continue to live in London. The third is likely to go into Paulo’s business and is not settled.

Paulo is very concerned about how Brexit will impact his business and is considering whether to reduce his imports to the UK and concentrate more on Eastern Europe. He has a UK passport, and a passport from his home country, but now fears that he may need another passport so that he can move freely around Europe post Brexit.

He has a trust in Jersey which he set up twenty years ago, but is now also concerned that his trustees will report to his home country, given his close connections there.

When he came to see me, Paulo wanted to know first how easy it would be to become a non-UK resident and to set up a bolt hole in Monaco.

I explained to him that in any year he spends 183 days in the UK, he will be automatically treated as UK resident, and will be treated as non-UK resident if he spends less than 16 days in the UK. This he said was not going to be possible, he and his wife wanted to see their grandchildren growing up.

The next question was whether he would keep a home in the UK – yes, he was quite decided. His wife would want to have her own home to be close to her children, but he could not see either of them neither spending three consecutive months of the year in the UK, they would always come and go.

In these circumstance Paulo and his wife would need to work out how many ties, they would retain in the UK.

Firstly, he would have tax resident children in the UK, so this is one tie, secondly, he and his wife would have accommodation in the UK, which would be another tie, however it was unlikely that he would work in the UK, but could not be sure. If not he would not have a work tie in the UK, if he did he would remain UK resident.

If not, he would need to be very careful not to spend more than 90 days in the UK, with family and friends. If he did, he would be treated in that year as being UK tax resident, and would remain UK tax resident for the following two years.

With regard to acquiring a home in Monaco, I told him that we could put him in touch with all the right property developers and if necessary the bankers we work with locally can arrange finance for him.

He then wanted to know what to do about his trust in Jersey and his concern that his trustees would report on his offshore finances to his home country in Central America. I told him that while he was UK tax resident we can advise on positioning his affairs in a way not to expose him in other jurisdictions.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

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Not in my backyard

Thanks to all of you who took the time to reply to last week’s note – Pugachev to Assist Tax Authorities.

The most common feedback, which I would like to address in this note, was ‘the Pugachev case will not affect trusts governed by my jurisdiction’. This comment came from readers in Cayman, Jersey, and Guernsey.

These jurisdictions, as well as many more: Bermuda, BVI, Isle of Man and Bahamas, have enacted local legislation which states that any action against the validity of any trust due, for example, to the settlor’s reservation of powers or powers reserved to a Protector in the Trust Deed, will not invalidate the trust. Furthermore, any foreign judgement presented to a court within that jurisdiction will not be recognised.

This has been upheld. In fact, local courts have gone one step further, such as in the Cayman case of RBS Coutts Cayman Ltd v W [2010] which directed the trustees not to comply with such an order.

So the question is, for example, what will a tax authority do, armed with evidence from CRS that a  trust which was set up by a Settlor resident in its jurisdiction do when it has information that the trust

·      has a Protector,

·      owns family businesses and or private shares in one or more joint venture businesses, and

·      is governed by a jurisdiction which has ‘firewall legislation’

We know from the tax manuals written to tax inspectors that the first step for them is to approach the trustee for a copy of the trust deed on suspicion of tax evasion.

On receipt of the trust deed it will look to see if, in accordance with the Pugachev case, the trustee has any autonomous power. If consent is needed for the exercise of most of its powers it needs the tax authority could that the Protector’s powers are personal and not fiduciary.

On this basis, it could issue a claim against the Settlor direct, for tax on all the trust’s assets as if the trust were a bare trust.  This approach does not need to take the case to the jurisdiction in which the trust is resident or governed, thereby neatly by-passing any firewall legislation.

This is what is commonly done by a disgruntled spouse faced with a family trust in a jurisdiction which has ‘firewall legislation’.

