agn international tax planning new orleans- october 2012

AGN international tax planning

New Orleans- October 2012

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Today’s speakers

Name: Jeroen in ‘t Hout

Title: International tax partner

Company Daamen & van Sluis (Rotterdam) / the Netherlands

Mobile: + 31 (0) 6 317 81 910

E-mail: [email protected]

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Today’s agenda

1. Corporate income tax planning

2. Personal income tax planning

3. Asset protection and confidentiality structures

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Corporate income tax planning

(also applicable for personal

income tax optimization)

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1. Principles of tax planning

2. Examples of international tax structures / explanation principles

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Principles of tax planning

1. Credit position / reduction of withholding tax

2. Deferral of income in case of country with credit system and double taxation treaty, such as US

3. Transferring assets, functions or risks to low tax entities

4. Using hybrid structures (hybrid instruments, hybrid entities)

5. Anticipating exit scenario

6. Beneficial ownership

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1. Principles of tax planning

2. Examples of international tax structures / explanation principles

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Example credit position / reduction of withholding tax

Owner

Foreign Co 1 Foreign Co 2

Reduction of withholding tax rates:

Possibility to reduce local withholding tax on dividends, interests and royalties;

Holdco country concluded tax treaties in which the withholding tax rate is

reduced to a very low percentage;

By interposing a holding, finance and licensing company these tax treaties can

be used by parent companies as well;

Beneficial ownership needs to be secured

Loan / sub-license

DividendLoan / license

Holdco

Foreign Co 3

Dividend

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Example deferral of income

Owner


Holding company-parking dividends/deferral of upstream dividends:

Possibility to reinvest in affiliates/share capital increase;

EU holdco (such as Dutch holdco) receives dividends from (EU) subsidiaries tax

exempt;

Instead of distributing to owner, Holdco increases interests in participations,

makes new investments or loans (in combination with for instance a cash pool

arrangement or treasury function).

Dividend Loans / investments

holdco

Foreign Co 3

Considerations:

Exit tax (transfer assets as from the beginning, call option, national grid within EU);

Direct ownership, US Subpart-F regulations, planning possible in combination with deferral structure (by using a foreign holding company)

Transfer pricing of income relating to assets (for instance royalty, lease). Combination with holding structure possible to reduce withholding taxes)

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Example transferring assets to a tax haven

ParentUS

holding Co

Owning

assets

Tax

havenLl

Example transferring functions and risks to tax haven (1)

Profit SOs

Tax Mfg.

Tax SOsProfit Mfg.

Profit SOs

Tax Mfg.

Profit Mfg.

Tax savings

Allocation of profit to a low taxed principal / central entrepeneur

Manufacturing Sites

Local Sales Offices

Value Add allocation

Regional Management

Costs

Third partySuppliers

Central Entrepreneur Model

Manufacturing

CentralEntrepreneur

Local Sales Offices

Stripped Risk

Value Add allocation

Regional Management

Costs

Third partySuppliers

Current Model

Profit CE

Tax SOs

Tax CE

Requirement: functions and risks should be transferred to the principal (see next slide)

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Example transferring functions and risks to tax haven (2)

Traditional Manufacturing

The manufacturer owns intangibles and manufactures product for its own risk and reward.

Contract Manufacturing

The manufacturer produces goods to order for and for the risk of the principal company. A contract manufacturer has less risk and earns a lower profit than a traditional manufacturer.

Consignment (toll) manufacturing

A consignment manufacturer processes goods belonging to the principal company and never takes ownership. It assumes less risk and earns a lower return than a traditional manufacturer.

