Tax Avoidance Strategies in the European Union

While the formation of the EU brought unity to its member nations in a number of ways, there still remains a substantial difference between the laws of those member nations which include tax avoidance strategies in the EU making them vary by country.

It is a well-known fact that some offshore tax haven countries have streamlined taxation laws that are fair to large investors, while others, such as Switzerland, have recently caved to foreign pressure and made their tax policies more stringent. Let’s take a look at some of the most popular nations among tax-savvy investors.

Cyprus: After Cyprus’ accession in the EU in 2004, it has managed to rapidly develop into one of the most prominent financial centres in Europe. It is a known fact that Cyprus has one of the lowest corporate tax rates in the EU at 12.5%, with a close to perfect tax exemption system for holding company income and double tax treaties in place with around 45 countries in total. Cyprus does not levy any withholding tax over outbound dividends or interest. There is normally no withholding tax over royalties either.

Latvia joined the EU in January 2014; this coincided with the enactment of new tax laws that promised to draw the interest of large investors to this small nation. Any profits earned by foreign investors from dividends and stock sales are tax-free, and there is no tax on transferring them out of the country. As far as corporate investors are concerned, Latvia also aims to please by offering a corporate tax rate of 15%.

Following on, Luxembourg is another small nation that continues to provide vast opportunities to foreign investors. It should be noted that British investors, however, will want to be wary of relying on this nation’s tax laws. This is because Luxembourg recently agreed to provide British authorities with information about the holdings of British investors. Yet, within its own border, this European nation continues to refuse to tax bank interest, investment dividends or capital gains, earned by its foreign investors.

Even though Austria has seen similar pressure to release foreign investors’ tax information, this country has made a point in stressing that it will continue to respect the privacy of these investors. Austrian bank accounts continue to be a secure, anonymous choice for tax-efficient investment. Nevertheless, as pressure on Austria’s privacy policies increases, investing in Austrian bank accounts may become increasingly tricky territory that must be navigated with the help of a professional advisor.

Both political and economic developments continue to change the way investors look at tax optimization strategies. Although some nations have changed the laws that once made them famous for offering a number of innovative tax avoidance strategies, other nations are stepping up to take their place as a favourite spot for investors to protect their assets.

Navigating foreign taxation laws can be complicated and difficult. Parparinos Milonas Corporate and Legal Consultants can simplify the process of choosing the best offshore investment jurisdiction for your individual needs whilst offering you the best legal and corporate advice.


Tax Avoidance Vs. Tax Evasion

Take the Legal Route to Reduce Taxes

When owning your own business, you most definitely have the right to organise it in such a way, ensuring you do not have to pay any more taxes than necessary. This strategic plan, known as tax avoidance, involves using legal means to reduce taxes and is the practice of setting up your business in such a way that it will undoubtedly be taxed fairly by the government of your country.
In contrast, tax evasion, is the practice of violating your country’s laws and paying less than the minimum amount of taxes.

Should the case be that your offshore business is set up as a controlled foreign corporation, then it is possible that you may be paying more than you need to in taxes. A CFC – Controlled Foreign Corporation, is a taxable business structure which is recognized by many countries.
Characteristically, your offshore business will be considered a CFC unless a couple of conditions are met:

  • A majority of your shareholders may not be citizens of your country, and
  • No more than a certain percentage of your company’s voting stock may be held by one shareholder.

The above as well as exact conditions may vary by country. For example, US taxpayers, in particular, must be wary of the distinction between non-taxable income from foreign businesses and taxable income made from passive investments.

While CFC definitions differ between countries, a number of taxpayers across North America, Australasia, and other nations have found that structuring offshore assets around a Panama Private Interest Foundation, known as a PPIF, is a sound strategy for tax optimisation.

The Panama Private Interest Foundation (PPIF) was developed as a way to make Panama a centre of offshore investment following suit from the Stiftung model, a family foundation formed under the laws of Liechtenstein.
Under the laws of Panama, the PPIF is an entity completely separate from the business owner and so can offer owners of offshore assets the opportunity to structure those assets so that they will not be defined as a CFC.

