By I. N. LEGAIR, Barrister

A cursory look at leading financial centres such as Bermuda, the Cayman Islands, the Bahamas and the Channel Islands leads one to instantly detect certain underlying ingredients which underpin their international tax planning industry (often erroneously referred to by laymen as “offshore banking”). The most critical of these factors combine to form what I refer to as “jurisdictional profile” which is determined after a particular type of peer review. A jurisdiction is not reputable merely because its local inhabitants, government or regulator says so. On the contrary, the accolade is earned only when those countries which are already deemed “reputable”, admit this other jurisdiction as a “recognised jurisdiction” and gives its practitioners all the facilities and accommodations worthy of membership of this informal yet elitist club. Any country that “recognises” other jurisdictions, but is recognised by no other, is clearly at the bottom of the pecking order.

The factors referred to above are respectively:

• The competence and reputation of the local regulator;
• The level of technical expertise available on the private sector side of the industry;
• The quality of the banking services and facilities available in the jurisdiction.

There are certain secondary factors which come into the mix, but only after the primary issues above have been properly satisfied. Such secondary factors include: (a) the quality and scope of the legislation (especially as this relates to companies and trusts),  (b) the level of taxation and the availability of a tax treaty network and (c)  the quality of the general infrastructure (airport access, schools, restaurants, conference facilities) etc.

Regulatory Regime

In virtually every reputable financial centre, the regulator has the statutory responsibility to: license, supervise, regulate, and discipline practitioners and entities which fall within the scope of its regulatory powers. In addition, the regulator has the responsibility of setting the standards and guidelines with which practitioners are expected to comply. It goes without saying that the regulator has to be ahead of the private sector, leading from the front as it were. The corollary of this is that the regulator must have the technical competence to lead. Any attempt to lead the private sector from a position of blindness will be met with resistance and hostility, especially as the private sector will invariably turn to the regulator for technical advice when confronting certain thorny or difficult issues which arise in their work from time to time.

Hence, in any reputable financial centre, the regulator is expected to be fully  versed in the laws of its own jurisdiction and simultaneously have a good commercial awareness of best international practice particularly in the areas of corporate and trust law, investment management, banking and captive insurance management. These competences can only be gained from rigorous training (much of it at postgraduate and professional level) and periodic secondments in other reputable financial centres. In reputable jurisdictions, the regulator leads the way, rather than bluffing its way into areas it does not understand.

The Private Sector

There is no reputable offshore jurisdiction that lacks a significant nucleus or pool of skilled professionals in the areas of trusts and corporate law, accountancy, investment advice and management and captive insurance management. Such a correlation is not fortuitous. However, such a skills pool does not always exist at the very outset. Where a deficit exists, governments (working in conjunction with the regulator) have sought to remedy the problem by importing expatriate professionals to fill the void, on the expectation (if not the condition) that these expatriates will train the local staff in the art and science of the industry.

Training is therefore a core component of success and the building of jurisdictional profile. Currently, the leading (by a very long way) professional body for practitioners in this field is the Society of Trusts and Estates Practitioners (“STEP”), which is based in the UK, but with branches in each and every reputable financial centre. The ICSA Certificate and Diploma in Offshore Administration and the Certificate in Captive Insurance from Caledonian University, Scotland are also highly sought after qualifications in this filed.

Availability of efficient banking services and products

Most clients use the services of an offshore financial certain to manage their financial affairs in a tax efficient manner. The most basic of the products available in these offshore centres is the international business company, which when used in a private wealth management or succession planning situation is a virtual private account formed under a corporate name.

An offshore company that is unable to open a bank account is of little use to anyone, since in order for the vehicle to be of maximum use, it must be able to disburse funds for the acquisition of assets, and receive funds when assets are disposed of.

It stands to reason therefore that a jurisdiction that is able (or willing) to open corporate accounts for clients is more likely to develop into a banking centre than one which is not. When coupled with the availability of additional services such as on-line banking, debit and credit cards, portfolio management (whether discretionary or advisory), back- to-back financing and secured lending which invariably involves the pledging of shares and securities, the scope for reputation building is enormous. Yet few jurisdictions grasp these opportunities. Why?

One reason is paranoia. Another is a lack of understanding of the requirements of the industry. Since the FATF black lists were published some years ago, some banks, particularly those in poorly regulated jurisdictions, have become very paranoid.  Those banks in reputable jurisdictions give preference for accounts to companies incorporated in their own jurisdiction and also to those incorporated in other reputable jurisdictions. Banks in non-reputable jurisdictions are paranoid even to opening accounts for companies incorporated in their own jurisdiction. In the result, a downward spiral has set in. If banks based in the country in which the offshore company is incorporated do not want such companies as clients, why should foreign banks? The prophecy has so far become self fulfilling and less business is being done. Meanwhile the reputations of poorly regulated jurisdictions have declined even further. In much the same way as success breeds success, so does failure breed failure.