Distributor

sellfinished

goods

sell

Risks:• Inventory• Warranty• Intangibles• Capital

buymaterials

Customer

Manufacturer

sell

Risks• Inventory• Warranty• Intangibles• Working

capital

sellfinished

goods

Risks:• Capital• Working

capital

buymaterials

Central Enterpreneur

Distributor

Manufacturer

sell

Customer

Central Enterpreneur

Distributor

Manufacturer

Customer

buymaterials

servicefee

processingServices

sell

sell

Risks:• Capital

Risks• Inventory• Warranty• Intangibles• Working

capital

Functions and risks should be transferred to the low taxed principal / central

enterpreneur (NL: excess profit is considered informal capital instead of taxable income):

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• Loan is profit participating (so-called profit participating loan, short: PPL);

• Different qualifications of this kind of loan are possible (debt vs equity);

• For example: the Netherlands: loan qualifies as equity – remuneration tax exempt under participation exemption;

• Foreign jurisdiction: loan remains true loan – remuneration tax deductible (subject to local rules);

• Based on Dutch case law, a loan qualifies as equity if:i) interest depends on profits of the debtor;ii) the loan is subordinated to all other creditors;iii) there is no fixed repayment date or a repayment date of more than 50 years;

• Not only possible with direct 5% shareholdings, but also with other group entities (i.e. sister entities provided a 33.33% relation exists).

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Example using hybrid structures (hybrid instrument)

Foreign Co

Dutch Co

Foreign Co

PPL PPL

PPL

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Example: hybrid profit participating loan

Foreign Co

Dutch Co Foreign Co

PPL

Note: at least 33.33% relation

Playing with alternatives at borrowing level, some examples:

Foreign Co

Lux Co Foreign Co Dutch Co Foreign Co

Malta / IRL

loan

Interest-free

loanCPEC / PPL

loan

Considerations

• CV is reversed hybrid entity, transparant for NL and a corporate for US tax purposes;

• Interest deduction at level of operating companies (1);

• Interest deduction at the level of US Inc (2);

• No taxation of interest at level of CV;

• US tax deferral for interest (and dividends) paid to CV

• Reduction of WHT (tax treaties);

• Dutch Co receives dividends tax free (participation exemption);

• 0% available under tax treaty (specific situation) and LOB test

• Real activities: hybrid provision art 24-4 treaty

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Use of a hybrid entity, example CV/BV structure

US INC (LP)

CV

Dutch Co

Loan

Loan

US LLC(GP)

Op Co’s

Equity

Loan

Other

Considerations

• BV1 is checked transparent, BV2 is an entity for US tax purposes;

• Interest deduction at level of operating companies (1);

• Interest deduction at the level of US Inc (2) if financed through a loan;

• No taxation of interest income in US (because BV1 is disregarded for US purposes) and the income can be deferred indefinitely;

• BV1 and BV2 form a fiscal unity, small spread reported as income;

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Example using hybrid structures (hybrid entity)

US INC

BV2

Loan

BV1

Op Co’s

Equity

Loan

Luxembourg tax

• Luxembourg tax authorities should treat NL SPV as NL branch of Lux;

• 95% of interest income is allocated to NL branch and thus exempt;

• NL SPV should not be on EU parent subsidiary list (because in that case it follows home state qualification of the entity);

• NL SPV should be a non-EU limited partnership

• NL SPV should be considered non-transparent (decree December 18, 2004);

• NL SPV needs to fulfil art 8b (substance requirements, minimum risk)

• Manage Subpart F

• Interest deduction

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Use of a hybrid treatment, example Lux/NL

US INC

NL SPV

Equity

Lux

Group

entities

Loan

Loan

LoanDutch tax

US tax

Group entities

Luxembourg tax

• Luxembourg tax authorities should treat NL SPV as NL branch of Lux;

• 95% of interest income is allocated to NL branch and thus exempt;

• NL SPV should not be on EU parent subsidiary list (because in that case it follows home state qualification of the entity);

• NL SPV should be a non-EU limited partnership.

