S.T.E.P. 2014 Ashvin Dwarka - FATCA-type disclosure obligations for trustees

FATCA-type fiscal disclosure for Mauritian trustees:
a global trend…
Ashvin Krishna Dwarka, Counsellor and notary
23 April 2014 – STEP (noon session)
1 © 2014 A. K. Dwarka

by Ashvin Dwarka, Notaire
I. FATCA UPDATE
2 © 2014 – A. K. Dwarka, Counsellor and notary

I.A Foreign Account Tax Compliance Act
 Operative words: “foreign” and “tax”
 Extending the reach of the long arm of the (fiscal)
law abroad
 Symptomatic of the “wising up” of tax authorities
 An inevitable by-product of the general move
towards exchange of information and mutual
assistance
 Is our global financial sector really that dependent on
US clients ? Let’s see...
 What about Europe ?

I.B Overview / reminder
 US FATCA: compliance and reporting
 FATCA is far-reaching: withholding agents and
MNEs, but also FFIs (foreign financial institutions)
 If FFI is not a “participating FFI”, then 30%
withholding tax applies
 If you are not an FFI, should you be concerned ?

I.C FATCA update (USA)
 USA: deadline extended to 1 July 2014
 IRS website contains a list of countries having
signed IGAs, having ratified IGA’s, etc:
http://www.treasury.gov/resource-center/tax-
policy/treaties/Pages/FATCA-Archive.aspx
5 © 2013 - G. Gowrea & A. K. Dwarka

I.D FATCA update (Mauritius)
 IGA + TIEA signed on 27 December 2013 (Mauritian Minister of
Finance and US ambassador) – To be ratified in Parliament
 FSC – invitation for comments to MoFED/MRA/SLO/BoM technical
committee in July 2013
 Now awaiting Regulations on IGA and TIEA
 Already treated as effective:
http://www.treasury.gov/resource-center/tax-
policy/treaties/Pages/FATCA-Archive.aspx

I.E IGA Models – a comparison
© 2014 – A. K. Dwarka, Counsellor and notary7
Model 1
 Local reporting by FFI
(local Revenue then
reports to IRS)
 Less burdensome for
FFIs
 Chosen by most
countries
 Mauritius has made the
most practical choice
Model 2
 Direct reporting by FFI
to IRS
 Cumbersome for FFIs
 Few countries: Japan,
Switzerland…

I.F Impact on Mauritius ?
 Domino effect:
 volume of future investments from US persons
 potential moves of financial institutions to limit their
exposure to a US client base due to the associated risks
and complexities of compliance
 compliance costs in terms of identification, assessment,
control measures, data management and reporting
 exposure to the eventual consequences of having US
taxpayers
 In case of non-compliance, in addition to 30%
withholding: Competent Authority will apply its
domestic law (including penalties) to address
significant non-compliance

II. THE FRENCH FIDUCIE

II.A The French fiducie: historical
approach
 Application of private international law principles
 Formerly, adaptation: i.e. recharacterisation as one of the
existing civil-law mechanisms, such as testamentary
executorship or agency (Pyrénées Minerals)
 Subsequently, recognition (Zieseniss): provided however
than French imperative public policy is not breached (esp.
re forced heirship)

II.B The French fiducie: a trust outside
Equity
 Recognition – Hague Convention on the Law
Applicable to Trusts and on their Recognition (1985):
“For the purposes of this Convention, the term "trust" refers
to the legal relationships created - inter vivos or on death -
by a person, the settlor, when assets have been placed
under the control of a trustee for the benefit of a beneficiary
or for a specified purpose.”

II.C The French fiducie: a trust outside
Equity
 La fiducie: the contractual pseudo-trust
 Not a creature of equity, but a contractual mechanism
(i.e. a bilateral manifestation of will, contrary to a trust
which can arise by a unilateral act)
 No rights in rem, no tracing rights (absence de droit de
suite)
 Of little practical relevance in estate planning
 Essentially for specific corporate matters: e.g. holding
shares as security, or in escrow
 Beware difference between “civil law” treatment and
“fiscal law” treatment ! Indépendance du droit
fiscal…

III. THE NEW FISCAL DISCLOSURE
RULES: A MINI FATCA?

II.A Mandatory disclosure under French
General Tax Code
 New French disclosure rules 2011/2012:
 French Finance Act 2011 of 29 July 2011,
 French Revenue ruling of 23 December 2011,
 Decree of 14 September 2012
 three French Revenue Statements of Practice dated 16
October 2012
 Arts 792-0bis and 1649 – French General Tax Code
 Inheritance tax and foreign trusts Art 750 FGTC

