Victorian Division
10-13 October, 2007
Lorne, VIC
VICTORIAN STATE
CONVENTION
Investing Offshore into
Foreign Flow-Through
Structures
Written by/Presented by:
Robert Gordon
Barrister
Melbourne Chambers
© Taxation Institute of Australia & Robert Gordon 2007 www.ectrustco.com / www.robertgordontax.com
Disclaimer: The material in this paper is published on the basis that the opinions expressed are not to be regarded as the official opinions of the
Taxation Institute of Australia. The material should not be used or treated as professional advice and readers should rely on their own enquiries in
making any decisions concerning their own interests.
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
CONTENTS
1
2
3
4
5
INTRODUCTION……………………………………………………………………………………………….4
1.1
Non-Portfolio Investment……………………………………………………….. ………………...4
1.2
Anti-Deferral Regimes…………………………………………………………………………...5
1.3
Portfolio Investment……………………………………………………………………………...5
1.3.1
Foreign Resident Investee Companies………………………………………………5
1.3.2
Foreign Resident Investee Unit Trusts……………………………………………….6
1.3.3
Non-Distributor Funds………………………………………………………………...6
1.3.4
Feeder Funds…………………………………………………………………………..6
1.3.5
Investment by Australian Resident Unit Trusts……………………………………..6
1.3.6
Investment by Australian Resident Listed Investment Companies……………….7
1.3.7
Investment by Australian Resident Partnerships…………………………………...7
CONDUIT STRUCTURES……………………………………………………………………................7
2.1
Transparent Entities………………………………………………………………………………7
2.2
Trusts and Treaties……………………………………………………………………………….7
2.3
Specific Conduit Regimes……………………………………………………………………….8
2.4
Tax Neutrality………………………………………………………………………………….….8
2.5
Treaty Shopping………………………………………………………………………………….8
2.6
Entity Categorisation……………………………………………………………………………..9
TAX HAVENS……………………………………………………………………………………………..9
3.1
Expansion of European Union ………………………………………………………………….9
3.2
“Harmful Tax Competition”………………………………………………………………………10
3.3
Business Profits without a PE…………………………………………………………………..10
APPLICATION OF TAX TREATIES TO CONDUIT ENTITIES; LIMITATION OF BENEFITS
ARTICLES………………………………………………………………………………………………….10
4.1
Malaysia…………………………………………………………………………………………..10
4.2
Treaty Renegotiation…………………………………………………………………………….11
4.3
Remittance………………………………………………………………………………………..11
4.4
Purpose……………………………………………………………………………………………11
CONDUIT ENTITIES AS “BENEFICIAL OWNERS” FOR TREATY PURPOSES (Indofood case
[2006] EWCA Civ 158)…………………………………………………………………………............11
5.1
Indofood Facts…………………………………………………………………………………...11
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
5.2
Indofood Findings………………………………………………………………………………..12
5.3
Luxembourg……………………………………………………………………………………..12
5.4
HMRC Guidance………………………………………………………………………………..13
6
FOREIGN HYBRIDS LLCS LLPS DIV 830………………………………………………................13
7
SECTION 485AA ELECTION…………………………………………………………………………..13
8
EXEMPTION FROM FIF FOR CERTAIN US FIF INTERESTS…………………………………….13
9
EXEMPTION FROM FIF FOR COMPLYING SUPER FUNDS……………………………………..14
10
BOT REVIEW OF ANTI-DEFERRAL REGIMES…………………………………………………….14
10.1
Controlled Foreign Company……………………………………………………………….…14
10.2
Transferor Trust……………………………………………………………………….............14
10.3
Section 404 Countries…………………………………………………………….…………...15
10.4
BOT Review………………………………………………………………………………….…15
11 EXAMPLES OF CONDUITS………………………………………………………………….……………..15
11.1 Conduit in source country…………………………………………………………………..........16
11.1.1 UK LLP…………………………………………………………………….……........16
11.1.2 UK private unit trust……………………………………………………………….…16
11.1.3 UK REIT……………………………………………………………………………....17
11.1.4 UK OEICs………………………………………………………………………....….17
11.2 Conduit for both source and intermediary country..............................................................18
11.2.1 Singapore “start-up” company……………………………………………….….….18
11.2.2 Singapore LLP………………………………………………………………….…….18
11.3 Conduit in intermediary country………………………………………………………….….…...19
11.3.1 Labuan company………………………………………………………………….….19
11.3.2 Malaysian company…………………………………………………………….……19
11.3.3 Malaysian “satay”……………………………………………………………….……19
11.3.4 Labuan CLG……………………………………………………………………….....20
11.3.5 Labuan unit trust……………………………………………………………………..20
11.3.6 Labuan LLP………………………………………………………………………..…20
11.3.7 Labuan Mutual Funds…………………………………………………………........21
11.3.8 Cyprus company……………………………………………………………………..21
11.3.9 New Zealand accumulation trust………………………………………………......21
11.3.10 New Zealand accumulation unit trust…………………………………………......21
11.4
Conclusion ………………………………………………………………………………..…...22
© Taxation Institute of Australia & Robert Gordon 2007
3
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
1
Investing Offshore into Foreign Flow-Through Structures
INTRODUCTION
The focus of the paper are issues in relation to portfolio investment in conduit structures in source
countries and those in interposed jurisdictions, such as tax havens
The paper deals only with outbound investment from Australia. Whilst the level of investment the paper
deals with is “portfolio”, the underlying investment may be an active business, or only involve passive
income e.g. interest.
What will become apparent is that “retail” investors in Australia, are most likely to make portfolio
investment in an Australian unit trust. The manager of such unit trusts is likely to offer several unit trusts
with different asset classes, such as “international shares”, “Japan shares”, “European shares”, “US
shares”, “global property”, or “international bonds”. Such unit trusts may also be categorised by risk level.
Retail investors are generally looking for the protection of an Australian regulated fund, which passes the
due diligence to the manager of the Australian fund. The Retail investor may also be concerned about
currency exposure and lack of information re offshore funds. Australian fund managers generally hedge
the funds assets to the Australian dollar.
Such an Australian unit trust managed by an Australian manager i, will then either directly manage the
foreign assets1, or contract with an international group to manage the foreign assets, or make investments
in suitable offshore vehicles managed by an international group. Australian unit trusts promoted by an
international groupii, may be managed by a related overseas manager 2, or be invested in suitable offshore
vehicles managed by the international group3.
Sometimes, but not always in contrast to the Retail investor, the High Net Wealth Individual (HNWI) may
be prepared to make a wholesale investmentiii direct into an offshore fundiv. The regulatory cost of such
offshore funds offering their investments direct to Retail investors in Australia is likely to be prohibitive,
relative to the small number of potential investors (and hence the potential amount invested).
The position of Australian resident companies making offshore portfolio investment is not a focus of this
paper, as the anti-deferral regime always led corporate investors to look to have at least a 10% (voting)
interest i.e. non-portfolio interest. Until 1 July, 2004, this would allow for a s23AJ exemption on dividends
from listed and limited exemption listed countries, and from that date, on dividends from all foreign
countries. Before 1 July, 2004, having at least a non-portfolio interest in unlisted countries would allow a
foreign tax credit for the proportion of foreign tax paid by the investee company.
It is first necessary to define some concepts, such as portfolio investment, conduit structures, and tax
havens.
1.1
Non-Portfolio Investment
For Australian international tax purposes, and also commonly in double tax agreements (DTAs), a
shareholding of less than 10% (usually voting) is within the definition of a portfolio shareholding. A
shareholding of 10% or more is a non-portfolio shareholding4.
A dividend received by an Australian resident company from a non-portfolio shareholding in a non-resident
company is non-assessable non-exempt (NANE) income under s23AJ of the 1936 Act v.
Non-portfolio dividends are assessable to all Australian non-corporate resident taxpayers, under s44, and
a credit is available only for foreign withholding tax.
E.g. Platinum Asset Management Limited (ASX code – PTM).
E.g. INVESCO Australia Limited is not listed in Australia, and is part of the AMVESCAP plc group, listed in New York, London, and
Toronto
iii
The expression Wholesale Investor comes from the Financial Services Licence provisions of the Corporations Act, specifically
s761G(7), the Regulations to which (7.1.18(2)), specify a price for an investment to be a minimum of $500,000, for an investment to
be to a wholesale client, compare retail client (s761G(4)).
iv
“Sophisticated Investors” are defined in the Fundraising provisions of the Corporations Act, specifically s708(8), consistent with the
tests for a Wholesale Investor, which include alternatives to the price of investment test, being a minimum gross income test
($250,000 pa.), or a net asset test ($2.5M). Such a person is commonly referred to as a HNWI. Retail investors must have
disclosure made to them by an Australian “prospectus”.
v
All section reference onwards will be to that Act unless indicated otherwise
i
ii
© Taxation Institute of Australia & Robert Gordon 2007
4
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
1.2
Investing Offshore into Foreign Flow-Through Structures
Anti-Deferral Regimes
To deal with the deferral of Australian tax that may otherwise arise in relation to non-resident companies,
in 1990 Australia introduced the Controlled Foreign Company (CFC) regime under Part X, in the case of
controlled companies, and in 1993, introduced the Foreign Investment Fund (FIF) regime under Part XI, in
the case of non-controlled entities.
1.3
Portfolio Investment
Portfolio dividends are assessable to all Australian resident taxpayers, under s44, and a credit is available
only for foreign withholding tax.
The FIF measures potentially apply at the level of the Australian resident entity that has the interest in the
first tier non-resident entity. They depend on an analysis of the first tier non-resident entity, with analysis
down to a second tier entity only if the active income exemption is sought.
Where Australian resident taxpayers have an interest in a non-resident company, which is not an
attributable CFC interest, the holding is a FIF interestvi, and attribution can take place under the FIF
regime.
Taxpayers with a less than 10% interest in a non-resident company often do not have the information to
do a “branch equivalent” calculation available for attribution under the CFC regime. To determine the FIF
attributable amount, where a “branch equivalent” calculation cannot be done, alternative proxy methods
are provided. They are the market value method, and the deemed rate of return method.
Necessarily the proxy methods may not give a good approximation to the actual return, and may include
unrealised gains. As interim distributions are assessable income they are excluded from FIF attributable
income: s530. On actual remittance, previously attributed income is “non-assessable non-exempt” income:
s23AK. A foreign tax credit is available for foreign withholding tax paid: s160AFCJ.