• NL SPV should be considered non-transparent (decree December 18, 2004);

• NL SPV needs to fulfil substance and minimum risk requirements;

• Interest deduction

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Hybrid finance structure: Lux/NL structure

Foreign Co

NL SPV

Equity

Lux

Group

entities

Loan

Loan

LoanDutch tax

Group entities

Example:

• Interpose a company with exemption system;

• Check all underlying participations as transparent entities;

• Foreign companies can be transferred without US consequences;

• Financing between companies can change;

• Note currency exchange risks

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Example anticipating exit scenario

Foreign Co

Dutch Co

Foreign Co

Important development

• More and more important for international holding and finance companies (i.e. important international case law, 2011 OECD report);

• Beneficial owner if (i) risk and (ii) full right to use [no agent, nominee or mere conduit];

• More and more tax treaties include limitation of benefits clause (i.e. US, Japan);

• Domestic anti look through legislation (i.e. Germany, Spain) including beneficial ownership requirements;

• Managing beneficial ownership and analysing local developments on a regular basis becomes relevant in order to stay in control;

• Solutions (i.e. equity wall, at arm’s length remunerations);

• Substance and risk increasingly important

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Example beneficial ownership – important in structuring

Some additional examples of tax planning structures

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Common features

Debt push down (local profit offset against interest deduction);

Use of local group tax regime;

Combination with financing structure;

Tax efficient repatriation, not within the scope of this presentation;

Bringing or adjusting the business model in line with tax model (i.e. principal structure, excess profit structure).

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Acquisition structures (1)

Spanish tax

• Interest deduction at the level of the Spanish group;

• No Spanish WHT on interest and dividend payments to the NL (note: anti treaty shopping rules)

• The SC is considered transparant and therefore the interest income is not taxable at the level of the Dutch BV;

• Application of the participation exemption at the level of the Dutch fiscal unity in relation to the income from target

• Dividends received from Dutch BV subject to tax in US unless it qualifies as a tax free return of capital (basis)

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Example acquisition structure – Spain (2)

US INC

Dutch BV

Dutch BV

SC

Equity

Loan

Target

Dutch tax

group

Spanish tax

group

Equity

Dutch tax

US tax

German tax

• Interest deduction at the level of GmbH & Co KG because the debt within Dutch tax group is linked with GmbH & Co KG;

• The KG is considered non-transparent for Dutch tax purposes;

• No pick up of interest in the NL;

• Dividends received from GmbH & Co KG are exempt as a result of the application of the participation exemption

• Dividend received from Dutch BV subject to tax in US unless it qualifies as a tax free return of capital (basis)

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Example acquisition structure – Germany (3)

US INC

Dutch BV

Dutch BV

GmbH & Co

KG Equity

Equity

Target

Dutch tax

group

German tax

group

Equity

Dutch tax

US tax

Loan

Benefit

• Interest deduction in the Netherlands and the US (double dip);

• GP US should be considered transparent for Dutch tax purposes;

• If no US substance is required, no US PE issue arises;

• Dividends received from US target are exempt as a result of the application of the participation exemption

• GP US qualifies as an entity and can be head of the US tax group;

• Interest on bank loan deductible (note: parent guarantee can create a problem)

• O% WHT possible on dividend payments

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Example acquisition structure – US (4)

BV

US target

US GP

US tax

group

Dutch tax

US tax

Bank

loan

BV

Considerations

• Dutch Coop frequently used because Coop is not subject to DWT;

• Possibility to form a fiscal unity in the Netherlands;

• As from 2012 legislation changed: anti-abuse measure, if Coop is solely interposed for DWT purposes than Coop becomes subject to DWT;

• Coop needs a business function (i.e. Distribution, principal entity);

• If shareholder (member) and subs are involved in entrepreneurial activities (combinations capital and labour) than Coop can have an intermediate holding function;

• Coop structure does not work anymore if individuals ultimately hold Coop membership without entrepreneurial function in between;

• Solution: Malta, Lux, Cyprus

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Use of Dutch cooperative entity – changes as from 2012

Group

Group

COOP

O% WHT

dividends

BV

Dutch tax

group

possible

Dutch tax

• RF contributes the ownership of machinery to Dutch BV. This Dutch BV rents the machinery to a Dutch subsidiary. The Dutch subsidiary has a branch office abroad (i.e. a project);

• As a result of the fiscal unity (consolidation) the internal rent is eliminated;

• For Dutch CIT purposes the fiscal unity has a branch / permanent establishment abroad. The profit of the branch is exempt in the NL.

