Is it a hostile world for UHNW families?

Last week I was invited to give the key note speech on wealth preservation in Montreux which over 170 guests attended, including a significant number of single and multi-family offices. At the end of my talk the chair asked the audience whether they thought the governments of the world were becoming more hostile to the UHNW community, the majority were of the opinion that they were and less than 10% were uncertain.

In my opinion the hostilities are very real and need to be taken seriously. Russia for example has in the last two years tightened its rules for all Russians who own companies offshore.  It wants to collect more tax from its wealthiest residents.

The simplest of structures I came across in my meetings in Montreux is called the ‘Russian Trust’, which is now beginning to cause serious and unwanted results. Sasha is a Russian resident who, to avoid the Controlled Foreign Company rules transferred shares in his Jersey investment co (Invest Co) to his driver. Unfortunately, his driver died unexpectedly and his widow is now claiming her rights to the shares in Invest Co! Sasha may have saved tax, but lost Invest Co.

A slightly more sophisticated structure was set up by Alexey and was described to me by his single family office CEO who attended the summit. Alexey transferred his shares in an offshore company (Profit Co) to a holding company in Guernsey, (Hold Co) in which professional directors were appointed to run Hold Co from ABC Trustee Company Ltd. The shares in Hold Co were also transferred to ABC Trustees Limited, but on ‘bare trust’ for Alexey which means that ABC Trustees Limited must do what Alexey tells them with the shares in Hold Co.

The Controlled Foreign Company (CFC) rules in Russia operate to tax all undistributed profits of both Profit Co and Hold Co to Alexey and Alexey is obliged to report these profits to the Russian tax authorities. The CFC rules apply if either Alexey controls Hold Co, or owns directly or indirectly more than 25% in Hold Co.

Alexey is not at all happy with the structure. The professional directors of Hold Co, operate the bank account and deliberately do not do what Alexey tells them, on the basis, so they tell him, that they need to have evidence that Alexey does not control Hold Co. However, given that ABC Trustee Company Ltd holds all the shares in Hold Co for Alexey under a bare trust arrangement, the structure will still need to be reported under the Common Reporting Standards by both ABC Trustees Ltd (assuming it is a Financial Institution) and by the bank with which it has an account to the Guernsey authorities which will then exchange this information to the Russian tax authorities.

Alexey clearly wants control, protection and privacy of Hold Co, but under his existing structure has none of these and could face prosecution in Russia as from next year.

I talked with the CEO of Alexey’s family office who was stuck as to finding the right way out of the current structure. I was able to propose a much better, more flexible and current solution which would account for the CFC rules, CRS reporting which was worrying the family and incorporated the Bahamas Executive Entity to own on the shares of Hold Co. This allows Alexey to have control and give him peace of mind.

The other rules which have been tightened in Russia, is where a profitable company situate in Russia pays out its profits to a jurisdiction with which it has a favourable double tax treaty such as Cyprus. Let’s take Ivan, he transferred the shares he had in a steel mill in Russia to a Cyprus holding company, Cyprus Co, which is owned by a trust and company offshore. Ivan and his family are beneficiaries of this offshore trust.

Ivan’s structure this year had to be adapted to fall outside the new rules. If his Cyprus Co was not to be treated as resident in Russia it needed to have a real presence in Cyprus. He needed to make sure that the Cyprus Co’s executive body did not operate in Russia, and its key officers did not perform their functions in Russia. He, therefore, took an office in Limassol, bought a holiday home in Paphos and engaged an account manager to work for Cyprus Co full time.

His concern has now turned to the profits accumulating in his offshore trust which owns a bank account in a CRS country. As from 2017 this trustee and bank will have to report the funds and any transactions to their Government, which will in turn report it to the Russian tax authorities. As a settlor Ivan like Alexi, will need to report the structure to the tax authorities if he has reserved to himself a benefit. He has no wish to benefit from the structure so is less concerned as to the tax consequences, but is very concerned by the exchange of this very private financial information, which may not be accurate, across the globe. He has seen families of wealthy Russian friends targeted by criminals once they obtain private financial information.  As one delegate said ‘CRS is a kidnappers’ charter’.

Most Russians aren’t trying to ignore the serious nature of these new rules but they do want to plan for privacy and safety of their assets in uncertain times. However, one of the professional delegates said that it was only a matter of time before the Russian tax authorities find a high profile tax dodger and drag him or her very publicly through the courts and into jail. It is not a good strategy to play Russian roulette!

If you have any comments, or would like to book a meeting with Caroline or one of her team to explore howbest to re structure foreign or domestic assets please contact or phone her on 020 3740 7423.