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Planning with trusts: Issues and considerations for the international family

Sergei Zhestkov | Moscow

Kirill Vikulov | Moscow

Vadim Romanoff | London

Bruno Dominguez | Barcelona

Lyubomir Georgiev | Zurich

Francesco Florenzano | Milan

18 October 2017

Agenda

1 Introduction 3

2 Case study – Russia and UK 5

3 Case study – Switzerland 10

4 Case study – Italy 19

5 Case study – Spain 23

© 2017 Baker McKenzie LLP

Typical issues for the multinational family (1)

3

Reasons to explore or adjust/revise the trust structure

family members

reside in different

jurisdictions

family and/or certain

family members

consider relocation to

other jurisdiction and

trust already exists

prior relocation

trust to be

established after

relocation

changes in local

or cross-border

legal or tax

environment (e.g.

introduction of

CFC rules, anti-

avoidance rules,

exchange of

information)


Typical issues for the multinational family (2)

4

Typical issues

for trusts

Choice of proper structure, proper

jurisdiction

Validity of a trust

Who 'controls' the trust ?

Taxation, CFC rules, etc.

Reporting the trust

FATCA, CRS, AEoI, etc.

Troubleshooting, disputes

1 Russia and UK


Russia and UK – Typical historic structure

6

CRS reposting on:

1. Settlor

2. Beneficiaries

receiving distribution

in the FY

3. Other controlling

persons, if Russian

tax residents

Third party

trustee

(non-UK)

Russian (non-UK

domiciled) Settlor

Transfer of real

estate and shares

Duties

Protector / protector

committee

(Switzerland)

Oversight over the

administration of the trust

Feeder Company

(non-Russian Co)

Distributions

(If any)

Russian tax

authorities Russian and UK tax

residents - Beneficiaries

Russian taxes

Offshore

company

(non-UK)

Case Study #1

Residential

property in the

UK

Discretionary

Trust


Key Features to Consider on Setting-up a Trust

7

Potential key objectives of Russian

residents:

Safeguarding foreign property

Succession planning

Confidentiality

New Challenges: (1) Russian

CFC rules (no practice) and

(2) CRS and increased

information exchange.

Is there a possibility to set-up a trust,

which is not a CFC in Russia?

Potentially yes, if Russian tax

residents do not retain 'control'

Otherwise, trust must be reported as

CFC, 13% individual income tax on

undistributed profits

Russian civil law does not

recognize trusts – is foreign

settlor/contributor required?


Russian Tax Implications

8

Broad definition of control

over a trust: exercising or

having an opportunity to

exercise a decisive

influence on the decisions

of the person managing

the assets of the structure

(trustee) in connection

with after-tax profit

(income) distribution

Default approach: settlor is a controlling

person, unless he/she cannot revoke and

cannot receive benefits from the trust

(including on liquidation). Possibility to

use non-Russian Settlors may depend on

the set-up, but must be carefully planned

(migration planning and other issues)

CFC profits below 10 mln. rubles are not

taxed (only administrative penalty in case

of non-reporting): confidentiality at a cost?

Trust should have audited financial

statements.

13% individual income tax

on free use of property

(material benefits) vs.

lease agreement to cover

expenses?

Beneficiaries – Russian tax residents are

subject to the 13% individual income tax

on distributions from the trust reduced by

the previously paid tax on CFC profits (if

any). CFC profits are reduced by the

amount of the profit distributions from

such CFCs.

Disclosure of

information under

the CRS should

be carefully

planned

Trust must report

on the Settlor and

controlling

persons;

Discretionary

beneficiaries may

be reported once

they receive

distributions

(confidentiality).


Recent UK Case on Trusts

9

1. Intention to divest property rights vs. retaining control over the property transferred to the Trust

2. Settlor acts as First Protector with extensive powers

a. Protector has the right to dismiss the Trustee without cause

b. Protector has extensive veto powers limiting discretion of the Trustee

3. Settlor is one of the Discretionary Beneficiaries and as Protector effectively controls appointment and removal of other Beneficiaries

4. Facts of the case indicate that the Settlor considered himself as the ultimate holder of the Trust Fund

a. Trust Fund is suggested as collateral to the bank on the loan to the Settlor

b. Trust Fund is occasionally used to fund personal expenses by the Settlor via controlling the bank account

c. The Trustee had no or little involvement in management of the Trust Fund

Trust

Assets in the UK

Healthy Check:

- Sham Trust?

- Illusory Trust?

How the trust management mechanism and conduct may be viewed in Russia:

- Control?

