baker mc kenzie dec newsletter 2nd part

Private Banking Newsletter

Indonesia

Creation of HNWI Tax Office

The formation of the HNWI Tax Office in 2009 heralds an attempt to increase tax compliance of Indonesian HNWIs and collect more personal income tax from them. Individuals with assets of at least US$1 million are pooled in this Tax Office. Currently, there are 1,200 taxpayers registered in this HNWI Tax Office. All of them reside in Jakarta.

This Tax Office serves as an intelligence bureau to monitor HNWI taxpayers’ transactions that have potential to be taxed. So far, there has been no significant contribution from the HNWI Tax Office towards tax revenue because most of the HNWI are shareholders of businesses or directors of companies, so their income tax has been withheld from their salaries and dividends.

Although the HNWI Tax Office’s contribution towards tax revenue is small, the Indonesian Tax Authority is considering increasing the number of individual taxpayers whose tax affairs will be administered in this HNWI Tax Office. The Indonesian Tax Authority is also considering including other HNWIs who reside outside Jakarta. The Indonesian Tax Authority still considers that the HNWI Tax Office is the best tool to gather information about HNWI taxpayers and monitor their taxable assets and transactions.

Wimbanu Widyatmoko (Jakarta) +62 21 515 4920 [email protected]

New rules prevent tax treaty abuse

In order to prevent tax treaty abuse, the Director General of Taxation issued two regulations that are known as PER-61/PJ./2009 (Procedures to Implement Double Tax Avoidance Agreements) and PER-62/PJ./2009 (The Prevention of Misuse of Double Tax Avoidance Agreements). These stipulate procedures that must be followed before non-residents are entitled to take advantage of reduced withholding tax rates under Indonesia’s tax treaties.

A. PER-61/PJ./2009 (Procedures to Implement Double Tax Avoidance Agreement)

Under PER-61/PJ./2009, a party may only be able to benefit from a Double Taxation Agreement (DTA) protection if it satisfies the following requirements:

a. the recipient of the income is a non-Indonesian resident taxpayer (eg not having any form of permanent establishment in Indonesia),

b. the recipient of the income has submitted a Certificate of Residency validated by the competent authority of the country where the recipient is resident, and

c. the recipient of the income is not misusing the DTA Agreement as governed in the regulations concerning prevention of misuse of DTA Agreements.

As a further qualification of the above rule, the Certificate of Residency as mentioned above must follow a specific form set out by PER-61/PJ./2009, as follows:

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a. Form DGT-1 (attached), to be used by parties other than parties who are specifically required to use Form DGT-2.

b. Form DGT-2 which must be used by parties receiving income through a Custodian or Foreign Bank.

Administratively, the Certificate of Residency must be:

a. completed and signed by the recipient of the income,

b. validated by the competent authority of the country where the recipient of the income is resident, and

c. provided to the Indonesian tax withholder before the end of the monthly reporting period of the tax payable.

The Indonesian tax withholder will then submit a copy of the Certificate of Residency as an attachment of its monthly tax return.

Under this regulation, if payment is made to a non-resident tax subject, the Indonesian tax withholder must submit its monthly tax return even if due to the application of the DTA Agreement, there is no withholding tax payable.

B. PER-62/PJ./2009 (The Prevention of Misuse of Double Tax Avoidance Agreements)

PER-62/PJ./2009 specifically deals with the substantive issue of misuse of tax treaties. It sets out the situations in which a misuse of a tax treaty is deemed to have occurred, and the consequences of such misuse.

PER-62/PJ./2009 provides that misuse of a tax treaty can be deemed to occur if:

a. the transaction has no economic substance and is performed by using a certain structure/scheme with the sole purpose of benefitting from the DTA,

b. the transaction is structured in a way that means its legal form will be different from the economic substance for the sole purpose of benefitting from the DTA, or

c. the recipient of the income is not the real owner of the economic benefit of the income (not the beneficial owner).

If there is a difference between the legal form of a transaction and its economic substance, the tax implication will be determined based on the economic substance rather than the legal form of the transaction.

PER-62/PJ./2009 further elaborates that the term “beneficial owner” as mentioned above means a recipient of income who is not acting as:

a. an agent,

b. a nominee, or

c. a conduit company.

34 Baker & McKenzie – December 2010


Moreover, PER-62/PJ./2009 also states that the following individuals and entities will not be considered to be misusing tax treaties:

a. an individual who is not acting as an agent or a nominee;

b. an institution which has been expressly mentioned in the DTA Agreement or has been agreed by the competent authority in Indonesia and the treaty partner country;

c. a non-resident taxpayer which has received income through a custodian from transfer of shares or bonds traded on the Indonesian stock exchange other than interest and dividends, provided that the non-resident taxpayer is not acting as an agent or a nominee;

d. a company whose shares are listed and constantly traded on a foreign stock exchange;

e. a pension fund that is established under the law of the Indonesian treaty partner country and is a tax resident of that country;

f. a bank; or

g. a company which has fulfilled the following requirements:

i. the establishment of the company in the treaty partner’s jurisdiction or the arrangement of certain transactions entered into by the company not solely to exploit the DTA Agreement’s benefits;

ii. the business activity is managed by a management that has authority to conduct transactions,

iii. the company has employees;

iv. the company has active business operation;

v. the income received from Indonesia is taxable in the country of residence; and

vi. the company will not use more than 50% of its total income received to fulfil its obligation to other parties in the form of interest, royalties, or other compensation.

If the recipient of the income is deemed to have misused a tax treaty, the income received will be subject to the normal withholding tax rate as stated in the Income Tax Law (i.e. 20%).

Besides setting out rules to prevent the misuse of DTA Agreements, PER-62/PJ./2009 also provides a form of protection to non-resident taxpayers that are subject to tax thereunder, namely, the non-resident taxpayer may apply to the competent authority where they reside to initiate a Mutual Agreement Procedure in accordance with the rules of the applicable tax treaty.




Indonesia - Hong Kong Tax Treaty

On 23 March 2010, Indonesia and Hong Kong signed a comprehensive tax treaty. The treaty will come into force after the completion of ratification procedures on both sides. The new tax treaty provides lower withholding tax rates on, for example, dividends than those under Indonesia’s tax treaties with other countries.

The rates under the new tax treaty for income in the form of dividends are as follows:

A. dividends are taxed at a rate of 5% of the gross amount of the dividends if the beneficial owner is a company which holds directly a minimum of 25% of the capital of the company paying the dividends; and

B. the maximum rate is 10% of the gross amount of the dividends in all other cases.

Withholding tax on interest under the new tax treaty may not exceed 10% and the maximum withholding tax on royalties is 5% of the gross payment.

Further, the new tax treaty also contains an Exchange of Information clause under which the scope of information exchange is restricted to “taxes covered” by the tax treaty, and the information exchanged shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the relevant taxes. The information shall not be disclosed to any third jurisdiction for any purposes.





India

Introduction of controlled foreign corporations regime

The Indian Income Tax Act does not contain any provision for taxation of income of offshore foreign corporations that are controlled by Indian residents. According to the Revised Discussion Paper on the Direct Taxes Code released by the Ministry of Finance on 15 June 2010, it is proposed to introduce a provision in the Code that, if the passive income earned by a foreign company that is controlled directly or indirectly by persons resident in India is not distributed to the shareholders, resulting in a deferral of taxes, the undistributed income will be deemed to have been distributed and taxed in India in the hands of resident shareholders as dividends received from the foreign company.

O.P. Bhardwaj Associated Law Advisers of New Delhi [email protected]

Regulation of unit-linked insurance products

On 9 April 2010, the Indian Securities and Exchange Board of India (SEBI) issued an order directing 14 insurance companies not to issue any offer document, advertisement or brochure or raise money from investors as subscription for any product, including unit-linked insurance policies, having an investment component in the nature of mutual funds, without obtaining a certificate of registration from SEBI.

However, the Insurance Regulatory and Development Authority (IRDA) took the position that the order of the SEBI was bad in law and without jurisdiction, and would adversely affect the interests of insurers and investors. Hence, by an order dated 10 April 2010, the IRDA directed that the 14 insurance companies that could, notwithstanding the order of the SEBI, continue to carry on insurance business as usual, including offering, marketing and servicing unit-linked insurance products in accordance with the guidelines issued by the IRDA.

In order to clear the uncertainty and the difference of opinion relating to the jurisdiction of SEBI and IRDA, an Ordinance was promulgated by the President of India on 18 June 2010 to clarify that “life insurance business” includes any unit linked insurance policy. The Ordinance also provides for the setting up of a joint mechanism consisting of the Finance Minister, Chairpersons of SEBI and IRDA and other officers for resolving any future differences of opinion as to whether any hybrid or composite instrument, having a component of money market investment or securities market instrument or a component of insurance or any other instrument, falls within the jurisdiction of IRDA or SEBI or the Reserve Bank of India or the Pension Fund Regulatory ad Development Authority.

O.P. Bhardwaj Associated Law Advisers of New Delhi [email protected]




Japan

Easing of anti-tax haven rules

Japan’s anti-tax haven rules (also referred to as the controlled foreign corporation (“CFC”) rules) have been liberalized as part of the 2010 tax reform program. While the CFC rules apply mainly to Japanese multinational companies, they also apply to foreign owned Japanese companies that control foreign subsidiaries. Specific amendments are outlined below.

A. Applicable foreign tax rate

Prior to April 2010, the CFC rules were triggered when a foreign related company was subject to an effective tax rate of 25% or less. “Foreign related company” is a foreign company, more than 50% of the shares of which are held directly or indirectly by Japanese companies, Japanese resident individuals or Japanese non-residents who have a special relationship with a Japanese company or resident individual.

From 1 April 2010, the Japanese CFC rules will only apply to CFCs with an effective tax rate of 20% or less. Thus, under the previous 25% threshold, a foreign related company in China (25% tax rate), South Korea (24.2% tax rate), Vietnam (25% tax rate), Malaysia (25% tax rate) and Taiwan (20% tax rate), would likely trigger the anti-tax haven rule, but under the revised threshold likely would not.

B. Treatment of foreign dividend income

In calculating the effective tax rate to be used as the Anti-Tax Haven Rule “trigger”, dividend income received by the CFC from related parties may be excluded from the CFC’s tax base. Specifically, the tax rules in effect before the revision allowed non-taxable dividends received from a foreign-related party of the CFC to be excluded in calculating the effective tax rate of the CFC, provided that the country in which the CFC is located has minimum share ownership requirements with respect to its participation exemption rules.

Under the 2010 revision, the requirements of the Japanese tax rules have been relaxed, allowing foreign dividend income to be excluded from calculating the CFC’s tax base as long as either (i) the foreign country has minimum shareholding requirements with respect to the local participation exemption rules or that a company satisfies “other requirements” under that country’s laws with respect to the participation exemption rules. Thus, where a CFC receives a dividend from a foreign related party that it may exclude from income under the laws of the local country, such dividend income now may arguably be excluded in calculating the CFC’s effective tax rate for purposes of the Japanese Anti-Tax Haven Rules, regardless of whether a minimum shareholding requirement with respect to the foreign dividend exclusion rule exists in the foreign country or not.

C. Changes to shareholding

Where a Japanese shareholder owned 5% or more of a CFC prior to 1 April 2010, income derived from the CFC by the Japanese shareholder was deemed to be tainted and was to be included currently in the shareholder’s income for Japanese tax purposes. (What constitutes a “shareholder” for these purposes includes a Japanese company or a Japanese company belonging to a group which holds the requisite proportion of shares, either directly or indirectly.) From 1 April 2010, the CFC shareholding threshold has been increased to 10%, and a threshold test will apply at the end of each of the CFC’s fiscal years.



D. New exception to Business Purpose Test for a “Controlling Company”

An exception to the provisions of the Tax Haven rules exists for a CFC which passes four tests: the business purpose test (jigyou kijun), the substance test (jitai kijun), the management control test (kanri shihai kijun) and either the unrelated parties test (hikanrensha kijun) or the country of location test (shozaichikoku kijun). Very generally, the requirements of the tests are as follows: for the business purpose test, that the CFC engage in a business other than the passive holding of shares, licensing of intangible rights, or leasing of tangible goods; for the substance test, that the CFC had a fixed place of business in the local country; and for the management control test, that the CFC engages in management in the country in which it is located. If the CFC’s main business is wholesale, banking, trusts, dealing in securities or sea transportation or air transportation, it must pass the unrelated parties test, whereby 50% or more of its transactions must be with unrelated parties; if its main business is other than one of the businesses listed above, it must pass the country of location test, such that it’s main business must be conducted in its country of location.

Under the 2010 tax revisions, where a CFC is a “controlling company” (a “toukatsu kaisha”), as defined below, the holding of shares will be disregarded in evaluating whether that CFC satisfies the business purpose test. In order for a CFC to be a controlling company, the requirements are that (i) all the CFC’s issued shares are held directly or indirectly by a Japanese parent; (ii) the CFC owns two or more “controlled companies”, as defined below, which the CFC controls and (iii) the CFC has fixed assets and the necessary personnel in the country of its location to engage in the control of the controlled companies. For purposes of this provision, “controlled companies” must be at least 25% controlled, through share ownership and voting rights, by the controlling company, and must carry on an actual business in the country in which their head office is located.

Additionally, if the other business conducted by the CFC for purposes of the “unrelated parties test” is a wholesale business, transactions with the controlled companies will be disregarded in determining whether the 50% threshold for non-related party transactions under the “unrelated party test” is met.

E. Inclusion of passive investment income

Currently, where a Japanese resident owns less than 10% of the CFC, none of the income of the Japanese shareholder related to the CFC is included in the Japanese shareholder’s income for Japanese tax purposes. The 2010 reforms have changed this situation so that passive income received by a CFC from investments that would otherwise satisfy the active business exemption discussed above will be included in assessable income for a Japanese shareholder. The following types of passive income will be included:

a. Dividend income on shares, where the Japanese shareholder holds less than 10% of the total shares, and capital gains on the sale of those shares (if sold on an exchange or over the counter);

b. Interest income on bonds, and capital gains on the sale of bonds (if sold on an exchange or over the counter);

c. Income arising from industrial rights and copyrights; and

d. Income derived from leases of aircraft and sea vessels.

Where, however, the total passive income received by a Japanese company from a CFC amounts to less than 5% of its pre-tax profits or is less than JPY10 million in a fiscal year, then the new passive income inclusion rule will not apply. Further, for income derived by the Japanese company from


items (i) and (ii) above, the relevant passive income will be excludable if it was in respect of activities of the CFC that are essential to its business.

F. Exemption of double taxation on multi-tier companies

While dividends paid by a CFC out of previously taxed earnings directly to its Japanese parent are generally exempt from tax, this exemption has generally been lost where the dividends were paid indirectly; for example, by the CFC to another subsidiary of the Japanese parent and then onward to the parent.

From 1 April 2010, dividends attributable to previously taxed retained earnings of a lower-tier CFC are now exempt from tax in Japan if those dividends are paid through a non-CFC, but only to the extent of the smaller of either of the following, with respect to the year in which the dividend was received by the CFC and the two years before the first day of the fiscal year in which the dividend was received (“the three-year period”):

a. the proportion of dividends received from the lower tier CFC within the three-year period; or

b. the proportion of the lower tier CFC’s income taxed in the hands of the Japanese parent within the three-year period.

Edwin T. Whatley (Tokyo) +813 5157 2801 [email protected]

New Tax Information and Exchange Agreements

In addition to new tax treaties, Japan signed its first Tax Information Exchange Agreement (“TIEA”) this year, and is in negotiations to ratify a second.

