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Amendments on the Laws of Some Offshore Jurisdictions

Amendments in the Company Law of the British Virgin Islands

The first significant update to the BVI’s corporate law regime since 2006 has come into force on the 15th of October 2012 by introducing the BVI Business Companies (Amendment) Act, 2012, and the associated BVI Business Companies Regulations of 2012.

In general most of the amendments introduced are of technical nature which have as a main purpose the efficient running in the Registry of Companies by reducing or even eliminating issues which required improvement and arisen over the years. Most of the changes are focused on who is permitted to submit certain documentation and in turn to whom the BVI registrar may deliver documents.

The most important changes introduced by the Amending Act and the Regulations are:

Company Names:
In order to eliminate the shortage of available names in the BVI, old company names may be accepted to be re-used in appropriate circumstances. In addition, the system which allows BVI Companies to be registered with foreign character names has now been formalized.

Share Class Conversion:
Shares in one class or series may provide for conversion into another class or series. Such provision expressly allows for the issue of convertible shares with the mechanism for conversion specified in the Memorandum and Articles of Association.

Bearer Shares:
Under the current regime, bearer shares must be held by an authorised custodian. The changes formally confirm that the custodian of a bearer share is not regarded as the shareholder, even though they are vested with voting rights. Registered Agents are now required to maintain a register with respect to bearer share companies, and record information regarding to the Beneficial Owner of such bearer shares.

Security Interest:
Security documents governed by BVI Law creating security over shares in BVI Companies can now provide that a charge may exercise their statutory enforcement rights immediately upon the occurrence of a default, as it is now permitted to exclude any statutory moratorium periods. Further, the amendments clarify that any security publicly registered in the BVI will constitute constructive notice to third parties.

Resignation of Registered Agent:
Registered Agents may now withdraw a notice of intention to resign (formerly they were unable to). Additionally, where a company finds itself without a registered agent (usually because the former registered agent has resigned), the company (the members, and if authorised by the Memorandum and Articles of Association, the directors) may now have power to appoint one.

Alternate Directors:
Alternate Directors may now sign written resolutions in place of their appointing director as well as attend and vote at meetings of directors (previously they could only attend meetings). This amendment will make it much easier for companies to perform business functions faster where directors are unavailable and have appointed an alternate.

Re-Appointment of First Directors:
First directors of a BVI Company are appointed by the Registered Agent within 6 months of incorporation. Subsequent directors are appointed by shareholders or where permitted by the M & A, by the Directors. Provision is now made for cases where the Registered Agent has exercised their power to appoint First Directors, but the director(s) die or resign prior to shares being issued. The BC Act is amended to provide that in this case the Registered Agent may appoint one or more persons as further directors.

Liquidation:
There are a number of changes to provisions relating to the voluntary liquidation of companies under the BC Act, of which the following are the most relevant:

  • Permitted Liquidators
It has now been clarified that an individual who is or at any time in the 2 years prior to the commencement of the liquidation has been a director or acted in a senior management position and whose functions have included financial management of the company or any affiliate is disqualified from acting as liquidator.

  • Solvency Declaration
The company must now be both cash-flow as well as balance-sheet solvent (instead of simply cash-flow solvent). Further, the practice of filing the declaration of solvency on commencement of voluntary liquidation without disclosing the names of the directors has been codified.

  • Filing and commencement
Filings at the Registry by a voluntary liquidator who is not resident in the BVI may only be made by a registered agent or a legal practitioner. On the other hand, the date that a solvent liquidation commences has been changed to the date of filing of the notice of appointment of a voluntary liquidator rather that the date the resolution appointing the voluntary liquidator is passed.

  • Advertising
The new regulations specify how a voluntary liquidator must advertise the commencement of the liquidation in accordance with the BC Act. The provisions prescribe for advertising locally (in at least one issue of a BVI newspaper), and in the company’s principal place of business if the same is outside the BVI (in at least one issue of a newspaper of the place of business, or if it has more than one, of its principal place of business). If the company does not have a place of business, or the voluntary liquidator does not know where the place of business is situated, in such manner as the liquidator considers most likely to come to ten attention of any creditor of the company.

  • Dissolution
Companies which are struck off will be deemed to be dissolved after seven (7) years rather than ten (10) years.

Although the amendments to the BVI company regime are fairly wide ranging and varied in scope, they do not fundamentally change the basic model. In this sense, there is nothing in the amendment which represents anything new in terms of BVI products or structure.


Latvia – a New Tax Haven

In 2013 Latvia will join the jurisdictions that offer low tax rates. Latvia will be especially attractive for setting up mother (holding) companies, as the new national tax legislation provides favourable tax rates for such types of income as dividends, interest, royalties, and capital gains.

The general details on the new tax rates are below:


Thus, Latvia has become one of the main competitors for such holding jurisdictions as Cyprus, Luxemburg, Malta, the Netherlands, UK, Switzerland and others.