Secondary factors

Assuming that the first hurdle is overcome these secondary factors could help to further boost a jurisdiction. Today, any jurisdiction that attempts to compete solely or primarily on legislation (as opposed to the core factors above) is bound to fail. Laws are easy to copy from one country to another. Application and creative use of these sophisticated laws requires a little more intelligence. A client will seldom part with his hard earned cash to a practitioner in a jurisdiction that boasts many sophisticated laws but few, if any, practitioners who can implement the sophisticated financial arrangements the client wishes to put in place.

On the matter of taxation, I know of no jurisdiction that is or has become reputable while simultaneously levying a high rate of direct taxation, though some jurisdictions (like Barbados) that have the benefit of a good tax treaty network may overcome this problem. The highly skilled bankers, accountants and investment advisers referred to earlier are quite averse to punitive direct taxes, and will not flock to live in those countries that levy a high charge.  The Isle of Man has recently come up with the most innovative idea of a charging zero rate on corporate earnings while simultaneously capping personal liability at ₤100,000. A variant of this scheme is being copied by the Channel Islands which up to now had a personal tax rate of 20%. The Cayman Islands and Bermuda have long been totally free of income tax.

Conclusion

Those countries that have followed the appropriate steps and made the initial investment have seen their economies exponentially transformed. They have notched up a contribution to GDP far beyond that made by, for example, tourism. The BVI is a case in point. It has in excess of 700,000 companies on its register, each of which pays a renewal fee of between $300- $400 per year to the government.  And that is just the beginning!

A high jurisdictional profile generates high rewards for those countries that are prepared to make the investment and adopt the correct policies and procedures in order to strengthen their regulatory regime, skills pool and banking industry.

The St Vincent and the Grenadines Hybrid Company:- A wealth of tax planning opportunities.

Isaac N Legair, (Barrister) of Dennings (Trustees) Limited describes some uses of the St Vincent and the Grenadines (“SVG”) hybrid company in international tax planning and as a vehicle for owning real estate in SVG.

The International Business Companies (Amendment and Consolidation Act) 2007 (the “2007 IBC Act”) came into force in February 2008. This Act represents the first major overhaul of the law governing international business companies in SVG since this corporate vehicle was introduced into the jurisdiction in 1996. In this amended and consolidated version, the opportunity was taken to update and modernise the old law while simultaneously creating a piece of legislation which could be extremely useful to tax and estate planners worldwide.

The 2007 IBC Act makes explicit provision for the incorporation of the following types of company:

1. Companies limited by shares;
2. Companies limited by guarantee (so called ‘mutual’ companies);
3. Companies limited by guarantee and having a share capital (so called ‘hybrid’ companies, and
4. Unlimited companies, which may (or may not) issue shares.

By far the most interesting of these is (3). These form the basis of this article.

Definition and Structure

The term “hybrid company” describes a company that is limited by guarantee but which also has a share capital. Such a company is normally structured with at least two classes of members – shareholding members and guarantee/beneficiary members. Shareholding members may own ordinary voting shares, preference shares, or both.

The directors elect guarantee members into membership of the company on condition that each member undertakes to contribute to the debts of the company up to certain specified maximum amount (typically US$100) in the event of its liquidation. Thus a guarantee member holds a contingent liability (an obligation) in contrast to a shareholding member who holds a positive stake (shares) in the company.

The constitutional documents of the hybrid are normally written so that the shareholding members get voting control and a fixed predictable (if any) return. This is achieved by issuing non-participating ordinary shares and/or preference shares. Any residual income is distributed at the discretion of the directors. This they will do so on an ex gratia basis to the guarantee members.

The ordinary shares are issued to professional managers, who act rather like ‘quasi trustees’ with full legal ownership of the company and corresponding voting rights over the corporate assets. Ordinary shareholders receive no financial benefit from holding the shares. All of the net financial benefits (after payment to preference shareholders) flow to the guarantee members, placing them in a position rather like the beneficiaries of a typical discretionary trust. The interest of a guarantee member may be extinguished on death so as to prevent succession problems, remove any probate requirements and therefore eliminate any inheritance tax or estate duty implications.

Section 52(d) defines a guarantee member as a person ‘who may not participate in the income, profits, gains or assets of the company or receive any distribution or payment from the company other than on an ex gratia basis at the sole discretion of the directors, or on the basis of a contract existing between him and the company’.

In an attempt to further clearly define the status of guarantee members; section 54(1) (b) requires that their names be kept on a separate register from the names of shareholding members. This is quite unlike some other jurisdictions where both sets of names appear on the same register, thus giving the impression that guarantee members have a positive a positive stake in the company synonymous, comparable or equivalent to that held by shareholding members.

As guarantee members do not own shares, it is questionable whether and to what extent the punitive controlled foreign corporation (“CFC”) legislation of their countries of residence apply to them.

Use of SVG Hybrid in International Tax Planning

The hybrid is an efficient tax planning vehicle for international clients whose domestic tax regime imposes punitive rates of tax coupled with controlled foreign corporation (CFC) anti-avoidance provisions.

Hybrid companies are often used as quasi discretionary trusts. They are especially useful to persons resident in civil law countries that do not recognize trusts. As with trusts, hybrid structures may be useful for asset protection, tax planning (including estate tax planning), confidentiality and avoiding forced heirship rules.