Tax authorities Creditors


UK Tax Implications

10

UK consequences Trusts still play a vital role in the wealth management but need to

balance against potential UK tax consequences

CGT: Occupation of the house rent-free by UK resident

beneficiaries can be a benefit under the CGT capital payment

rules (the remittance basis of taxation will not apply)

Solutions for UK resident beneficiaries

ATED-related CGT on sale of property by company and annual

ATED

IHT, from 6 April 2017:

6% ten-yearly charges (consider deducting relevant

borrowings) and disclosure to HMRC, and

40% under GWR rules (possible solution – specifically

exclude settlor)

But consider insurance/ spousal exemption to mitigate the

charge to IHT

Potential confidentiality safeguards afforded by using companies,

but consider proposed UK real estate register (exemptions?)

0

10

20

30

40

50

60

70

80

Old

ru

les

(201

3)

201

7 a

nd

onw

ard

s

Old rules (2013)

2017 and onwards

- Relevant property (6%

10-yearly)

- Inheritance tax

- ATED (1.1% yearly)

- Capital Gains Tax

(up to 28%)

2 Switzerland


CRS Reporting of Financial Institution Trust

12

Protector

Trust

Assets

Competent Authority

Reportable Jurisdiction

Competent Authorities

automatic

exchange

Settlor

Beneficiaries

Trustee Trust

1 Trustee, "on behalf of" the Trust, conducts

required CRS reporting on Protector,

Settlor, Beneficiaries as required to

Competent Authority where the Trust is

"resident." 2 Information reported is automatically

exchanged to Competent Authorities

where the Protector, Settlor, or

Beneficiaries are tax resident.


Decantings

13

Trust A

Trust A

Assets

1. Trustee invades Trust A

Assets to pay Trust A

Assets to different trust.

Trust B

Trust B

Assets

2. Trustee holds assets

received from Trust A

as trust fund of Trust B.

Trustee A Trustee B

"Decanting" typically describes the exercise of a trustee's power to

transfer, pay, or appoint assets from the corpus of the one trust to a

different trust.


Decantings – Possible Reporting (Trustee A)

14

Reportable

Persons

Explanation

If Trust A is treated as

settlor of Trust B… Possibly none.

Trust B not treated as beneficiary

(i.e., Equity Interest holder) of Trust

A (but what if Trust A is

terminated?).

If Trust B is treated

as beneficiary of

Trust A…

Possibly none, or

If no "look-through" of Trust B as an

Entity beneficiary due to Financial

Institution status.

Controlling Persons

of Trust B.

If "look-through," Trustee A may be

required to report Controlling

Persons* of Trust B.

1

2

*Reminder: Controlling Persons in this context may include the natural persons who are the settlor, trustee,

protector, and beneficiaries of a trust or any other natural person exercising ultimate effective control over

the trust.


Decantings – Possible Reporting (Trustee B)

15

Reportable

Persons

Explanation

If Trust A is

treated as

settlor of

rust

B…

Controlling Persons of Trust

A (as Settlor); protector and

beneficiaries of Trust B (as

normal). or

If "look-through" of Trust A is required, then Trustee

B should treat the Controlling Persons of Trust A as

the "settlors" of Trust B. Normal reporting of Trust

B's other Equity Interest holders.

Protector and beneficiaries

of Trust B (as normal).

If no "look-through" required due to Financial

Institution status of Trust A, then no reporting of

Controlling Persons as "settlors". Normal reporting

of Trust B's other Equity Interest holders.

If Trust A is not

treated as settlor

of Trust B…

Settlor of Trust A; protector

and beneficiaries of Trust B

(as normal).

If economic settlor of Trust A also treated as settlor

of Trust B, then he/she, as settlor, is reported by

Trustee B. Normal reporting of Trust B's other Equity

Interest holders.

If Trust B is

beneficiary of

Trust A…

Protector and beneficiaries

of Trust B (as normal).

Trust A not treated as settlor (i.e., Equity Interest

holder) of Trust B. Only Trust B's other Equity

Interest holders are reported.

1

2


Migrations

16

Trust A (Jurisdiction A)

Trust A (Jurisdiction B)

change in trustee

change in place of administration

change in governing law

Examples of trust

migrations or

re-domiciliations:

Amendment of

trust's governing

law

Change of trustees

or place of

administration


Migrations - Possible Reporting

17

Reportable

Persons

Reporting

Party

Explanation

If trustee remains

the same… Possibly none. N/A

No change in place of

residency of the FI trust if

trustee remains the same, so

the trust may not have

migrated for CRS purposes.