1.3.1
Foreign Resident Investee Companies
Whilst almost all interests not caught by the CFC provisions, will fall within the FIF provisions, there are a
large number of exemptions, based on excluding those interests where tax deferral is less likely.
The more important exemptions from Part XI are in relation to investment in:
Division 3
Foreign companies engaged in Eligible Activities*, as determined by Stock
Exchange categorisation method, or balance sheet method
Division 4
Stock Exchange listed Bank
Division 5
Licensed Life Assurance Company
Division 6
Stock Exchange listed General Insurer
Division 7
Stock Exchange listed Commercial Realty Company
Division 8
Certain US Entities
Division 13
Stock Exchange listed companies, involved in combination of Life Assurance,
General Insurance, and Realty activities
*Eligible Activities are defined such as to be active businesses, unless they are trading in tainted assets;
or carrying on banking, life assurance, general insurance, or realty business (other than construction), and
are not listed on a stock exchange
vi
Such that the share holding subject to FIF may be up to 50%
© Taxation Institute of Australia & Robert Gordon 2007
5
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
1.3.2
Investing Offshore into Foreign Flow-Through Structures
Foreign Resident Investee Unit Trusts
As can be seen from the exemptions listed above, none apply to an interest in a non-resident unit trust
(other than for certain US resident trusts under Division 8), even if carrying on an active business of the
type which would have gained exemption if carried on by a company. That is, there is an active bias
against unit trusts.
1.3.3
Non-Distributor Funds
So it can be seen that the classic “non-distributor” trust or company may be seen as an obvious target of
the FIF measures. For instance a Hong Kong resident unit trust that doesn’t distribute, with a redemption
facility for holders to realise their investments as a capital gain 5.
The Hong Kong Investment Funds Association websitevii lists a total of 1,998 unit trusts and mutual funds
authorised by the Securities and Futures Commission (SFC) of the Hong Kong SAR as at 31.12.05. Buy
and sell prices are advertised in the South China Morning Post and on websites.
The SFC registers certain foreign investment vehicles, as well as HK resident unit trusts. HSBC in HK
provides detailed listings of HK and offshore funds that it can assist investors to accessviii.
1.3.4
Feeder Funds
However, the FIF measures apply regardless of the fund’s distribution policy. Compare the exemption for
such funds from the equivalent UK regime, where they have an acceptable distribution policy. Interposed
entities may be “fed” by an onshore fund, or the moneys may be directed to the offshore affiliate of the
onshore funds manager.
For example, internet research discloses onshore funds may “fed” a Hong Kong unit trust or Cayman
Islands resident unit trust6, or Bahamas companies7, or Cayman Islands mutual fund company8, that make
passive investments. Such entities may or may not be listed on a local stock exchange in their country of
residence, or an exchange of convenience, e.g. Bermuda 9, Channel Islands, and Cayman Stock
Exchanges.
JFCP Emerging Markets Equity Fund is an Australian resident unit trust that discloses10 in its Information
Brochure that it intends to invest exclusively in a sub-fund of “JP Morgan Funds”, an “umbrella structured
open-ended investment company with limited liability, registered under Luxembourg law”.
1.3.5
Investment by Australian Resident Unit Trusts
In the context of Australian resident investment trusts, the most common variety would be a “unit trust”, for
which the unit holder, paid a fair market value. Unless an Australian resident unit trust is treated as a
corporation for Australian tax (Div 6B and 6C), foreign income flowing to that unit trust will be assessable
proportionately to presently entitled Australian resident unit holders ix.
Australian resident unit holders will be entitled to a foreign tax credit for any foreign income which has
borne foreign withholding tax. Note there is no credit for underlying corporate tax even if the unit trust
holds a non-portfolio interest in a foreign company.
Portfolio holdings by an Australian resident unit trust are subject to the FIF provisions, unless the total
holding of attributable FIF interests is less that 10% of total foreign interests i.e. the “balanced portfolio”
exemption: Division 14. However, to establish the “balanced portfolio” exemption, much of the same
analysis of the FIF interests is required. If non-exempt FIFs exist, and the “balanced portfolio” exemption
does not apply, the Australian resident unit trust will have to keep FIF attribution accounts for each nonexempt FIF in relation to each unit holder. As a result, commonly, Australian resident unit trusts will “bed
and breakfast” their clearly non-exempt FIF interests on 30 June, so as not to hold any FIF attributable
interests on the day attribution takes place i.e. tax year end11.
vii
www.hkifa.org.hk
www.hsbc.com.hk
Press reports as at the time of writing indicate government interest in liberalising Div 6C
viii
ix
© Taxation Institute of Australia & Robert Gordon 2007
6
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
TR2007/D7 attempts to deal with when Part IVA might apply to “bed and breakfasting” where the taxpayer
seeks to realise a loss to offset against gains. This must be one of the rare cases where the ATO doesn’t
want the tax treatment to follow the economic result for Part IVA purposes. As managed funds “bed and
breakfasting” their clearly non-exempt FIFs at year end, this usually results in bring forward net gains
rather than realising net losses, so arguably TR2007/D7 is irrelevant to them x.
1.3.6
Investment by Australian Resident Listed Investment Companies (LICs)
LICs tax treatment had been facilitated by amendment to the tax law (from 1 July, 2001) such that LICs
could benefit from 50% CGT discount available for holdings of more than 12 months, not normally
available to companies: Sub-div 115-D of the 1997 Act. For example, Argo Investments Ltd, and
Australian Foundation Investment Company.
1.3.7
Investment by Australian Resident Partnerships
Except for Australian resident limited partnerships, which are treated as companies (Div 5A), Australian
residents who are members of a partnership which has foreign source income, will be assessable on it,
with a foreign tax credit for any foreign tax paid on that income.
As all but partnerships for lawyers and accountants are limited to 20 members, by the partnership law, an
Australian partnership is not a common collective investment vehicle for Australian portfolio investors, and
therefore won’t be discussed further.
2
CONDUIT STRUCTURES
As the name implies, a conduit structure is one through which income flows. Such a structure may be
(largely) “fiscally transparent” for tax purposes, or it may be “opaque”, but in a country which does not levy
significant tax12.
2.1
Transparent Entities
Whilst a foreign general partnership will often be “transparent” for the purposes of the tax law in the
jurisdiction in which it is formed, the fact that the partners will have joint and several liability, would usually
make such a structure unattractive for collective investment.
There a many countries which have Limited Liability Partnerships (LLPs) and Limited Liability Companies
(LLCs), which, as the names suggest, provide limited liability, but which are also “transparent” for tax
purposes, at least if an election is made to be taxed as though they were general law partnerships. To the
extent the income of the LLP or LLC is foreign and the members of the entity are foreign, the fact that the
country of formation may have high tax rates is not necessarily a concern.
Foreign unit trusts will often also be “transparent” to the extent that viewed from the jurisdiction of
formation, the income is foreign source and the unit holders are foreign. Again, in that case, the fact that
the country of formation may have high tax rates is not necessarily a concern. Australia and to a lesser
extent, New Zealand13 are good examples of trusts with such treatment.
2.2
Trusts and Treaties
Whether a unit trust will be treated by treaty partners as a resident of the other contracting State will
depend on a number of issues, not just whether the treaty partner may regard the trust as “transparent” or
“opaque”14.
Some of Australia’s treaties expressly include trusts as “persons” the subject matter of the treaty e.g. US
(2001 protocol), UK (2003 agreement), Canada (2002 protocol), New Zealand (2005 protocol) xi, and
Mexico (2002 agreement), at least as long as the trust is not only subject to tax in the country of source 15.
x
xi
Although the joint submission by the TIA and others dated 31 August, 2007 seeks assurance that this is so.
See TR2005/14
© Taxation Institute of Australia & Robert Gordon 2007
7
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
Most of Australia’s other more modern treaties don’t deal expressly with trusts xii, but certainly exclude the
possibility of a “person” (which would include a trust, as a body of persons) being a resident if the “person”
is only taxable in the country of source 16.
Other than the countries named above, and assuming that the trust is not only subject to tax in the country
of source, trusts may be the subject of Australia’s treaties depending on the question of “beneficial
ownership”, which will bring in Article 3(2), which refers back to the domestic law of the country asking the
question17.
Invariably the last paragraph in Article 4 of those treaties also specifies that a “person” who is a dual
resident shall be determined to be a resident solely of the country in which their “effective management”
resides.
2.3
Specific Conduit Regimes
Whilst an ordinary company in a high tax country is not going to be suitable as a conduit entity, as usually
foreign source income will be assessable, or dividends may only be able to be paid free of tax to foreign
shareholders if tax is paid first, some countries have enacted specific conduit regimes e.g. recently,
Australia: Sub-div 802-A of the 1997 Act.
Others provide a “participation exemption” on the receipt of dividends (and some also, like Australia,
exempt capital gains on disposal of the participation 18). To the extent that those countries allow dividends
to be paid out of those untaxed profits, without significant withholding tax, the fact that they are generally
high tax countries, won’t prevent them from being effective conduits.
2.4
Tax Neutrality
More common is the use of ordinary companies resident 19 in low tax or effectively low tax countries, to be
a conduit entity.
The driver to use a low or effectively low tax country, is to choose a tax neutral location to bring together
investors from several countries. For example, 80% of the world’s hedge funds are said xiii to be based in
the Cayman Islands. This is so, even though the Cayman Islands have no DTAs (as hedge funds usually
look for gains rather than income, and usually only income is subject to withholding taxes).
The Cayman Stock Exchange specialises in listing of offshore mutual funds, and whilst this may not
provide liquidity in practice (as redemptions by the manager are far cheaper), it does provide some
regulatory comfort, which regulation may in turn allow listing on the Irish or Luxembourg Stock Exchanges.
Whilst any flow-through structure may be described as a conduit, tax deferral is more likely to be possible
if the flow-though of income and capital gains is delayed, subject of course, to the potential application of
the FIF measures.
2.5
Treaty Shopping
A use of conduit that may have nothing to do with obtaining tax deferral, is where the interposed entity has
been interposed in an attempt to “treaty shop” into the country of source of income in order to minimize
source country taxation20.
When the exemptions from the FIF measures, as set out above, are considered, it can be seen that the
interposition of a tax haven or effective tax haven conduit (which is not itself a CFCxiv), will disable all but
Division 3 potential FIF exemptions, as the interest under consideration will not be directly in any exempt
categoryxv.