A. Signing of New Japan-Bermuda TIEA

Japan signed a TIEA with Bermuda on 1 February 2010 which allows for full exchange of information regarding civil and criminal tax matters between the two countries.

The Agreement provides a detailed mechanism for the exchange of tax information, with a view, according to the MOF of “preventing cross-border fiscal evasion and tax avoidance”.

Although the main purpose of the agreement is to allow for sharing of fiscal-related information, the agreement also contains tax provisions relevant to pensioners, students, and government workers, “for the purpose of promoting personal exchange between Japan and Bermuda” and further allows for mutual agreement procedures between the two governments.

While this was the 19th signed TIEA for Bermuda, it was Japan’s first and, according to the MOF, “will be Japan’s practical contribution in expanding the international information exchange network aimed at the prevention of cross-border fiscal evasion and tax avoidance”.




B. Agreement on New Japan-Cayman TIEA

On 26 May 2010 the MOF announced that Japan and the Cayman Islands had agreed in principle on a an agreement for the exchange of information for the purpose of preventing fiscal evasion, and to set out rights between the country with respect to certain categories of taxation.

Although the agreement is expected to include provisions to exempt tax at source for certain types of individuals, such as pensioners (similar to the TIEA with Bermuda, discussed above), the main focus of the agreement is expected to be exchange of information, so as to assist Japan in examining potential fiscal evasion.


New Social Security Agreement with Brazil

On 29 July 2010, Japan’s Ministry of Foreign Affairs announced it had signed a new Social Security Agreement with Brazil. Under the agreement, employees from one country temporarily working in the other country (for five years or less) will be able to join the pension system of the other country, and count the period of employment in each country.

This agreement should promote increased economic relations between the countries, which is particularly important to Japan in light of Japan’s aging workforce and the perceived need for additional potential labour sources.





Malaysia

Islamic Finance incentives

Numerous tax incentives were granted previously to promote Islamic finance in Malaysia. These incentives were extended in the government’s last budget in terms of scope and effective period.

A. Export of financial services

(a) Banking institutions currently enjoy a tax exemption on profits of newly established branches overseas or income remitted by new overseas subsidiaries. This will be extended to insurance and takaful companies too.

(b) The current tax exemption is given for a period of 5 years from the commencement of operations of the branches or subsidiaries. This effective period will be given more flexibility to be deferred from the date of commencement of operations to begin not later than the third year of operations.

(c) Currently, applications to establish new branches or subsidiaries overseas must be submitted to Bank Negara Malaysia between 2 September 2006 until 31 December 3 2009. This period will be extended until 31 December 2015.

B. International Islamic Financial Centre

(a) Currently, expenses incurred in the promotion of Malaysia as an International Islamic Financial Centre (“MIFC”) are given a double deduction incentive. This incentive was originally effective between YA 2008 until YA 2010. This has now been extended until YA 2015.

(b) The deductible expenses, which need to be verified by the MIFC Secretariat, are:

(i) market research and feasibility study;

(ii) preparation of technical information relating to type of services offered;

(iii) participation in an event to promote MIFC;

(iv) maintenance of sales office overseas; and

(v) publicity and advertisement in any media outside Malaysia.

C. Expenditure to establish Islamic Stock Broking Companies

(a) Currently expenditure incurred prior to the commencement of an Islamic stock broking company is deductible. The incentive is subject to the condition that the company must commence its business within a period of 2 years from the date of approval by the Securities Commission.

(b) This incentive, which would originally expire on 31 December 2009 has been extended until 31 December 2015.



D. Incentives on issuance of Islamic Securities

(a) Currently expenses incurred in the issuance of Islamic securities approved by the Securities Commission are deductible.

(b) The incentive was originally effective from YA 2003 until YA 2010. It will now be extended until YA 2015. This incentive will be further extended to Islamic securities approved by the Labuan Financial Services Authority (“Labuan FSA”), effective from YA 2010 until YA 2015.

E. Profits from non-ringgit sukuk

(a) Currently profits from non-Ringgit Sukuk approved by the Securities Commission and issued in Malaysia are tax exempt from YA 2008. However, this tax exemption does not cover profits from sukuk approved by the Labuan FSA. Therefore, profits derived from the issuance of sukuk approved by the Labuan FSA will also be tax exempt effective from YA 2010.

F. Standardizing tax assessment system for special purpose vehicles

(a) Currently a special purpose vehicle (“SPV”) established under the Companies Act 1965 solely to channel funds for the purpose of issuing Islamic securities approved by the Securities Commission will not be subject to income tax and is not required to comply with administrative procedures under the Income Tax Act 1967.

(b) Income received and the costs incurred in the issuance of Islamic securities by the SPV are deemed income and the cost of the company establishing the SPV. Therefore, the company establishing the SPV is subject to tax on that income and given a deduction on such cost incurred.

(c) The above will now apply to SPV’s established under the Labuan Companies Act 1990 who elect to be taxed under the Income Tax Act 1967. This will be effective from YA 2010.

G. Stamp duty exemption on Sharia Financing Instruments

(a) Presently, stamp duty exemption is available on instruments executed pursuant to a scheme of financing which is in accordance with the principles of Sharia approved by the Bank Negara Malaysia and the Securities Commission. The same incentive is now extended to schemes of financing which are in accordance with the principles of Sharia approved by the Labuan FSA.

H. Extension on stamp duty exemption on instruments of Islamic Financing

(a) Presently, the instruments of Islamic financing approved by the Sharia Advisory Council of Bank Negara Malaysia or the Sharia Advisory Council of the Securities Commission are given additional stamp duty exemption of 20%. The additional exemption is given after ensuring tax neutrality between conventional and Islamic financing. The exemption period is now extended until 31 December 2015.

Adeline Wong (Kuala Lumpur) +603 2298 7880 [email protected]

Gladys Chun (Kuala Lumpur) +603 2298 7935 [email protected]




Reforms affecting Labuan

On 2 April 2009, the OECD issued a report on the progress made by offshore jurisdictions in the implementation of the international tax standard for the exchange of information, which categorized Labuan IBFC as a jurisdiction on the OECD’s blacklist.

Labuan FSA (then known as LOFSA) had issued a statement to the OECD to clarify Labuan’s position. Labuan stated that it is committed to the international standard for the exchange of information and has cooperated with competent tax authorities from other countries on tax evasion matters and financial crime, particularly money laundering. As a result, in April 2009, the OECD recharacterized Labuan as a jurisdiction committed to fighting tax abuse and to implementing internationally agreed tax standards (that is, it was moved to the OECD’s gray list).

In February 2010, the OECD listed Malaysia on the “White List” (that is, a jurisdiction that has substantially implemented the internationally agreed tax standards for transparency and exchange of information between countries).

Malaysia is committed to these international standards and has been engaging in discussions with Malaysia’s tax treaty partners to remove elements of its treaties that do not conform to the OECD standards. Malaysia has signed an Exchange of Information (EOI) protocol with several countries as part of a commitment to implementing the internationally agreed tax standard on transparency and exchange of information. The countries are Belgium, Brunei, France, Ireland, Japan, Netherlands, San Marino, Senegal, Seychelles, Turkey, United Kingdom and Kuwait. The protocols are in line with the exchange of information provision of Article 26 of the OECD Model Tax Convention. Over the next few months, Malaysia will be signing a number of other EOI protocols to continue to enhance its Double Taxation Agreements with other countries.

This creates a higher platform for Labuan to position itself as a major regional and global offshore financial centre.

Labuan’s commitment to the international tax standard on EOI is also reflected in the recent revisions to the Labuan legislative framework on 11 February 2010.

Changes to the EOI standards are embodied in amendments to existing legislation as well as in four new acts. The new laws and amendments to existing legislations governing Labuan offshore entities came into effect on 11 February 2010. The four new acts enacted are Labuan Limited Partnerships and Limited Liability Partnerships Act 2010, Labuan Foundations Act 2010, Labuan Islamic Financial Services and Securities Act 2010 and Labuan Financial Services and Securities Act 2010. Amendments were made to the Labuan Business Activity Tax Act 1990, the Labuan Companies Act 1990, the Labuan Trusts Act 1990 and the Labuan Financial Services Authority Act 1990.

The new laws allow for the creation of Labuan Foundations, limited liability partnerships, protected cell companies (insurance and mutual funds), shipping operations, Labuan Special Trust and financial planning activities.

A. Labuan Financial Services and Securities Act 2010

The new Labuan Financial Services and Securities Act 2010 provides for the registration of Labuan private trust companies to act as trustees for specific trusts where the settlors are family members or connected persons.



B. Labuan Foundations Act 2010

The new Labuan Foundations Act 2010 provides for the establishment of foundations based on the concept of contractual duties recognized in civil law countries. The main purpose of a Labuan foundation will be to manage its property and the founder and beneficiaries of a Labuan foundation may be residents or non-residents.

C. Labuan Islamic Financial Services and Securities Act 2010

The new Labuan Islamic Financial Services and Securities Act 2010 sets the licensing and regulatory framework for Islamic financial services and securities in Labuan and provides for the establishment of Islamic banking and Takaful businesses including captive Takaful businesses plus Labuan Islamic trusts, foundations, limited partnerships and limited liability partnership.

The Labuan Islamic Financial Services and Securities Act 2010 represent a prominent highlight in providing a platform for the establishment of Sharia-compliant entities to promote the continuing growth of the Islamic financial market. The roles and functions of the Sharia Supervisory Council (“SCC”), formerly known as the Sharia Advisory Committee, have been boosted with the enactment of this Act. Moreover, any rulings made by the SSC can now service as the reference point for the court in dispute resolution on Sharia issues related to Islamic banking and finance.

D. Labuan Limited Partnerships and Limited Liability Partnerships Act 2010

The new Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 renamed offshore limited partnership as Labuan limited partnership and provide for the establishment and conversion of Labuan companies into Labuan limited liability partnerships.

E. Amended Labuan Companies Act 1990

The amended Labuan Companies Act 1990 allows for the incorporation and conversion of an existing Labuan company into a protected cell company (“PCC”) for the conduct of insurance and mutual fund businesses. The PCC remains a single legal entity but may segregate its asset into separate legally independent cells, each of which is ring fenced from the other cells.

F. Amended Labuan Trusts Act 1996

The amended Labuan Trusts Act 1996 now allows a Malaysian resident to set up and be the beneficiary of a Labuan trust.

The legislative overhaul is aimed at enabling Labuan to offer a wider range of financial products and services and to become the first common law country to have specific legislation for Islamic financial services. These complement the existing range of products and services readily available and provide investors with a wider choice of financial products to maximise investment opportunities whilst ensuring that the business transactions and practices in Labuan IBFC continue to be conducted in accordance with the internationally accepted standards and best practices.

There have been other developments in Labuan that provide flexibility for Labuan banks and to locate its operations outside of Labuan.


A. On 19 January 2010, Labuan FSA announced that Labuan banks and Labuan investment

banks have been accorded the added flexibility of being able to establish their offices in other parts of Malaysia other than Labuan with immediate effect.

B. The recently introduced policy is an extension of the initiative that was introduced in May 2009 that allowed Labuan Holding Companies to establish their operational and management offices in Kuala Lumpur.

C. This policy is aimed at attracting more international banks to choose Labuan IBFC as a base for their regional operations and leverage on the offerings of first class infrastructure, facilities, human capital and professional services that are available in Malaysia.

D. The general criteria for establishing offices outside Labuan include the following:

a. An application for approval to set up the co-located office submitted to LOFSA prior to its establishment;

b. The applicant must continue to have applications continued holding of an office in Labuan with suitable number of staff to perform the functions assigned to the Labuan office; and

c. The applicant is conducting the following business activities at the co-located office:

i. banking business as permitted under the Offshore Banking Act 1990 or any other relevant legislation; and

ii. any other banking businesses as may be permitted from time to time.








Reintroduction of Real Property Gains Tax

Although Malaysia has a real property gains tax (RPGT) regime on gains from disposal of real property as well as shares in real property companies, real property gains were exempted from Malaysian tax during the period 1 April 2007 to 1 January 2010. The Government has now reinstated the real property gains tax beginning 1 January 2010 where the disposal is made within 5 years from the date of the acquisition of such chargeable asset. Gains made from the disposal of chargeable assets which are held for more than 5 years will be exempted from the real property gains tax pursuant to the Real Property Gains Tax (Exemption)(No.2) Order 2009.

Transfers of property between spouses, parent and child or grandchild as well as the once in a lifetime disposal of residential property for a Malaysian citizen or a permanent resident of Malaysia will continue to be tax exempt.

In many respects the RPGT, in its new incarnation, is fairly similar to the old regime but some of the most notable changes include:

A. Both the disposer and the acquirer must submit a return on the disposal of real property via the requisite forms (regardless of whether the exemption applies) and the time allowed for doing so is extended to 60 days instead of one month under the old regime;

B. An acquirer will be required to withhold 2% of the total consideration for the disposal or the whole amount of the cash consideration if that is less and, whether withheld or not, to pay that amount directly to the Inland Revenue within 60 days of the date of the disposal. Failure to do so causes a 10% increase in the amount payable. This is significantly different from the previous system under which the acquirer was required to retain a part of the disposal proceeds pending tax clearance but with no requirement to make any payment unless required by the Inland Revenue Board; and

C. A certificate of non-chargeability will be issued to the disposer where there is no tax liability.

A taxpayer who is an individual will normally be entitled in respect of each chargeable gain to an exemption of RM10,000 or 10% of that chargeable gain, whichever is greater.

Where the disposal price of an asset is less than the acquisition price, there is an allowable loss. Relief is to be given for such loss by deducting it from the total chargeable gains for the year of the loss (after excluding, in the case of an individual the exemption of RM10,000 or 10% referred to above). Any amount that cannot be relieved due to an insufficiency of chargeable gains can be carried forward and offset in future years.

This differs from the previous loss relief which required the allowable loss to be multiplied by the rate of tax that would have applied for that year if it had been a chargeable gain. Relief was then given against tax on chargeable gains in the same or a future year. Old losses calculated in this way sustained up 31 March 2007, which have not been relieved, may be carried forward for relief in the period commencing 1 January 2010.





Liberalization of foreign investment restrictions on real estate acquisitions

Following the announcement made by the Government on 30 June 2009 to liberalise property acquisition by foreigners, the Economic Planning Unit of one Prime Minister’s Department (“EPU”) has revised the Guidelines on Acquisition of Properties (“Guidelines”) accordingly. The new Guidelines came into effect on 1 January 2010.

Those with foreign interests will no longer be required to obtain the approval of the Economic Planning Unit for acquisition of commercial, industrial, agricultural land above the value of RM500,000. The relevant State Government will, however, continue to have authority in respect of real property transactions involving foreign interests.

Acquisition of residential units by foreign interests will not require the EPU’s approval if the value of the residential unit is more than RM500,000. This measure will take effect from 1 January 2010 and will increase from the previous threshold of RM250,000.

Kindly note that those with foreign interests are not allowed to acquire the following:

A. properties valued at less than RM500,000 per unit;

B. residential units under the category of low and low-medium cost as determined by the State Authority;

C. properties built on Malay reserved land; and

D. properties allocated to Bumiputra interest in any property development project as determined by the State Authority.

EPU approval is required for real property transactions resulting in the dilution of Bumiputras or Government interests in real property, as follows:

A. Direct acquisitions of real property where (a) there is a dilution of Bumiputra or Government interests in real property; and (b) the real property is valued above RM20 million.

