s.t.e.p. 2014 ashvin dwarka - fatca-type disclosure obligations for trustees

FATCA-type fiscal disclosure for Mauritian trustees:a global trend…

Ashvin Krishna Dwarka, Counsellor and notary23 April 2014 – STEP (noon session)

1 © 2014 A. K. Dwarka

by Ashvin Dwarka, Notaire

I. FATCA UPDATE

2 © 2014 – A. K. Dwarka, Counsellor and notary

I.A Foreign Account Tax Compliance Act

Operative words: “foreign” and “tax” Extending the reach of the long arm of the

(fiscal) law abroad Symptomatic of the “wising up” of tax

authorities An inevitable by-product of the general move

towards exchange of information and mutual assistance

Is our global financial sector really that dependent on US clients ? Let’s see...

What about Europe ?3 © 2014 – A. K. Dwarka, Counsellor and notary

I.B Overview / reminder US FATCA: compliance and reporting FATCA is far-reaching: withholding agents and

MNEs, but also FFIs (foreign financial institutions)

If FFI is not a “participating FFI”, then 30% withholding tax applies

If you are not an FFI, should you be concerned ?


I.C FATCA update (USA)

USA: deadline extended to 1 July 2014 IRS website contains a list of countries having

signed IGAs, having ratified IGA’s, etc: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

5 © 2013 - G. Gowrea & A. K. Dwarka

I.D FATCA update (Mauritius) IGA + TIEA signed on 27 December 2013 (Mauritian Minister of Finance and

US ambassador) – To be ratified in Parliament

FSC – invitation for comments to MoFED/MRA/SLO/BoM technical committee in July 2013

Now awaiting Regulations on IGA and TIEA Already treated as effective: http://www.treasury.gov/resource-

center/tax-policy/treaties/Pages/FATCA-Archive.aspx6 © 2014 – A. K. Dwarka, Counsellor and notary

I.E IGA Models – a comparison

© 2014 – A. K. Dwarka, Counsellor and notary7

Model 1 Local reporting by FFI

(local Revenue then reports to IRS)

Less burdensome for FFIs

Chosen by most countries

Mauritius has made the most practical choice

Model 2 Direct reporting by

FFI to IRS

Cumbersome for FFIs

Few countries: Japan, Switzerland…

I.F Impact on Mauritius ? Domino effect:

volume of future investments from US persons potential moves of financial institutions to limit their

exposure to a US client base due to the associated risks and complexities of compliance

compliance costs in terms of identification, assessment, control measures, data management and reporting

exposure to the eventual consequences of having US taxpayers

In case of non-compliance, in addition to 30% withholding: Competent Authority will apply its domestic law (including penalties) to address significant non-compliance



II. THE FRENCH FIDUCIE


II.A The French fiducie: historical approach

Application of private international law principles

Formerly, adaptation: i.e. recharacterisation as one of the existing civil-law mechanisms, such as testamentary executorship or agency (Pyrénées Minerals)

Subsequently, recognition (Zieseniss): provided however than French imperative public policy is not breached (esp. re forced heirship)


II.B The French fiducie: a trust outside Equity

Recognition – Hague Convention on the Law Applicable to Trusts and on their Recognition (1985):

“For the purposes of this Convention, the term "trust" refers to the legal relationships created - inter vivos or on death - by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.”


II.C The French fiducie: a trust outside Equity

La fiducie: the contractual pseudo-trust Not a creature of equity, but a contractual mechanism

(i.e. a bilateral manifestation of will, contrary to a trust which can arise by a unilateral act)

No rights in rem, no tracing rights (absence de droit de suite)

Of little practical relevance in estate planning Essentially for specific corporate matters: e.g. holding

shares as security, or in escrow Beware difference between “civil law” treatment

and “fiscal law” treatment ! Indépendance du droit fiscal…



III. THE NEW FISCAL DISCLOSURE RULES: A MINI FATCA?


II.A Mandatory disclosure under French General Tax Code

New French disclosure rules 2011/2012: French Finance Act 2011 of 29 July 2011, French Revenue ruling of 23 December 2011, Decree of 14 September 2012 three French Revenue Statements of Practice

dated 16 October 2012 Arts 792-0bis and 1649 – French General Tax Code Inheritance tax and foreign trusts Art 750 FGTC


III.B Mandatory disclosure under French General Tax Code Introduction of broad fiscal definition of a trust: “all

of the legal relationships created under the laws of a State other than France, by a person who has the capacity of settlor, whether by an inter vivos or mortis causa instrument, with a view to placing properties or rights under the control of an administrator, in the interests of one or more beneficiaries or for the attainment of a specific purpose.” – Article 792-0bis

Striking resemblance to Hague Convention definition Not good enough for the Civil Code, but deemed

appropriate to support a charging provision !