As most are civil law countries don’t recognize trusts in their domestic law. However, many EU countries are signatories to the
“Hague Convention on Trusts and their recognition” (1 July, 1985)
xii
xiii
Refer www.lowtax.net
xiv
An exempt FIF interest is excluded in calculating the attributable income of a CFC (ss384(2)(ca) & 385(2)(ca)) are not modified by
s431A), but any foreign withholding tax borne by the CFC will be lost as a credit to Australian investors. Also see under heading
“Section 404 Countries”
xv
and the Div 3 (active income) exemption only goes down to the second tier non-resident company.
© Taxation Institute of Australia & Robert Gordon 2007
8
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
Also already noted, Australian fund managers “bed and breakfast” those interests at each year end, to
avoid having to do the FIF calculations, but of course, this has the effect of realising gains which would
otherwise have potentially remained unrealised.
Where the ultimate entities into which investment might have taken place, would not be eligible for FIF
exemption, the interposition of a conduit entity may not make the FIF situation any worse than it would
have been if the conduit had not been used. There may be scope by choice of the right place of residence
of the conduit, to treaty shop into an investee country. This would minimize withholding taxes, so when
income and capital gains are ultimately distributed, the foreign tax borne is minimized21.
It should be noted that for outbound investment from Australia, an objective of minimizing foreign tax is not
a “tax benefit” for the purposes of Part IVA.
Due to the design of the FIF provisions, the most promising use of a conduit is where the income will
attach lower withholding taxes going to the conduit than to Australia direct, and the income is to flow
though the conduit quickly. That is, the object isn’t Australian tax deferral, but reduction of foreign
withholding taxes. This is essentially the issue that arose in the Indofood case, discussed below.
2.6
Entity Categorisation
Memec Plc v IRC [1998] STC 754 dealt with the UK tax characterisation of a German silent partnership.
The approach taken was to analyse the characteristics of the civil law entity, and to equate it as closely as
possible to the common law entity that it most closely resemblesxvi.
The ATO has shown a marked reluctance to tackle this issue. As far as I can find they have not sought to
deal with foreign Foundations22. In relation to Dutch Stichtings, ATO ID 2007/42 reaches the conclusion
they are trusts, based on Harmer v FC of T 89 ATC 5180. In relation to Anstalts, there is no ruling
available but PS LA 2007/7 says at example 2, that an Anstalt “limited by shares”, will be a company.
The concept of a “mutual fund”, which term is used loosely in the investment industry, originally comes
from the use of the term in the US Investment Company Act 1940, and may either be legally a unit trust, or
a company23.
3
TAX HAVENS
There is no universal definition of “tax haven” as such, and often the residents of countries described as
tax havens, pay significant taxes, whereas non-residents may use entities in such a country to derive
foreign source income with no, or effectively low tax rates. See ATO publication “Tax Havens and Tax
Administration” (issued 15 July, 2004).
3.1
Expansion of European Union
Countries in the EU who had effective “ring fenced” preferential regimes e.g. Ireland, and new entrants to
the EU who had preferential regimes for use by foreigners e.g. Malta and Cyprus, have moved to met the
requirements of the EU. That is, whilst the EU can’t dictate their tax rates xvii, member countries still can’t
have preferential regimesxviii.
Some of those countries have responded to the “Old Europe’s” xix horror, by dropping their corporate tax
rates across the board, in Ireland’s case to 12.5% on trading profits, and in Cyprus, to 10% on all profits.
Some recent admissions to the EU from Eastern Europe xx have corporate tax rates of around 15%, and
have sought to align their VAT rate with it.
xvi
As observed by Prof. Burns in his article (at 28) referred to below
Acknowledged as recently as 7 August, 2007 on the OECD website
xviii
Malta / EU announcement of 24 March, 2006
xix
Phrase as coined by former US Secretary of State, Donald Rumsfield, for the German/French axis
xx
Bulgaria 10% from 1 January, 2008; Romania 16% from 2005; Czech Republic announced 15% for 2008
xvii
© Taxation Institute of Australia & Robert Gordon 2007
9
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
However, non-tax regulation can be a “light touch” so as to attract particular types of business in the EU,
e.g. public offer funds management business in Ireland24, and Luxembourgxxi. Compare the attraction of
hedge fund management to the Cayman Islands (non-EU).
3.2
“Harmful Tax Competition”
Alongside the EU, the OECD’s so-called “Harmful Tax Competition” Project 25 has resulted in tax havens
being forced to become more transparent by agreeing to record information on who is using their regimes,
and to share that information with the Revenues of the countries where those investors are resident 26.
Generally this has only been successful against the small island countries xxii, whereas economically
relatively powerful non-OECD countries, such as China (including Hong Kong), Malaysia and Singapore,
are unaffected. Tax preferred arrangements for foreigners only, within OECD members, have been largely
removed, but the tax competition between countries tax systems as a whole, has probably increased,
rather than harmonised27.
Australia has managed to get three island tax havens to enter into Information Exchange Agreements 28
under this pressure i.e. Bermuda, Antigua, and Barbuda. “Knowing your client” anti-money laundering
laws world-wide promoted by the Financial Action Task Force on Money Laundering (FATA) especially,
after 9/11, have also had that effectxxiii.
3.3
Business Profits without a PE
In contrast to the situation where the tax haven entity holds portfolio interests in an investee company in a
source country, a tax haven entity might be used as an ultimate holding company for an active business.
For instance, if there were 20 Australian un-associated investors for an active income project, each of their
interests would only be 5%, and so is a portfolio interest in the tax haven entity.
Business may then be carried on from the tax haven with source countries, which may not be subject to
source country tax, either because (less often) there is a relevant tax treaty, or the source country does
not tax non-resident companies on business profits (compare dividends, interest, or royalties) if they don’t
have a PE in the source country (e.g. UK), or no “trade or business” in the source country (e.g. US).
4
APPLICATION OF TAX TREATIES TO CONDUIT ENTITIES; LIMITATION OF BENEFITS
ARTICLES
Australia has only entered into a few DTAs that seek to limit the benefits of the treaty to parties that have a
significant connection to the contracting State. On the other hand, the US has a policy of not entering into
DTAs unless the treaty contains a “Limitation of Benefits” (LOB) article. Unsurprisingly, Australia’s first
DTA that contained such an article was the 1982 treaty with the US.
The DTA with Russia (which came into effect on 1 July, 2004) contains a more restricted LOB provision,
Article 23, directed at tax preferred regimes that provide more confidentiality than normal.
4.1
Malaysia
The Second Protocol with Malaysia excised entities subject to the Labuan offshore tax regime, from
benefiting under the Australia / Malaysia DTA. This really only has a “one way” impact i.e. for treaty
shopping into Australia.
This is because Australian investment in Labuan entities is not dependent on the DTA, as Labuan entities
do not subject dividends, interest or royalties to withholding, and non-portfolio shareholdings in Labuan
companies continue to benefit from s23AJ. Further, if the business is active, the investment benefits from
the “participation exemption” from capital gains tax: Sub-div 768-G of the 1997 Act.
xxi
Luxembourg (adjoining Belgium, France & Germany) was an EU founding member (& is the seat of the European Court of
Justice), not to be confused with Liechtenstein (between Switzerland & Austria), which is not in the EU.
xxii
Land-locked Liechtenstein is not in the OECD, and is one of the last countries attacked, to be holding out against the Project. The
others are Andorra, Liberia, Monaco & the Marshall Islands
xxiii
In Australia, they are being progressively implemented by the Anti-Money Laundering and Counter-Terrorism Financing Act 2006
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4.2
Investing Offshore into Foreign Flow-Through Structures
Treaty Renegotiation
Traditionally the Australian government’s attitude to treaty shopping was relatively relaxed. There was no
obvious pressure within Australia or from without, to negotiate DTAs with such articles, or for the general
anti-avoidance provision to be applied in cases of treaty shopping 29.
Now that Australia has embarked upon its own conduit regime to attract holding company business, it is to
be expected that States wishing to enter into DTAs with Australia may be more inclined to ask for LOB
articles, although evidence of likely abuse may be necessary before this trend emerges xxiv.
The “most favoured nation” clauses of some of Australia’s treaties xxv will require Australia to renegotiate
several of its treaties, in line with the new US and UK treaties, and the trend there to reduce source
country tax, may put more pressure on Australia to include LOB articles.
In this regard, it is notable that the Treasurer’s announced on 3 August, 2007 a revised treaty with Japan
having been agreed in principle, which is said to contain an LOB article.
Curiously there is no LOB in the DTA with Vietnam, as its tax system is least likely to be comparable to
that of Australia.
4.3
Remittance
Treaties with countries which only tax income or some income on a remittance basis of taxation, usually
expressly limit the benefit of the treaty to income actually remitted e.g. Article 23 of the UK DTA. Also see
Article 2(3) of the Singapore DTA and Article 27 of the Malaysia DTA in this regard.
4.4
Purpose
Since 1994 it has been the policy of the UK to seek to include a more specific anti-treaty shopping
provision in its dividends, interest, and royalty articles, similar to Articles 10(8), 11(9), and 12(7) of the
2003 Australian DTA, which excludes benefit from the DTA where the main purpose or one of the main
purpose of any person concerned with the creation or assignment of the shares, debt-claim, or royalties,
respectively, is to take advantage of the DTA30.
5
CONDUIT ENTITIES AS “BENEFICIAL OWNERS” FOR TREATY PURPOSES
(INDOFOOD CASE [2006] EWCA CIV 158)
Without a specific LOB article, it must be remembered that all treaties have a requirement that interest,
dividends and royalties be “beneficially owned” by the recipient, in order that treaty rates of withholding
apply.
A recent English Court of Appeal case highlights this requirement, which has more often than not, been
overlooked, except where the recipient is a bare trustee or nominee for the beneficial owner.
Whilst the case is not a tax case as such, in that the Revenue authorities of the relevant countries weren’t
parties, the consequence of the case are being taken very seriously in Europe, at least on the issue of
“beneficial ownership”, with perhaps, less concern about the findings of tax residence of the conduit
entities.
