OFFSHORE ESTATE AND TAX PLANNING

 

 

Larger OECD economies such as the US, UK, European countries (e.g. France and Germany) and others such as Australia have generally high individual income tax rates.  Many countries also have estate or death duties, inheritance taxes or probate taxes.  Many OECD countries have also sought to prevent their taxpayers using tax havens by attributing tax haven income to their domestic OECD taxpayers.  The laws under which income is attributed to OECD country taxpayers are often described as “controlled foreign company” (CFC) or “transferor trust” or “grantor trust” tax legislation.


Paradoxically, many OECD countries offer (sensible and necessary) tax concessions to foreign investors (such as full capital gains tax exemption or low withholding tax rates on dividends) to attract foreign capital investment into their domestic industries.  A Panama foundation can be an ideal vehicle to take advantage of such concessions offered to foreign portfolio investors in US, UK, European or Australasian stock markets.

 

Sheltering Offshore Income


 In the past, US, UK or European taxpayers have used companies or trusts established in Switzerland, the Channel Islands or the Caribbean to receive foreign income free of US, UK or European domestic income tax.  Such methods are increasingly ineffective as US, UK and European laws now tend to attribute income accruing in offshore companies or trusts back to the US, UK or European shareholders or settlors of offshore companies and trusts.
Because a Panama foundation is a civil law concept, it may sometimes be used in place of offshore trusts and companies without necessarily creating adverse tax consequences for settlors or beneficiaries.

 

US Estate Duty and Offshore Tax Planning


The US estate tax is a well-known problem for wealthier American families. In addition there are potential income tax problems associated with foreign grantor trusts established by US persons from which any US person may benefit.  Further, there are punitive Treasury reporting requirements on foreign assets of US persons which require careful compliance.  Nonetheless, in certain circumstances, a carefully structured Panama foundation may be used as part of a US estate and income tax planning strategy in the context of asset protection through divestment.

 

UK Inheritance Tax and Offshore Tax Planning


The UK Inheritance Tax can also be very severe.  In particular, gifts made during life to a trust or company attract a 20% immediate charge.
The UK is peculiar in that different inheritance tax and offshore income tax regimes apply to domiciled versus non-domiciled UK residents.  Offshore inheritance tax and income tax planning is relatively easy for non-domiciled UK residents but the UK Government now levies (at the time of writing) a 50,000 pound charge for selling this tax status to expatriates living in the UK.  Non-domiciled UK residents may find that asset divestment to a Panama foundation may be cheaper and provide superior UK tax benefits than paying the 50,000 pound charge, but careful planning is required before electing not to pay the “non domiciliary” charge.
For UK taxpayers who are domiciled in the UK, offshore tax planning is more difficult as anti-avoidance provisions block most uses of foreign trust.  Even here, however, there can be circumstances where asset divestment in favour of a Panama foundation may be legitimately employed.
There are several countries (including OECD countries) which do not have death duties.  However, assets transferred to such a country may later be bequeathed, free of inheritance tax or estate taxes, through a separate will made in that jurisdiction.
A Panama family foundation can be the ideal beneficiary of such a will thereby effectively enabling assets to be held for UK or US family beneficiaries without being subject to UK inheritance tax or US estate tax.  It may also be possible to protect assets in the investor’s home country by having a Panama foundation operate in conjunction with a domestic entity funded by the investor for his family’s ultimate benefit.
Foundations bring with them the important advantages of offshore trusts but planning for estate or inheritance taxes is, of course, complex and needs to be undertaken with care to ensure compliance with domestic and foreign laws.

 

Canadian Offshore Tax Planning


A final word, specifically concerning Canada, and which is of particular interest to Asians who are concerned with the protection of their wealth and assets, especially if either themselves or family members are emigrating there.


Since 1972 Canada has allowed immigrants to shelter income and capital gains in an offshore trust for the first 60 months of their residency in Canada and although changes are being proposed to the tax rules, the benefits of this “immigration trust” are not expected to be fundamentally affected.


The governing law of the trust should be established in a recognised offshore jurisdiction and competent trust management employed (the situs of the trust need not be where the trustee is resident).   The beneficiaries must have no fixed rights to either income or capital, which means that the settlor and his family are discretionary beneficiaries.  Importantly, provided any distributions are only made from capital, they will be tax-free when received by the beneficiary resident in Canada.


Once 60 months has elapsed, the trust will then be deemed to be tax-resident in Canada but even so there are still advantages in maintaining it.  Inheritance and succession planning are core elements of any trust which can still be used for managing wealth and ensuring that it is distributed in a responsible manner; this can be very important in the case of young beneficiaries.  Additionally, privacy is a very important consideration for Asian families and trusts, like Panamanian foundations, avoid the public glare that probate entails.
Another form of offshore discretionary trust used in Canada is known as the “Granny Trust”.  Individuals not residing in Canada may wish to benefit family, or

 

others, who do, and gifts can be made to the non-resident “Granny Trust” without income or capital gains tax on the assets being incurred.  The important features of this type of trust, which includes asset protection, requires, however, that the donor of assets not be resident in Canada when it is created and, subsequently, not become a resident of Canada for more than 60 months.  Only capital can be distributed to beneficiaries to ensure that no taxes become payable. 

 

Australian Offshore Tax Planning


Australia does not have any death duties but capital gains tax can be triggered when assets are shifted offshore.  In addition, income accruing to overseas companies and trusts may be attributed back to Australian taxpayer shareholders, settlors or beneficiaries.  However, a Panama foundation may still be properly used as part of an Australia estate and asset protection strategy.  This is particularly so when used in conjunction with a well-designed Australian will and can confer lasting benefits on family beneficiaries.

 

Notes:

 

·   We can refer you to lawyers in both Canada and Australia, and US and UK tax advisers when appropriate, who are competent to advise on international estate planning whilst understanding what is required to ensure that a Panama foundation or trust can be properly used for international income tax or capital gains tax planning, having regard to domestic law requirements.  Please be aware that all the above material is given by way of general information only, because international tax or estate planning requires specialised and personal advice. 


·    We will always act in your best interests and, as we have previously stated on our website, we do not accept commissions from any service providers, but because of the blend of international governmental and commercial experience which we offer, unique in Panama, we do believe that we can offer you guidance that is second to none in the jurisdiction.

 

 

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