In order to succeed the court in the jurisdiction in which the claim is brought will look at the terms of the Trust Deed, what powers were reserved and to whom. It will then look at the Letter of Wishes to see whether this sets out the purpose of the trust, and most critically it will look at the correspondence between the Settlor and the Trustee, in particular immediately before the trustees make a distribution or invest or dispose of trust assets.  – Is the Settlor using the trust fund as his/her own piggy bank?

Given that the many professional trustees owning, in whole or in part, family businesses or other private shareholdings, frequently rely on the experience and knowledge of the Settlor in making its decision as to which investments to keep and which to sell, this guidance could give the tax authority the evidence it needs to tax the underlying assets. The  order sought would be to tax the Settlor as if the trust assets were held by him/her personally on the basis that the trust was a bare trust and the trust assets were held to the order of the Settlor.

This has been a well-worn path trodden by many spouses seeking to claim against trust assets. If a spouse is then unable to pay without access to the trust fund, he or she is left to ask the trustee for a distribution. If the trustee refuses, then the Settlor could face bankruptcy or a custodial sentence for contempt of court.

It is what many call rough justice.

In my personal experience, most Settlors who find themselves in such a situation demand that the trustees make a distribution. If they do so, then that is proof that the trustees simply do what they are told, if however, they do not – could they be accused for not acting in the best interests of the beneficiaries by allowing him/her to go to prison for want of a distribution.

The fact that the trust may have a clause in the deed such that such an action will make the Settlor an excluded person may have some influence on the court but depending on the wording, that it is likely to be at the discretion of the trustees, will be unlikely to affect the decision of the court.

We live in an age where tax authorities now have the information they need to attack and they will use any and all the existing case law to – make the best possible case to secure their goal; to tax the underlying trust assets.

Trustees may wish to ignore how and when tax authorities will use the information they are about to or already have in their possession, but to do so when there are robust and safe alternatives is do so at the risk of alienating their best clients and business.

If you would like to hear about what we do for our clients or have comments about this article please get in touch below.

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Tax authorities are assisted by Pugachev

On the 11th October 2017, the Privy Council handed down a judgement in the case of Mezhprom v Pugachev which should send shivers down the spines of every fiduciary business as well as all families whose wealth is held in offshore trusts.

Sergei Pugachev was the founder of Mezhprom which was once Russia’s leading private bank. In due course, however, it got into financial difficulties and had to be bailed out by the Russian Central Bank.

Creditors of the bank included The Deposit Insurance Agency an arm of the Russian State. It claimed that Mr Pugachev had misappropriated the funds and settled them in five trusts in New Zealand with private trustee companies, of which his adviser and his wife, in New Zealand were directors. Mr Pugachev was the Settlor and Protector and he, and his partner and children were the Beneficiaries.

As Protector Mr Pugachev had extensive powers to block any decision of the Trustee, and if it did not do what he wanted, he could remove and replace it.

The decision of the Judge focused on the intention of Mr Pugachev at the time he created the trust. Did he intend to divest himself of control of the assets when he set up the trust and transferred the assets to his trustee? If not, then his role as Protector was ‘personal’ and not ‘fiduciary’.

The importance of this distinction in the Judgement is fundamental. If ‘personal’, then in exercising his extensive blocking powers over the decisions of the trustee, he need only consider his own needs and requirements. If however, his intention at the outset was that the role of the Protector was ‘fiduciary’ then the Protector must, in exercising his powers, consider what was in the best interests of all the beneficiaries.

If the proper construction of the trust documentation was that Mr Pugachev intended that the role of the Protector was ‘personal’, then the trust was not a sham, it was a trust – but only a bare trust. As a bare trust, the assets were in the name of the trustees, but held to the order of Mr Pugachev. The beneficial interests in the trust assets remained with Mr Pugachev – and were, therefore, available to be seized by the bank Mezhprom to meet the claims of its creditors such as the DIA.

The Judge went on, if on a proper construction of the intention of Mr Pugachev at the time he set up the trust, was to divest himself of control of the assets, then following the Esteem case, he needed to find a common intention by both the trustees and the settlor to mislead, for it to be a sham.