5.1
Indofood Facts
In Indofood International Finance Ltd v JP Morgan Chase Bank N.A. London Branch [2006] EWCA Civ
158 (2 March 2006), the Mauritius incorporated plaintiff, Indofood, was a wholly owned subsidiary of an
Indonesian resident company, which wished to raise finance without the borrower being liable to withhold
20% Indonesian tax that would have applied on the interest if there was no relevant treaty between
Indonesia and the lenders. Under the Indonesia/Mauritius treaty the interest withholding rate was 10%.
xxiv
Which may be slow if the ATO does not interpret the new law with its purpose in mind: see ATO ID2005/200 for a startling
example.
xxv
e.g. France Art 27A, Swiss protocol para 4, Italian protocol para 8, Korean protocol para 6, Norway protocol para 1
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Investing Offshore into Foreign Flow-Through Structures
The defendant was the trustee for note holders, on US$280M notes issued by Indofood in the international
market, and which funds were lent essentially back-to-back to the parent company. Due to perceived
general treaty abuse, Indonesia cancelled the Indonesia/Mauritius treaty. Under the terms of the notes, if
the treaty was cancelled, the notes were to be redeemed, unless there were “reasonable measures”
available to continue to limit the Indonesian withholding tax to 10%.
Due to interest and currency rate changes, it was in the interest of Indofood’s parent (which was
guarantor) for the notes to be redeemed, but not in the interest of the note holders. The defendant trustee
required a declaration that there were no reasonable measures available before agreeing to redeem the
notes.
The only alternative put before the Court, was the interposition of a Dutch company in between Indofood
and its Indonesian parent, the alleged effect of which would be to limit the Indonesian interest withholding
tax to 10% under the terms of the Indonesia / Netherlands DTA.
5.2
Indofood Findings
For present purposes, the Court had to determine whether such Dutch company would be the “beneficial
owner” of the interest under the DTA; whether the Dutch company would, as required, be a resident of
Holland, and if the answer to both those was affirmative, whether those steps were reasonable to adopt.
On the first question, the Chancellor (with whom the other two members of the Court agreed), held at para
42:
“The fact that neither the Issuer nor Newco was or would be a trustee, agent or nominee for the
noteholders or anyone else in relation to the interest receivable from the Parent Guarantor is by no
means conclusive. Nor is the absence of any entitlement of a noteholder to security over or right to
call for the interest receivable from the Parent Guarantor. The passages from the OECD commentary
and Professor Baker's observations thereon show that the term ‘beneficial owner’ is to be given an
international fiscal meaning not derived from the domestic laws of contracting states. As shown by
those commentaries and observations, the concept of beneficial ownership is incompatible with that of
the formal owner who does not have ‘the full privilege to directly benefit from the income’.”
On the second question, the Chancellor held that it was likely that the Dutch company would have
“effective management” in Indonesia, and as such, would not be a resident of Holland under the DTA 31.
Whilst the Chancellor’s finding on residence is open to serious doubt in the light of Wood v Holden (HM
Inspector of Taxes) [2006] EWCA Civ 26 (26 January 2006), the other two members of the Court found it
unnecessary to decide the residence point (without referring to any authority, and the Chancellor himself
did not refer to Wood v Holdenxxvi), but were of the view that in any event it would not be reasonable to
require the borrower to take such steps.
5.3
Luxembourg
In an article in the International Finance Law Journal, Supplement – The 2007 Guide to Private Equity and
Venture Capital, under the heading “Looking back, moving forward - Highlights of last year” Simon Skinner
and Simon Yates write:
“Private equity-backed deals are often implemented using structures including a Luxembourg
holding or finance company…Luxembourg…has an extensive tax treaty network (including a
treaty with the UK which, being old, does not contain a treaty shopping provision restricting
benefits where an entity is established in Luxembourg purely to take advantage of the treaty).
…The Indofoods decision caused great concern in the securitization markets, where the use of
conduit companies is widespread…However, it is also potentially relevant in the private equity
sphere due to the popularity of Luxembourg holding companies. If a Luxembourg company lends
funds into a UK group, it will be important to ensure interest can be paid without withholding tax,
and reaching this position might require a treaty claim.”
xxvi
Which referred with approval to Esquire Nominees Ltd v FC of T (1971) 129 CLR 177
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5.4
Investing Offshore into Foreign Flow-Through Structures
HMRC Guidance
HM Revenue & Customs has now published guidance on the effect of Indofood. The guidance essentially
focuses on whether there has been what it perceives as treaty abuse i.e. if interest was effectively
destined for onward payment, especially to a party who would have incurred a higher UK withholding tax
liability if the payment had been made directly from the UK to their country of residence 32.
So in a case where a special purpose vehicle (SPV) in an effective low tax treaty country raised the funds
to lend into the UK by way of a quoted Eurobond, such that there would be no UK withholding in any
event, this would not be an abuse of the treaty33.
The published guidance restricts itself to the issue of “beneficial ownership” of interest. If the SPV raised
the funds by way of equity in the SPV, and then lent the money at interest, so that the character of the
income would change into dividend income in the hands of the portfolio investor, it should not have an
Indofood problem, especially if the timing and the quantum of the dividend was in the discretion of the
SPV.
In fact, such a SPV raising equity, and investing to receive dividends and royalties, should likewise not
have an Indofood problem if the payment and timing of dividends to shareholders in the SPV is in the
discretion of the SPV.
6
FOREIGN HYBRIDS LLCS LLPS DIV 830
A foreign “limited liability company” (LLC), even if its members are treated for tax purposes as thought
they were partners in a partnership in the country of formation, are treated as a foreign company, and so
CFC and FIF provisions applied to its members, unless Div 830 of the 1997 Act applies. Div 830 first came
into operation on 30 June, 2004.
Foreign Limited Liability Partnerships (LLPs) are also treated as though they are companies by Div 5A of
Part III of the 1936 Act, even though they were in the form of partnerships in the country in which they
were formed, and treated as such for tax purposes in that country, unless Div 830 applies.
For example, most US LLPs are unincorporated, but UK LLPs are incorporated under the Limited Liability
Partnership Act 2000. UK LLPs are in wide-spread use in the professions and the venture capital
industryxxvii.
Initially Div 830 was expressly limited in application to US formed LLCs and LLPs, with scope to expand
its operation to such entities formed in other countries, by regulationsxxviii. UK LLPs have recently been
added to Div 830 by regulation (830.15.01).
Under s830 the Australian resident members with a non-portfolio interest in a US LLP or LLC, or a UK
LLP, which are not taxed as a resident entity in any foreign country, are taxed in Australia as partners
rather than shareholders in a foreign companyxxix. Accordingly, they will not have CFC interests in the LLP
or LLC as such34.
7
SECTION 485AA ELECTION
Under s830 the Australian resident members with a portfolio interestxxx in a US LLP or LLC, or a UK LLP,
which are not taxed as a resident entity in any foreign country, and who make an election under s485AA
of Part XI, are taxed in Australia as partners rather than shareholders in a foreign company. Accordingly,
they will not have FIF interests in the LLP or LLC as such.
8
EXEMPTION FROM FIF FOR CERTAIN US FIF INTERESTS
Under Div 8 of Part XI, where a US corporation, LLP, LLC, Regulated Investment Company, Real Estate
Investment Trust (REIT), or “common trust fund” is subject to full US tax i.e. to be treated as “opaque”, an
xxvii
See the membership of the British Venture Capital Association (www.bvca.co.uk)
via s830-15(3)
xxix
s830-10(1)(c) & 830-15(1)(b)
xxx
via s830-10(2) or 830-15(5)
xxviii
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Investing Offshore into Foreign Flow-Through Structures
Australian resident entity with a membership interest is exempt from FIF attribution, subject to certain
conditions.
Those conditions are that the taxpayer’s interest in the US entity is held for the sole purpose of investing in
a business conducted in the US, or real property located in the US, and the total value of non US source
income and gains, non-resident US FIF interests, and real property located outside the US does not
exceed 5% of the total value of all interests 35.
This exemption has been referred to as politically motivated, in that it has been extended to the US only,
when other countries may have suitable low deferral regimes. It has been said that the concession was
extended as part of the build up to the Australia/US “free trade agreement”.
9
EXEMPTION FROM FIF FOR COMPLYING SUPER FUNDS
As a complying superannuation fund has a tax rate of 15% (and 10% on capital gains), the risk of deferral
from foreign portfolio investment was thought to be too low to continue to include complying super funds
as FIF attributable taxpayers, from 1 July, 2003: Division 11A of Part XI.
This is big news when combined with the superannuation “simplification” package introduced with effect
from 1 July, 2007. For many persons contemplating a portfolio investment offshore, provided the
proportion of super fund asset that will be represented by FIF interests does not exceed the prudent level
required for SIS Act purposes, a self-managed super fund (SMSF) to invest offshore may be ideal.
That Division also allows complying super funds to pool their interests through “fixed trusts”, but that
exemption is fraught with difficulty due to the on-going concerns36 about the definition of “fixed trust”.
10 BOT REVIEW OF ANTI-DEFERRAL REGIMES
To understand the scope of the Review, it is first necessary to refer in a little more detail to the CFC and
Transferor Trust regimes.
10.1 Controlled Foreign Company
Where five or fewer un-associated Australian resident parties hold 50% or more of the shares of a nonresident company, that company will be a CFC, with attribution of “attributable income” to “attributable
taxpayers”: s456 of Part X.
Broadly, an “attributable taxpayer” is an Australian resident taxpayer with at least a 10% control interest in
the CFC: s361 (1). The attribution of particular (generally passive) items under the CFC regime uses a
“branch equivalent” method i.e. attributes actual income and realised gains of the CFC, with a credit for
foreign tax. On payment of a dividend, previously attributed income is “non-assessable non-exempt”
income: s23AI.
Whilst there is the concept of a Controlled Foreign Trust xxxi (CFT) in Part X, its purpose since 1 July, 2004
is with one exception37, to trace control and perform attribution from CFCs, rather than to attribute income
to an Australian resident directly from the net income of the CFT.
10.2 Transferor Trust
Division 6AAA (the “transferor trust” measures), performs the attribution where there has been a transfer
of property or services to a non-resident trust, but importantly, transfers on arm’s length terms such as a
normal subscription for units at market value, to “public unit trusts”, are excluded from Division 6AAA, and
except where there are five or fewer unit holdings with 50% or more of the entitlementsxxxii, provided that
there are at least 50 unit holders in total xxxiii, any attribution will still take place under the FIF measures,
rather than the “transferor trust” provisions 38.
xxxi
ss 342 & 361(2)
s 342(b)
xxxiii
s 102AAF
xxxii
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Investing Offshore into Foreign Flow-Through Structures
10.3 Section 404 Countries
Due to the amendments effective 1 July, 2004, it became possible to overcome the application of the FIF
provisions on portfolio dividends from “listed countries” and previously “limited exemption listed countries”,
by interposing a CFC. On 23 December, 2004, the Treasurer announced a “section 404 review” and
released a discussion paper. It is expected that this avenue will be closed off 39, but the timing of any
amendment is still unknown.