Latvia is equally attractive as other classic European holding jurisdictions as it is an EU country and it complies with the European banking legislation. Further, last year Latvia was not an offshore jurisdiction and it is not a country where the operations are subject to intensive control of tax authorities or anti-money laundering authorities.

Latvia is also favourable due to a simple and fast registration procedure similar to the Russian procedure. Currently the national legislation enables companies to be registered without the on-spot presence of the ultimate beneficial owners via a power of attorney. It should be also noted that Latvia is a country with Romano-Germanic legal system and it does not permit the use of the structure with trust deeds and nominee shareholders that are so attractive in island jurisdictions. Nevertheless, where beneficial owners are willing to keep the privacy Latvia can use a sub-holding company for the purposes of incorporation. An option for such structure is drawn below:


Double Tax Treaty between Russia and Latvia

Besides, Latvia entered in a number of tax treaties with most of the key jurisdictions, including with the ex-Soviet Union countries. In October 2012 the double tax treaty between Russia and Latvia adopted in 2010 was finally ratified.

Before the treaty came in force, from the time the Soviet Union collapsed until recently it was not gainful for Russian business to make payments to Latvian companies that are taxed with the withholding tax in accordance with the Russian Tax Code. Now entering into such transactions with Latvia for Russian business is equally advantageous, as the same transactions with other jurisdictions.

Dividends

According to the provisions of the Tax Treaty, dividends paid from Russia to Latvia will be taxed at the following rates:

  • 0 % rate in Latvia;
  • 5 % rate in Russia (as per the Doubles Tax Treaty), provided that a person entitled to the dividends is a legal entity (other than a partnership) owning directly at least 25 per cent of the share capital of the dividend paying company and the amount of the invested capital is over seventy-five thousand US Dollars.;
  • In Russia at the rate of 10% in all other cases.

The dividends paid from Latvia to Russia shall be taxed at the following rates:

  • 0 % rate in Latvia;
  • 9 % rate in Russia. Under a few conditions, however, dividends received in Russia can be taxed at 0% rate in the Russian Federation because Latvia has not been included in the offshore “black list” where the discount tax rated is not applicable. Such conditions are: 1) ownership of shares/stakes of the company paying dividends for over 365 calendar days and 2) ownership of not less than 50 % of shares/stakes of such company.

Controlled liabilities

The income from controlled liabilities in accordance with the Doubles Tax Treaty shall be taxed as dividends provided that such re-qualification is permitted by the national legislation of the outgoing income country.

Interest

As per the Treaty the interest shall be taxed similarly to Russia. In the creditor-country interest will be taxed at the rates fixed by national legislation and in the lender-country, provided the national legislation charges the withholding tax, interest shall be taxed at the following rates:

  • 5 per cent from the total interest on any type of loans granted by a bank or another financial establishment to a bank or to another financial establishment;
  • 10 per cent from the total interest in all other cases.

Thus, the transfer of usual interests from Russia to Latvia will be charged with 10 % tax in Russia and in Latvia the tax rate will be 0% in accordance with the national legislation of Latvia.

Royalties

As far as taxation of royalties is concerned the procedure is similar to the one on taxation of interests. Royalties can be taxed either in the country of the owner that receives income as well as in the country of the license-holder that pays the royalties in Russia and such income will be taxed at 0% in Latvia.

Capital gains

As far as taxation of capital gains is concerned there is a rule common to most double tax treaties and it copies the provisions of the Tax Code of the Russian Federation. According to it, income received by one country resident from selling of the shares/a stake in a company, where over 50 per cent of the shares/stake cost is connected directly or indirectly with overseas immovable property, is taxed in the country where such immovable property is located.

Immovable property

For the purposes of the Treaty, the term immovable property has the meaning as prescribed by the national legislation of its location country. The Treaty, however, treats equally income from immovable property and agricultural and forestry income. Income from co-ownership investments funds is not qualified as immovable property income and it is classified as different type of income.

Thus, from 2013 Latvia is a promising jurisdiction for setting up holding and sub-holding companies for Russian business persons.


Ukraine – Cyprus: Double Tax Agreement under New Rules.

Cyprus does not give up its positions of an attractive jurisdiction despite of the increase of VAT and intense influence of European legislation on disclosure of information. Cyprus continues to enter into double tax treaties which increase its flexibility in tax planning structures.

In early 2012 there was a key event for Ukraine and Cyprus. On November, 08 the President of Ukraine officially visited the Republic of Cyprus and this visit resolute in signing of a number of bilateral international treaties, in particular, they signed 8 bilateral treaties regulating cooperation in the areas of maritime and shipping, airline communication, health and medicine, agriculture, athletic and sport and investment. One of the most crucial documents signed between the Government of the Republic of Cyprus and the Government of Ukraine is the Convention on Double Tax Avoidance and Prevention of Income Tax Evasion. This document will replace the document made between the USSR and Ukraine in 1983 that is currently in force. It should be noted that Ukraine was one of the last ex-Soviet republics to sign a bilateral agreement with Cyprus. The new Convention is expected to be ratified by both countries during 2013 and therefore, it will possibly come in force on 01st January 2014. The main purpose of this Convention in the form that it has been signed, as the competent bodies of both countries believe, was the intention to enforce the anti-money laundering protection.