III.B Mandatory disclosure under French
General Tax Code
 Introduction of broad fiscal definition of a trust: “all of
the legal relationships created under the laws of a
State other than France, by a person who has the
capacity of settlor, whether by an inter vivos or
mortis causa instrument, with a view to placing
properties or rights under the control of an
administrator, in the interests of one or more
beneficiaries or for the attainment of a specific
purpose.” – Article 792-0bis
 Striking resemblance to Hague Convention definition
 Not good enough for the Civil Code, but deemed
appropriate to support a charging provision !15 © 2014 – A. K. Dwarka, Counsellor and notary

III.C Mandatory disclosure under French
General Tax Code
 Reporting requirements – Article 1649
 Applicable to trusts in existence, created, amended
or terminated after 31 July 2011:
 if the settlor is a French tax resident
 if at least one of the beneficiaries is a French tax
resident
 if an asset (whether property or a right) is located in
France
 Reporting party: the “administrator” of the trust
 Contents of declaration to be filed
 Limited exemptions: charity, certain pension funds
and CIS
 Penalty for failure to report: EUR 10,000 or 5% of16 © 2014 – A. K. Dwarka, Counsellor and notary

III.D Mandatory disclosure : practical
difficulties
 Practical difficulties:
 5% penalty for non-disclosure is on annual basis (several
years of non-disclosure = increasing liability).
 Conflicts with local law: what if it requires consent of
beneficiaries before disclosure to foreign authority?
 Keeping track of “nomadic” settlors and beneficiaries: how
can the trustee know whether any one of them has
become a French tax residents ?
 Lack of distinction between classes of beneficiaries (so
even discretionary trusts entail reporting obligations).

II.E Mandatory disclosure : criticism
 Criticism from legal writers:
 “The French tax authorities have always had a problem
with the taxation of trusts because a trust does not exist in
French law and it is very difficult to assimilate to a French
vehicle. So in its own pragmatic way the French
government decided to ignore the legal refinements
of a trust and treat all trusts the same for taxation
purposes whether they are revocable or irrevocable, or
whether the rights of the beneficiary are discretionary or
absolute.”
 applies indiscriminately to foundations
 an extremist application of “substance-over-form”
 Enormous confusion: no clarification from French
Revenue authorities (e.g. uncertain treatment of
QROPS and UK pension schemes, which should be
exempt)18 © 2014 – A. K. Dwarka, Counsellor and notary

II.F Mandatory disclosure: impact on
inheritance tax planning
 French inheritance tax rates – the “Chinese vineyard”
phenomenon
 Territoriality of French IHT:
 if deceased or donor is French tax resident, worldwide estate
charged to French IHT;
 if deceased or donor non-French tax resident, declaration to be
filed in France only concerns assets located in France if done,
legatee or trust beneficiary is a non-French resident;
 finally, IHT on worldwide estate even if the deceased or donor
is a non-French tax resident, where the donee, legatee or trust
beneficiary is a French tax resident
 France-Mauritius DTA does not cover inheritance tax: a
structure that works from an income or corporate tax
standpoint can lose its edge with respect to IHT

II.G Cases in which new rules might not
apply
 Where the French element is completely dissociated
 Non-individual (i.e. corporate) settlor : this might also
be covered in the long run
 Debt vs equity (debt-based structures through
registered, authentic deeds)
 No direct or identifiable beneficial interest
(discretionary trusts, certain purpose trusts)
 Protector: no beneficial interest, but holding indirect
supervisory and incentive powers
 Collective investment schemes (specific cases only)

II.H Mandatory disclosure: a mini-FATCA ?
 US FATCA: compliance and reporting
 FATCA is far-reaching: US withholding agents and
MNEs, but also FFIs (foreign financial institutions)
 If FFI is not a “participating FFI”, then 30%
withholding tax applies
 French rules are less complex:
 trustees to disclose initial creation of trust,
 also, report on market value of trust assets as at 1
January each year;
 penalty: higher of EUR 10,000 or 5% of value of trust
assets
 A sort of “Foreign Trust Tax Compliance Act”
 A major step on the road to FATCA

IV. Conclusion
 Trustee liability under trust law principles (duty owed
to beneficiaries to keep abreast of legislative
changes)
 The Ostrich gambit ? Reliance on secrecy and
confidentiality ?
 Not a good strategy: EoI and TIEAs
 Legal professional privilege: the final frontier ?

Further queries:
23
Ashvin Krishna Dwarka
Counsellor
&
Civil-law notary
 (+ 230) 208 72 38
 ashvin@dwarkachambers.com
LinkedIn: http://mu.linkedin.com/pub/ashvin-krishna-
dwarka/11/786/8a4

S.T.E.P. 2014 Ashvin Dwarka - FATCA-type disclosure obligations for trustees

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (18)

Similar to S.T.E.P. 2014 Ashvin Dwarka - FATCA-type disclosure obligations for trustees

Similar to S.T.E.P. 2014 Ashvin Dwarka - FATCA-type disclosure obligations for trustees (20)

Recently uploaded

Recently uploaded (20)

S.T.E.P. 2014 Ashvin Dwarka - FATCA-type disclosure obligations for trustees