10.4 BOT Review
So the current situation is that there are four distinct anti-deferral regimes:




CFC (Part X)
FIF (Part XI)
Transferor Trusts (Div 6AAA)
Deemed present entitlement (ss96B & C)
In the case of a trust, which of the latter three applies in a particular case, is extremely complex with
different treatments in each, as will be seen below in the example given of a UK unit trust.
Further, only companies are entitled to a potential “active income” exemption, and not all taxpayers who
can perform a “branch equivalent” calculation are allowed to use it. Also, the exemptions and de minimus
rules are inconsistent between the regimesxxxiv.
At the request of the government, The Board of Taxation conducted a review of the anti-deferral regimes,
and in May, 2007, the “Review of Foreign Source Income Anti-Tax-Deferral Regimes-Discussion Paper”
was released. It was not definitive as to what should be done, but sought further submissions.
In summary, from a paper, “Harmonization of Australian’s Anti-Deferral Regimes” by Prof. Burns 40,
presented to IFA Melbourne, 12 June, 2007, and the submissions of the Law Council of Australia and the
Taxation Institute of Australia on 5 & 6 July, 2007, respectively, it is clear that there is largely consensus
that:





the active income exemption should be available to trusts;
as per the government’s un-enacted announcement, ss96B & C be repealed (which involved all
non-fixed trusts falling within Div 6AAA, and all fixed trusts falling within FIF);
branch equivalent calculations should be available to all who have the information to do them, at
their election;
that exemptions and de minimus provisions should be uniformxxxv; and
the regimes should be consolidated if at all possible, with acknowledgement that dealing with
non-fixed trusts involves extra difficulty
It is likely that the anti-deferral regime review may be stalled by the 2007 Federal Election, although
Taxation Laws Amendment (2007 Measures No 4) Bill 2007 does pre-empt the Review in one important
issue, by providing that some FIF taxpayers may do a “branch equivalent” calculation 41.
11 EXAMPLES OF CONDUITS
Whilst care has been taken in setting out the relevant foreign law in the following examples, no assurance
can be given concerning accuracy.
As there is usually a dichotomy between Retail investors making their investment through an Australian
resident unit trust, and a HNWI potentially investing directly into an offshore fund, the examples focus on
the issues for the HNWI.
xxxiv
xxxv
The de minimus for FIF is on an interest with a market value less than $50,000 (un-indexed since 1993), under s515
And de minimus levels indexed
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Investing Offshore into Foreign Flow-Through Structures
For Australian Retail investors in Australian unit trusts, as it is the practice of Australian fund managers to
“bed and breakfast” their clearly non-exempt FIF interests immediately before year end, there may be little
tax deferral available.
11.1 Conduit in source country
The UK is rarely seen as a potential conduit, except where the underlying profits have been subject to
comparable tax to the UK, because it has a credit system in relation to foreign dividends, rather then the
exemption system found in a number of EU countries.
However, it has been proposed to consider introducing a “participation exemption” in the UK probably from
2009, which may make it a more common conduit location: “Taxation of the foreign profits of companies: a
discussion document”, HM Treasury/HM Revenue & Customs, June, 2007.
However, there are structures for investment in the UK other than ordinary companies, which are conduits
within the UK.
11.1.1 UK LLP
Take for example, a UK LLP with 20 unrelated Australian HNWIs as equal members (i.e. 5% each, being
a portfolio interest), for investment into a UK active business. The UK LLP, which is incorporated, will be a
foreign hybrid limited company for the purposes of Div 830. The members each make a s485AA election
so FIF won’t apply to their membership interest. The limited members will have limited liability. They will
be taxed personally as partnersxxxvi taxed in UK.
As the members derive the UK source income, they are taxed in Australia on it, with a credit for the UK tax
paid by them. That is, there is no tax deferral, as the Australian tax liability is as partners.
Unless the UK tax paid exceeded 45%, the maximum tax payable is limited by the foreign tax credits, to
the Australian top marginal rate, plus Medicare Levy. 50% CGT discount is available on capital assets
held by the LLP for more than 12 months.
Had the individuals made a like investment in a UK company, the company would have paid 30% UK tax,
and the dividend would have then been subject to up to 46.5% in the hands of the HNWIs.
That is, an overall tax rate of some 62.55%, as the UK tax paid by the company is not creditable in the
hands of the Australia HNWIs. Even if the company was entitled to the 20% tax rate applicable to “small
companies” (less than £300,000 profit p.a.), the overall rate of tax would still be 57.2%.
11.1.2 UK private unit trust
Take for example, a UK unit trust with 20 unrelated Australian HNWIs as equal unit holders (i.e. 5% each,
being a portfolio interest). This would not be a “collective investment scheme” regulated by the Financial
Services Authority i.e. not a public offer unit trustxxxvii.
As 5 or few unit holders will not hold less than 50%, the trust is not a CFT, but as there are less than 50
unit holders, it is not excluded from Div 6AAA, and hence is excluded from FIF. If the trustee accumulates
the UK income42, as it is “subject to tax” in the UK on it43, there is no attributable amount under s102AAU.
If the UK tax rate44 is less than that applicable to the Australian HNWIs, then there will be a deferral of tax
until the unit holders are made entitled, at which time s99B will apply to tax them on it, less a credit for UK
tax paid by the trustee. There is also an interest charge to compensate the ATO for delay in the amount
becoming taxable arises under s102AAM.
xxxvi
Section 118ZA of the Income and Corporation Taxes Act 1988 & s863 Income Tax (Trading and Other Income) Act 2005
A public offer unit trust is taxed as though the trustees were a company: s468(1) ICTA 1988, but at the “lower rate” for income
tax (20%): s468(1A). In contrast, the trustees of a private unit trust are taxed as trustees: s469(2) ICTA 1988, and tax paid by the
trustees is deemed to be paid by unit holders on distribution: s550 ITTOIA 2005.
xxxvii
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Investing Offshore into Foreign Flow-Through Structures
11.1.3 UK REIT
Under pressure from the UK property industry, having to compete with US REITs, and to a lesser extent,
Australian property unit trusts, the UK introduced a regimexxxviii described as for “Real Estate Investment
Trusts” (REITs), which commenced 1 January, 2007.
The “transparent” tax treatment is afforded only to listed UK resident property companies that met several
criteria, and so the REIT nomenclature is a bit misleading.
No corporate tax is payable by a UK REIT, as long as there is 90% profit distribution. Non-corporate
shareholders are taxable on distributions as though the distribution was rent rather than dividends.
Withholding of tax is made on distributions.
The main conditions are that the UK REIT not be an open-ended investment company; not be a “close”
company, and have only one class of ordinary shares. The UK REIT must have at least three rental
properties (commercial or residential), and that no one property be valued at more than 40% of the total.
There are limits to the extent the UK REIT can gear its investments, and on the extent of its non-rental
activities. There are already several UK REITs listed on the London Stock Exchangexxxix. UK property
companies wishing to convert to REIT status suffer a 2% of market value charge to compensate the
Revenue for converting status.
It would appear that a stock exchange listed UK REIT that invests only in commercial property should
qualify for exemption under Division 7 of the FIF provisions.
As the shareholder suffers the foreign tax personally on actual distribution, the foreign tax will be
creditable. Due to the requirement to distribute 90% of the REITs income, they will not be a tax deferral
vehicle but should be attractive to Australian portfolio investors wishing to gain an expose to UK
commercial realty in a tax efficient and relatively liquid form.
11.1.4 UK OEICs
An Open-Ended Investment Company (OEIC) is a “collective investment scheme” regulated by the
Financial Services Authority45. They may invest in or outsidexl the UK. They compete directly with public
offer unit trusts, and European funds called UCITS, of which the FCPs (Fonds communs de placement)
and SICAV (Société d’investissement à capital variable) are examples, available in the UK (and Hong
Kongxli).
Whilst the tax rates payable by OEICs are the same as a public offer unit trustxlii, that is, 10% on funds
invested in sharesxliii, and 20% on income from bonds, property or cash, as the OEIC is a company, the
Australian resident portfolio shareholder isn’t entitled to a foreign tax credit on that tax paid by the
company, whereas an Australian resident portfolio unit holder will get a foreign tax credit for tax paid by
the trustee of a unit trustxliv. There is no withholding tax on distributions from an OEIC or public offer unit
trust, to an individual, or foreign trustees for individuals, not ordinarily resident in the UK.
Whilst OEICs and public offer unit trusts are not taxed on UK capital gainsxlv, that is of no relevance where
the fund is a public offer fund with more than 50 unit holders or shareholders, and the FIF provisions will
apply to their interest.
xxxviii
Finance Act 2006 Part 4
e.g. Land Securities, British Land, Hammersen, Liberty International, Brixton, Great Portland Estates, Primary Health Properties,
Workspace, Slough Estates
xl
For example, from the website (www.invesco.co.uk), see INVESCO PERP Hong Kong & China Fund
xli
The HSBC website lists Alliance Bernstein offering both vehicles with SFC authorisation.
xlii
Technically, “authorised unit trusts”, defined in s468(6) ICTA 1988 with reference to s243 of the Financial Services and Markets
Act 2000. OEICs are equated to authorised unit trusts by the Open-Ended Investment Companies (Tax) Regulations 1997
xliii
20% less 10% tax credit on dividend
xliv
ss6AB(4) & 6B(2A)
xlv
and such gains are listed (Item 212 of Schedule 9 of the Income Tax Regulations) as EDCI
xxxix
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Investing Offshore into Foreign Flow-Through Structures
As unrealized capital gains of the fund will be reflected in the unit or share price, and as the market value
method is the most likely method of “attribution”, the benefit of the UK not taxing realized gains is lost.
11.2 Conduit for both source and intermediary country
In relation to Europe, Greg Lazarus has dealt in his paper, with Ireland’s “Common Controlled Funds”
(CCF) and the similarly structured Luxembourg “Fonds Commun de Placement”, and their potential
characterization for Australian purposes, and has expressed the conclusion the CCF is likely to be treated
as a limited partnership46.
