Using a Corporate Settlor for a Foreign Trust - STEP · PDF file1 Using a Corporate Settlor for a Foreign Trust STEP 4th Annual Miami Summit May 31, 2013 Robert Mack, Appleby (Cayman)

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Using a Corporate Settlor for a Foreign Trust

STEP 4th Annual Miami SummitMay 31, 2013

Robert Mack, Appleby (Cayman) Ltd. (Grand Cayman, Cayman Islands)Ana Claudia Akie Utumi, Tozzini Freire (Sao Paulo, Brazil)Jennifer J. Wioncek, Baker & McKenzie LLP (Miami, Florida)

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Topics

– Tax-Neutral Reasons Uses of Corporate Settlors– Brazilian Tax Reasons for Using a Corporate Settlor– U.S. Federal Tax Issues When Using a Corporate

Settlor

Tax-Neutral Uses of Corporate Settlors

CORPORATE SETTLORS

International Business Companies “IBC’s” will usually have wide powers to deal with the property of the company roughly akin to that of natural persons.

CORPORATE SETTLORS4

The memorandum and articles of association of most IBC’s will not usually contain a power to settle assets on trust.

CORPORATE SETTLORS5

Where there is doubt regarding the scope of the powers to make dispositions of company property into trust, consider whether it is possible to amend the memorandum and articles of association either before the IBC is established (preferable) or after.

CORPORATE SETTLORS6

The issue of corporate benefit must be considered prior to any disposition of company property into a trust.

CORPORATE SETTLORS7

The question must be asked; what benefit (if any) is there to the company to establish a trust?

CORPORATE SETTLORS8

Common examples of where the presence of a corporate benefit is clear include the creation of an employee benefit trust for the employees of a company.

CORPORATE SETTLORS9

Questions can arise, however, where there does not appear to be any benefit to the company in establishing a trust and disposing of property into a trust.

CORPORATE SETTLORS10

The type of company should also be carefully considered. Does the client wish to use a new company whose sole purpose is to act as the settlor of the trust, or does the client wish to use an existing company (such as a family trading company) to settle the trust? Will the board of directors be prepared to comply with the wishes of the shareholder to establish the trust? What form of IBC will work best for the client?


The maintenance of capital doctrine must also be considered. What prejudice might there be to the creditors of the company? Is the IBC in breach of local company law/regulations?


Will offshore “firewall” legislation protect a disposition of property contrary to the laws where the IBC is registered?


Advantages of using an IBC : Can protect the privacy of the real economic settlor of the Trust (i.e. the underlying client), however, declarations of trust (one party trust deeds) can often achieve the same level of confidentiality. Use of IBC’s can, also provide continuity in contrast to natural persons.


Disadvantages of using an IBC: Costs (both set up and maintenance), questions over the proper exercise of corporate powers, board of directors may choose not to uphold the wishes of the shareholder, particularly where there is no corporate benefit in establishing a trust.


Questions of artificiality can arise where structuring is designed to obscure the identity of the true economic settlor whether for tax planning or privacy and/security reasons.


Private purpose trusts (known as STAR Trusts in the Cayman Islands) can often provide excellent solutions to a wide range of client needs. In the Cayman Islands, IBC’s, so long as they are authorised to do so, can act as settlors of Cayman Islands STAR trusts.


Brazilian Tax Reasons for Using a Corporate Settlor

Use of fiduciary structures in Brazil

− There is no Trust in Brazilian legisation, nor the concept of fiduciary ownership

except for certain credit transaction, but in this case the assets stay in the possession of the debtor, not of the creditor

from Brazilian legal and tax perspectives, transfer of assets to a Trust is deemed a donation


− Donation by a Brazilian individual

Mandatory preservation of the mandatory heirs share -50% of the donor's assets

Necessary to verify the individual's liabilities to avoid accusation of fraud against creditors

Estate and Gift Tax - 2% to 8%, depending on the state where the donor resides - São Paulo: 4%

Tax on Foreign Exchange Transactions (IOF/FX) on transfer of the funds - 0.38%


− Donation by a Brazilian individual

Removal of the assets from the donor's Statement of Assets that is inserted in the annual tax return

• actual reduction of the individual's wealth for tax purposes

Risk: Brazilian authorities understand that the income tax exemption on donations apply solely to transactions between individuals