B. Indirect acquisitions of real property by those with a foreign interest through acquisition of shares if:

a. the transaction results in a change in control of the company owned by Bumiputra interests and/or a Government agency;

b. real property makes up more than 50% of the said company’s assets; and

c. the real property is valued at more than RM20 million.

Where EPU approval is required, the following conditions will be imposed:

a. the acquiring company is to have at least 30% Bumiputra shareholding; and

b. a Malaysian-incorporated company owned by those with a foreign interest is to have at least a paid-up capital of RM250,000.



In terms of timing for compliance with the above-mentioned conditions, the equity and paid-up capital conditions for direct acquisition of property must be complied with before the transfer of the property’s ownership. For indirect acquisition of property, the equity and paid-up capital conditions must be complied with within 1 year after the issuance of written approval.

With the liberalization of the new Guidelines, the purchase of real property is less cumbersome and can be completed faster without the EPU approval. The relevant State Government will therefore continue to be the only regulator in respect of real property acquisition by foreign interests. This could effectively mean that there could be varying degrees of liberalized foreign investment policies between states.






Philippines

Exchange of information

On 5 March 2010, the President of the Philippines signed into law the Republic Act No. 10021 otherwise known as the “Exchange of Information on Tax Matters Act of 2009” (the “Act”), which essentially authorizes the Bureau of Internal Revenue (“BIR”) to exchange information on tax matters with foreign counterparts to help fight international tax evasion.

In the past, the government found it difficult to comply with the provisions on the exchange of information set by international organizations due to certain legal restrictions, particularly the Philippines’ strict bank secrecy laws. The Act, which amended some provisions of the National Internal Revenue Code of 1997, seeks to strengthen the government’s capacity to implement the country’s commitments under existing tax conventions or agreements. This comes on the back heels of the Organization for Economic Cooperation and Development’s blacklisting the Philippines as a tax haven last year.

A common provision found in the tax treaties is exchange of information provisions, mandating cooperation between the tax administrations of the two Contracting States. Thus, the competent authorities are required to exchange such information as is necessary for carrying out the provisions of the tax treaty, or for the prevention of fraud, or for the administration of statutory provisions concerning taxes to which the treaty applies provided the information is of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes.

A. Amendments introduced

Prior to the passage of the Act, the authority of the BIR to inquire into bank deposits and other related information held by financial institutions was limited to investigations pertaining to:

a. decedents for estate tax purposes; and

b. applications for compromise settlements of taxes on the grounds of financial incapacity.

The amendments introduced by the Act authorize the BIR commissioner to inquire into bank deposits and other related information held by financial institutions to supply information to a requesting foreign tax authority. The requesting foreign tax authority must provide the following information to demonstrate the relevance of the information to the request:

a. The identity of the person under examination or investigation;

b. A statement of the information being sought including its nature and the form in which the said foreign tax authority prefers to receive the information from the Commissioner;

c. The tax purpose for which the information is being sought;

d. Grounds for believing that the information requested is held in the Philippines or is in the possession or control of a person within the jurisdiction of the Philippines;

e. To the extent known, the name and address of any person believed to be in possession of the requested information;



f. A statement that the request is in conformity with the law and administrative practices of the said foreign tax authority, such that if the requested information was within the jurisdiction of the said foreign tax authority then it would be able to obtain the information under its laws or in the normal course of administrative practice and that it is in conformity with a convention or international agreement; and

g. A statement that the requesting foreign tax authority has exhausted all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.

The Commissioner is mandated to forward the information as promptly as possible to the foreign tax authority. To ensure a prompt response, the Commissioner shall confirm receipt of a request in writing to the requesting tax authority and shall notify the latter of delinquencies in the request, if any, within sixty (60) days from receipt of the request. If the Commissioner is unable to obtain and provide the information within ninety (90) days from receipt of the request, due to obstacles encountered in furnishing the information or when the bank or financial institution refuses to furnish the information, he shall immediately inform the requesting tax authority of the same, explaining the nature of the obstacles encountered or the reasons for the refusal.

The Act likewise allows a requesting foreign tax authority to study the income tax returns of taxpayers upon order of the President, subject to rules and regulations on necessity and relevance that may be promulgated upon enactment of the law.

B. Acts penalized

In order to prevent any potential abuse, the Act penalizes:

a. BIR personnel for unlawful divulgence of information obtained from banks to persons other than the requesting foreign tax authority; and

b. Bank officers who refuse to supply requested tax information.

The requesting foreign tax authority likewise is mandated to maintain confidentiality of the information received.

Dennis Dimagiba (Manila) +63 2 819 4912 [email protected]



Data Warehousing of assets of taxpayer under Investigation

In a move that perhaps foreshadows a tightening up of tax compliance with respect to HNWIs in the Philippines, the government promulgated Revenue Memorandum Order No. 26-2010 in order to institute a system for the development of a Data Warehouse which will contain information on the assets of taxpayers under investigation that may be utilized in collection enforcement proceedings. The information will include, among others, the type of assets, the location of the assets, the bank accounts maintained (including the type of account, the account number, and the name and address of the bank), Transfer Certificate of Title (TCT) number (in case of real property), name/address of debtor and all other necessary information.

Dennis Dimagiba (Manila) +63 2 819 4912 [email protected]

Singapore

Mental Capacity Act

The Mental Capacity Act (“MCA”) came into effect in 2010. The MCA is based on the UK’s Mental Capacity Act 2005 and introduces lasting (or enduring) powers of attorney in Singapore. A donor in Singapore may now use a lasting power of attorney to appoint a donee/donees to make decisions on behalf of the donor in the event of the donor suffering mental incapacity. Such decisions may be in relation to the donor’s personal welfare and/or property and affairs.

Edmund Leow (Singapore) +65 6434 2531 [email protected]





Spain

Spanish Budget for 2011: tax amendments and measures to stimulate investment and employment

On 21 December 2010 the Spanish Parliament approved the General Budget for 2011 which contains a number of tax amendments that are generally applicable as of 1 January 2011 in addition to the tax measures to stimulate investment and employment adopted on 3 December 2010 by the Spanish Government. The main amendments are outlined here below.

1. Personal Income Tax

a) Two new tax brackets have been introduced for taxpayers earning more than EUR 120,000: taxable income between Euro 120,000 and Euro 175,000 will be subject to a marginal tax rate of 44% while taxable income in excess of Euro 175,000 will be taxed at d 45%. The Personal Income Tax maximum rate up to now (43%) will continue to be applicable to income between EUR 53,407 and EUR 120,000.

It should be noted however that half of the Personal Income Tax collections are attributed to Spanish Autonomous Regions and these have legal competence to modify the correspondent tax rates as well which some of them have also announced for 2011 increasing their tax rates up to 49% even.

b) The 40% reduction of the tax base that applies to income generated over a period of more than 2 years has been limited and will apply only to income up to EUR 300,000 as of 1 January 2011. Over such amount non-periodic income will be taxed at the marginal tax rates in full.

c) The 15% tax credit for annual costs including interest (up to Euro 9,015) incurred for the purchase or restoration of the taxpayer’s primary residence is virtually eliminated as it will be obly applicable to taxpayers earning less than EUR 24,170. However, those who have purchased their dwellings before 31 December 2010 and already benefit from this tax credit will be able to keep it until they have completely paid their houses.

d) Finally, the 50% reduction of taxable income derived from the rental of dwellings will increase to 60% while the current 100% reduction that applies to rental income when the tenant is younger than 35 will only apply when the tenant is younger than 30 from 1 January 2011 onwards.

2. Amendment of SICAV tax regime

Over the last years it has been usual that SICAV’s shareholders cashed back a significant part of their investment into the SICAV not via dividends but with capital reductions or share premium returns that allowed them to drain liquidity from the SICAV avoiding capital gains and deferring tax payment on the capital gains to the moment the SICAV is transferred or winded-up.

Further to the amendment to the SICAV tax regime approved by the Spanish Parliament, as of 23 September 2010, income derived by Spanish resident individuals from collective investment institutions (including not only Spanish SICAVs but also collective investment institutions and funds registered in other countries) as a result of capital reductions or share premium returns will be generally taxed at 19%/21%.


The amendment also establishes that Spanish corporate shareholders of collective investment institutions will be taxed by Corporate Income Tax as well on all income derived from capital reductions or share premium distributions, without any deductions.

3. Corporate Income Tax

The turnover threshold to qualify as a SME for Corporate Income Tax purposes has been raised up to EUR 10,000,000 and the amount of income obtained by SMEs that may be subject to the reduced tax rate of 25% (instead of the general 30% tax rate) has been also increased from EUR 120,000 to EUR 300,000.

SMEs whose transactions with a related party in a given year do not exceed EUR 100,000 are also released from preparing transfer pricing documentation unless they carry out transactions with related parties that are resident in a tax haven jurisdiction.

For all kinds of companies, tax free depreciation of fixed assets and real estate used in business activities and acquired between 2011 and2015 has also been approved.

4. Stamp Duty

1% Stamp Duty that applied to the incorporation of companies and increase of share capital, to contributions made by the shareholders that do not result in an increase of the share capital and to the transfer of the registered address or the effective place of management to Spain of a company not resident in the European Union has been abolished as of 23 December 2010.

5. Chamber of Commerce fee

This formerly mandatory fee based on the profits of companies has been modified so that it will only be paid by those companies that voluntarily choose to do so.

Bruno Domínguez (Barcelona) +34 932 06 08 20 [email protected]

Berta Rusiñol (Barcelona) +34 932 06 08 20 [email protected]





Taiwan

Alternative Minimum Tax and Tax on Offshore Income

The Taiwan Ministry of Finance (“MOF”) has finally issued the long awaited guidelines for taxation of offshore income (including capital gains) earned by individuals.

Prior to 1 January 2010, Taiwan individual tax residents were taxed only on their Taiwan sourced income. However, offshore income will be subject to another tax regime, generally referred to as Alternative Minimum Tax (“AMT”), as from 1 January 2010.

Under the previous system, individuals were required to file regular income tax returns without including their offshore income and certain other tax-exempted income, and to calculate their tax liability under the existing rates. Under the AMT rules, they are now required to add to such income certain tax-exempted income and deduct from this amount NT$6 million. The AMT rate of 20% will be applied to the resulting figure. They will then be required to pay the higher of these two amounts.

Effectively, what this means is that, from 1 January 2010, offshore income, if it exceeds NT$1 million, will be included for calculation of an individual’s tax liability under the AMT rules.

People have long been sceptical of the Taiwan government’s political willingness to tax offshore income. With the release of the guidelines, the MOF has signalled that it will be proceeding with this plan.

The MOF still faces technical hurdles in enforcing taxation of offshore income. First is the difficulty of collecting tax information from other countries, due to Taiwan’s unique political standing in the world and small number (16 only) of tax treaties. Second is the fact that Taiwan does not have rules to tax the income of offshore companies (CFC rules) and trusts that have been established by Taiwan residents. This offers planning opportunities for individuals to hold their offshore assets through such offshore vehicles and thus avoid the application of the AMT rules.

Without going into specifics, additional observations are as follows:

(a) The definition of a “taxpayer” goes beyond Taiwan citizens. Expatriates who stay in Taiwan more than 183 days during a year will be subject to the AMT and thus will be taxed on their worldwide income. Depending on the facts of each case, employers who operate a tax equalization scheme for their expatriate employees might find this burdensome.

(b) Distributions from mutual funds designated for investing in offshore securities will now be taxable. Such funds have been attractive to Taiwanese investors in the past because distributions were tax free until 31 December 2009. Under the new AMT, the market for these products is likely to suffer, and this will particularly affect foreign asset management companies. While capital gains from the redemption/transfer of shares in mutual funds issued by domestic asset management companies will very likely be deemed to be domestic capital gains from security trading and thus will remain tax free, such gains from funds issued by foreign asset management companies will be deemed to be offshore income and thus subject to AMT. This disparity will put foreign asset management companies at a tax disadvantage, and they are already lobbying against this proposal.

There are planning opportunities for high net worth individuals who wish to defer the taxation of their offshore income. This is because the language of the guidelines and some of the provisions appear


inconsistent as to when particular types of income will be considered “earned”. The issue in this context is whether repatriation of income and gains to Taiwan will be required for the AMT to apply.

Dennis Lee (Taipei) +886 2 2715 7288 [email protected]

Unlicensed financial institutions are not permitted to perform promotional activities in Taiwan

On 25 August 2010, the Taiwan Financial Supervisory Commission (FSC) promulgated an amendment to the existing rules that prohibit a non-Taiwan bank from promoting its services and products to Taiwan customers or conducting promotional activities through its onshore (Taiwan) presence.

Specifically, the new rules explicitly forbid any Taiwan branch of a foreign bank from conducting any promotional activities or client solicitation pertaining to opening offshore bank accounts or accepting deposits/funds from Taiwan residents for or on behalf of its head office, affiliates, or any other foreign institution that is not licensed under Taiwan laws.

Illegal activities include (but are not limited to) providing business premises for promotional events, holding seminars, arranging business visits, assisting in verifying identities of clients, or any other promotional or client solicitation activity for the purpose of opening offshore bank accounts with unlicensed financial institutions, or accepting deposits/funds from Taiwan residents for unlicensed financial institutions.

It is also unlawful for any employee of a foreign bank’s Taiwan branch to enter into any agreement with any unlicensed financial institution to perform any prohibited promotional or client solicitation activity for or on behalf of any unlicensed institutions.

In addition, according to the new rules, Taiwan branches of foreign banks are obliged to inform the chief audit executives of their head office of these forbidden activities in order to prevent their affiliates or departments who do not have licence in Taiwan from conducting any promotional activities relating to opening offshore bank accounts or accepting deposits/funds from Taiwan residents in Taiwan.

Any violation of these new rules may subject the responsible person of a foreign bank’s Taiwan branch to imprisonment for between 3-10 years, and/or a fine of between NT$10-200 million.

In practice, clients in Taiwan will often need to open offshore bank accounts for the purpose of accepting services, or purchasing products, from offshore financial institutions who are likely to be unlicensed in Taiwan. In our view, the new rules simply reaffirm the FSC’s longstanding policy of disallowing unlicensed financial institutions from carrying out any direct client solicitation or promotional activities in Taiwan with respect to unlicensed financial products or services in Taiwan, including offshore asset management and foreign insurance policies. These rules in effect further discourage the unlicensed promotion of offshore financial services or products in Taiwan. Unlicensed banks are not permitted to promote their banking services in Taiwan; unlicensed securities firms are not permitted to advertise their securities services or products in Taiwan; and unlicensed insurance companies are forbidden to directly solicit business from Taiwan residents in Taiwan.




While the content of the new rules is not anything new, their explicitness signals a new boldness by the FSC to enforce its policies more diligently. In light of this more stringent policy, we anticipate (and have already observed) a growing assertiveness by the FSC to monitor and penalize unauthorized activities of unlicensed financial institutions in Taiwan.

Michael S Wong +886 2 2715 7246 [email protected]

Sabine Lin +886 2 2715 7295 [email protected]




Ukraine

Companies in Ukraine made liable for corrupt practices

Starting from 1 January 2011, a company in Ukraine, other than a state-owned company or an international organization, may be subject to liability up to its liquidation for the acts of corruption committed by its individual director, attorney in fact or shareholder (each, the “authorized person”). Such liability of the companies has been introduced by the new anti-corruption legislation of Ukraine consisting of the Law “On Framework for Prevention of and Counteraction to Corruption” and the Law “On Liability of Legal Entities for Corruption” (collectively, the “Anti-Corruption Laws”), which were adopted by the Parliament of Ukraine in June 2009.