Additionally, when the majority of a corporation’s shares are subscribed to the PPIF, it no longer meets many nations’ criteria for being considered a CFC.
While U.S. residents must contend with additional hurdles posed by IRS regulations, a Panama Foundation is normally an excellent choice when it comes to making sure you pay a fair tax rate on your foreign assets.

If the asset is classified as a CFC, then owning a foreign asset can result in a significant tax burden. The good news is that by subscribing some of the shares of a foreign asset to a Panama Foundation, can prevent it from being considered a CFC in many countries. The definition of a CFC again varies from nation to nation, and the regulations involved can be complex.

The professional team at Parparinos Milonas Corporate and Legal Consultants is able to guide asset owners through the process of structuring their assets so that they will be taxed fairly. Feel free to contact us with questions about taxes on your foreign assets or to set up a tax-optimized structure to meet your needs.

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Cyprus has still no sign of the ‘Lagarde list’

France has repeatedly been asked by the Cypriot Government to hand over a list of suspected Cyprus-based tax evaders. The requests to date have still not been met with success as told by the Cyprus Finance Minister.

The Finance Minister Harris Georgiades told MPs that since March 2013, Nicosia on several occasions has asked Paris to furnish the so-called ‘Largarde list’, with Nicosia invoking the double taxation avoidance treaty between the two countries. When pressed on the subject, the minister said a fresh attempt would be made at obtaining the list. But he added however, that he was not optimistic.

Harris Georgiades at the time was attending a session of the House watchdog committee, whose official order of business was reviewing the Auditor-general’s findings on the finance ministry for the year 2013. It was clear that the Minister’s responses did not satisfy MPs.

AKEL’s representative Irini Charalambidou said Cyprus is the only country that has not got the ‘Lagarde list’, whereas other countries which have obtained it have since moved in on big tax evaders. “It seems some people here do not want the list,” she added in a loaded comment.

According to the findings of an investigation of over 100,000 HSBC clients from 203 countries by the Washington-based International Consortium of Investigative Journalists (ICIJ), over 300 Cyprus-affiliated individuals or companies have money sitting in Swiss bank accounts.

There was more rancour when Georgiades, asked who drafted the legislation on the bail-in commonly known as the ‘haircut’ of depositors, and replied that the previous government did.

In late 2012, during the administration of Demetris Christofias, the finance ministry and the Central Bank of Cyprus jointly drafted The Resolution of Credit and Other Institutions Law.

According to Georgiades, on January 11, 2013 then-finance minister Vasos Shiarly addressed a letter to the European Central Bank, in which he forwarded the law and asked for the ECB’s expert feedback.

The ECB’s position at the time was that insured deposits (below €100,000) should not be exempt from a haircut, he added.

This provoked outrage from AKEL MPs, who accused Georgiades of twisting the facts and the government camp of cowardice.

AKEL representative, Pambos Papageorgiou burst out by addressing the President and saying “You did the haircut, you should stick by it, instead of blaming others for it.”

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Cyprus: Enquiry into Petroleum-related products

On 17 December 2014, the Commission for the Protection of Competition had announced on its official website that it would proceed with a sector enquiry regarding the petroleum products sector, pursuant to the newly introduced Section 32A of the Protection of Competition Laws 2008 and 2014. The announcement stated, among other things, that the common public perception of the relative market and according to the press is that the prices of petroleum-related products increase rapidly when import costs increase, but decrease slowly when import costs fall, a phenomenon branded as ‘rockets and feathers’. It was also noted by the Commission, that the sector enquiry will be general, as it entails data collection and does not directly concern any individual enterprise. Although it is not for sure, following the sector enquiry, the commission may investigate relevant individual cases.

Site investigation of facilities

On 16 January 2015, the commission also announced that it will proceed, on the basis of Section 31 of the Protection of Competition Laws 2008 and 2014, with a site investigation of the facilities of Cosmos Trading Ltd and Fereos Ltd.

The related proceedings commenced on 13January 2015 within the ambit of the preliminary assessment of a complaint filed by the Cyprus Association of Convenience Stores regarding possible infringements of Section 3(1) of the Protection of Competition Law of 2008. The commission has made it clear that the investigation does not indicate that any company has violated competition legislation but rather, the objective is to collect the data needed to conduct the necessary investigation in accordance with the commission’s powers and jurisdiction to apply the relevant legislation.