When used as a quasi trust, the hybrid company is typically structured with a single ordinary share carrying one vote but having no right to dividends and no right to participate in the capital or income of the company in any way. The guarantee members have no voting right in the company but participate fully in its income and capital. By adopting this formulation, control of the company legally rests with the ordinary shareholders, but most of the economic benefits flow to the guarantee members.

The hybrid offers an ideal structure for long-term investors who accumulate their profits offshore tax-free. Beneficiary members can honestly declare to authorities in their own country that they do not own, directly or beneficially, assets overseas.

The income tax statutes of many onshore countries, and in particular any related anti-avoidance provisions, often seek to tax undistributed or untaxed profits of low tax paying companies as if they had been received by the shareholders. The different legislations approach this goal in different ways but there is often a focus on the percentage of shares held.   Alternatively, the legislation may focus on the control of the company, even if control is achieved otherwise than through the ownership of shares. However, in the organization of a typical hybrid company as set out above the guarantee members do not own shares nor have control.  Professional managers act as shareholders and have legal control of the company.  This may mean that the typical anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. Additionally, such a structure may not bring about any reporting requirement for the guarantee member so, on a practical level, unwanted attention from onshore revenue authorities is avoided.

Impact of Caricom Tax Treaty

As international business companies, SVG hybrids are exempt from taxation in SVG and are given a 25 year tax exemption certificate by the registrar upon formation. In the minority of cases this total exemption from local taxation may not be beneficial to the company or it’s preference shareholders, (it is assumed that holders of ordinary shares do not get a dividend) who may be at a disadvantage if they are unable to prove to the tax authorities in their home country that the dividends they receive or the corporate profits from which such dividends were paid, have not been charged to SVG tax.

The 2007 IBC Act goes some way towards providing a solution. Section 180 gives companies an irrevocable option to either (a) remain totally exempt from taxes as at present, or (b) pay corporate income tax at the rate of 1% on their annual profits. Those companies that choose to pay the 1% tax must file annual tax returns and comply with the requisite provisions of income tax legislation.

Nevertheless, this option is an extremely good tax planning tool for companies based in the Caribbean Single Market or Caricom region, the Member States of which have ratified a multilateral Double Taxation Agreement amongst themselves. This “Treaty” provides that income arising in one Member State by a resident of another shall be taxed only in the source country, and taxed only once. It further exempts dividends payable by a company resident in one Member State from taxation not only in the country in which the income arises but also in the country in which the shareholder is resident.

The Treaty therefore provides significant tax planning opportunities for companies resident in one Member State but doing business in another through a subsidiary.

Many international companies are currently investing in the oil and gas industry in Trinidad and Tobago and in the real estate and hotel development projects across the Caricom region. Such investors could benefit greatly from using SVG companies and trusts as part of their group structure.

The 2007 Act gives international investors the perfect opportunity to minimise their tax liability and exposure. The tax advantages described above could not be obtained by using a BVI company as that country is not a Caricom Member State. SVG should be considered the jurisdiction of choice for those investors who wish to tap into the Trinidad and Tobago oil and gas boom and more generally into the major real estate developments taking place across the region.

Hybrid as owner of SVG Real Estate

The 2007 IBC Act (unlike its predecessor), gives companies the corporate capacity to own an interest in real estate situated in St Vincent and the Grenadines. However, this is subject to the proviso that if an Alien Land Holding Licence (“ALHL”) would otherwise be required, the requirement for such a licence could not be avoided merely by owning real estate through using a corporate vehicle.  In summary, an ALHL is required where the company is owned and/or controlled by persons who are not citizens of SVG, or where such persons derive the major share of dividend from the company.

The acquisition and disposal of SVG real estate currently attracts stamp duty at a rate of 5% payable by both the purchaser and vendor.  A SVG hybrid company, creatively used, probably in conjunction with an international trust formed under the SVG International Trust Act of 1996, could (on first and subsequent disposal) help to minimise these otherwise punitive rates of taxes.

Distribution of Assets under hybrid structure

The company will not normally pay dividends, or reward the ordinary shareholders and directors in any way (except for the payment of annual fees). Holders of preference shares are invariably entitled to a variable yet predictable return according to the terms of issue of the shares and the constitution of the company. The assets (including residual profits) of the company are accumulated in the tax-free jurisdiction of incorporation.

During the life of the company, distributions are made by the directors to the guarantee members on a purely discretionary or ex-gratia basis. Beneficiary members have no positive right to request or demand that a distribution be made to them.

Upon liquidation, all remaining net assets go to the beneficiary members, again on an ex gratia basis. Where a company has a single beneficiary member, the company is automatically liquidated upon the death of that member, or earlier, according to its constitution.

Summary

As an entity which offers the flexibility of the discretionary trust and the familiarity of the traditional company, the SVG hybrid yields considerable tax planning opportunities for those professional advisers who wish to manage the affairs of their clients in a discreet yet watertight manner. Don’t leave home without it!

Isaac Legair may be contacted at: dennings@vincysurf.com