• The rent between the two Dutch BV reduces the local profit as a deductible expense while the rent is not taxed in the NL.

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Example leasing structure

RF

Dutch BV

Dutch BV

Dutch tax

group

Equity

Local tax

Rent

Branch / project

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Cash pool structure

Owner


Purpose of cash management arrangement and some tax aspects:

More efficient use of cash worldwide. Excess cash can be pooled in a master

account on a day-to-day basis. Consequently, the local interest burden on debit

accounts can be decreases;

Reduction of interest withholding tax (WHT) under NL tax treaties and the

Netherlands do not levy interest WHT;

Cost plus arrangement for the Dutch cash pool activities possible

Excess cash LoanDutch holdco

Foreign Co 3

Loan

Dutch tax

• The Netherlands provide a payment discount for wage tax due with respect to employees involved in R&D activities provided requirements are met;

• The R&D activity can be taxed for corporate income tax purposes on a cost-plus basis;

• A further facility exists to obtain an additional deduction for non-labour R&D costs (so-called RDA).

• As a result of specific transfer pricing regulations in Ireland / Malta the royalty payments paid by group entities for the use of the IP are not taxed (an intermediate license company needs to be interposed in between)

• Royalty payments for the use of the IP is deductible

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Intangible property (IP) structure, an example:

RF

NL (R&D)

Owner

(Ireland/Malta)

Contract

R&D

Group license

payments

Malta / Ireland

Group entities

Affiliated group entity

Brazil tax

• CV is considered an entity for Brazil purposes and transparent for NL purposes. Deferral structure whereby CV income is not taxed in NL and Brazil. Distribution of income from NL to Brazil can be deferred indefinitely.

• Participation exemption;

• Use of Dutch investment subsidy possible;

• Matching credit for interest income possible (thus credit for interest withholding tax is deemed 20% in stead of actual paid interest)

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Set-up foreign joint venture at Dutch level (example Brazil):

Brazil partner

CV

Brazil business

Dutch taxNL partner

NL joint venture

BV

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General characteristics of the Netherlands (1)

Considerations to invest in the Netherlands:

Excellent expat community facilities (schooling, tax rules, housing etc);

Multi-lingual, highly educated workforce available;

Highly developed and efficient infrastructure;

The Netherlands is a stable and reliable OECD member has a ditto tax regime;

Open, informal and co-operative governmental institutions (business minded approach) including red carpet treatment for foreign investors;

EU member State; thus benefits from the EU treaty (Freedoms, no currency exchange risks, VAT, etc);

“Gateway to Europe” function: Amsterdam Schiphol Area and Rotterdam Harbour are top end locations for setting up logistics/distribution/transportation business through Europe;

Venlo area (South Netherlands) upcoming location for logistics/transportation (especially for South Europe/CE/Russia market);

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General characteristics of the Netherlands (2)

Considerations to use the Netherlands for international legal and tax structuring:

The Netherlands is not on any black list of other countries as a tax haven country or from a transfer pricing point of view;

Business minded approach;

Extensive experience in setting-up international tax, legal and confidentiality structures;

A horizontal relation with the tax authorities is possible (for instance by concluding advance agreements with the tax authorities);

The Dutch tax authorities and advisors are aware and anticipate the developments in the international area (i.e. managing beneficial ownership, substance and risk requirements etc);

The Netherlands is internationally focused (historic), the Netherlands was one of the countries in the world that initiated international tax structures, the Dutch approach has been copied and is still being copied by many other European countries

Daamen & van Sluis and related business partners are available to assist setting-up your legal and tax structure and maintain the structure (accounting).