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European hedge funds shut down at record pace

Hedge funds in Europe are closing down at the fastest-ever pace as rising costs, weak performance and a slowdown in the pace of new investment leads some embattled founders to bail out.

Statistically four in every 10 funds which closed last year were in Europe, home to a large number of smaller funds, as the total number of closures rose to a record 370, Eurekahedge data showed, even as other regions benefited from a rise in global industry assets to a record near $3 trillion US Dollars.

This European trend comes after Eurkeahedge’s European funds index rose just 0.7 per cent in 2014, way below a 5.5 per cent gain by North American peers and notching up an eighth straight year of underperformance.

Anne-Gaelle Pouille, a senior portfolio manager at fund of hedge funds PAAMCO, stated that “Patience of course can only run so deep for many investors,”, “Not all investors, but many investors have struggled to make money in Europe, and when that goes on for a number of years … money is going to exit.”

Amongst the high-profile investors to recently ditch hedge funds, citing poor performance and high costs, were Britain’s Local Pensions Fund Authority and the Dutch pension fund PMT.

Cleaning out the weaker firms in a region with a relatively large number of smaller funds may help those remaining to get a bigger slice of the pie when things take a different course, but it means reduced choice for investors and less business for those who service the industry, such as the investment banks who carry out their trades and are known as prime brokers.

Heading the way in closures with nearly a third of the total are the so-called equity long-short funds, which bet on falling and rising stock prices. Computer-trading funds and those betting on macroeconomic issues also saw heavy casualties.

The majority of the attrition was felt among smaller managers, or those managing US$350 million or less, although blue-chip names were not immune, with US$27 billion Brevan Howard and Bramshott both forced to close funds after recording poor performance.

Data showed that investors pulled a net US$13 billion out of European hedge funds in the second half of last year, having invested a net US$35 billion in the first half and US$64 billion in 2013.

Additionally lower returns in 2014 mean the lucrative performance fees charged by hedge funds in Europe shrank at a faster pace than global peers, leaving them with less money to invest in the business and retain key traders and portfolio managers.

Compounding that financial quandary, smaller funds have found the cost of meeting new rules in Europe, particularly after the introduction of Europe’s Alternative Investment Fund Managers Directive (AIFMD), rise more than elsewhere.

Peter Astleford, a partner at law firm Dechert said “The pendulum towards more onerous rules in the US has stopped swinging. There is, at best, only very limited evidence of this in Europe,” Michele Gesualdi, chief investment officer at investment manager Kairos Partners said however “For those who can ride out the current squeeze, however, the future may be brighter, especially if performance picks up. “This is really the survival of the fittest environment,” Gesualdi said. “This year, European funds might surprise people in terms of generating returns.”

The typical management fee for Hedge funds is between one and two per cent and then a cut of profits of between 15 and 20 per cent. It is a fact however that both earners have been under pressure and have dropped since 2008. While larger funds generate enough from management fees to pay for fixed costs, smaller managers may have to use some of the performance fee.

Last month, a Citigroup survey released, showed that a hedge fund needs about $310 million to turn profitable, although some prime brokers say it’s possible for some simple strategies such as long/short equity hedge funds to break even with US$100 million.

According to data from Eurekahedge, nearly three quarters of the hedge funds in Europe manage US$200 million or less. The region is home to nearly 37 per cent of hedge funds globally by number but hosts just 22.7 per cent of the industry’s assets, data from Eurekahedge also showed, down from 25 per cent in October 2007.

As regulation costs have risen and many funds were burnt after being on the wrong side of an unpredictable rise in the Swiss franc in January, it is apparent that 2015 has started off in a harsh way.

Citigroup estimates funds with US$350 million or less saw compliance costs rise 31 per cent last year and notes they may not be able to break even on management fees alone. Sandy Kaul, head of business advisory services at Citi, said: “That either is going to have to be covered by principals coming up with more money, or we could probably expect to see a pretty substantial wave of small hedge fund closures.”