III.C Mandatory disclosure under French General Tax Code Reporting requirements – Article 1649 Applicable to trusts in existence, created, amended

or terminated after 31 July 2011: if the settlor is a French tax resident if at least one of the beneficiaries is a French tax resident if an asset (whether property or a right) is located in

France Reporting party: the “administrator” of the trust Contents of declaration to be filed Limited exemptions: charity, certain pension funds

and CIS Penalty for failure to report: EUR 10,000 or 5% of

value of trust assets, whichever is the higher


III.D Mandatory disclosure : practical difficulties Practical difficulties:

5% penalty for non-disclosure is on annual basis (several years of non-disclosure = increasing liability).

Conflicts with local law: what if it requires consent of beneficiaries before disclosure to foreign authority?

Keeping track of “nomadic” settlors and beneficiaries: how can the trustee know whether any one of them has become a French tax residents ?

Lack of distinction between classes of beneficiaries (so even discretionary trusts entail reporting obligations).


II.E Mandatory disclosure : criticism Criticism from legal writers:

“The French tax authorities have always had a problem with the taxation of trusts because a trust does not exist in French law and it is very difficult to assimilate to a French vehicle. So in its own pragmatic way the French government decided to ignore the legal refinements of a trust and treat all trusts the same for taxation purposes whether they are revocable or irrevocable, or whether the rights of the beneficiary are discretionary or absolute.”

applies indiscriminately to foundations an extremist application of “substance-over-form”

Enormous confusion: no clarification from French Revenue authorities (e.g. uncertain treatment of QROPS and UK pension schemes, which should be exempt)


II.F Mandatory disclosure: impact on inheritance tax planning French inheritance tax rates – the “Chinese vineyard”

phenomenon Territoriality of French IHT:

if deceased or donor is French tax resident, worldwide estate charged to French IHT;

if deceased or donor non-French tax resident, declaration to be filed in France only concerns assets located in France if done, legatee or trust beneficiary is a non-French resident;

finally, IHT on worldwide estate even if the deceased or donor is a non-French tax resident, where the donee, legatee or trust beneficiary is a French tax resident

France-Mauritius DTA does not cover inheritance tax: a structure that works from an income or corporate tax standpoint can lose its edge with respect to IHT


II.G Cases in which new rules might not apply

Where the French element is completely dissociated Non-individual (i.e. corporate) settlor : this might

also be covered in the long run Debt vs equity (debt-based structures through

registered, authentic deeds) No direct or identifiable beneficial interest

(discretionary trusts, certain purpose trusts) Protector: no beneficial interest, but holding indirect

supervisory and incentive powers Collective investment schemes (specific cases only)


II.H Mandatory disclosure: a mini-FATCA ? US FATCA: compliance and reporting FATCA is far-reaching: US withholding agents and

MNEs, but also FFIs (foreign financial institutions) If FFI is not a “participating FFI”, then 30%

withholding tax applies French rules are less complex:

trustees to disclose initial creation of trust, also, report on market value of trust assets as at 1

January each year; penalty: higher of EUR 10,000 or 5% of value of trust

assets A sort of “Foreign Trust Tax Compliance Act” A major step on the road to FATCA


IV. Conclusion

Trustee liability under trust law principles (duty owed to beneficiaries to keep abreast of legislative changes)

The Ostrich gambit ? Reliance on secrecy and confidentiality ?

Not a good strategy: EoI and TIEAs Legal professional privilege: the final frontier ?


Further queries:

23

Ashvin Krishna DwarkaCounsellor

&Civil-law notary

(+ 230) 208 72 38 [email protected]

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