If the trustee

changes…

Possibly none.

or N/A

The FI trust continues to

exist but has changed its

residency for CRS purposes.

Settlor,

protector,

beneficiaries.

Trustee in

Jurisdiction A.

The FI trust, as resident in

Jurisdiction A, ceases to

exist and all "accounts"

treated as closed.

1

2


Liquidations

18

Examples of possible liquidation scenarios:

Trust is terminated by the Trustee and all of the

assets are distributed to one or more beneficiaries.

Trust is revoked by the Settlor and all of the assets

are revested in the Settlor.

All of the Trust assets are appointed out to a third-

party (either a beneficiary or otherwise) pursuant

to a power of appointment.

Final distribution of the remaining trust assets to

one or more beneficiaries.


Liquidations – Possible Reporting

19

Reportable

Persons

Why?

If liquidation and distribution to

beneficiary…

Settlor, protector,

beneficiaries.

Beneficiary receiving distributions

reported with amount and "account"

closure. "Account" closure reported for

other Equity Interest holders.

If trust is revoked… Settlor, protector,

beneficiaries.

Settlor reported with amount revoked and

"account" closure. "Account" closure

reported for other Equity Interest holders.

If liquidation and

distribution to non-

beneficiary via power of

appointment…

Settlor, protector,

beneficiaries. or

"Account" closure reported for other

Equity Interest holders.

Recipient, settlor,

protector,

beneficiaries.

Recipient reported as "beneficiary" with

amount. "Account" closure reported for

other Equity Interest holders.

1

2

3 Italy

© 2017 Baker McKenzie LLP 21

Settlor

(Non Italian

resident)

Third party trustee

(Non-Italian)

Italian resident

beneficiaries

Reporting of the holding

of foreign assets

Irrevocable

Discretionary

Trust

Italian Tax

Authorities

Holding company

(Non-Italian resident)

Portfolio

Mng Co OpCo OpCo

Real Estate

Co


Trust recognition and tax regimes of trusts

22

trusts cannot be governed by Italian

law. Trusts governed by non-Italian law

are recognized in Italy pursuant to Trust

Hague Convention

income of trusts "with identified

beneficiary/ies" (a beneficiary qualifies

as "identified" if he has recourse against

the trustee for the payment of an

identified item of income) is imputed

and taxed at the level of the beneficiary

on a pass-through basis.

a de facto power of an Italian resident

(settlor or beneficiary) to direct and

interfere with the trustee activities may

be considered by the Italian Tax

Authorities as sufficient to disregard the

trust and deem the trust's assets and

income as directly pertaining to that

Italian resident.

opaque trusts are treated as a taxable

person for corporate income tax

purposes. A non-resident opaque trust

is liable to income tax in Italy only of the

Italian sourced income

Trust recognition Disregarded trusts

Transparent trusts Opaque trusts

Italian general

considerations


Taxation of the life cycle phases of a trust

23

Set up of the trust and addition of

the assets. In general, no Italian

donation tax applies as the settlor

is not Italian resident. If assets

located in Italy are transferred,

donation tax may be levied under

certain circumstances. Donation

tax rates vary among 4% and 8%

depending of the nap of kin. A

threshold of 1 million of € is

available to each of the children

and spouse of the settlor.

Broadly shared position among

the scholars that no income

taxation is levied on the trust

income at the level of the Italian

resident beneficiaries

The distribution of the trust's assets to the

beneficiaries. Broadly shared position

among the scholars that Italian

beneficiaries are not subject to income

taxation on the assets' distribution from a

trust. If assets located in Italy are

transferred, donation tax may be levied

under certain circumstances.

Reporting duties of the Italian resident

beneficiaries of the trust assets located out

of Italy. The expected broadening of the

subjective scope of application of the

reporting duties following the

implementation of the AML IV Directive.

The case

study

4 Spain


Spanish law does not recognize trusts. Spain has not subscribed The Hague

Convention on the Law Applicable to Trusts and on Their Recognition and Spanish

legislation does not recognize trusts either. Court precedents do not recognize the

division of legal and beneficial ownership of trust assets between the trustee and the

beneficiaries of a trust.

The tax treatment of the trust relationship is therefore uncertain and several different

interpretations could apply (i.e. the trust may be characterized as a transparent entity,

or disregarded in its entirety, or the trust relationship might be characterized as a gift

from the settlor to the trustees or the beneficiaries).

Tax rulings issued by the General Directorate of Taxation on 14 January and 14 May

2010 insist on disregarding the trust and considering the relationship between the

settlor and the beneficiaries to take place directly as if the trust never existed.