• Withholding income tax on foreign beneficiaries: 15% or 25% if resident in a tax haven jurisdiction


− Distributions to Brazilian beneficiaries

Taxation by individual income tax (IRPF) - maximum rate of 27.5%

• No matter whether it is distribution of principal or income

no Gift Tax

• donation depends on "voluntary act"

– The trustee has discretion, but the distributions cannot be voluntary, but rather compliant with the determinations of the deed of trust and letter of wishes


− Structuring by means of investment vehicles

Brazilian individual invests in an offshore company (OFF1)

OFF1 invests in OFF2

OFF2 is the transferor of the assets to the Trustee


− Impacts in Brazil:

Investment in OFF1:

• IOF/FX at 0.38%

• No Gift Tax

• No WHT risk

• Declaration of the OFF1 to Brazilian tax authorities and Central Bank



Investment in OFF2:

• No impact in Brazil if the is no asset located in Brazil

– - transaction between two non-Brazilian entities

Transfer of the assets from OFF2 to Trustee:

• No impact in Brazil if the is no asset located in Brazil



Distribution of proceeds to OFF2:

• No impact in Brazil

Distribution of proceeds to Brazilian beneficiaries

• IRPF at 27.5%

© 2013 Baker & McKenzie LLP

U.S. Federal Tax Issues When Using a Corporate Settlor

© 2013 Baker & McKenzie LLP 28

U.S. Federal Income Tax Issues– Classification of Corporations

Default RulesClassification Election (“Check the Box”)Special Types of Foreign Corporations w/ U.S. Shareholders

Passive Foreign Investment Companies (“PFICs”)Controlled Foreign Corporations (“CFCs”)

– Classification of Trusts“Ordinary” TrustsBusiness TrustsInvestment Trusts

– Who is Treated as the Grantor?Corporation = business purposeShareholders = personal purposes


U.S. Federal Income Tax Issues– Foreign Grantor Trust Limitations

Grantor Trust v. Nongrantor TrustForeign Nongrantor Trusts with U.S. BeneficiariesGrantor Trust AdvantagesU.S. limits how non-U.S. persons can structure grantor trusts

Revocable TrustsDistributions of income or capital during grantor’s lifetime can only be made to grantor or grantor’s spouse


U.S. Federal Income Tax Issues– Purported Gifts to U.S. Persons

If a trust has received a gratuitous transfer from a foreign corporation, then distributions from the trust to a U.S. donee are treated as a distribution from the foreign corporation:

PFIC = distribution is taxed under the PFIC rules; Non-PFIC = distribution is taxed as a dividend to the extent of foreign corporation’s E&P.

A “check the box” election to treat foreign corporation as a disregarded entity (i.e., transparent) cannot avoid these rules.U.S. donee files IRS Form 3520 to report the purported gift.Exceptions:

Aggregate distributions from all foreign corporations and related persons does not exceed $15,102 (2013);The tax liability would be higher if treated as a distribution from the trust;Charitable transfers;U.S. donee can demonstrate to the IRS certain reasons why the transfer should not be recharacterized.


U.S. Federal Gift & Estate Tax Issues– Gifts by Corporations

“Gratuitous” transfers from a corporation are generally treated as gifts by the shareholders.U.S. citizens/U.S. domiciliaries are subject to U.S. federal gift tax on gratuitous transfers of their worldwide assets.Non-U.S. citizesn/Non-domiciliaries are generally subject to U.S. federal gift tax on gratuitous transfers of real estate and tangible personal property located in the United States.

– Succession of Shares in Corporate SettlorU.S. citizens/U.S. domiciliaries are subject to U.S. federal estate tax on transfers of their worldwide assets on death.Non-U.S. citizesn/Non-domiciliaries are generally subject to U.S. federal estate tax on transfers of certain U.S. situs property on death, which includes stock in a U.S. corporation.

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Circular 230 Legend

– Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this presentation is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

Thank you!

Ana Claudia Akie [email protected]

T: +55 11 5086.5443M: +55 11 9 8337.2929

Jennifer J. [email protected]

T: (305) 789-8985

Robert [email protected]

T: (345) 814-2733

Documents

Using a Corporate Settlor for a Foreign Trust - STEP · PDF file1 Using a Corporate Settlor for a Foreign Trust STEP 4th Annual Miami Summit May 31, 2013 Robert Mack, Appleby (Cayman)