A legal entity may be held liable under the Anti-Corruption Laws only when its authorized person has committed a corrupt act which qualifies as a crime under the Criminal Code of Ukraine (e.g., giving a bribe or intrusion into the courts’ activities) and provided that it has been made on behalf of a company and for its benefit. We note that a company would be subject to the foregoing liability regardless of whether the authorized person had actually been found guilty and prosecuted for the act of corruption pursuant to legislation of Ukraine. A company would also suffer sanctions if the court proceeding was not completed, inter alia, due to the authorized person’s death, or adoption of an amnesty law by the Parliament of Ukraine applicable to such authorized person.

In addition to the liquidation of a company for corrupt practices such as terrorism financing, under the Anti-Corruption Laws, a company may also be subject to a fine up to approximately USD 32,000 (if calculated at the date of this newsletter), a prohibition to engage in certain business for up to a three-year period, or seizure by the state of the company’s property or moneys generated as a result of the authorized person’s crime. The fine and seizure of properties and moneys may be applied to a company in combination with liquidation or prohibition to engage into certain business.

Finally, according to the Anti-Corruption Laws, a contract entered into as a result of corrupt practices may be declared null and void by the court.

Andriy Nikiforov (Kyiv) +38 44 590 0101 [email protected]

Natalia Vilyavina (Kyiv) +38 44 590 0101 [email protected]





United States

IRS creates new taxation regime under the Voluntary Disclosure Penalty Framework for PFICs

Under US tax rules, US-based mutual funds and investment funds are taxed in such a way that the taxpayer must report income and gains from the fund on an annual basis. Thus, when the fund is sold, very little tax, if any, is owed. The purpose of these rules is to avoid the use of funds in such a way that taxation, which should otherwise occur on an annual basis, is in some way deferred until a later date allowing items that would normally be taxed at ordinary income to be converted into capital gains.1

Example #1: US mutual fund reflecting application of current tax rules.

Investment Sale

1/1/2002 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 Totals EXAMPLE 1 US Mutual Fund

Note 1

Current Tax Rules

Value of Fund 500,000.00 535,000.00 572,450.00 612,521.50 655,398.01 701,275.87 750,365.18 802,890.74Growth Note 2 4% 20,000.00 21,400.00 22,898.00 24,500.86 26,215.92 28,051.03 30,014.61 173,080.42Income Note 3 3% 15,000.00 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 129,810.32Turnover Note 4 33% 6,600.00 7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 9,904.82 57,116.54 Taxable Income:

Non-qualified dividend

15,000.00 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 129,810.32

Short-term capital gains

6,600.00 6,600.00

Long-term capital gains

7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 125,868.70 166,480.42

Tax: Dividend Tax 35% 5,250.00 5,617.50 6,010.73 6,431.48 6,881.68 7,363.40 7,878.83 45,433.61

1 Facts and assumptions used in the examples:

1. Initial investment of $500,000 made on 1 January 2002, which is assumed to be the start date for the mutual fund. This latter assumption eliminates the potential impact of unrealized gains inside the mutual fund at the time the individual invests in the fund.

2. Annual growth of the fund’s assets is assumed to be 7%: 4% growth in the value of the portfolio securities and 3% income attributable to interest and dividends.

3. Assume that no dividends are actually paid from the fund; all earnings on assets are invested inside the fund.

4. To highlight the benefit attributable to investing in a foreign mutual fund before the enactment of the PFIC rules, we assume that the income earned by the fund (3% annually) would constitute nonqualified dividends if distributed annually to the funds shareholders.

5. The voluntary disclosure filing period is assumed to be 2003 through 2008.

6. The entire fund is sold on 31 December 2008.

7. It is assumed that inside the fund one-third of the assets are sold each year producing a short-term capital gain in 2002 and long-term capital gains in each subsequent year. This allows us to demonstrate the required inclusion in income for a shareholder in a US mutual fund for the internal capital gains realized by the fund.

8. In all of the examples, generally, it is assumed that ordinary income and short-term capital gains are subject to tax at the top marginal rate.


STCG Taxed as ordinary income

35% 2,310.00 - - - - - - 2,310.00

LTCG Tax 15% - 1,059.30 1,133.45 1,212.79 1,297.69 1,388.53 18,880.31 24,972.06 Total Taxes 7,560.00 6,676.80 7,144.18 7,644.27 8,179.37 8,751.92 26,759.14 72,715.67 Note 1 The initial investment occurs at the time the fund is started, on January 1, 2002. All shares sold December 31, 2008. The fund is

an income oriented fund with a large concentration in fixed income holdings Note 2 The annual increase in the value of the portfolio including realized and unrealized gains. Note 3 Income from interest and dividends earned by the fund on its portfolio assets. All dividend income assumed to be nonqualified.

All income is reinvested by the fund. Note 4 This is the portion of the increase in value of the fund that is realized each year through the sale of securities. After the first year

of the fund, all gains are assumed to be long-term capital gains.

In the non-US context, there is no mechanism to force a taxpayer to realise the income on an annual basis.

Example #2: Foreign mutual fund demonstrating the application of the tax rules in effect prior to the enactment of the PFIC rules in 1986. The result is compared to Ex. 1, showing the tax savings from using a foreign mutual fund, pre-PFIC rules.

Investment Sale

1/1/2002 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 Totals EXAMPLE 2 Foreign Mutual Fund

Note 1

Pre-PFIC Rules

500,000.00 535,000.00 572,450.00 612,521.50 655,398.01 701,275.87 750,365.18 802,890.74Growth Note 2 4% 20,000.00 21,400.00 22,898.00 24,500.86 26,215.92 28,051.03 30,014.61 173,080.42Income Note 3 3% 15,000.00 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 129,810.32Turnover Note 4 33% 6,600.00 7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 9,904.82 57,116.54 Taxable Income:


-


-


302,890.74 302,890.74

Tax: Dividend Tax 35% - - - - - - - -STCG Tax 35% - - - - - - - -LTCG Tax 15% - - - - - - 45,433.61 45,433.61 Total Taxes - - - - - - 45,433.61 45,433.61 Tax Savings To Foreign Mutual Fund (Pre PFIC Rules)

7,560.00 6,676.80 7,144.18 7,644.27 8,179.37 8,751.92 (18,674.47) 27,282.06

Note 1 The initial investment occurs at the time the fund is started, on January 1, 2002. All shares sold December 31, 2008. The fund is an

income oriented fund with a large concentration in fixed income holdings Note 2 The annual increase in the value of the portfolio including realized and unrealized gains. Note 3 Income from interest and dividends earned by the fund on its portfolio assets. All dividend income assumed to be nonqualified. All

income is reinvested by the fund. Note 4 This is the portion of the increase in value of the fund that is realized each year through the sale of securities. After the first year of

the fund, all gains are assumed to be long-term capital gains.

Using the above example, using a non-US mutual fund creates a net saving of approximately US$28,000. Thus, the US created a set of rules called the Passive Foreign Investment Company, or



PFIC rules. The purpose of these rules is to allow a taxpayer to elect to have a fund taxed as if it were a US fund or defer the tax until a later point. However, when it defers, it will be subject to an interest charge and a conversion of income. Generally, a PFIC is defined as any non-US corporation needing either an income test or an asset test.2

Example #3: Foreign mutual fund demonstrating application of the look back taxation rules applicable to section 1291 funds. The result is compared to Ex. 1 to show the additional tax cost of using a foreign mutual fund under the §1291 regime.

Investment Sale

1/1/2002 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 Totals EXAMPLE 3 Foreign Mutual Fund (PFIC)

Note 1

§1291 Fund 500,000.00 Note 5 572,450.00 612,521.50 655,398.01 701,275.87 750,365.18 802,890.74Growth Note 2 4% 21,400.00 22,898.00 24,500.86 26,215.92 28,051.03 30,014.61 153,080.42Income Note 3 3% 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 114,810.32Turnover Note 4 33% 7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 9,904.82 50,516.54 Taxable Income:


- - - - - -


- - - - - - -


- - - - - - -

PFIC Other Income

Note 6 - - - - - 43,354.72 43,354.72

Tax: Dividend Tax 35% - - - - - - -STCG Taxed 35% - - - - - - -LTCG Tax 15% - - - - - - -Tax on PFIC Other Income

35% - - - - - 15,174.15 15,174.15

PFIC Deferred Tax

Note 7 - - - - - 92,394.11 92,394.11

Interest on PFIC Deferred Tax

Note 8 - - - - - 24,410.93 24,410.93

Total Taxes - - - - - - 131,979.19 131,979.19 Additional tax vs. domestic mutual fund

(6,676.80) (7,144.18) (7,644.27) (8,179.37) (8,751.92) 105,220.05 66,823.52

Note 1 The initial investment occurs at the time the fund is started, on January 1, 2002. All shares sold December 31, 2008. The fund is



of the fund, all gains are assumed to be long-term capital gains. Note 5 In this example tax returns are filed for the tax years 2003 through 2008 under the VDP. Note 6 This represents the current portion of the gain from sale of the §1291 Fund (the “excess distribution) allocable to 2008 and taxable

as ordinary income.

2 The threshold on the income test is if 75% of the income is from a non-US source. The asset test is a 50% greater of the assets are subject to these rules. These rules primarily attack investment funds outside of the United States typically structured as Luxembourg SICAVs or unit trusts or some other fund vehicle.


Note 7 This is the tax attributable to the portion of the excess distribution that is allocated to each year in the holding period prior to the

year of sale. Note 8 This is the compound interest charge related to the tax determined for each year in the holding period of the section 1291 Fund

prior to 2008.

Benefit of New Protocol Including Penalty and Interest Sale in 2008 2003 2004 2005 2006 2007 2008 Totals EXAMPLE 3 §1291 Fund §1291 tax and Interest - - - - - 131,979.19 131,979.19Interest on deficiency to 4/15/2010 - - - - - 5,385.87 5,385.87Accuracy penalty - - - - - 26,395.84 26,395.84Interest on penalty - - - - - 1,077.17 1,077.17 Totals - - - - - 164,838.08 164,838.08

Thus, while imperfect, the election to be taxed annually is designed to create “rough justice” with the equivalent onshore fund.

There was a further option for taxation being a “mark-to- market”, but this was limited to certain publicly traded investments and needed to be timely made.

Example #4: Foreign mutual fund applying the section 1296 mark-to-market provisions. The result is compared to Ex. 3, to show the savings from electing mark-to-market taxation (§1296).

Investment Sale


Note 1

§1296 Mark to Market

500,000.00 Note 5 572,450.00 612,521.50 655,398.01 701,275.87 750,365.18 802,890.74Growth Note 2 4% 21,400.00 22,898.00 24,500.86 26,215.92 28,051.03 30,014.61 153,080.42Income Note 3 3% 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 114,810.32Turnover Note 4 33% 7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 9,904.82 50,516.54 Taxable Income:


- - - - - - -


- - - - - - -


- - - - - - -

§1296 Gain / (Loss)

Note 9 37,450.00 40,071.50 42,876.51 45,877.86 49,089.31 52,525.56 267,890.74

Tax: Dividend Tax 35% - - - - - - -STCG Taxed 35% - - - - - - -LTCG Tax 15% - - - - - - -Tax on §1296 Income

35% 13,107.50 14,025.03 15,006.78 16,057.25 17,181.26 18,383.95 93,761.76

Total Taxes - 13,107.50 14,025.03 15,006.78 16,057.25 17,181.26 18,383.95 93,761.76



Tax savings vs. §1291 Fund taxation

Note 10

(13,107.50) (14,025.03) (15,006.78) (16,057.25) (17,181.26) 113,595.25 38,217.43

Note 1 The initial investment occurs at the time the fund is started, on January 1, 2002. All shares sold December 31, 2008. The fund is



of the fund, all gains are assumed to be long-term capital gains. Note 5 In this example tax returns are filed for the tax years 2003 through 2008 under the VDP. Note 9 The increase in value for years prior to the VDP filing period (2002) is not subject to tax since the initial year of filing in this

example is the year 2003. Note 10 The saving is attributable to the compound interest charge component of the §1291 fund tax and the tax on the appreciation in

value for years prior to the VDP filing period.

Benefit of New Protocol Including Penalty and Interest Sale in 2008 2003 2004 2005 2006 2007 2008 Totals EXAMPLE 4 §1296 Mark to Market Tax 13,107.50 14,025.03 15,006.78 16,057.25 17,181.26 18,383.95 93,761.76Interest on deficiency to 4/15/2010 5,717.76 5,177.87 4,239.71 2,992.95 1,694.81 750.22 20,573.33Accuracy penalty 2,621.50 2,805.01 3,001.36 3,211.45 3,436.25 3,676.79 18,752.36Interest on penalty 1,143.55 1,035.58 847.94 598.59 338.96 150.04 4,114.67 Totals 22,590.31 23,043.49 23,095.79 22,860.24 22,651.28 22,961.00 137,202.11

In the context of banks outside of the US, the use of investment funds is incredibly important, particularly for smaller clients. The reason being that these funds allow for diversification that otherwise might not be possible in an account. Further, it allows for an additional fee level that might not be able to be possibly obtained. In the authors’ experience, some 40% to 50% of most accounts held by banks outside the US, particularly wealth management institutions, will be in the form of offshore investment funds that will be classified as PFICs. As discussed and illustrated above, unfortunately from a US tax perspective, these are incredibly destructive.

Because on many occasions the acquisition value of the fund is unknown, the manner in which they are taxed is extremely onerous, and the valuation structure is highly unfair. Further, in the context of PFICs, very few taxpayers or their professionals were actually aware of these rules and, as a consequence, certain practitioners ignored the effect of PFICs treating them all as capital gains investments. Other practitioners were very careful to try and administer as best as possible. Lastly, some practitioners were using a “mark- to-market” approach as if an election that could had been made was made allowing for treatment.

Unfortunately, this disparate result and lack of knowledge of these rules and their taxation created disparate results for taxpayers. It also created a situation in which taxpayers not complying with the law [found themselves in a better position] than those who made good faith attempts to comply with the law. In view of this, in early August the IRS created a system designed to be “fair” to all taxpayers by effectively admitting that the PFIC taxation regime does not work and created a substitute that was understandable and fair for everyone.


Economically, the result of this is a substantial saving for many taxpayers. Taking a look at the example above, and applying it to this new system, the following is gleaned:

Example #5: Foreign mutual fund subject to the mark-to-market provisions as modified by the new protocol. The result is compared to Ex. 4, to show the savings compared to the normal mark-to-market rules under §1296.