In the context of the tax amnesty carried out in Spain in 2012, it was expressly

recognized by the Spanish tax authorities that assets kept in a trust structure must be

attributed for tax purposes to the individuals that actually have control over the assets

and/or the income generated by the assets (which is usually the settlor in the case of

a revocable trust and the beneficiaries in an irrevocable trust).


Irrespective of its

characterization, the

contribution to the trust

may be considered a

change in the composition

of the net worth of the

contributor and therefore

result in a taxable gain or

loss (equal to the difference

between the current market

value of the asset and

taxpayer's acquisition cost

of such assets).


Special attention should be devoted to shares of companies kept with a trust as, once

the trust is disregarded and its investments considered to be kept directly by the

Spanish taxpayers, CFC rules usually would apply on such investments.

Spanish CFC rules determine that Spanish resident companies or individuals must

include and be subject to Spanish Corporate or Personal Income Tax (up to 48%

rates) any positive income obtained by a non-resident entity (even if such company

has not actually distributed the profits to its Spanish shareholders) provided that their

stake in the foreign company is greater than 50% and the Corporate Income Tax paid

by the non-resident entity in its jurisdiction is less than 75% of that which it would have

paid under Spanish Corporate Income Tax (i.e. below 18.75%).

Such rule applies on so-called "passive income" obtained by foreign company (i.e. title

to real estate property, a stake in the equity of any kind of entity and assignment of

stockholder capital to third parties, provision of services, financial or assurance

operations with related parties).

This applies not only to companies based in a tax haven jurisdiction but to any foreign

company even those established in the EU.


In general terms, under Spanish regulations, it is not advisable to interpose a

company located in a foreign jurisdiction (even when that is a jurisdiction which is not

listed as a tax haven jurisdiction) under the trust, considering not only Spanish CFC

rules but also the general anti-avoidance rules contained in our legislation – such as

qualification (i.e. substance versus form), conflict in the application of the tax law (i.e.

abuse of law) and simulation (i.e. sham transaction) on which the Spanish Tax

Authorities may disregard the structure.

Provided that the trust is disregarded for tax purposes in Spain, those Spanish

resident individuals that actually control the trust and are currently entitled to its

proceeds must report the assets under the trust in the yearly Declaration of assets

kept abroad (tax form 720) indicating they do so as "titular real" (i.e. the obligation to

file this reporting form derives from their actual ownership on the assets).

Trust structures' are disregarded by Spanish tax authorities and therefore all income

derived from the underlying assets are subject to Spanish Personal Income Tax,

Wealth Tax or Inheritance and Gift Tax in hands of the individuals that actually control

the trust or receive interest in a trust (whether the settlor or the beneficiaries)

regardless of the place where the assets are located.


# Conclusion

In general terms, under Spanish regulations, it is not advisable to interpose a

company located in a foreign jurisdiction (even when that is a jurisdiction which is not

listed as a tax haven jurisdiction) under the trust, considering not only Spanish CFC

rules but also the general anti-avoidance rules contained in our legislation – such as

qualification (i.e. substance versus form), conflict in the application of the tax law (i.e.

abuse of law) and simulation (i.e. sham transaction) on which the Spanish Tax

Authorities may disregard the structure.

Provided that the trust is disregarded for tax purposes in Spain, those Spanish

resident individuals that actually control the trust and are currently entitled to its

proceeds must report the assets under the trust in the yearly Declaration of assets

kept abroad (tax form 720) indicating they do so as "titular real" (i.e. the obligation to

file this reporting form derives from their actual ownership on the assets).

Trust structures' are disregarded by Spanish tax authorities and therefore all income

derived from the underlying assets are subject to Spanish Personal Income Tax,

Wealth Tax or Inheritance and Gift Tax in hands of the individuals that actually control

the trust or receive interest in a trust (whether the settlor or the beneficiaries)

regardless of the place where the assets are located.

29


Speakers

Bruno Dominguez Barcelona

+34 93 206 08 36

bruno.dominguez

@bakermckenzie.com

Francesco Florenzano Milan

+39 02 76231 304

francesco.florenzano

@bakermckenzie.com

Vadim Romanoff London

+44 20 7919 1592

vadim.romanoff

@bakermckenzie.com

Kirill Vikulov Moscow

+7 495 787 5972

kirill.vikulov

@bakermckenzie.com

Lyubomir Georgiev Zurich

+41 44 384 14 90

lyubomir.georgiev

@bakermckenzie.com

Sergei Zhestkov Moscow

+7 495 787 2700

sergei.zhestkov

@bakermckenzie.com

30

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