In Asia, Singapore has double tax agreements with the following countries that do not have agreements
with Australia47: Bahrain, Bangladesh, Brunei, Bulgaria, Cyprus, Egypt, Israel, Kuwait, Latvia, Lithuania,
Luxembourg, Mauritius, Mongolia, Portugal, and Turkeyxlvi.
11.2.1 Singapore “start-up” company
Take for example, a Singapore “start-up” company (for which no Ministerial approval is required) to
commence business based in Singapore, on 1 January, 2008, with 20 equal shareholders, being
Australian HNWIs i.e. 5 % each, being a portfolio interest. Its business may benefit from treaty relief for
not having a PE in source countries,
From 1 January, 2008, the Singapore corporate tax rate will be 18%, but with such a company, the first
S$100,000 will be tax free, and the next S$200,000 half exempt, so on an annual net income of
S$500,000, the effective tax rate in Singapore on that level of income will be 10.8%.
There is no dividend withholding tax and no longer a tax “top up” required when paying a dividend out of
untaxed income. The FIF regime will apply, but as the business will have more than 50% of its assets
involved in an active business (using the balance sheet method), there will be no attribution. The profits
are reinvested in the business (in active assets).
Whilst there will be no credit for the share holders for the 10.8% Singapore tax paid, the longer the
deferral, the more valuable the lower tax rate is to allow the business to “snowball”.
11.2.2 Singapore LLP
Take for example, a Singapore LLP, which is in law a partnershipxlvii, and in which the partners are taxed
as partners in Singapore, with 20 unrelated Australian HNWIs as equal partners (i.e. 5% each, being a
portfolio interest), for investment into a business based in Singapore.
As it is “fiscally transparent”, for Singapore treaty purposes, it is assumed it won’t get source country treaty
relief, but in some countries, the domestic law does not provide for a tax liability unless there is a PE in
source country e.g. UK, or no “trade or business” in the US.
The Singapore LLP will be a foreign hybrid limited partnership for the purposes of Div 830. The members
each make a s485AA election so FIF won’t apply to their membership interest. The limited members will
have limited liability. They will be taxed personally as partners taxed in Singapore.
As the members derive the Singapore LLP income, they are taxed in Australia on it, with a credit for the
18% non-resident Singapore tax paid by them. That is, there is no tax deferral, as the Australian liability is
as partners.
Unless the Singapore tax and other foreign tax paid exceeded 45%, the maximum tax payable is limited
by the foreign tax credits, to the Australian top marginal rate, plus Medicare Levy. Australian 50% CGT
discount is available on capital assets held by the LLP for more than 12 months. There is no CGT in
Singapore, although speculative profits are treated as ordinary income.
xlvi
xlvii
Australia is apparently negotiating a DTA with Turkey
Limited Liability Partnerships Act 2005, effective from 11 April, 2005
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Investing Offshore into Foreign Flow-Through Structures
11.3 Conduit in intermediary country
The Malaysian Federal Territory of Labuan, is an example of an effective tax haven jurisdiction, which
caters for offshore business through a variety of different business structures formed and taxed under
specific Federal legislation.
However, it is somewhat unique in that most of Malaysia’s DTAs may be available, unlike most pure tax
havens, which have no or very limited treaty coverage. Nor is it referred to in the ATO’s “Tax Havens and
Tax Administration” paper.
Malaysia has double tax agreements with the following countries that do not have agreements with
Australia48: Albania, Bahrain, Bangladesh, Egypt, Jordan, Kuwait, Kyrgyzstan, Luxembourg, Mauritius,
Mongolia, Namibia, Pakistan, Seychelles, Sudan, Turkey, United Arab Emirates, and Uzbekistan.
Also, the terms of the treaty with Poland are far more favorable than Australia in that there is 0% dividend
withholding tax compared to 15% in the treaty with Australia 49.
11.3.1 Labuan company
A company formed or registered in Labuan, is liable under the Labuan Offshore Business Activity Tax Act
1990 (LOBATA), to 3% tax on audited profit (assuming it has some trading income), or upon election, to a
flat tax of RM20,000. A non-trading company is not audited and isn’t taxable under LOBATA.
All but eightxlviii of Malaysia’s DTAs may be available. Those which aren’t have specified that entities
subject to LOBATA are excluded. The Malaysian Budget delivered on 1 September, 2007 has specified
that from 1 January, 2008, companies formed in Labuan may elect to be taxed as ordinary Malaysian
companies under the Income Tax Act 1967.
11.3.2 Malaysian company
An ordinary Malaysian company is subject to exchange control, but is not taxable in Malaysia on foreign
source income, and no tax is payable on dividends paid to non-resident shareholders50.
The OECD Commentary acknowledges countries with territorial system of taxation can’t be excluded from
benefit of DTAs on that basis51.
Obviously, ordinary Malaysian companies are not excluded from any of Malaysia’s DTAs, compare
LOBATA companies are excluded from eight of Malaysia’s DTAs.
If the implementation of the Budget announcement that Labuan companies can elect to be taxed as
ordinary Malaysian companies, is limited to tax, then a Labuan company so electing should not be subject
to exchange control, and can continue to benefit from the liberal regulatory regime apply to Labuan
entities.
11.3.3 Malaysian “satay”
A Malaysia “satay” is an ordinary Malaysian company wholly owned by a Labuan, Malaysia company. The
satay overcame the Labuan treaty problem with eight countries.
The ordinary Malaysian subsidiary still has a Malaysian exchange control issue, which was partly solved
by paying through regular dividends to the Labuan parent. The satay requires express approval of
LOFSA52.
However, as the satay creates another tier in the structure, it will disable potential reliance on the active
income exemption (Div 3), unless it is the ordinary Malaysian company which carries on the business.
xlviii
Australia, UK, Japan, The Netherlands, Sweden, Finland, Norway, Luxembourg
© Taxation Institute of Australia & Robert Gordon 2007
19
Robert Gordon
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Investing Offshore into Foreign Flow-Through Structures
11.3.4 Labuan CLG
Labuan company limited by guarantee (“CLG”) is provided for by Labuan company law. TD2007/20 says a
CLG is capable of being a CFC interest but does not saying anything about whether it is capable of being
an FIF interest.
If there are 11 equal members who are un-associated for tax purposes, the CLG will not be a CFC interest
(being less than 10%, so that five or fewer Australian residents do not have 50% or more of the
membership interests).
Further, the membership interests are not within the definition of FIF interests, which only encompass
actual issued shares. It is still possible for the CLG to pay dividends in due course, to members.
11.3.5 Labuan unit trust
Take for example, a Labuan unit trust. Whether or not the unit holders are presently entitled to the net
income in each year, it is taxed as a LOBATA company.
Assume the unit trust has 20 unrelated Australian HNWIs as equal unit holders (i.e. 5% each, being a
portfolio interest). As 5 or few unit holders will hold less than 50%, the trust is not a CFT, but as there are
less than 50 unit holders, it is not excluded from Div 6AAA, and hence is excluded from FIF.
If the trustee accumulates offshore income, the unit holders will be attributed on a “branch equivalent”
basis under s102AAU of Div 6AAA, with a credit for foreign tax paid by the trustee. As tax deferral isn’t
available, it would probably make more sense for the trustee to distribute the income.
The effect of the structure will then be two-fold. Firstly, the unit holder will be entitled to a foreign tax credit
for all foreign tax paid by the trustee xlix, which would not have been the case if the investment had been in
a Labuan company.
Secondly, the Labuan unit trust53, being taxed in Malaysia as a company54, should be entitled to the
benefit of all but eight of Malaysia’s DTAs, subject to the Indofood argument that dividends interest and
royalties derived by the Labuan unit trust are not beneficially owned by it.
Business profits should not have that problem, as the term beneficially owned is not used in the business
profits articles of DTA. In any event, if the trustee has a discretion to accumulate or distribute income of
the trust, the “beneficial owner” in the Indofood sense, is less likely to be the unit holder.
Buy-back of units is treated for Australian purposes as a CGT event which will enable a 50% CGT
discount for holdings of more than 12 months by individuals and trusts.
11.3.6 Labuan LLP
Take for example, a Labuan LLP, which is in law a partnership l, but which is taxed as a LOBATA
companyli, with 20 unrelated Australian HNWIs as equal partners (i.e. 5% each, being a portfolio interest),
for investment into an e-commerce business selling computer software, based in Labuan, but for which
most of the income arises from selling programs to other countries.
As it is “opaque”, for Malaysian treaty purposes, it should get source country treaty relief from all but eight
of Malaysia’s treaty partners.
In some countries, there is no tax liability unless there is a PE in source country e.g. UK, or no “trade or
business” in the US.
xlix
Section 160AF(1)
Labuan Offshore Limited Partnerships Act 1997
li
LOBATA includes a Labuan LLP within the definition of “offshore company”.
l
© Taxation Institute of Australia & Robert Gordon 2007
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Robert Gordon
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Investing Offshore into Foreign Flow-Through Structures
The members interest in the LLP will be an FIF interest (as it is deemed to be a company for Australian
purposes), but as the business is active, so there is no FIF attribution.
The limited members may have limited liability even outside of Malaysia, at least in common law countries,
on the basis of the English Court of Appeal decision of Johnson Matthey and Wallace Ltd v Ahmad
Alloush (1985) 135 NLJ 1012.
11.3.7 Labuan Mutual Funds
Labuan Mutual Funds55 may be companies, LLPs or unit trusts. There are two types of fund. A private
fund must have no more than 100 investors, or any number if their investment is at least RM500,000.
There is no prescribed limit to a private fund’s investments, so it may be in essence, a “hedge fund”. A
public fund is one in which subscription is invited from the public. It is limited in the risk it can take through
the type and concentration of asset class it can hold, and limits on its gearing. Both types of fund will be
subject to FIF attribution.
11.3.8 Cyprus company
Cyprus is a EU member with a flat 10% corporate tax rate56. It has an extensive treaty network. For
example, often interest and royalty withholding tax in the EU is 0% or 5%.
There is no tax on payment of dividends to non-resident shareholders of a Cyprus company, even outside
the EU.
Cyprus has double tax agreements with the following countries that do not have agreements with
Australia: Belarus, Bulgaria, Egypt, through former USSR treaty (Armenia, Azerbaijan, Kyrgyzstan,
Moldova, Tajikistan, Ukraine, Uzbekistan), Kuwait, Lebanon, Mauritius, Russia 57, Syria, Seychelles,
through the former Yugoslavia treaty (Serbia & Montenegro, and Slovenia).