Investment Sale


Note 1

New Protocol Mark to Market

500,000.00 Note 5 572,450.00 612,521.50 655,398.01 701,275.87 750,365.18 802,890.74Growth Note

2 4% 21,400.00 22,898.00 24,500.86 26,215.92 28,051.03 30,014.61 153,080.42

Income Note 3

3% 16,050.00 17,173.50 18,375.65 19,661.94 21,038.28 22,510.96 114,810.32

Turnover Note 4

33% 7,062.00 7,556.34 8,085.28 8,651.25 9,256.84 9,904.82 50,516.54

Taxable Income:


- - - - - - -


- - - - - - -


- - - - - - -

Mark to Market Gain / (Loss)

Note 11

72,450.00 40,071.50 42,876.51 45,877.86 49,089.31 52,525.56 302,890.74

Tax: Dividend Tax 35% - - - - - - -STCG Taxed 35% - - - - - - -LTCG Tax 15% - - - - - - -Tax on M to M Gain / (Loss)

Note 12

20% 14,490.00 8,014.30 8,575.30 9,175.57 9,817.86 10,505.11 60,578.15

Interest on 2003 tax

Note 13

7% 1,014.30 - - - - - 1,014.30

Total Taxes - 15,504.30 8,014.30 8,575.30 9,175.57 9,817.86 10,505.11 61,592.45 Tax savings vs. §1296 Mark to Market

Note 14

(2,396.80) 6,010.73 6,431.48 6,881.68 7,363.40 7,878.83 32,169.31

Tax savings vs. §1291 Fund

Note 15

(15,504.30) (8,014.30) (8,575.30) (9,175.57) (9,817.86) 121,474.08 70,386.74

Note 1 The initial investment occurs at the time the fund is started, on January 1, 2002. All shares sold December 31, 2008. The fund

is an income oriented fund with a large concentration in fixed income holdings Note 2 The annual increase in the value of the portfolio including realized and unrealized gains. Note 3 Income from interest and dividends earned by the fund on its portfolio assets. All dividend income assumed to be nonqualified.


of the fund, all gains are assumed to be long-term capital gains. Note 5 In this example tax returns are filed for the tax years 2003 through 2008 under the VDP. Note 11 Under the new protocol the entire appreciation in the value of the fund is taxable in the first year of the VDP filing period, 2003.Note 12 This is the tax rate mandated by the new protocol applicable to gains reported during the VDP filing period, 2003 through 2008.Note 13 Under the new protocol the tax calculated for the first year of the VDP filing period, 2003, is subject to an interest charge of 7%.Note 14 The saving is attributable to the mandated tax rate for gains on stock subject to mark to market rules under the new protocol.

This benefit is offset somewhat by the taxation of the amount of appreciation attributable to years prior to the VDP filing period



and the interest charged on the tax computed for 2003. Note 15 The saving is attributable to the mandated 20% tax rate under the new protocol and avoidance of the compound interest charge

attributable to the §1291 computation. Note 16 The impact of state income taxes has not been considered.

Benefit of New Protocol Including Penalty and Interest Sale in 2008 2003 2004 2005 2006 2007 2008 Totals EXAMPLE 5 New Protocol M to M Tax 15,504.30 8,014.30 8,575.30 9,175.57 9,817.86 10,505.11 61,592.45 Interest on deficiency to 4/15/2010 6,763.29 2,958.79 2,422.69 1,710.26 968.46 428.70 15,252.19 Accuracy penalty 3,100.86 1,602.86 1,715.06 1,835.11 1,963.57 2,101.02 12,318.48 Interest on penalty 1,352.66 591.76 484.54 342.05 193.69 85.74 3,050.44 Totals 26,721.11 13,167.70 13,197.59 13,062.99 12,943.59 13,120.57 92,213.55

Thus, the consequence is roughly 25% savings over what would be the normal taxation regime. This stems from:

(1) The IRS using a 20% tax rate as opposed to an income tax rate of 35%; and

(2) The correlated accuracy related penalties based on the difference in the taxation owing.

What does this mean for taxpayers? The first thing it means for taxpayers is that if a return preparer used an effective mark-to-market election, it is highly likely that he or she will need to revise the related returns and the like to reflect what is occurring in practice under these new regimes. It also means that those practitioners who use the proper PFIC calculations will, in fact, be required to review their work to determine if there are substantial savings.

Practical guidance: Our experience is that given this new regime, if there is more than a $100,000 of PFIC income, the taxpayer should consider whether or not it makes sense to revise the numbers. The reason for the $100,000 limitation is that a $100,000 has a net effective saving to the client of roughly $18,000 to $20,000. Given the cost of revising the computations, amending tax returns and related costs, it is probably not economically practical to do it for clients with less than a $100,000 of PFIC gain.

Practical comment: The next big issue to keep in mind is that it does not make sense to elect into this process. As discussed above, the IRS guidance makes it very clear that once one has elected into the system for those specific investments, they have elected into the system forever. For many clients who are with banks that exited them from continuing to bank with the bank, this may not be a significant issue, however, many banks do not require an exit and, to the extent they did not, keeping in the mark- to-market may have dramatic long-term consequences for the client on a perspective basis.

What does this mean in the context of voluntary disclosure clients? As the authors have previously discussed, the penalty framework that expired on October 15 has not necessarily been implemented in a particularly fair approach. This extra statutory approach taken by the US governments towards PFICs in the context of voluntary disclosure is, in effect, an attempt by the IRS to resolve various issues associated with voluntary disclosure. The question is, however, should the IRS permit this


approach to PFIC on a future basis and, if so, should it encourage statutory changes by the US congress?

Marnin Michaels* (Zurich) +41 44 384 12 08 [email protected]

* This article was co-written by Marnin Michaels with Hank Alden of the Everest Ito Group.

IRS releases proposed regulations treating protected cells as separate Entities for Federal Tax Purposes

On 14 September 2010, the US Internal Revenue Service (the “IRS”) published Proposed Regulations (the “Proposed Regulations”) clarifying the US federal tax treatment of series limited liability companies (“LLCs”) and protected cell companies (“PCCs”). While the Proposed Regulations may be relevant to a wide variety of taxpayers, they should be particularly relevant to insurance companies and holders of US compliant insurance products.

In January 2008, the IRS issued Notice 2008-19 requesting comments on what further guidance would be appropriate for PCCs.3 The Proposed Regulations provide such further guidance.

The Proposed Regulations treat individual domestic “series” or “cells” as separate entities for US federal tax purposes but do not apply to non-US individual series or cells unless the series or cell itself conducts an insurance business. Significantly, the Proposed Regulations do not provide separate entity treatment for certain “segregated asset accounts” of life insurance companies. Moreover, while the Proposed Regulations address the US federal tax treatment of an individual series in a series LLC or individual cell in a PCC, they do not address the classification of the series LLC or PCC itself.

Background

Broadly, a PCC is an entity which – in addition to its main “core” level – contains a number of segregated parts, or “cells.” The assets and liabilities of each cell are legally separate from the other cells, as well as from the “core” of the company. Accordingly, the liabilities of each cell may only be satisfied from the assets of that cell. Statutes in several jurisdictions allow a cell of a PCC to engage in insurance business.4

The Proposed Regulations

The Proposed Regulations generally provide that, for domestic series and cells, whether or not a series or cell is treated as an independent legal person separate from its “core” level for local law purposes, the series or cell will be treated as a separate entity for US federal tax purposes.

This general rule also applies to foreign series or cells that conduct an insurance business. Foreign cells are considered to conduct an insurance business if more than half of the foreign cell’s business is

3 2008-5 I.R.B. 366 (15 January 2008). 4 The Proposed Regulations specifically mentioned the following statutes in this regard: The Companies (Guernsey) Law, 2008 Part XXVII (Protected Cell Companies), Part XXVIII (Incorporated Cell Companies); The Companies (Jersey) Law, 1991, Part 18D; Companies Law, Part XIV (2009 Revision) (Cayman Isl.) (Segregated Portfolio Companies); and Segregated Accounts Companies Act (2000) (Bermuda).




the issuing or reinsuring of insurance or annuity contracts. The general rule does not apply to “a segregated asset account” of a life insurance company.

The Proposed Regulations distinguish between a “series” and the “series organization.” The “series organization” is the core level which includes each individual series. A “series” is defined as a segregated group of assets and liabilities that is established pursuant to a series statute by agreement of a series organization. Therefore, a “series” generally includes a cell, segregated account, or segregated portfolio but not the “series organization,” or core level (i.e. the PCC itself).

A “series organization” includes a series LLC, PCC, series partnership, series trust, segregated cell company, segregated portfolio company, or segregated account company.

The following example illustrates these principles for a foreign insurance cell:

Facts:

(i) Insurance Cell Co is a series organization organized under the Cayman Island Companies Law. Insurance Cell Co. has established one cell, Cell A, pursuant to the Cayman Islands Companies Law. More than half the business of Cell A during the taxable year is the issuance of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. If the activities of Cell A were conducted by a domestic company, that company would qualify as an insurance company within the meaning of sections 816(a) and 831(c)5 of the Internal Revenue Code.

Analysis:

(ii) Cell A is treated as an entity formed under Cayman Islands law. Because Cell A is an insurance company, it is classified as a corporation.6

Analysis

As the example illustrates, the Proposed Regulations treat foreign Cell A as an entity separate from Insurance Cell Co and separate from any other series that might be established by Insurance Cell Co. Cell A is treated as an entity because the cell is foreign and conducts insurance business.

We note that if the Proposed Regulations applied to treat a foreign insurance cell as a separate entity for US federal tax purposes, it would appear that the foreign cell would be eligible to elect under Code section 953(d) to be treated as a US domestic insurance company for tax purposes and that such election would not impact the non-US status of other foreign cells.

Application

Assets invested in so-called “variable” life insurance and/or annuity products are sometimes placed in a segregated account funding the respective policies. In the case of a product issued by a PCC, the assets are placed in an individual cell of a PCC; the Proposed Regulations would not apply to change the current tax treatment of a foreign PCC or its foreign cells that do not conduct insurance business themselves.

5 These provisions define what it means to be a “life insurance company” or other insurance company for purposes of the Internal Revenue Code of 1986, as amended (hereinafter, the “Code”). 6 Insurance companies may not elect to “check-the-box” to change their default corporate classification for US federal tax purposes. Code section 7701(a)(3).


The following chart illustrates such a structure:

Term used under ProposedRegulations

If Offshore Insurance PCC (“OIP”) conducts an insurance business and utilizes foreign cells merely to hold assets backing policies issued by OIP, the Proposed Regulations do not alter the current tax classification of the foreign cells.

Segregated asset accounts of life insurance companies are explicitly excluded from the definition of a “series.” Because the Proposed Regulations only apply to a “series,” such segregated asset accounts should not be subject to entity treatment under the Proposed Regulations. Moreover, the Proposed Regulations only apply to a foreign series that conducts insurance business, which an account backing a policy does not do.

Going forward

Although the Proposed Regulations do not address the treatment of a PCC itself, or the cells of a foreign PCC if the cells are not conducting insurance business, the Proposed Regulations contemplate that further guidance may be issued.

As a general matter, US persons investing in certain life insurance and annuity products designed to comply with the US federal income tax rules can achieve exemption or deferral from US income taxation.

Reporting

The Proposed Regulations require that each series organization and each series in a series organization annually file a statement providing certain identifying information to be prescribed by the IRS.

Effective date

The Proposed Regulations are effective on the date the regulations are published as final in the Federal Register. However, taxpayers need to take the Proposed Regulations into account now. The reason is that, if finalized, the Proposed Regulations will apply to cells and series that do not qualify under a transition rule. The transition rule applies only to arrangements put in place before 14 September 2010 and that satisfy the additional requirements discussed below.

Offshore InsurancePCC

Segregated Asset Accounts of each Policy

Series Organization

Segregated Asset Accounts

Policyholders



Transition rule

Under a proposed transition rule, a series and the series organization may be eligible to qualify for single-entity treatment if the entity meets the following requirements:

The entity was established before 14 September 2010;

The series conducted business or investment activity on and prior to September 14, 2010 (in the case of a foreign series, the series must have conducted an insurance business);

In the case of a foreign series, (i) the foreign series’ classification was “relevant” for US federal tax purposes and (ii) more than half the business of the series consisted of conducting insurance business for all taxable years beginning with the taxable year that includes 14 September 2010;

No owner of the series treats or has treated the series as an entity separate from any other series of the series organization on any Federal tax returns or withholding documents;

The series and series organization had a reasonable basis for their claimed classification; and

Neither the series nor any owner of the series nor the series organization was notified that classification of the series was under examination by the IRS before the Proposed Regulations become final.

The transition rule is only available if there is not a 50% or more ownership change of the series or series organization after 14 September 2010.

Paul DePasquale (Zurich) +41 44 384 14 20 [email protected]

Lyubomir Georgiev (Zurich) +41 44 384 14 90 [email protected]

Michael Donovan (Zurich) +41 44 384 13 72 [email protected]

Notice 2010-60 provides initial IRS proposed guidance on implementation of new withholding tax regime enacted by FATCA

The Foreign Account Tax Compliance Act (“FATCA”) became law in March 2010, and it included a new, and additional, withholding tax compliance regime providing for automatic withholding of 30% on payments to foreign financial institutions (“FFIs”) and nonfinancial foreign entities (“NFFEs”). It also set forth a number of exceptions and exclusions from the withholding requirements. The FATCA statute was codified as sections 1471 through 1474 (“Chapter 4”) of the Internal Revenue Code (“Code”).

FATCA’s provisions left many of the details and definitions to regulations to be issued by the Internal Revenue Service (“IRS”). The first of this guidance appeared on August 27, 2010, in the form of Notice 2010-60 (“Notice”). The Notice addresses the new withholding tax requirements enacted in FATCA, and provides preliminary guidance and requests comments on their implementation.





Because FATCA’s new withholding tax provisions do not apply until 2013, and because of the potential complexity of implementing the new system, it seems likely that we will see a number of revisions, extensions, and elaborations of elements addressed in the Notice. This was the pattern when the IRS began work on the Qualified Intermediary regime. The Notice explicitly mentions that future guidance will include a draft FFI Agreement and draft information reporting and certification forms.

The Notice addresses some of the issues in implementing the new withholding tax regime, including:

1. Exemptions and exclusions from Chapter 4 withholding;

2. The definitions of which entities are FFIs, and which are NFFEs;

3. The information and identification requirements imposed on FFIs and NFFEs who wish to avoid the automatic 30% withholding on payments; and

4. The information and identification requirements with which a withholding agent that is a United States financial institution (“USFI”) must comply to make a payment free of 30% withholding.

Each of these issues is discussed in detail below.

1. Grandfathered obligations

Importantly, payments on obligations existing or entered into before 18 March 2012, will not be subject to the new withholding regime, as provided in the enacting legislation. The Notice provides guidance on what types of obligations will be “grandfathered” under this provision. According to the Notice, regulations will define “obligation” for these purposes to mean any legal agreement that produces or could produce withholdable payments. However, the Notice states certain things will not be treated as “obligations” for this purpose. Thus, any instrument treated as equity for US tax purposes or any legal agreement that does not have a definitive expiration or term (e.g., savings deposits, demand deposits and other similar accounts) will be subject to the new withholding tax rules, even though in existence on 18 March 2012. Additionally, it does not include brokerage, custodial and similar agreements to hold financial assets for the account of others and to make and receive payments of income and other amounts with respect to such assets.

If an otherwise grandfathered obligation is “materially modified,” it will lose its exempt status. In the case of debt, this means a modification that is a significant modification as defined in Treasury Regulations section 1.1001-3. In all other cases, whether a modification is material will be based on all the relevant facts and circumstances.

2. FFIs and NFFEs

Under the new withholding tax regime, payments of withholdable payments to FFIs are subject to 30% withholding tax, unless the FFI enters into an FFI Agreement with the IRS. An FFI that enters into an FFI Agreement is denominated a “participating FFI” (“PFFI”) by the Notice.

A. Definition of “Financial Institution”

Section 1471 provides that an FFI is a “financial institution” that is a foreign entity. The term “financial institution” means any entity that:



a. accepts deposits in the ordinary course of a banking or similar business;

b. holds financial assets for the account of others as a substantial portion of its business; or

c. is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest in such securities, partnership interests or commodities.