• Foreign business profits are exempt (0%) and local Dutch profits are taxed (20%-25%);

• A company performing business operations in the Netherlands is subject to VAT (21%) and needs a VAT registration. As a result the company is required to send invoices increased with VAT and on the other hand input VAT can be recovered;

• Employers need to withhold wage tax for employees, which is an advance levy in respect of personal income tax;

• Individuals working in the Netherlands are subject to Dutch personal income tax (1.85% - 52%). A possibility exists to obtain a 30% ruling for foreign people assigned to the Netherlands (as a result 30% of the income is tax free). Salary split possibilities for directors of Dutch companies exist;

• No capital tax exist in the Netherlands;

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Short overview Dutch taxes (1)

• Corporate income tax

• Value added tax (VAT)

• Wage tax

• Personal income tax

• Capital tax

• Interest and royalty payments: no WHT existsDividend payments: 15% dividend WHT. Reduction to nil possible under (i) tax treaties, (ii) EU law, (iii) obtaining a specific exemption for contributed retained earnings or (iv) as a result of specific tax structuring (i.e. [a] based on 1994 case law, [b] emigration and subsequent liquidation or other possibilities);

• 2% RET tax on transfer of private property (for living purposes);6% RET tax on transfer of business property (exemptions are possible);

• Tax on insurance premiums or related services (9.7%), increase to approx 21% expected in 2013;

• Inheritance / gift tax is levied from individuals who are a residents of the Netherlands for Dutch tax purposes. Thus individuals who are a tax resident of RF under the NL/RF double tax treaty would not be subject to Dutch Inheritance / gift taxes if they would have a Dutch company;

• Dutch municipalities levy local tax with respect to ownership of real estate.

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Short overview Dutch taxes (2)

• Withholding taxes (WHT)

• Real estate transfer tax

• Insurance tax

• Inheritance / gift tax

• Municipal property taxes

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Personal income tax planning

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1.Principles of tax planning

2.Examples of tax structures

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Principles of tax planning

1.Personal income tax planning

2.Improve the tax relation between the personal holding company (corporate tax) and the private owner (personal tax)

3.Migration to a tax friendly country

4.Inheritance tax planning

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1.Principles of tax planning

2.Examples of tax structures

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Example personal income tax planning

Salary split of wage:

• Difference employee and director;

• Physical presence at foreign board meetings preferred;

• Contracts;

• Social security position needs to be secured

International joint ventures (i.e. global partnership laywers):

• Partnerships profits allocated to various countries (low taxed);

• Legal situation needs to be considered (extension of liability)

Taxation private owner

• Branch profit can be exempt under tax treaties provided various requirements are met (for instance real business activities)

• Allocation of shares to a company;

• Conversion / relation corporate income tax and personal income tax. In this respect we note that private owner is considered a foreign tax payer for personal income tax purposes and not for corporate income tax purposes. The exemption of foreign profits can be difference in the personal income tax (i.e. Luxembourg 50% in stead of 100% in case of corporate income tax payer)

• Alternatively the activities of the group can be preformed through the branch (no separate legal entities)

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Example relation holding and private owner (1)

Private owner

Group

Local tax

Branch (owning

business)

Possibilies

• Special tax regime for holding possible (i.e. Netherlands)

• Migrate holding to a different low taxed country. Consider exit taxation

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Example relation holding and private owner (2)

Private owner

Group

Holding $$

Possibilies

• Migrate private owner to a different low taxed country;

• Consider exit taxation;

• Consider dividend withholding tax after migration. In order to anticipate this, consider migration of holding as well

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Example migration of private owner

Private owner

Group

Holding $$

Possibilies

• In particular in case the assets exit of active business operation transfer of the ownership to the family can be considered;

• This is possible if facility in this respect exists;

• Structure can be set-up that legal ownership and decisive power remains at private owner (for instance by using a specific foundation for this purpose).