Because Cyprus is an EU member, the EU parent / subsidiary directive has the effect that most dividend
withholding tax on non-portfolio dividends from EU member states to Cyprus is 0%.
11.3.9 New Zealand accumulation trust
TR2005/14 specifies that a NZ Foreign Trust exempt on its foreign source income by sHH4(1) of the
Income Tax Act 2004, will not be treated as a NZ resident for treaty purposes lii.
The particular type of trust in question has at no time during the relevant income year, a settlor resident in
NZ. As the Australia / New Zealand treaty expressly excludes from residence an entity which is only
subject to tax on domestic source income, the ruling says such a NZ trust is not a resident of NZ entitled
to the benefits of the DTA.
Presumably an Australian resident trust is entitled to the benefits of the NZ treaty, because the trustee is
not only subject to tax on domestic source income, if the income is accumulated and taxed to the trustee
under s99A. This is the ATO position in effect stated at para.13 of the ruling.
11.3.10
New Zealand accumulation unit trust
Take for example, a NZ unit trust with 20 unrelated Australian HNWIs as equal unit holders (i.e. 5% each,
being a portfolio interest).
As 5 or few unit holders will hold less than 50%, the trust is not a CFT, but as there are less than 50 unit
holders, it is not excluded from Div 6AAA, and hence is excluded from FIF.
If the trustee accumulates the NZ and foreign income58, and is “subject to tax” in NZ on it 59, there is no
attributable amount under s102AAU.
lii
also see TA2004/4
© Taxation Institute of Australia & Robert Gordon 2007
21
Robert Gordon
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Investing Offshore into Foreign Flow-Through Structures
If the NZ tax rate60 is less than that applicable to the Australian resident individuals, then there will be a
deferral of tax until the unit holders are made entitled, at which time s99B will apply to tax them on it, less
a credit for NZ tax paid by the trusteeliii.
There is also an interest charge to compensate the ATO for delay in the amount becoming taxable, under
s102AAM.
11.4 Conclusion
Whilst any flow-through structure may be described as a conduit, tax deferral is more likely to be possible
if the flow-though of income and capital gains is delayed by the conduit being “tax opaque”, subject of
course, to the potential application of the FIF measures. If the conduit is “tax transparent”, then deferral
won’t be available, but more use can be made of foreign tax credits.
Retail investors
Retail investors in Australia, are most likely to make portfolio investment in an Australian unit trust. Retail
investors are generally looking for the protection of an Australian regulated fund, which passes the due
diligence to the manager of the Australian fund. Australian fund managers generally hedge the funds
assets to the Australian dollar.
Australian public offer unit trusts have an increasing choice of investments which should be FIF exempt
e.g. US entities (Div 8) or listed UK REITs (Div 7).
Australian unit trusts
Due to the compliance burden of the FIF regime, most Australian unit trusts will “bed and breakfast” their
clearly non-exempt FIF interests at year end.
If the non-exempt FIF interest is in a source country, and is structured as a “tax transparent” conduit in the
source country e.g. US LLC, US LLP, UK LLP, UK public offer unit trust, then the Australian trustee will at
least be able to pass on a credit for the foreign tax borne by the Australian trustee.
If the investment is going to be into what would be a non-exempt FIF interest, if held directly, and is to be
in a source country that doesn’t have a suitable “tax transparent” conduit, then a suitable intermediary
country conduit (treaty shopping), may at least minimize foreign withholding tax e.g. Luxembourg OEICs liv.
As foreign taxes paid by a “tax opaque” conduit in a source or intermediary country, are not creditable to
the Australian investor, the minimizing of foreign tax increases the return to the Australian investor.
HNWI direct into offshore fund
Sometimes, but not always in contrast to the Retail investor, the HNWI may be prepared to make a
wholesale investment direct into an public offer offshore fund. The HNWI investing directly into an offshore
public offer fund may still be able to obtain some tax deferral, by investing in well chosen passive exempt
FIF interests. There is still the FIF compliance cost to consider.
HNWI FIF active income exemption
If the HNWI is going to invest in what would be an active income exempt FIF interest (Div 3 – using the
balance sheet method), then tax deferral will be available. Further, as the active income exemption can be
met down two foreign tiers, the HNWI can treaty shop through an effective low tax conduit holding entity
e.g. Singapore, Malaysian, or Cyprus company that has a trading subsidiary in a source country. This may
minimize foreign withholding tax.
liii
liv
Confirmed in ATO ID 2007/48
See reference to the JFCP Emerging Markets Equity Fund in 1.3.4 above, & to the DB iGAP Fund in endnote 3
© Taxation Institute of Australia & Robert Gordon 2007
22
Robert Gordon
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Investing Offshore into Foreign Flow-Through Structures
HNWI non-exempt FIF interest
If the HNWI is going to invest in what would be a non-exempt FIF interest, if held directly, and is to be in a
source country that doesn’t have a suitable “tax transparent” conduit, then a suitable intermediary country
conduit (treaty shopping), may at least minimize foreign withholding tax e.g. Singapore, Malaysian, or
Cyprus company. As foreign taxes paid by a “tax opaque” conduit in a source or intermediary country, are
not creditable to the Australian investor, the minimizing of foreign tax increases the return to the HNWI.
Transparent entity HNWI foreign tax credits
If the HNWI is going to invest in what is a non-exempt FIF interest in a source country, and it is structured
as a “tax transparent” conduit in the source country e.g. US LLC, US LLP, UK LLP, UK private unit trust,
NZ unit trust, or Singapore LLP, then the HNWI will at least be able to get a credit for the foreign tax borne
by the HNWI.
SMSFs
SMSFs are likely to be very popular vehicles for FIF investment, due to their outright exemption from the
FIF regime.
DISCLAIMER
This paper is not intended to be advice, and should not be relied on as such.
28 September, 2007
Robert Gordon, FTIA Barrister, has practiced in tax since 1979, initially as an accountant with Big Four
firms (he is now a FCPA), then as a solicitor, becoming a tax partner at Corrs Chambers Westgarth. For
the last 15 years he has been a member of the NSW Bar specializing in tax, with a special interest in
international tax. He holds an LLM from Monash University, and is on the Law Council tax sub-committee.
He was admitted as a solicitor in England & Wales in 1989. In 2006 he had a one year sabbatical in
London where he studied international tax. He now also has chambers in Melbourne.
BIBLIOGRAPHY & DETAILED REFERENCE
1
From its website: www.platinum.com.au, its share funds all appear to be managed from Australia into offshore
listed shares.
2
From its website: www.invesco.com.au, its funds investing offshore, all appear to be managed by group companies
outside Australia, and its offshore share funds appear to invest in offshore listed shares.
3
E.g. Deutsche Asset Management (Australia) Limited, is not listed in Australia, and is part of the Deutsche Bank
AG group, listed in Germany. From its website: www.am.australia.db.com, for example, its Deutsche Global Alpha
Fund is invested in the DB iGAP Fund domiciled in Luxembourg, and in its RREEF Global (ex-Australia) Property
Securities Fund, may invest in property trusts in the Americas, Europe, and Asia, but doesn’t specify who manages
the trusts.
4
A non-portfolio shareholding entitles a corporate shareholder to a proportionate credit for underlying tax paid by
the company paying the dividend. The position is similar in the UK via s790(6) Income and Corporation Taxes Act
1988.
5
Off-market buy-backs of non-resident company shares are still treated by Div 16K of Part III of the 1936 Act, as a
dividend, so at the risk of the anti-dividend stripping provisions, the offer to buy the shares may be made by an
“arranger”.
6
For example, from an internet search, unlisted Australian funds manager Absolute Capital
(www.absolutecapital.com.au), feed funds into The DCO Equity Opportunities Fund No 1, being a Cayman Islands
unit trust.
7
For example, from an internet search, previously listed but now unlisted Australian hedge fund manager, Pengana
Capital Limited (www.pengana.com.au) feeds investment into a Bahamas company, Santa Barbara Market Neutral
Fund (Bahamas) ERISA Ltd.
© Taxation Institute of Australia & Robert Gordon 2007
23
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
8
For example, from an internet search, unlisted Australian funds manager, Absolute Capital feeds investment into a
Cayman Islands entity, Wollemi Credit Opportunities Fund LLC (www.wollemi.com.ky), and another Australian
unlisted funds manager, Basis Capital (www.basiscap.co.au), feeds into a Cayman Islands mutual fund, Basis Yield
Alpha Fund (which was placed into liquidation on 30 August, 2007, due to the US sub-prime mortgage crises).
9
Fidelity Investments Australia Limited has a stable of Australian unit trusts e.g. Fidelity Europe Fund, Fidelity
World Fund, that have Fidelity Investment Limited with a Bermuda address, as their investment manager, but it is
not clear from its website (www.fidelity.com.au), whether the Australian funds invest in offshore funds, or just have
assets managed by offshore managers.
10
www.jfcp.com.au. That fund has a minimum investment of $500,000 i.e. the minimum for a Wholesale Investor.
11
“Foreign Investment Funds and Capital Gains Tax” Mills & Ward TIA National Convention 18 March, 2004.
12
Reference is made to the Commentary on OECD model treaty Article 1, especially para.5, and earlier report of the
Committee on Fiscal Affairs, “The Application of the OECD Model Tax Convention to Partnerships” (1999).
13
Refer generally, “New Zealand Trusts in International Tax Planning” J Preeble [2000] B.T.R. 554
14
Refer generally, “The Treatment of Trusts under the OECD Model Convention” Part II J Avery Jones et al [1989]
B.T.R. 65. Also refer “The International Guide to the Taxation of Trusts”, Lyons & Jeffrey, IBFD (loose-leaf)
15
A UK resident trust should always be a UK resident for UK treaty purposes, as the current law provides that the
trustee is always the primary taxpayer, on foreign and domestic source income. Compare to Australia where an
Australian resident trustee is only taxed in some circumstances, e.g. where the beneficiary is under a legal disability
(s98(1)), is a non-resident individual or company (now s98(2A)), from 1 July, 2006 is a non-resident trustee (now
s98(4)), or there is income to which no beneficiary is presently entitled (s99A). However, s3(11) of the International
Agreement Act recognises that absent such a provision, treaty country beneficiaries would argue that the treaty
would apply to their beneficial entitlement to business profits derived by the Australian PE of the trustee..