The Notice discusses each of the above categories and also identifies certain classes of foreign entities that will not be subject to the new withholding tax regime in any case. These include FFIs that the IRS believes should be either (1) excluded from the definition of a financial institution and treated as NFFEs, (2) deemed to be compliant without the need to enter into an FFI Agreement or (3) identified as posing a low risk of tax evasion and thus exempt from the new withholding tax regime.

i. Accepts deposits

According to the Notice, this category of financial institution generally includes (but is not limited to) entities that would qualify as banks under Code section 585(a)(2), savings banks, commercial banks, savings and loan associations, thrifts, credit unions, building societies and other cooperative banking institutions. The Notice points out that being subject to banking and credit laws, or subject to regulatory oversight by a regulatory authority, is not necessarily determinative of whether the entity qualifies as a financial institution.

ii. Holds financial assets for the account of others

This category of financial institution includes entities that, as a substantial portion of their business, hold financial assets for the account of others. Such institutions may include, for example, broker-dealers, clearing organizations, trust companies, custodial banks and entities acting as custodians with respect to the assets of employee benefit plans. As above, whether the entity is subject to banking and credit laws or regulatory supervision is relevant but not necessarily determinative of whether the entity is a financial institution.

iii. Engaged primarily in the business of investing, reinvesting or trading in securities, etc.

This category has potentially the broadest sweep of the three categories, and includes any entity engaged (or holding itself out as engaged) primarily in the business of investing, reinvesting or trading securities, partnership interests, commodities or any interest in such instruments. According to the Notice, this category of financial institution generally includes (but is not limited to) mutual funds, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools and other investment vehicles.

According to the Notice, the term “business” differs in scope and content from the term “trade or business” as used elsewhere in the Code. The example given in the Notice explains that while an isolated transaction may not give rise to a trade or business in other sections of the Code it may cause an entity to be considered a financial institution depending on such factors as the magnitude and importance of the transaction in comparison to the entity’s other activities. From this, it would appear that a foreign legal entity that simply buys and holds portfolio investments would, potentially, be in the “business” of investing in securities. The Notice indicates that whether an entity is in such a “business” will depend on all the facts and circumstances, but promises that future guidance will provide guidelines to determine what types of activity constitute a “business”, and when an entity is “primarily” in such a business.


B. Entities excluded from the definition of financial institution and/or exempt from some or all

of the new withholding tax rules for FFIs

Given the extremely broad scope of the definition of an FFI, it is not surprising that the Notice contains a substantial discussion of entities that, on one basis or another, the IRS proposes will not be subject to the new withholding tax regime for FFIs.

i. Entities that will be exempt from withholding

Certain foreign entities that would be FFIs solely because they are engaged primarily in investing, reinvesting or trading in securities will not be classified as FFIs, providing they fall within certain categories of entities described below. However, if they are not FFIs, then they are NFFEs, and NFFEs are subject to their own new withholding tax regime. Despite this, the IRS has apparently decided that these types of entities should not be subject to either the new FFI or NFFE withholding tax rules, and so the Notice states that they will be exempted. The specific categories of exempted entities in the Notice include:

Certain holding companies: Foreign entities whose primary purpose is to act as a holding company for a subsidiary or group of subsidiaries that primarily engage in a trade or business other than that of a “financial institution”. The Notice specifically excludes from this exemption any entity functioning as an investment fund, such as a private equity fund, venture capital fund, leveraged buyout fund or any investment vehicle whose purpose is to acquire or fund the start-up of companies and then hold those companies for investment purposes for a limited period of time.

Start-up companies: Start-up entities that intend not to operate as financial institutions, but are not yet operating their intended business, will be excluded as FFIs for the first 24 months after their organization. This does not include venture funds or other investment funds that invest in start-up entities.

Non-financial entities that are in liquidation or emerging from reorganization or bankruptcy are excluded as FFIs if they intend to continue or recommence operations as non-financial institutions, but only if they were not previously a financial institution.

Hedging/financing centers of a non-financial group: Foreign entities that primarily engage in financing and hedging transactions for members of its expanded affiliated group, i.e., group finance companies, will not be treated as FFIs, provided that they render no services to non-affiliates and the group as a whole is not engaged in the business of being a financial institution.

The Notice requests comments on how to define the foregoing categories, and whether new categories of entities should also be excluded as FFIs.

ii. Insurance companies

The Notice says the IRS intends to differentiate between insurance companies whose business consists solely of issuing insurance or reinsurance contracts without cash value, such as most property and casualty policies, which will not be FFIs, and insurance companies that issue cash value insurance contracts, such as life insurance or annuity contracts that typically combine insurance protection with an investment component, or similar arrangements, which will be treated as FFIs. The Notice solicits



comments on the “appropriate treatment” of these latter insurance companies, as well as on how to define such contracts and arrangements.

iii. Entities with certain identified owners (“Documented FFIs”)

Certain foreign entities that are FFIs due solely to the fact that they are engaged primarily in the business of investing, reinvesting or trading will be treated as deemed-compliant FFIs (“Documented FFIs”) that will not be subject to the new withholding tax rules. Such foreign entities would include investment funds and other entities that may have only a small number of direct or indirect account holders, all of whom are individuals or NFFEs exempted from the new withholding tax. The Notice gives an example of a small family trust settled and funded by a single individual solely for the benefit of his or her children. To qualify for this exception, the withholding agent must:

Specifically identify each individual, specified US person or excepted NFFE that has a direct or indirect interest in such entity;

Obtain from each such person the documentation that the withholding agent would be required to obtain from such person under the Notice if the person were a new account holder or a direct payee of the withholding agent; and

The withholding agent reports to the IRS any specified US person identified as a direct or indirect interest holder in the entity.

The Notice requests comments on whether certain small FFIs should be treated as NFFEs, regardless of whether the withholding agent currently determines the direct and indirect owners of the entity for purposes of local law or regulatory requirements.

iv. Financial institutions organized in US territories

According to the Notice, the IRS generally does not intend to treat financial institutions organized in US possessions (e.g., Puerto Rico, the Virgin Islands, Guam) as FFIs.

C. Classes of persons posing a low risk of tax evasion

The FATCA legislation anticipated that the IRS could designate certain classes of persons that should not be subject to the new withholding tax regimes because there would be a low risk of tax evasion.

The Notice specifies only one such class—retirement plans. To qualify for the exemption, the foreign retirement plan will need to satisfy a number of requirements, including:

Qualification as a retirement plan under the law of the country in which it is established;

Sponsorship by a foreign employer; and

No US participants or beneficiaries other than employees that worked for the foreign employer in the country in which such retirement plan is established during the period in which benefits accrued.

The Notice requests comments on whether certain other categories of employee benefit plans should be treated like retirement plans, how to define a retirement plan for these purposes, and how such a plan would document itself to a withholding agent.


D. Treatment of certain other classes of entities

i. US branches of FFIs

An otherwise withholdable payment reported as effectively connected income (“ECI”) by an FFI’s US branch relieves an FFI from being subject to withholding with respect to that income, according to the Notice. This, however, does not cover all payments that may be made to an FFI’s US branch. For example, withholdable payments that a US branch receives on behalf of its account holders and withholdable payments that a US branch receives on its own account that are not reported as ECI will be subject to the new withholding tax regime. Additionally, the IRS does not intend this to relieve an FFI from entering into an FFI Agreement to avoid withholding under the new regime, even if the FFI receives withholdable payments solely through its US branch. The Notice says the IRS will not adopt the special presumption used in Chapter 3 withholding, and requests comments on how a withholding agent could determine the application of the ECI exclusion, given that the withholding agent will not necessarily have any information on which payments are treated as ECI by a branch of an FFI. Notwithstanding the foregoing, the Notice states that the IRS is considering permitting US branches to document their account holders in the same manner as USFIs (see below).

ii. Controlled Foreign Corporations (“CFC”)

The Notice says the IRS plans to require CFCs to not only comply with their current CFC documentation and reporting requirements but also, should they qualify, enter into an FFI Agreement and comply with that Agreement’s documentation and reporting requirements to avoid the new withholding requirements. The Notice points out that the information required by Chapter 4 is more extensive than that required by the CFC rules, and promises that the IRS will coordinate the CFC and FFI Agreement reporting requirements with the objective of avoiding duplication.

E. Excepted NFFEs

As described above, the Notice sets forth a variety of exclusions and exemptions applicable to FFIs. As noted, these entities could be treated as NFFEs, but the Notice indicates they will be excluded from the withholding requirements otherwise applicable to NFFEs. Such entities are denominated “Excepted NFFEs” in the Notice.

3. Collection of information and identification of persons by financial institutions

Although the new withholding regime generally requires that withholding agents withhold 30% on withholdable payments to either FFIs or NFFEs, the new withholding requirements may be avoided. In particular, an FFI can avoid withholding on payments it receives if it enters into an FFI Agreement with the IRS, thus becoming a “Participating” FFI (“PFFI”). NFFEs can also avoid 30% withholding by providing information on their “substantial” US owners, or certifying that they have no such US owners. The Notice describes the proposed FFI Agreement’s requirements, as well as the procedures for NFFEs to avoid withholding.

A. FFI Agreement

An FFI can avoid withholding if it enters into an FFI Agreement thereby becoming a PFFI. When entering into the agreement the FFI agrees, among other requirements, to:

Obtain such information regarding each holder of each account maintained by the FFI as is necessary to determine which (if any) of such accounts are US accounts,



Comply with due diligence procedures the Secretary may require with respect to the

identification of US accounts,

Report certain information with respect to US accounts maintained by the FFI and

Withhold on certain payments to non-participating FFIs and recalcitrant account holders.

In order to comply with the above requirements for individual account holders, a PFFI will need to determine whether their individual accounts holders are to be treated as US persons or non-US persons. For entity account holders the process is more complicated. A PFFI will need to determine whether the entity should be treated as a US person, an FFI, an entity determined to present a low risk of tax evasion (e.g., retirement plans, see above), or an NFFE. If it determines that the account holder is a US person, the PFFI will also need to determine whether the entity is to be treated as a specified US person or a non-specified US person. If the account holder is an FFI, then the PFFI will need to determine whether the entity is to be treated as a PFFI, a Documented FFI or a non-participating FFI. If the account holder is an NFFE, then the PFFI will need to determine whether the entity is to be treated as a US-owned foreign entity, that is, whether the NFFE has substantial US owners; if the NFFE is an “excepted NFFE” (see above), however, it will not be treated as having substantial US owners according to the Notice. These same requirements will apply to USFIs.

To facilitate this identification the Notice states that PFFIs will be permitted to rely on Forms W-9 they already have in their possession. The IRS is also considering issuing employer identification numbers to PFFIs (“FFI EINs”) in order to facilitate the identification process. Until withholding agents are able to verify the status of FFIs, they will be permitted to rely on certification by an FFI that it is a PFFI, unless they know or have reason to know otherwise.

The Notice provides separate procedures for identifying individual financial accounts and entity financial accounts. Within those categories, procedures for identification are distinguished between preexisting accounts and new accounts. The PFFI is to proceed through the steps in each procedure until the entity is classified.

The Notice states that “future guidance” will be provided to distinguish preexisting accounts from new accounts.

i. Preexisting individual accounts

A preexisting individual account is one in existence on the date that the PFFI’s FFI Agreement becomes effective. The PFFI must first determine whether the preexisting individual account is a US account, an account of a recalcitrant account holder, or another account. The Notice sets forth the following procedure to make this determination:

(1) If the average of the month-end balances or values during the calendar year preceding the entry into force of the FFI’s FFI Agreement of all depository accounts held by the account holder at such FFI was less than US $50,000 then the account can be classified as other than a US account. The FFI can elect not to apply this step.

(2) If not excluded by Step (1) and the account holder is already documented as a US person, then the account will be treated as a US account and the person treated as a specified US person.

(3) If neither of the prior steps applies to an account, the FFI can treat the account as other than a US account if, after a search of the electronically searchable information maintained by the FFI and associated with the account, the FFI does not find any indicia of potential US status.


Indicia of potential US status include: (i) identification of the account holder as a US resident or citizen; (ii) a US address associated with the account holder; (iii) a US place of birth for the account holder; (iv) the sole address on file is in the US; (v) power of attorney or signatory authority has been granted to a person with a US address; or (vi) there are standing instructions to transfer funds to an account maintained in the US or direction is received from a US address.

(4) If there are indicia of potential US status, the FFI must obtain additional information and/or documentation, depending upon the indicator. If the account holder is identified as a US citizen or resident, the FFI must obtain Form W-9 from the account holder. If the account holder has a US address or place of birth, the FFI must obtain Form W-9 or Form W-8BEN and documentary evidence establishing non-US status of the account holder (i.e., non-US passport). If one of the latter three US indicia is found, the FFI must obtain Form W-9 or Form W-8BEN or documentary evidence establishing non-US status. If the FFI already has the documentation indicated in its files, it need not request the account holder for the documentation again.

(5) The FFI has one year from the effective date of its FFI Agreement to complete the first three steps above and request the documentation specified in Step (4). Account holders not providing documentation within one year of request will be classified as “recalcitrant account holders” until the documentation is received.

Within two years after the date on which the FFI’s FFI Agreement enters into effect, the preexisting accounts determined to be other than US accounts which had an average monthly balance in excess of US $1 million during the year before the FFI’s FFI Agreement entered into effect will be subject to the procedures for a new account (discussed below) to determine whether such accounts should continue to be treated as other than US accounts.

Within five years after the date on which the FFI’s FFI Agreement enters into effect, all preexisting accounts determined to be other than US accounts will be subject to the new account procedures to determine whether such accounts should continue to be treated as other than US accounts. Additionally, future guidance will prescribe circumstances where the accounts classified as other than US accounts because they fell below the US $50,000 threshold but have subsequently risen above that threshold will be subject to the preexisting account procedures.

Comment. Although the foregoing guidance indicates the IRS has thought about reducing the burden of the initial transition into the FFI Agreement, it also indicates that, within either a two- or five-year period, the FFI must apply the more stringent requirements of the procedure for new individual accounts to preexisting accounts.

ii. New Individual Accounts

New individual accounts are those opened by individuals after the date that a PFFI’s FFI Agreement becomes effective, including new account relationships (e.g., a new custodial account for an individual with a preexisting depository account). The Notice prescribes the following steps to be applied to new individual accounts.

(1) An account is treated as not a US account under the US $50,000 threshold for depository accounts similar to Step (1) for preexisting accounts, including the option for the FFI not to apply this step.

(2) Same as Step (2) above.



(3) For accounts not covered by the first two steps, the FFI is required to obtain and examine

documentary evidence establishing US or non-US status of individual account holders. If the FFI finds a US person then it must obtain a Form W-9.

(4) If none of the prior three steps apply, the FFI is required to examine all other information (and not just electronically searchable information) collected in connection with the account to identify indicia of potential US status. The indicia are the same as above and accounts found with indicia of potential US status will be treated as potential US accounts for purposes of Step (5) below. All other accounts will be treated as other than US accounts.

(5) For accounts containing indicia of potential US status, the FFI will be required to obtain the same documentation as described in Step (4) for a preexisting individual account. If the account holder does not provide the documentation he or she will be classified as a recalcitrant account holder.

(6) An FFI will be required to repeat Step (4) and Step (5) each time the FFI knows or has reason to know that the circumstances affecting the classification of an account have changed.