The Judge looked to the divorce case of A v A for a precedent.  A common intention can be construed where the trustee, although not obviously or deliberately out to mislead, had a ‘reckless indifference’ as to what was the intention of the settlor and went along with it to secure the business.  

If this was the proper construction of the facts, then the test set by Esteem was satisfied and the trust as set out in the documentation was a sham and could be set aside as being void ab initio.

The Judge continued; if on a proper construction of all the circumstances leading up to the formation of the trust, Mr Purgachev had the intention to form the trust, the Protector’s powers were fiduciary and the trustee was not reckless as to the intention of Mr Pugachev in setting up the trusts, he would still set aside the transfer of the assets into the trust because they were transferred with the intention of defeating his creditors, so would be available to meet the claims of the creditors of the bank.

Mr Pugachev was defeated on all claims.

Some advisers say that the importance of this case is limited to its facts; Mr Pugachev, was Settlor, Beneficiary and a Protector with extensive reactive reserved powers. I do not agree.

This case, is dynamite for any third party, such as a tax authority. Tax authorities across the globe now know who is the Settlor, whether the Settlor is also a beneficiary and which trusts have a Protector under CRS.

All they now need to do, following the decision in the Pugachev case is to ask the Trustee for a copy of the Trust Deed. With this, they can identify the powers of the Protector and attack the trust on the basis that the Protector’s powers were personal to the Settlor, either directly or through his nominee which they can now glean from an objective interpretation of the trust deed. Before this case the tax authority would need to prove a common intention on behalf of the trustee and the settlor, to deceive.

I have for many years been wary of the office of Protector, and this case justifies my contention that the role of Protector puts the trust at risk of an investigation.

If you would like to hear about what we do for our clients or have comments about this article please get in touch below.

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Facebook Under Fire

In this digital age, we disclose our likes and dislikes every day, all the time; loyalty cards, browsing on the internet, and going about our daily activities, monitored 24/7 by CCTV cameras. So, what is the big fuss with Facebook and Cambridge Analytica? The issue is not even current; it relates back to an event which happened in 2014.

Facebook makes revenue out of allowing third party developers, such as Cambridge Analytica, access to the data of millions of its users.  In 2014, the data of their members and their friends required less filtering than today. But what is relevant today is that we now know Cambridge Analytica used this data to help Trump into the White House.

For many who think Trump should not be President, the use of this information in this way is an outrage. Whether Facebook will be made to pay, however, will depend on the law at that time. Facebook was subject to an order made in 2011 not to share data with any third party without the express permission of the user. However, it neatly sidestepped this requirement with the use of irritating pop-ups.

One of the issues addressed in the EU initiative on General Data Protection Regulations is to stop these annoying pop-ups which won’t disappear until you have ticked the box which says ‘I have read and agree to the terms and conditions’. Under the new initiative, due to become law on 25th May, consent can only be meaningfully if ‘freely given’ which means that consent is asked for in ‘clear and plain’ language.

Under these new data protection regulations there are 6 principles

·      The data must be collected lawfully, fairly and transparently

·      It must be collected only for a specific legal purpose

·      It must be adequate, relevant and limited to what is necessary

·      It must be accurate and kept up to date

·      It must be stored only as long as is necessary, and

·      It must ensure appropriate security, integrity and confidentiality.

These regulations apply to all digital technology businesses, but do they apply to the information collected by Governments? Under the existing rules, if the primary purpose of collecting data is for the best interests of the security and well-being of the country’s residents as a whole, or for the purposes of collecting and administering tax then the data protection rules may not apply subject to proportionality.

Let’s put this in context: Ferdinand set up a trust in Jersey fifteen years ago, with the proceeds of the sale of his first business. He appointed a professional, reputable trustee and his brother in law as a Protector. He and his family are UK resident, non-UK domiciled, but Ferdinand spends a lot of his time in Central America where many of his businesses are based. His businesses have done well and now his trusts are worth many hundreds of £’s millions.