16
FSI sub-committee of the NTLG minutes of April, 2007 state that whilst there is an Australia model treaty, it is not
going to be released, but in any event, it was acknowledged the recently signed treaty with Finland is close to the
model.
17
See generally, “The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model”
Parts I & II, Avery Jones et al, [1984] B.T.R. 14 & 90. Also see “Beneficial Ownership and the OECD Model”,
Oliver, Libin, van Weeghel & du Toit, [2001] B.T.R. 27
18
For example, the Netherlands, and Denmark, as long as the participation is held for the requisite period. See
endnote below about Danish dividend withholding tax.
19
See for instance, “Selected Aspects of Source and Residency in the New Millennium”, M Dirkis, TIA National, 16
March, 2007.
20
Refer generally to “Treaty Shopping – the current state of play”, Marcarian, The Tax Specialist, February, 2006; I
V Gzell QC “Treaty Shopping” 27 Australian Tax Review 65; and the OECD Committee on Fiscal Affairs report
“Double Taxation Conventions and the Use of Conduit Companies” as referred to in Commentary on Article 1 of the
OECD Model DTA.
21
As Taxation Laws Amendment (2007 No 4) Bill 2007 will abolish the ability to carry forward excess foreign tax
credits, that carry forward under the current law for 5 years, it is all the more to minimize foreign taxes.
22
refer generally “The Private Foundations Handbook” M Grundy ed., ITPA, 2007
23
It should be noted that under that Act, a “hedge fund” is a mutual fund with less than 100 members, who must be
sophisticated investors. A hedge fund, unlike an ordinary mutual fund, is not restrained as to what it can invest into,
or how it may use leverage, derivates, short selling, and other sophisticated high risk techniques to make money in
rising or falling markets.
24
From the Vanguard Investment Series Plc website (www.vanguard.com), it can be seen that it is an open-ended
investment company with variable capital, incorporated and resident in Ireland with 27 sub-funds, and is regulated by
the Irish Financial Service Authority, and as a UCITS pursuant to the European Communities (Undertakings of
Collective Investment in Transferable Securities)(Amendment) Regulations 2003. Its prospectus says that it will bear
no Irish tax. Also from its website, see the prospectus of the Baring International Umbrella Fund, which is an Irish
resident unit trust with eight sub-funds.
25
OECD Report on Harmful Tax Competition - An Emerging Global Issue (1998);
OECD Report: Towards global tax co-operation: Progress in identifying and eliminating Harmful Tax Practices
(2000);
OECD Harmful Tax Project: 2001 Progress Report;
OECD Harmful Tax Project: 2004 Progress Report;
Progress Towards a Level Playing Field: Outcomes of the OECD Global Forum on Taxation (2005)
26
“Harmful tax competition: Defeat or victory” Jogarajam & Stewart (2007) 22 Australian Tax Forum
27
Refer for instance, to “The OECD and the Offshore World”, R Hay, ITPA Journal Vol VII No 3 (2007)
28
See for instance, “International exchange of taxation information”, R Hamilton, The Tax Specialist, October, 2006
© Taxation Institute of Australia & Robert Gordon 2007
24
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
29
Deutsch & Blanche in their article noted below, refer to an Indian Supreme Court case, Union of India v Azadi
Bachao Andolan (2003) 263 ITR 706 (SC), where an attempt to argue that the Indian/Mauritius DTA should, absent
a specific LOB article, still be interpreted to deny third parties the DTA benefit, was rejected.
30
“Current Notes – Treaty Shopping: imitation is flattering” [2000] B.T.R. 133. Also see Article 4(5) of the
Australia/China DTA, which has a similar effect.
31
Refer generally, to “Place of Effective Management as a Residence Tie-Breaker”, J Avery Jones, IBFD BulletinTax Treaty Monitor, January, 2005.
32
Refer generally, “Treaty Shopping and Beneficial Ownership: Indofood International Finance Ltd v JP Morgan
Chase Bank London Branch [2006] B.T.R. 422; “Definition of ‘Beneficial Ownership’: UK case provides analytical
guidance for Australia” EC Loew, ATP Weekly Tax Bulletin, 15 September, 2006; and “Beneficial Ownership:
HMRC’s Draft Guidance on Interpretation of the Infofood Decision”, R Fraser & JDB Oliver, [2007] B.T.R. 39.
33
In “Recent international tax issues in treaties and other developments”, Deutsch & Blanche, NSW International
Tax Masterclass, TIA, 27 September, 2006, the authors express reservations about the authority of the case for
Australian purposes (at p29), as well as making suggestions (at p27) as to how the introduction of “spread” and
“risk/substance” may overcome the Indofood decision in relation to interest in/interest out situations.
34
See generally, “Foreign hybrids – Beware of the thorns” Hadassin & Saville, The Tax Specialist, August, 2006.
Also see “UK limited liability partnerships now eligible for foreign hybrid treatment. But what about other entities?”
N Sammel, ATP Weekly Tax Bulletin 13 July, 2007, which refers to ATO ID 2006/91 (Korean Hapja Hosea) and
ATO ID 2006/149 (Bermudan Exempted Limited Partnership).
35
See generally, “Foreign investment fund rules: exemptions for investments in US funds”, P Norman, The Tax
Specialist, June, 1999.
36
This point is referred to in the Mills & Ward paper and in “Foreign investment fund changes and other related
changes emerging from the review of international taxation arrangements”, P. Barlin, NSW International
Masterclass, TIA 22 September, 2004. There has also been a call to allow non-residents to invest in such a fixed trust
as such investors should not be subject to Australian tax on the foreign source income: “International tax reform
affecting the funds management industry”, G Lazarus, TIA National, 15-17 February, 2006 (at para. 2.4.5). Lazarus
also makes the point about the interpretation afforded by ATO ID 2005/200.
37
Since the repeal of ss458 & 459, the only application is s459A. Also see TD2007/D1 and “Beware 47A!”, P
Bender, The Tax Specialist, April 2007
38
If there are five or fewer unit holdings with 50% or more of the entitlements, the trust will be CFT, and those unit
holder will be taken out of the FIF provisions by s493(b), leaving those unit holders to be assessed under the deemed
entitlement provisions of ss96B & C. If the fund does not have five or fewer unit holdings with 50% or more of the
entitlements, and is not offered to the public or has less than 50 unit holders, the unit holders will stay in the
transferor trust regime: s493(a).
39
Where the CFC held exempt FIF interests, actual dividends received by the CFC were also not attributable if from
listed or s404 countries, and from 1 July, 2004, the on-payment of the dividend to Australia was NANE under s23AJ.
40
Who makes the point that specific exemptions in the FIF provisions, such as for non-resident deceased estates,
may be “clawed back” by s96B.
41
Proposed s559A of Part XI. Whilst this is welcome, the fact that the opportunity was not taken to repeal ss96B &
C is regrettable.
42
As the beneficiaries are not actually presently entitled, s97 should not assess them as the income arises, and s96A
is not relevant. This assumes that s96B has no operation, which is not entirely clear.
43
None of the income being “eligible designated concession income” in the UK: Sch 9 of the Income Tax
Regulations
44
Its trustee is taxed as a “person”, at rates up to 40%. Whilst the example doesn’t involve seeking treaty relief, a UK
trustee of a unit trust will normally be a UK resident person entitled to treaty relief.
45
Open-Ended Investment Companies Regulations 2001, made under s236 of the Financial Services and Markets
Act 2000, but available under previous relations since 1997.
46
Query whether the logic in TD2005/28 is likely to tend the Commissioner to treating them as trusts?
47
It also has treaties with the following countries which are not yet gazetted: Estonia, Kazakhstan, Malta, Morocco,
Qatar, Ukraine
48
It also has treaties with the following countries which are not yet gazetted: Bosnia & Herzegovina, Croatia, Brunei,
Iran, Kazakhstan, Lebanon, Luxembourg, Morocco, Myanmar, Oman, Qatar, Syria, Venezuela, Yemen, Zimbabwe
49
Polish non-treaty rate of dividend withholding tax is 20%. Whilst the treaty with Denmark also specifies a 0% rate
for dividends, the current position in Denmark is that there is no dividend withholding tax for 15% shareholders from
treaty countries, in any event.
50
As acknowledged by the paper commissioned by Australian Treasury and authored by R Warburton & P Hendry,
“International Comparison of Australia’s Taxes” (2006)
51
Para. 8 of Commentary on OECD Model Treaty on Article 4
© Taxation Institute of Australia & Robert Gordon 2007
25
Robert Gordon
www.ectrustco.com / www.robertgordontax.com
Investing Offshore into Foreign Flow-Through Structures
52
Labuan Offshore Financial Services Authority, as would otherwise breach s147 of the Labuan Offshore
Companies Act 1990.
53
Regulated under the Labuan Offshore Trust Act 1996
54
The Labuan Offshore Business Activity Tax Act 1990 includes a Labuan Offshore Trust within the definition of
“offshore company”.
55
They are governed by the Labuan Offshore Securities Industry Act 1997. It defines "mutual fund" being those that:
“(a) collects and pools funds for the purpose of collective investment with the aim of spreading investment
risk: and
(b) issues shares which entitle the holder to redeem his investments within a specified period that is agreed
upon by the parties and receive an amount computed by reference to the value of a proportionate interest in
the whole or part of the net assets of the company, partnership or unit trust as the case may be,
and includes an umbrella fund whose shares are split into a number of different class funds or sub-funds and
participants in which are entitled to exchange rights in one part for rights in another.”
56
Most foreign dividends are exempt from tax. If an amount is taxable, a foreign tax credit is available for foreign
withholding tax up to the 10% rate of corporate tax.
57
It should be noted that due to heavy usage of the Cyprus treaty into Russia, it is reported that in December, 2005
the head of the Russian tax service announced a review of the operation of the treaty: source – www.lowtax.net.
58
As the beneficiaries are not actually presently entitled, s97 should not assess them as the income arises, and s96A
is not relevant. This assumes that s96B has no operation, which is not entirely clear.
59
None of the income being “eligible designated concession income” in the NZ, but untaxed capital gains with be
EDCI: Item 209 of Schedule 9 of the Income Tax Regulations
60
A NZ unit trust is taxed as though it was a company. Its trustee is taxed as a “person”, at rates up to 33%. Whilst
the example doesn’t involve seeking treaty relief, a NZ trustee of such a unit trust will normally be a NZ resident
person entitled to treaty relief.
© Taxation Institute of Australia & Robert Gordon 2007
26