Future guidance will prescribe the period in which these steps must be performed, the default treatment of account holders during that period, and the when the steps must be reapplied when an account exceeds the US $50,000 threshold.

iii. Preexisting entity accounts

The steps to determine whether a preexisting entity account is to be treated as a US account, PFFI account, Documented FFI account, non-participating FFI account, an account with a low risk of noncompliance, recalcitrant account holder account, excepted NFFE account, other NFFE account or other account are:

(1) Account holders already identified as US persons will be permitted to provide documentation establishing they are not specified US person for purposes of Chapter 4. If they fail to provide the documentation within one year they will be classified as specified US persons. Comments are requested regarding the development of presumptions on which a PFFI could rely to determine whether a US person is a specified US person.

(2) If not identified in Step (1), the FFI is required to search its electronically searchable files for indications that the entity account holder is a US entity. If found, such entities will be presumed to be US until they provide documentation establishing they are not US persons or, if they are US persons, they are not specified US persons. If the entity does not provide such documentation within one year of the FFI’s request, it will be presumed to be a specified US person until it provides such documentation.

(3) All entity account holders not classified as US persons in Step (1) or Step (2) will be presumed to be foreign entities. The FFI must then search the electronically searchable files associated with that account for indications the account holder is an FFI. If found, the FFI must request the account holder’s FFI EIN and certification of its PFFI status. If not provided, then the PFFI will request documentation indicating whether the entity is a PFFI, a Documented FFI, a non-participating FFI, an entity that has a low risk of noncompliance, or an NFFE. While waiting for the documentation the entity account will generally be treated as other than a US account, unless the account holder is identified by the IRS on a list, in which case the account will be treated as the account of a non-participating FFI. Moreover, the


Notice indicates that PFFIs may be required to report information concerning an entity that provides documentation that it is a PFFI, but does not provide a valid FFI EIN.

(4) If the entity is not a US person after Step (1) or Step (2) and not an FFI after Step (3) then the PFFI will examine the entity’s account file for evidence that the entity is engaged in an active trade or business other than an FI business. If found, the entity will be treated as an Excepted NFFE. If not found, the PFFI will request documentation from the entity demonstrating whether it is a PFFI, a Documented FFI, a non-participating FFI, an NFFE, or an entity with a low risk of noncompliance. If the entity fails to provide the documentation it will be treated as a non-participating FFI. The Notice requests comments as to the level of evidence necessary to establish that an entity is engaged in an active trade or business, as well as ways this step can be structured to avoid abuse.

If the documentation provided by the account holder indicates the account holder is an NFFE, the PFFI must obtain documentary evidence (or rely on documentary evidence in the account file) that the NFFE is an Excepted NFFE. If such evidence is not obtained, the FFI must specifically identify each individual and each other specified US person that has an interest in such entity. If a specified US person is identified, then the PFFI will treat the account as a US account and obtain the required documentation from each person and report any such specified US person to the IRS. If it cannot obtain the documentation, the account holder will be treated as a recalcitrant account holder.

iv. New entity accounts

The FFI will determine how to treat new entity accounts by following similar procedures to the procedures described above with respect to preexisting entity accounts. However, with respect to new entity accounts, FFIs must determine how to treat such accounts using all information collected by the FFI regardless of whether such information is electronically searchable. The Notice says an FFI will be presumed to know information it collects, such as “know your customer” and anti-money laundering information, for purposes of determining whether documentation provided by the entity is unreliable or incorrect.

B. USFIs

To comply with its obligations as a withholding agent on withholdable payments to either an FFI or an NFFE, a USFI will be required to determine how to treat entities to which it makes withholdable payments. The Treasury and the IRS will require USFIs to determine whether their foreign entity account holders are NFFEs or FFIs by applying procedures similar to those above for entity accounts.

i. Preexisting financial accounts

For an account maintained with a USFI to be a preexisting account, it must be opened before January 1, 2013. The steps to determine how to treat a preexisting entity account are:

(1) All entity account holders who qualify as US persons for purposes of chapter 3 or chapter 61 of the Code are US persons for purposes of Chapter 4. The rest of the entity account holders will be treated as foreign entities.

(2) Where the entity is not a US person, the USFI must search its electronically searchable files for indications that the entity account holder is an FFI. If not found, the entity will be classified as an NFFE. If found, the USFI must request certification that the entity is a PFFI (i.e., FFI EIN). If not provided, the USFI must request documentation indicating whether the foreign entity is a PFFI, a Documented FFI, an entity with a low risk of noncompliance, a



non-participating FFI or an NFFE. While waiting for documentation the entity will be classified as an Excepted NFFE.

(3) The USFI must examine the entity’s account file for evidence that the entity is engaged in an active trade or business other than an FI business. If found, the entity will be treated as an Excepted NFFE. The Treasury and the IRS are contemplating permitting USFIs to rely in part on information from third-party credit databases to make this determination. If not found, the USFI must request documentation certifying whether the entity is a PFFI, a Documented FFI, a non-participating FFI, an entity with a low risk of noncompliance, or an NFFE. If the documentation provided by the account holder indicates the account holder is an NFFE, the PFFI must obtain documentary evidence that the NFFE is an Excepted NFFE or the FFI must specifically identify each individual and each other specified US person that has an interest in such entity. If a specified US person is identified, the PFFI will treat the account as a US account and obtain the required documentation from each person and report any such specified US person to the IRS.

ii. New financial accounts

The USFI will be required to determine how to treat such accounts by following procedures similar to the procedures described above with respect to preexisting financial accounts. However, with respect to new financial accounts, USFIs must determine how to treat such accounts using all the information collected by the USFI regardless of whether such information is electronically searchable. The Notice requests comments regarding appropriate procedures for identifying entities among new account holders of USFIs.

4. Reporting on US accounts

The Notice sets forth what the IRS considers its preliminary views on information reporting for US accounts pursuant to an FFI Agreement for each US person in the account:

The name, address and taxpayer identification number (“TIN”) of each account holder which is a specified US person,

In the case of any account holder which is a US-owned foreign entity, the name, address, and TIN of each substantial US owner of such entity,

The account number,

The account balance or value, and

The gross receipts and gross withdrawals or payments from the account.

With respect to the account balance, the Notice provides that future guidance will stipulate that the highest account balance during the year, calculated monthly if possible, should be reported. Additionally, a PFFI will be required to provide account-related information such as account statements or daily receipts and withdrawals to the IRS upon request.

The Treasury and the IRS are requesting comments regarding other potential approaches that would provide adequate information in a manner that would be administrable without being subject to manipulation by US account holders. Additionally, comments are being requested regarding specific foreign laws that may prevent reporting the information above and a description of the steps a PFFI would be required to follow to overcome or waive any such restriction.


A. Section 1471(c)(2) Election

A PFFI can elect to be treated as if it were a US person and each holder of a US account that is a specified US person or US-owned entity were an individual and citizen of the United States. The reporting for an FFI that makes a section 1471(c)(2) election remains unchanged except that an electing FFI will not have to report the account balance or value or the gross receipts and gross withdrawals of payments. The Treasury and the IRS are requesting comments on whether and what circumstances a PFFI should be permitted to make the election with respect to a subset of its accounts without making the election for all of its accounts.

B. Duplicative reporting

The Treasury and the IRS intend to issue regulations providing that in the case of a PFFI that maintains an account of another PFFI, only the PFFI that has the more direct relationship with the investor or customer will be required to report.

C. Reporting recalcitrant accounts

The Treasury and the IRS intend to require a PFFI to report the number and aggregate value of financial accounts held by recalcitrant account holders and related or unrelated non-participating FFIs. In addition, they intend to require PFFIs to report the number and aggregate value of financial accounts held by recalcitrant account holders that have US indicia.

5. Requests for comments

The Notice is lined with requests by the Treasury and the IRS for comments and suggestions as to how to best implement this new program. They request specific comments regarding:

Verification requirements applicable to PFFIs,

Treatment of passthrough payments,

Election to be withheld upon,

Sanctions with respect to recalcitrant account holders,

FFIs subject to restrictions prohibiting US account holders,

Electronic filing requirements for financial institutions,

Application of Chapter 4 by US withholding agents other than USFIs, and

Potential modifications to Chapter 4 requirements based on availability of information from other sources.

Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose 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.

Thomas O’Donnell (Zurich) +41 44 384 14 40 thomas.o’[email protected]

Rodney Read (Zurich) +41 44 384 12 91 [email protected]


mailto:thomas.o%E2%80%[email protected]



Modifications to US Federal Estate, Gift, and Generation-Skipping Transfer Taxes

On 18 December 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“Tax Relief Act”). Title III of the Tax Relief Act, titled “Temporary Estate Tax Relief,” includes provisions that will modify certain currently existing rules on US Federal Estate, Gift, and Generation-Skipping Transfer (“GST”) taxes (collectively, “Transfer Taxes” and individually, “Transfer Tax”). Unless extended by Congress, the Transfer Tax provisions amended or added by the Temporary Estate Tax Relief provisions will sunset after 31 December 2012.7

This client alert summarizes the main points of the Temporary Estate Tax Relief provisions with respect to each of the three Transfer Taxes.8 This client alert is not intended to be a comprehensive analysis of these provisions.

The 2010 Option of No Estate Tax and No Carry-Over Basis or an Estate tax and a Step-up

The US Federal Estate Tax and the “step-up in basis at death rules”9 are reinstated retroactive to 1 January 2010.10 The Prior law repealing the US Federal Estate Tax for year 2010 and providing for the “modified carryover basis rules”11 is treated as if it had never been enacted.12 However, notwithstanding the reinstatement of the US Federal Estate Tax, an executor of an estate of a decedent dying in 2010 may elect to treat the estate under the rules providing for no estate tax and modified carryover basis.13 The manner and time to make such an election is to be provided by the Secretary or his delegate.14 Once made, the election is revocable only with the consent of the Secretary.15

For US person decedents with small estates that would not be subject to tax with the new exemptions, Executors will want to make sure a basis-step up is achieved. For non-US person decedents, the desired result will depend on the specific needs of the relevant family. Generally, for families with no US person heirs but US situs assets, it will be incumbent to ensure that the no estate tax election is made. For families non-US decedents and US family members and US situs assets, case specific analysis is required.

Estate Tax

The US Federal Estate Tax and the “step-up in basis at death rules”16 are reinstated.17 Prior law repealing the US Federal Estate Tax for year 2010 and providing for the “modified carryover basis rules”18 is treated as if it had never been enacted.19

7 See Sections 101(a)(1), 304 of the Tax Relief Act. Unless noted otherwise, all section references hereafter are to the Tax Relief Act. 8 This client alert does not address (i) credits or deductions for State estate taxes, (ii) qualified conservation easements, and (iii) installment payment of estate taxes. 9 Section 1014 of the Internal Revenue Code of 1986, as amended (the “IRC”). 10 Section 301(a). 11 IRC § 1022. 12 Section 301(a). References herein to “prior law” are to the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law 107-16, June 7, 2001 (the “EGTRRA”). 13 Section 301(c). 14 Id. 15 Id. 16 Section 1014 of the Internal Revenue Code of 1986, as amended (the “IRC”). 17 Section 301(a).


The reinstated US Federal Estate Tax includes the following features, which apply to estates of decedents dying after 31 December 2009,20 unless noted otherwise:

Maximum 35% Rate: the maximum estate tax rate is 35%.21

$5,000,000 Exclusion Amount: the applicable exclusion amount is $5,000,000.22 This amount is indexed for inflation after 2011.23

Addition of Deceased Spouse’s Unused Exclusion Amount: for decedents dying after 31 December 2010, the applicable exclusion amount of the surviving spouse includes the “basic exclusion amount” of $5,000,000, which is indexed for inflation after 2011, and the deceased spouse’s unused exclusion amount.24 The surviving spouse may not use the deceased spouse’s unused exclusion amount unless the executor of the deceased spouse makes an election on a timely filed estate tax return,25 regardless of whether such return is required to be filed.26 Once made, the election is irrevocable.27 Notwithstanding statutory limitation periods, the Secretary of the US Treasury (the “Secretary”) may examine at any time the deceased spouse’s estate tax return in order to determine the proper unused exclusion amount.28 The Secretary is expected to issue regulations to implement these provisions.

Notwithstanding the portability of the deceased spouse’s unused exclusion amount, an estate tax return is required to be filed for any decedent if the gross estate exceeds the basic exclusion amount ($5,000,000 in 2011).29

Extended Time to File Return, Pay Tax, and Disclaim: for decedents dying after 31 December 2009 and before the date of enactment of the Tax Relief Act, time is extended to file the estate tax return, pay the estate tax, and make qualified disclaimers.30 The extended due date for such acts is nine months after the date of enactment of the Tax Relief Act.31

18 IRC § 1022. 19 Section 301(a). References herein to “prior law” are to the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law 107-16, June 7, 2001 (the “EGTRRA”). 20 Section 301(e). 21 Section 302(a)(2). 22 Section 302(a)(1). 23 Id. 24 Section 303(a). The deceased spouse’s unused exclusion amount is the lesser of (i) the basic exclusion amount ($5,000,000 in 2011) or (ii) any remaining portion of the basic exclusion amount after taking account the amounts used to compute the tentative estate tax under IRC Section 2001(b)(1). 25 Section 303(a). 26 Technical Explanations to Tax Relief Act, p. 52. 27 Section 303(a). 28 Id. 29 Section 303(b)(3). 30 Section 301(d)(1). “Qualified disclaimers” are made under IRC Section 2518. 31 301(d).



Computation of Tentative Estate Tax: for purposes of computing the tentative estate tax, the amount of gift taxes payable on and unified credit against such gifts made by the decedent after 1976 is computed by using the estate tax rate in effect on the date of the decedent’s death (rather than at the time of the gifts).32

Gift Tax—Reunification of the Gift/Estate Tax Unified Credit

Unless noted otherwise, the amendments or additions to the US Federal Gift Tax by the Tax Relief Act apply for transfers made after 31 December 2010.33 The key provisions are as follows:

Maximum 35% Rate: the gift tax and the unified credit against the gift tax are computed by using the estate tax rate schedule,34 which has a top rate of 35%. For purposes of determining the unified credit against the gift tax, the previously used credits are computed by using the gift tax rates in effect in the year of the gift.35

$5,000,000 Exclusion Amount & Deceased Spouse’s Unused Exclusion Amount: the applicable exclusion amount for gifts is at least $5,000,000.36 The unused exclusion amount of a deceased spouse is portable with respect to the US Federal Gift Tax.37

GST Tax

The US Federal GST tax is reinstated.38 The reinstated US Federal GST Tax, as amended by the Tax Relief Act, is effective after 31 December 2009.39

As a result of the reinstatement, the Tax Relief Act includes several important clarifying and conforming amendments to the US Federal GST Tax, including the following:

Zero Tax Rate in 2010: the tax rate for GST transfers in 2010 is zero.40 For GST transfers in 2011 and 2012, the maximum tax rate is 35%.41

Maximum $5,000,000 Exclusion, Deceased Spouse’s Unused Exclusion Amount Not Portable: for purposes of computing the GST exemption amount, the exclusion amount is $5,000,000.42 The deceased spouse’s unused exclusion amount it not portable with respect to GST transfers.43

32 Section 302(d)(1). 33 See Sections 301(b), 302(b)(1)(B). 34 Section 301(b), Section 302(b)(2). See IRC § 2502(a)(1) prior to the enactment of the EGTRRA. See also Technical Explanations to the Tax Relief Act, p. 50. 35 Section 302(d)(2). This provision is effective for gift transfers after December 31, 2009. 36 Sections 301(b), 302(b)(1). See IRC § 2505(a)(1), as amended by the Tax Relief Act. 37 See Section 303(b)(1); Technical Explanations to the Tax Relief Act, p. 52. 38 Section 301(a). 39 Section 301(e). 40 Section 302(c). 41 See IRC § 2641. 42 See IRC § 2631(c), as amended by Section 302(a)(1). 43 Section 303(b)(2).