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Example consider inheritance tax planning

Private owner

Group

Holding

Family

Possibilies

• Normally income of a holding company is subject to 20%-25% corporate income tax;

• In addition at private owner level 25% personal income tax is levied;

• In case holding only holds portfolio investments the status of the holding can be converted from a taxed BV into a tax exempt BV (Exempt Investments Fund: in Dutch: “Vrijgestelde Beleggingsinstelling”, short VBI);

• Thus corporate taxation at holding level is eliminated and only 25% personal income tax applies to profits of holding;

• The reason to introduce the VBI was to compete against foreign tax regimes. However, VBI needs to fulfil various requirements and as a result a foreign holding could be preferred in certain situations.

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Introduce tax exempt Dutch holding vehicle (VBI)

Private owner

Holding $$

VBI

Possibilies

• A private owner is due 25% personal income tax if he receives a dividend from the holding;

• This personal income tax due can be recuded to a lower percentage by migrating to a different country (Cyprus, Netherlands Antilles, Switzerland, Austria);

• Upon migration the Dutch tax authorities impose an assessment to preserve the right to tax the excess value of the shares in the BV held by the private owner. The assessment does not result in an immediate tax liability but will be realized if certain acts by the private owner are done (such as sale of shares etc). After a period of 10 years the assessments expires. Thus after 10 years the shares can be sold. Under tax treaties the right to tax the excess value may be limited (thus limiting the 10 years period). However, during the 10 years period the private owner is allowed to borrow money from BV or it is allowed that distributes 90% of its profits reserves;

• Anticipate 15% Dutch dividend withholding tax and find ways to avoid it (i.e. migrate holding to Luxembourg and subsequently liquidate it)

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Migration of private owner

Private owner

Holding $$

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Asset protection and

confidentiality structures

Asset protection and confidentiality structures

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1. Look for countries with international investment protection treaties in case of foreign investment. In case of countries like Africa and Latin America look for countries that had a colony in the past (Belgium, Spain ect);

2. Confidentially: structure are set-up in order to avoid that beneficial owners are known in public register and business can be traced to them (i.e. required in the market or for safety purposes).

Voting trust:

the shares in NV or BV are converted into depository receipts;

The depository receipts are held by a foundation (the voting trust) which is fully transparent for tax purposes;

the person holding the depository receipts is not registered with the trade register. In the deed of foundation it can be arranged that the depository receipts can be transferred through a private contract (thus without notary even for BV receipts);

only the management of the voting trust is registered with the trade register and could consist of an independent Dutch trust office or an individual other than the RF individual in order to avoid that RF individual is registered in a Dutch public register;

if shares in a foreign company can be converted into depository receipts of a Dutch voting trust interposing a Dutch BV / NV is not strictly necessary

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Voting trust (in Dutch “Stichting Administratiekantoor”)

BV / NV

NL

RF individual

Business owned by

RF individual

VT

Partnership structure:

a Dutch partnership can be formed through a private contract;

the general partner is registered with the Dutch trade register. This could be for instance a foundation managed by an independent Dutch trust office or an individual other than the RF individual in order to avoid that RF individual is registered in a Dutch public register;

the partnership contract can be drafted in such a way that it is considered fully transparent for Dutch tax purposes. The general partner receives a limited management fee (could be taxable at the level of foundation) and the majority of the income flows to the RF individual at the moment the underlying tax haven entity would distribute a dividend;

Possibility to structure foreign portfolio investments. We note that such investments would not qualify for the participation exemption except for real estate portfolio investments (95%).

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Partnership structure

NL

RF individual

Portfolio investments

Partnership

FoundationLimited partner

(i.e. 99.99%)

General partner

(0.01%)

Tax haven structure

agn international tax planning new orleans- october 2012

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