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Offshore trust
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Offshore trust

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  • 1. Tax and other aspects of Offshore Trusts Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants Email: paresh@bom3.vsnl.net.in International Fiscal Association Western Region Chapter
  • 2. Overview of Presentation History and the Trust Law Application and use of the Trust Trust – The Nature of the Arrangement Trust – An Equitable obligation unlike other laws Equitable title its Nature and Effect Testamentary Trust
  • 3. Trust and Allied Terms - Meaning Trust Trustees Beneficiaries Protector Proper Law Place of Administration Letter of Wishes
  • 4. Types of The Trust Implied & Express Trust Revocable & Irrevocable Trust Discretionary Trust Life Interest Trust Interest in Possession Trust Accumulation & Maintenance Trust Bare Trust Purpose Trust
  • 5. Structure of the Trust Purpose of the Settlor Asset Protection Accumulation or Taxation etc. Selection of the Jurisdiction Survey vs. Purpose Analysis Onshore or Offshore Situation of Assets & Residence country of Settlor & Beneficiaries cont…
  • 6. Structure of the Trust Tax issues of Onshore Trust and the State of Beneficiaries’ Resident Other related Legal and regulatory issues Domestic Taxation & Exchange Control etc. Treaty & the Trust Scope & its Development OECD report & probable solution
  • 7. Establishing an Offshore Trust Legal Pre – requisite. Purposes of establishments & document of Trust deed – General & Taxation Other documents of establishment of Trust Powers & Relationship of Functionaries Important Features of the Trust deed & the documentations KYC
  • 8. Offshore Trust: Legal Issues Trust Law Fraudulent Disposition Act Court’s Power of Administration Anti Money Laundering Act Migration of Trust Law of Inheritance Trustees Regulation
  • 9. Offshore Trust – Operational Issues Types of Trust, arrangement of correspondence & validity of Trust Status Functions of Trust, Investment, Business, etc. Recurring KYC documents Indemnity of the Trustees Opening the Banking Account Audit and Accounts
  • 10. Offshore - Jurisdictions Types of Trust & Jurisdiction Protection of the Assets Security of the Trust Funds Language and efficiency of Administration Financial Infrastructure, its Cost & Geographical location Tax & Other related Laws
  • 11. Onshore - Jurisdiction Features of the Trust Laws Interesting Offshore features Taxation Provisions Investment exemptions Offshore – Onshore Synergy Lack of Infrastructure, Legal framework & Financial Services Onshore Jurisdiction – A need
  • 12. Trust in India Indian Trust Act, 1882 Bombay Public Trust Act, 1950 Benamidar Prohibitions Act, 1988 Trust & FEMA Income Tax Act, 1961 Assessment of Trust Investment in Funds & Vehicles
  • 13. Taxation of UK Trust Trust Type – Bare Trust Assessed at the Beneficiary Level Tax is levied at the normal rate applicable to Individuals/Concessional rate as if trust does not exist cont….
  • 14. Taxation of UK Trust – Continue … Trust Type – Interest in Possession Trust Assessed at the Trustee Level Tax is levied at the normal rate applicable to Individuals/Concessional rate on the income received by the trustees Beneficiaries are also taxed in the normal way with creditable taxes paid by the trustees Beneficiaries may obtain refund if assessable under lower brackets of taxes cont….
  • 15. Taxation of UK Trust – Continue … Trust Type – Discretionary Trust(Page 21 to 23) Flat rate of tax at 34% & 25% Trustees & Beneficiaries are taxed Provision of Tax Pool for the trust Accumulations are tax exempt in the hands of the beneficiaries
  • 16. Tax Pool – UK Discretionary Trust Tax credit @ 34% is ensured to the beneficiary Trustees to “Pool” enough payment of taxes Non payment tax credit – not includible Distribution will reduce the tax pool at the applicable rate Payment by Trust if Pool is not sufficient
  • 17. Case Study 2 Taxation of Trustee Dividend Received 90 Imputation Credit 10 Gross Income 100 Tax payable 25 Non Payable Tax Credit 10 Tax Payment 15 Amount for disposal 75
  • 18. Case Study 2 If trustee distributes GBP 75 Taxation of Beneficiary Net Income 75.00 Tax credit to be provided 38.63 Gross Income 113.63 Credit available in Pool 15.00 Therefore trustee cannot distribute GBP 75 cont….
  • 19. Case Study 2 – Continue… Maximum gross income can be GBP 90 (75+15) Therefore, Net distribution by trustees = GBP 59.40 Trustees to pay additional tax of GBP 15.60 Tax credit to be passed = GBP 30.60
  • 20. Case Study 1-UK Discretionary Trust Trust has income of GBP 66 which it proposes to distribute, what will be the amount distributed to beneficiaries and tax payment, if any in following cases where balance in tax pool account is NIL Less than 34 GBP 34 More than 34
  • 21. Case Study 3 - US Grantor Trust US Transfer Tax Exempt upto US$ 2 mn Exempt if transferred to spouse who is citizen Non US citizen souse exempt if transferred to Qualified Domestic trust Foreign Person exempt upto US$ 60,000 Applies only to US property US gift tax Exempt upto US$ 1.2 mn Exempt upto 1,20,000 per annum Upto US$ 12,000 Applies only to US property
  • 22. Case Study 3 Case (a) P desires to gift US$ 10 mn to his son and eventually to grand daughter
  • 23. Case Study 3 (a) - Solution Foreign Grantor Trust Not subject to US tax except on income from US Bonds Distribution not taxable for son Assets on death of father not subject to transfer tax in USA On death it is a non grantor trust Migrate trust to USA – only current income taxable & no problem of accumulation; or Distribute only to Non US beneficiaries and loan to US beneficiaries Accumulate in the Annuity Policy
  • 24. Case Study 3 Case (b) Son intends to return to UAE. Father wants to leave US$ 10 mn
  • 25. Case Study 3 (b) - Solution Grantor Trust Tax Avoidance Expatriate (TAE) if worth is more than US$ 2 mn Upto 10 year following the expatriation, US Law applies to TAE Estate tax to apply upto 10 years Capital Gains chargeable although he is non US person Grantor trust avoids net worth being in excess of US$ 2 mn TAE not applicable Exemption on Transfer tax & Capital Gains apply
  • 26. Case Study 3 Case (c) Father wants to leave US$ 10 mn. Son wants to leave it to his non US wife on his death Solution US irrevocable trust for son as a life tenant & after him under discretion to his wife with a remainder to Grand daughter on wife’s death No estate duty or gift tax on son’s death or on wife’s death
  • 27. Case Study 3 Case (d) Father wants to stay with his son in USA Solution Make irrevocable gifts to reduce Estate taxable in USA Non Grantor Foreign Trust with no US beneficiaries or with all of them as beneficiaries Sale Appreciated assets Sale Appreciated property
  • 28. Thank You