Extended Time to File Return and Make Elections: for transfers made after 31 December 2009 and before the enactment of the Tax Relief Act, time is extended to file a return to report GST transfers and make any election required to be made on such return.44 The extended due date for GST transfers after 31 December 2009, is nine months after the date of enactment of the Tax Relief Act.45

GST Tax Applies in 2010 Even If Executor Makes the Election: the election by an executor of an estate of a decedent dying in 2010 for no estate tax and carryover basis is not taken into account in determining whether the decedent is the transferor of property for GST purposes.46 Further, the election does not affect the continued applicability of the GST tax.47

Comments

Several general comments on the Temporary Estate Tax Relief provisions can be made.

First, the provisions appear to have simplified the Transfer Taxes with a unified applicable exclusion amount and the same rate schedule. The applicable exclusion amount is $5,000,000 and can be increased up to $10,000,000 for US Federal Estate and Gift Taxes. Thus, estate balancing will no longer be needed and will drafting became more simple.

Second, the estate tax exemption rate for non-US persons remains $60,000.

Third, the Temporary Estate Tax Relief provisions offer flexibility. The election afforded to executors of estates of decedents dying in 2010 permit the estates to choose between the alternate regimes of not paying the estate tax and deferring built-in gain or paying estate tax now and having no built-in gain as of the date of the decedent’s death. Generally, estates worth no more than $5,000,000 may not find it worthwhile to make the election because of the step-up in basis at death. The extended due date for certain acts, such as filing the estate or GST returns, is another example of the provisions’ flexibility.

Finally, the provisions clarify that the US Federal GST Tax scheme applies in year 2010, although the tax rate in such year is zero. This means certain GST transfers from a trust funded in 2010 may still be subject to GST tax, although with a GST exempt amount of $5,000,000, the tax may not be common.

Marnin Michaels (Zurich) +41 44 384 12 08 [email protected]

Quan Nguyen (Zurich) +41 44 384 13 37 [email protected]

44 Section 301(d)(2). 45 Section 301(d). 46 Section 301(c). 47 Technical Explanations to Tax Relief Act, p. 51.





Forthcoming events 7th Middle East International Wealth Management Program

Dates: 21-22 March 2011 Venue: Abu Dhabi, UAE (exact venue to be confirmed)

For more information, please contact: Christine Adams at +41 44 384 12 28 or at [email protected]

Annual International Tax, Trust and Insurance Training Program

Dates: 14-15 April 2011 Location: Dolder Grand Hotel, Zurich, Switzerland

For more information, please contact: Christine Adams at +41 44 384 12 28 or at [email protected]




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LawInContext Pte. Ltd. (“LawInContext”) was created by the global law firm Baker & McKenzie and provides cost-effective access to online legal information and training tailored to select communities of clients. LawInContext is neither a law firm nor authorized to practice law. No attorney-client relationship will be formed or deemed to be formed with Baker & McKenzie or contributing law firms through the use of LawInContext’s legal information, knowledge management, and training services. This may, in some jurisdictions, be considered “Attorney Advertising” for Baker & McKenzie and other contributing firms. A full disclaimer is available at http://www.lawincontext.com.






LawInContext Private Banking Webinar Series

The Needs of Wealth Owning Families & the Tools that Work

The LawInContext Private Banking fall/winter 2010-2011 webinar series will give participants an overview of the relevant insurance and tax planning strategies available to wealth owning families and the global financial institutions that represent them. This complimentary series begins in November and runs through June 2011.

Key issues covered include the following:

An Insight into the Needs of Wealth Owning Families Around the World

Use of Life Insurance as a Tax and Succession Planning Tool

Tax Planning with Trusts / Foundations

Countries Covered Include:

Canada

Denmark

India

Luxembourg

New Zealand

Portugal

Singapore

Switzerland

Turkey

USA

For further information or to Register for this series, please go to www.lawincontext.com/events


LawInContext Financial Products Distribution Webinar Series

Life Insurance Policies with Investment Portfolio Features

The LawInContext Financial Products Distribution fall/winter 2010-2011 webinar series will give participants an overview of the legal and regulatory considerations to the cross-border marketing and distribution of life insurance policies with investment portfolio features, including the tax law considerations to such activity. This complimentary series begins in November and runs through June 2011.

Key issues covered include the following:

What is a Life Insurance?

Regulatory Environment

Countries Covered Include:

Belgium

Brazil

Cyprus

France

Germany

Luxembourg

Portugal

Russia

Spain

Taiwan

For further information or to Register for this series, please go to www.lawincontext.com/events.




Wealth Management Contacts Amsterdam Claude Debussylaan 54 1082 MD Amsterdam P.O. Box 2720 1000 CS Amsterdam, The Netherlands Tel: +31 20 551 7555 Fax: +31 20 626 7949 Mark P. Bongard Peter van den Oord Maarten Hoelen Maarten van der Lande Marnix Veldhuijzen

Barcelona Avda. Diagonal, 652, Edif. D, 8th/F 08034 Barcelona, Spain Tel: +34 93 206 08 20 Fax: +34 93 205 49 59 Esteban Raventos Bruno Dominguez Elisa Ferrer

Beijing Suite 3401, China World Tower 2, China World Trade Center 1 Jianguomenwai Dajie Beijing, China Tel: +86 10 6535 3816 Jinghua Liu

Berlin Friedrichstrasse 79-80 10117 Berlin, Germany Tel: +49 30 20 38 7 600 Fax: +49 30 20 38 7 699 Wilhelm Hebing

Bogotá Avenida 82 No. 10-62, piso 6 Apartado Aéreo No. 3746 Bogotá, D.C., Colombia Tel: +57 1 634 1500; 644 9595 Fax: +57 1 376 2211 Jorge Lara Jaime Trujillo Laura Ramirez

Brussels Avenue Louise 149 Louizalaan Eighth Floor 1050 Brussels, Belgium Tel: +32 2 639 36 11 Fax: +32 2 639 36 99 Alain Huyghe Géry Bombeke Benoît Philippart de Foy

Budapest Andrássy-út 102 1062 Budapest, Hungary Tel: +36 1 302 3330 Fax: +36 1 302 3331 Geza Kajtar Gergely Riszter Timea Bodrogi

Buenos Aires Avenida Leandro N. Alem 1110, Piso 13, C1001AAT Buenos Aires, Argentina Tel: +54 11 4310 2200; 5776 2300 Fax: +54 11 4310 2299; 5776 2399 Martin Barreiro Alejandro Olivera

Caracas P.O. Box 1286 Caracas, 1010-A, Venezuela Tel: +58 212 276 5111 Fax: +58 212 264 1532 Ronald Evans

Chicago One Prudential Plaza 130 East Randolph Drive Chicago, Illinois 60601 Tel: +1 312 861 8000 Fax: +1 312 861-2899; 861 8080 Narendra Acharya Bruce Baker Mark Oates Kerry Weinger

Frankfurt Bethmannstrasse 50-54 60311 Frankfurt/Main, Germany Tel: +49 69 29 90 8 0 Fax: +49 69 29 90 8 108 Christian Brodersen Sonja Klein

Geneva Rue Pedro-Meylan 5 1208 Geneva, Switzerland Tel: +41 22 707 98 00 Fax: +41 22 707 98 01 Stephanie Jarrett Denis Berdoz Per Prod’hom Brice Thionnet Tiffany de Waynecourt-Steele Stephanie Vuadens

Hong Kong 14th Floor, Hutchison House 10 Harcourt Road, Hong Kong Tel: +852 2846 1888 Fax: +852 2845 0476; 2845 0487 Michael Olesnicky Richard Weisman Steven Sieker Jacqueline Shek Pierre Chan Winnie Choy Travis Benjamin

Juarez P.T. de la Republica 3304, Piso 2 32330 Cd. Juárez, Chihuahua, México Mailing Address: P.O. Box 9338 El Paso, Texas 79995 Tel: +52 656 629 1300 Fax: +52 656 629 1399 Jaime Gonzalez-Bendiksen

Kuala Lumpur Wong & Partners Level 21, Suite 21.01 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur, Malaysia Tel: + 60 3 2298 7888 Fax: +60 3 2282 2669 Adeline Wong Yvonne Beh Lim Tien Sim

Kyiv Renaissance Business Center 24 Vorovskoho St. Kyiv 01054, Ukraine Tel: +380 44 590 0101 Fax: +380 44 590 0110 Ihor Olekhov Hennadiy Voytsitskyi

London 100 New Bridge Street London EC4V 6JA, England Tel: +44 20 7919 1000 Fax: +44 20 7919 1999 Paul Stibbard Ashley Crossley Nigel Beadsworth Elena Gogh Salpy Kouyoumjian Katie Price Julia Ramsden Zoe Sive Emma Tyrrell

Luxembourg 12 rue Eugéne Ruppert 2453 Luxembourg Luxembourg Tel: +352 26 18 44 1 Fax: +352 26 18 44 99 André Pesch

Milan 3 Piazza Meda 20121 Milan, Italy Tel: +39 02 76231 1 Fax: +39 02 76231 620 Francesco Florenzano Barbara Faini

Madrid Paseo de la Castellana 92 28046 Madrid, Spain Tel: +34 91 230 45 00 Fax: +34 91 391 5145; 391 5149 Luis Briones Antonio Zurera

Manila 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City, Taguig, Metro Manila 1634 Philippines Tel: +63 2 819 4700 Fax: +63 2 816 0080, 728 7777 Dennis Dimagiba

Melbourne Level 19 CBW 181 William Street Melbourne, Victoria 3000 Tel: +61 3 9617 4200 Fax: +61 3 9614 2103 John Walker

Mexico City Edificio Scotiabank Inverlat, Piso 12 Blvd. M. Avila Camacho 1 11009 México, D.F., México Tel: +52 55 5279 2900 Fax: +52 55 5279 2999 Jorge Narvaez-Hasfura

Miami Mellon Financial Center 1111 Brickell Avenue, Suite 1700 Miami, Florida 33131 Tel: +1 305 789 8900 Fax: +1 305 789 8953 Bob Hudson James H. Barrett Simon Beck Dara Green Steven Hadjilogiou Daniel Hudson Caryn Smith Jennifer Wioncek Stewart Kasner Bobby Moore

Moscow Sadovaya Plaza, 11th Floor 7 Dolgorukovskaya Street Moscow 127006, Russia Tel: +7 495 787 2700 Fax: +7 495 787 2701 Alexander Chmelev Sergei Zhestkov Igor Kuznets

New York 1114 Avenue of the Americas New York, New York 10036 Tel: +1 212 626 4100 Fax: +1 212 310 1600 Dean Berry Margaret Paradis

Palo Alto 660 Hansen Way Palo Alto, California 94304 Tel: +1 650 856 2400 Fax: +1 650 856 9299 Scott Frewing

Paris 1 rue Paul Baudry 75008 Paris, France Tel: +33 1 44 17 53 00 Fax: +33 1 44 17 45 75 Stéphanie Auferil Marine Dupas Michael Khayat

Prague Praha City Center Klimentská 46 110 02 Prague 1, Czech Republic Tel: +420 236 045 001 Fax: +420 236 045 055 Pavel Fekar

Rome Viale di Villa Massimo, 57 00161 Rome, Italy Tel: +39 06 44 06 31 Fax: +39 06 44 06 33 06 Aurelio Giovannelli G. Franco Macconi

São Paulo Trench, Rossi e Watanabe Advogados Av. Dr. Chucri Zaidan, 920, 13° andar, Market Place Tower I Sao Paulo, SP, 04583-904 Brazil Tel: +55 11 3048 6800 Fax: +55 11 5506 3455 Alessandra S. Machado Simone D. Musa Adriana Stamato

Santiago Nueva Tajamar 481 Torre Norte, Piso 21 Las Condes, Santiago, Chile Tel: +56 2 367 7000 Fax: +362 9876; 362 9877; 362 9878 Sergio Illanes Leon Larrain Ignacio Garcia

Singapore 8 Marina Boulevard #05-01 Marina Bay Financial Centre Tower 1 Singapore 018981 Tel: +65 6338 1888 Fax: +65 6337 5100 Edmund Leow Wei Kee Ho Zhi Xiang Ke Allen Tan Jack Wong

Stockholm Baker & McKenzie Advokatbyrå KB Vasagatan 7 Box 180 SE-101 23 Stockholm Tel: +46 8 566 177 00 Fax: +46 8 566 177 99 Bo Lindqvist

Sydney Level 27, A.M.P. Centre 50 Bridge Street Sydney, N.S.W. 2000 Tel: +61 2 9225 0200 Fax: +61 2 9225 1595 John Walker Tim Sherman

Taipei 15th Floor, Hung Tai Center No. 168, Tun Hwa North Road Taipei, Taiwan 105 Tel: +886 2 2712 6151 Fax: +886 2 2716-9250; 2712 8292 Michael Wong Dennis Lee




Tokyo The Prudential Tower, 13-10 Nagatacho 2-Chome, Chiyoda-Ku, Tokyo 100-0014 Japan Tel: +81 3 5157 2700 Fax: +81 3 5157 2900 Yukinori Watanabe Edwin Whatley

Toronto BCE Place 181 Bay Street, Suite 2100 PO Box 874 Toronto, Ontario M5J 2T3 Tel: +1 416 863 1221 Fax: +1 416 863 6275 Brian Segal Salvador Borraccia Kristy Balkwill

Vienna Schottenring 25 1010 Vienna, Austria Tel: +43 1 24 250 Fax: +43 1 24 250 600 Georg Diwok Imke Gerdes

Warsaw Rondo ONZ 1 00-124 Warsaw, Poland Tel: +48 22 576 31 00 Fax: +48 22 576 32 00 Piotr Wysocki

Washington, D.C. 815 Connecticut Avenue, N.W. Washington, DC 20006-4078 Tel: +1 202 452 7000 Fax: +1 202 452 7074 Christine Sloan

Zürich Holbeinstrasse 30 P.O. Box 8034 Zurich, Switzerland Tel: +41 44 384 14 14 Fax: +41 44 384 12 84 Markus Affentranger Richard Gassmann Hans-Andrée Koch Marnin Michaels Tom O’Donnell Marie-Thérèse Yates Lyubo Georgiev Quan Nguyen Michael Parets Michael Donovan Rodney Read Elena Zafirova Mark Hale Paul DePasquale

Editorial Contacts Managing Editors

Paul Stibbard (London) Tel: +44 20 7 919 19 95 [email protected]

Stephanie Jarrett (Geneva) Tel: +41 22 707 98 21 [email protected]

For further information regarding the newsletter, please contact:

Sebastien Guelet (Barcelona) Tel: +34 93 206 08 20 [email protected]




Baker & McKenzie has been global since our inception. It is part of our DNA.

Our difference is the way we think, work and behave – we combine an instinctively global perspective with a genuinely multicultural approach, enabled by collaborative relationships and yielding practical, innovative advice. With 3,750 lawyers in 40 countries, we have deep understanding of the culture of business the world over and are able to bring the talent and experience needed to navigate complexity across practices and borders with ease.

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© 2011 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

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