Wealth Planning and CBI Are Separate Worlds, But This is About to Change

 

Changes in international taxation and the new economic substance rules offer unique advantages for some Caribbean and European CIPs, writes Carlyle Rogers.

For decades now, the wealth management, tax planning, and asset protection industry – which use corporate, trust, and other structures in low tax jurisdictions – and the CIP industry have existed side by side but in two parallel and separate universes. 

This, despite the fact that some jurisdictions, especially those in the Caribbean like Antigua & Barbuda, Saint Lucia and Saint Kitts & Nevis, have active international financial services or offshore sectors. Anguilla, Cayman Islands, and Turks & Caicos don’t have CIPs but have residency programs and are also international financial services centers (IFCs). Similar situations exist also in Cyprus and Malta, two of the leading CIP and IFC spots in Europe.

The recent changes to the international tax rules were driven by the EU and the G20, and promulgated through the OECD’s BEPS (Base-Erosion and Profit Shifting) project. 

The resultant push for economic substance in the jurisdiction of domicile for companies engaged in some specific activities presents an opportunity for players, both the jurisdictions themselves and the service providers, in the two industries to work in tandem in order to give clients more holistic wealth management and citizenship planning advice.

See also: Citizenship and Wealth Advisors: What Each Needs to Know About the Other to Help Their HNWI Clients

The new rules are too complex to discuss in an article of this length but suffice it to say that the days of HNWIs (High Net Worth Individuals) using structures in low tax jurisdictions that are just shell entities with no real economic activity taking place there, in order to legally minimize their tax obligations or to engage in evasion, are over. 

Both FATCA and CRS were already designed to combat tax evasion but the ball has been moved even further along whereby legal tax minimization is being made even more difficult by the rules which now demand that in order for persons to effectively make use of structures in low tax jurisdictions, for specific activities, economic substance must be present within the jurisdictions. 

It must be noted that as of the time of my writing this article, these rules are mainly in force in places such as Anguilla and the other British Overseas Territories as well as the UK’s Crown Dependencies. They are not in force currently in the Caribbean CIP jurisdictions but it is my view that it is only a matter of time before these jurisdictions are forced by the EU to implement them or face blacklisting. 

See also: Carlyle Rogers: RCBI-Industry Finds Itself in Crosshairs as OECD Continues War on Tax Competition

The new economic substance rules are required for relevant activities such as banking, insurance, fund management, financing and leasing, shipping, intellectual property business, distribution and service centers business, headquarters, and entities that are holding companies. However, I also predict that, in the future, all companies, irrespective of the activity they are engaged in, will have to comply with these new economic substance rules.

The economic substance test that these entities are subjected to, demands that the companies have mind and management and qualified employees to execute the activities the entities are doing, physically present within the jurisdictions of domicile. In addition, the companies must have physical assets whether leased, rented or owned in terms of office space from which to carry out the activities and the core income-generating activities as described above must be executed from within the jurisdiction where they are incorporated.

What this, therefore, means for HNWIs is that if they are to legally make use of structures in low tax jurisdictions to conduct certain activities, as set out above, they must spend sufficient time there in order to exercise the requisite mind and management, have sufficient assets and employees there, and conduct the core income-generating activities in these jurisdictions. 

Where a jurisdiction offers these low-tax structures, what better place to secure citizenship from in order to be able to spend sufficient time there to exercise mind and management, conduct business and thus benefit from the low taxes that these jurisdictions offer. It thus becomes a natural fit between a low tax jurisdiction and one that also has a CIP for the HNWI to establish both a structure there and gain a passport and citizenship. In other words, the same jurisdiction will allow for a HNWI to “kill two birds with one stone.”

The Caribbean and European jurisdictions mentioned earlier are, consequently, ideally suited to take advantage of this growing convergence of advantages between the CIP sector and the provision of international financial services because of their low and or zero tax rates on personal, corporate and other forms of income and capital appreciation.  It is therefore important that the jurisdictions both at governmental and service provider levels understand that there are opportunities for CIP jurisdictions to benefit from these changes in the international tax architecture that are being implemented and to make the most of them. 

CIP service providers and offshore corporate/trustee firms must now learn more about each others’ practice areas and cooperate. The tax/wealth adviser must now possess a more holistic understanding of the needs of the HNWI and not just be contented to flog a trust or a company in a particular jurisdiction because he or she is more familiar with it. 

The same goes for the immigration lawyer. His or her advice must not be predicated on familiarity with a particular program or where his/her employer has offices but must take into consideration the tax implications of the jurisdictions where the client wishes to live and the passport said client wishes to secure.

I hope that, as time progresses, more and more industry incumbents will come to this realization and better serve the needs of their clients.

More from Carlyle Rogers’ Truth to Power Column:

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