The new Convention contains the provisions that differ dramatically from the existing ones. Besides, a number of new provisions shall negatively affect the tax payers (such as cancellation of favoutable tax rates for dividends, royalties, interest) it therefore can cause considerable outflow of Ukrainian investments into other jurisdictions. Nevertheless, despite the loss of a number of tax advantages the Republic of Cyprus, as many experts still believe after the new Convention is enforced, can definitely keep it attractiveness for the purposes of structuring of asset-holding on the territory of Ukraine.

  • Dividends
According to the provisions of the Convention, dividends paid to the Cyprus shareholders of Ukrainian companies shall be taxed at 5% (provided that the ultimate owner owns over 20 per cent of share capital of the company paying dividends or a person had invested in purchase of shares or other rights of the company over €100 000) or 15 % (in all other cases).

In practice, this, however, will matter only in relation to the payment of dividends by a Ukrainian company to its subscribers – the resident of the Republic of Cyprus, since payment of dividends by Cyprus companies to its foreign companies is not charged with any tax, as per the local taxation.

  • Interest
The treaty in force between Cyprus and the USSR provides for a zero tax rate for the withholding tax. According to the new Convention, income from debt claims (the interest) paid to the resident of Cyprus shall be taxed at 2% in Ukraine. Similarly to dividends, payment of income from Cyprus companies to foreign entities/persons as the interest is not subject to taxation in the Republic of Cyprus.

  • Royalties
Payments for granting the license over the intellectual property rights in accordance with the new Convention shall be taxed in Ukraine at 5% (in relation to any copyright over a scientific work, patent, trademark, secret formula, process or know-how) or at 10% (on other payments).

It should be noted that royalties payments paid by Cyprus companies abroad are free from taxation provided that they had appeared outside of the Republic of Cyprus.

  • Income from immovable property and capital gains
Despite the widely used international tendency, the new Convention does not provide special provisions on taxation of sale of shares (stake) in the share capital of the company the assets of which are mostly immovable property. Due to the above the said income shall be qualified as “other income” and shall be taxed in the country of the seller’s residency.

Furthermore, it should be noted that the income of Cyprus companies from immovable property (including the income from the use of the immovable property) shall be taxed at 15% in Ukraine once the Convention comes into force.


Other important amendments

Apart from the most important changes in the laws of the low tax jurisdictions there are a few other essential international agreements coming in force in 2013 that can dramatically influence international tax planning:

Double Tax Treaty between Hong Kong and Switzerland

The Finance Department of Switzerland declared that on the 15th October 2012 the Double Tax Treaty between Switzerland and Hong Kong came into force.

The Treaty shall come into effect in Switzerland as from the 1st January 2013 and from 1st April 2013 it shall apply to taxes charged in Hong Kong.

In absence of such treaty income received by the residents of Switzerland from Hong Kong sources is taxed in both territories.

After the treaty comes in force when, for instance, a Swiss resident pays dividends to a Hong Kong resident, the withholding tax shall be charged and paid to the budget at the rate of 10% instead of 35% which is due currently, provided that the recipient of dividends is a legal entity holding minimum 10% of the share capital of the paying company.

Cyprus and Estonia: the Double Tax Treaty and Prevention of Tax Evasion

In October 2012 Cyprus and Estonia signed the Double Tax Treaty and Prevention of Income Tax and Capital Gains Tax Evasion.

The purpose of this treaty is to facilitate the flow of investments, provision of equal opportunities for market participants and remove double taxation burden which may arise from cooperation between Cyprus and Estonia.

Currently this treaty has not been ratified yet. After the ratification will have taken place interest payments as well as dividends and royalties shall not be taxable with a withholding tax in Estonia.

Russia and Argentina have signed a Double Tax Treaty

In September 2013 the Federation Council of Russia ratified the Convention between the Government of the Russian Federation and the Government of Argentina on avoidance of double taxation on income tax and capital tax.

The Double Tax Treaty regulates taxation of legal entities and physical persons, such as property tax, corporate tax, dividends, royalties and the like.

Amendments of the tax treaties between Russia and Armenia

In late October 2012 the Protocol on amendments of the Double Tax Treaty between Russia and Armenia dated 28th October 1996 and the related Protocol dated 28th December 1996 was ratified.

The principal purpose is to eliminate double taxation on corporate income, taxes of individuals, on property of legal entities and individuals, as well as to prevent tax evasion and not to allow tax discrimination.