His Jersey trustees tell him that under CRS he is obliged to self-certify his tax residence. From records kept by his professional trustees, it is known that he lives with his family in the UK, but spends a lot of his time in Central America.

In order to fill out this form correctly, Ferdinand, asks a reputable firm of accountants in both the UK and Central America for a tax report as to whether he is tax resident, and if yes, is he fully up to date on all taxes.

The UK report made it clear that Ferdinand was UK resident but not liable for any taxes. However, the report from Central America, was uncertain as to his tax residence, but that if he were tax resident, no taxes were due. Ferdinand has given both reports to his Jersey trustees and they have reported accordingly.

Ferdinand is keen to restructure his trust to give him greater control and to put beyond doubt that he is not tax resident in Central America. However, he is concerned about the information which has already been collected and exchanged? Has he got a right to demand that the information ‘be forgotten’ and when? If he were to make such a request, would not serve to draw attention to himself?

In Article 17 there is a ‘right to erase’. But does this to apply to data collected under the CRS?

Common sense would argue that if it was reasonable to collect information, even when there was a ‘reasonable excuse’ to say that this information would not give rise to any further tax due, Ferdinand would have the right to demand that this information be erased within a reasonable period of time, if by then inaccurate or out of date or maybe not?

The answer will only emerge as a result of long and painful litigation. If you do not wish to be a test case – please contact …. to find out how you can maximise control and minimise exposure.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

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The Partner for Private Clients

Last Tuesday we officially launched the BConnect Club, the partner for Private Clients. It was a fabulous event held on the roof terrace of the Trafalgar where we were joined by sponsors, Julius Baer, SPS Security, luxury chocolatiers  Godiva and Cult Wines. The room was packed with single family offices and carefully chosen UHNW friends of ours.

The BConnect Club is focused on serving the best interests of the UHNW community and the independent platform is able to provide them with fresh, exclusive deals which are pre-vetted, the opportunity to find co-investors for existing projects, meet each other at our Club events and get the opportunity to see the best luxury brands. 

As many of you will know, I am passionate about the unique concerns of the wealthy, which I wrote about in my book ‘When you are Super Rich who can you Trust?’.

It is a fact of life that whereas flames attract moths, money attracts all manner of greed in the form of sophisticated salesmen keen to get rich themselves. Therefore, the community which is in most need of advice and advisors tends to be very private and hard to reach. However, they have money and money needs to be invested, spent and taxed. For all these activities, they need advisers - ones they can trust to help them spend wisely, invest well, pay the right amount of tax and keep a low and safe profile.

And herein lies the conundrum – how do you chose your inner cabinet of advisers, to look after your best interests amongst a sea of sharks?

I set up Family Bhive ten years ago as aggregation resource of information for wealthy individuals. This hard to reach private community asked me and my team to provide a platform, where they could follow their interests and learn more about their concerns without revealing who they were and what they wanted.

Our UHNW members would contact our team to ask us, for example, to source five accountants who specialise in tax investigations, so they could compare one with another before asking for a meeting.

In conjunction with setting up Family Bhive I founded GFOS as a leader for wealth planning and structuring for UHNW individuals and Family Offices.  With the introduction of FATCA and the OECD Common Reporting Standard, all financial accounts held offshore are now being automatically disclosed to the tax authority in which the wealthy individual is living – whether there is any suspicion of tax evasion or not.

Through GFOS, we are able to offer Protection solutions to families who are concerned with the erosion of privacy, loss of control over their assets in trust and smooth succession. 

Through BConnect Club, we can now extend our partnership to find good quality deals. Already our private client members have put forward numerous ‘buy side’ deals, which are on line, families which are cash rich looking to invest – at the right price in property, bio tech and energy companies.

We will also be going out to our members to ask them what else they are looking for, across our range of portals; deals, luxury products and service providers. Once they tell us what they want, we source it, and promote it, and we tell our clients when we have what they are looking for.

If you would like to find out how you can join the Club please get in touch on the number below.

For any other Family Office needs please also write to us direct.

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