So many countries are now taking notice of how they can best attract offshore money that a second instalment, covering five countries from the traditional powerhouse of Switzerland to Singapore, the power rising in the east, and a surprising new entry, is necessary. The only thing that remains is to call your tax adviser.
One of the advantages of a global banking system is that you do not have to live where your money does. Some of the best tax havens are not attractive enough to make visiting your money an enticing proposition — let alone living beside it. That’s where Singapore comes in: as well as possessing all the attributes of a desirable corporate tax haven, it is the sort of place in which one could quite happily set up a base.
The standard rate of corporation tax is 18 per cent, according to KPMG’s Chiu Wu Hong, one of their tax partners, but it is eminently flexible. ‘If you become a big company, you may be given a more favourable tax rate of 5 or 10 per cent, based on
negotiations with the government,’ he says. The more employment your firm creates and the more it adds to GDP, the less tax you will pay. A rate of zero per cent is not unheard of. Corporate deductions for expenses are liberally approved, though personal ones are less easy to get through.
In competition with its South-east Asian neighbour Hong Kong, Singapore stands up well, according to Wu Hong. ‘The advantage is the extensive tax treaty network which we have, which Hong Kong doesn’t have,’ meaning that companies won’t be taxed twice in both home states and Singapore. There are now double taxation treaties with 60 countries, including Britain but not America, and thanks to these, the withholding tax on foreign income is reduced to between ten and 15 per cent while there may be no tax at all on dividend income.
Hedge funds are also finding the Singaporean scene congenial: there are more launches in Singapore than in Australia or Hong Kong. As well as the brief registration time for funds, there are tax exemptions for capital gains and income taxes.
Everybody knows what Orson Welles in The Third Man claimed was Switzerland’s sole contribution to the world: the cuckoo clock. Even then, this was unfair, since anyone with monetary sense had a Swiss bank account. The world may have moved on but the Swiss financial system has remained the gold standard, even with global pressure bearing down on it.
The Swiss system does not immediately appear enticing: it is a morass of different levels of authority — federal, cantonal, municipal — that impose their own rules. Indeed, there is no centralised tax regime.
But the advantage is that the cantons compete to attract business, as seen in 2006 when Obwalden cut its corporation tax to 6.6 per cent and others followed. This free market only makes it more attractive from the outside, although it has caused some problems: a Swiss court struck down Obwalden’s plan to tax those earning more than CHF300,000 (about £150,000) at just 1 per cent.
There is a federal corporation tax of 8.5 per cent, for which a ten-year exemption can be granted (under the Bonny Decree) for businesses that bring extra economic value or create jobs.
Setting up a domiciliary company so your business can be managed from abroad is simple. By definition, the business is allowed no physical presence in Switzerland and cantonal corporation tax may even be waived.
Daniel Gremaud, the leader of tax and legal services in western Switzerland for PriceWaterhouseCoopers, says that it is not tax itself that sets Switzerland apart. ‘It has an advantage because it’s not in the EU, yet is there another country where you speak English, French, German and Italian?’ In competition with Ireland, Luxembourg and the new EU nations of Eastern Europe, Switzerland’s centrality and long-term adaptation to business needs make it a first-class choice.
Trouble is looming, however. The EU Savings Tax Directive allows home nations to tax their citizens’ holdings in Switzerland with a 15 per cent withholding tax. The latest news is that UBS will no longer provide offshore accounts for Americans, since Washington is unhappy at the billions of dollars of revenue it loses to Lake Geneva every year.
Perhaps no other country has such a divided approach to being a tax haven: businessmen would be better domiciling their companies in Alastair Darling’s jacket pocket than in Monaco for the purposes of tax avoidance, but the country cannot get enough of individual HNWs, enticing them with no income tax.
If you own a business, do not even think of locating it in Monaco, unless you want to see your profits languish in the Monegasque treasury. For companies that earn more than a quarter of their profits abroad, there is a tax rate of 33.33 per cent. Regulation of financial businesses is strict, dissuading banks and hedge funds from setting up there.
This all leaves a bitter taste in the corporate mouth, and you do not need to transfer wealth to Monaco just for the climate, which is available anywhere on the Côte d’Azur. The redeeming feature is the lack of income tax (unless you are a French national). Anyone who has serious assets to protect comes to Monaco.
There are taxes on many other things in Monaco — VAT of almost 20 per cent on most items (as in France), stamp duty on businesses and houses of 7.5 per cent, the EU Savings Tax Directive on interest — but the absence of income tax has fostered a private banking industry controlling £30 billion — 5,000 people have Monegasque citizenship, but there are 300,000 bank accounts.
William Eason, managing partner of Lawrence Graham in Monaco, says what distinguishes Monaco is the unparalleled standard of living. ‘If you want to take it under any headings,’ William says, ‘security, healthcare, schools, quality of life, culture, it’s excellent.’
The problem — or the benefit — is that you need to spend at least three months a year in Monaco, which is not convenient for everyone. Still, the next time the British government rattles the non-doms’ cage, those birds of paradise may just head for the principality on the Mediterranean.
Unlike chic Monaco, with its emphasis on individual HNWs — as opposed to their businesses — Luxembourg embraces corporates.
Bring your holding companies, your hedge funds yearning to be free. HNWs, however, face a 38 per cent income tax rate and a municipal business tax (although the wealth tax has been repealed), so they are unlikely to be found strolling the Grand Duchy’s streets.
In recent years, Luxembourg’s government has redefined its brand of holding companies, replacing the 1929 original with a pragmatic type of company called a Family Private Assets Management Company (SPF). These stand outside corporation tax, municipal business tax, wealth tax and withholding tax, provided they do absolutely nothing except shuffle share and bond certificates in Luxembourg.
Companies that want to have some activity while retaining tax transparency are also catered for. Limited partnerships (SeCS) are liable for none of the three main taxes, and foreign capital gains may also escape tax.
But Luxembourg comes into its own with hedge funds. Undertakings for Collective Investment (UCIs) have €2 trillion (£1.6 trillion) under their control as of May this year, far more than equivalents in France or Britain. The taxation on UCIs is negligible, although the ubiquitous EU Savings Tax Directive is bearing down on some.
Eric Fort, tax partner at one of Luxembourg’s biggest legal advisers, Arendt and Medernach, says that Luxembourg has a perpetually pro-investor political class: ‘We have a serious legislature but it’s as flexible as possible. The administration is pretty investor-minded and proactive.’
The bouclier fiscal (tax shield), introduced in a 2006 finance bill and since refined by President Sarkozy, means that no taxpayer in France will pay more than 50 per cent of their income in tax (originally 60 per cent). In a society where income over €77,000 (£61,000) is taxable at 58 per cent, plus social taxes and national insurance, this ceiling will greatly benefit HNWs who can arrange to minimise their income.
William Eason, managing partner of Lawrence Graham in Monaco, explains how best to take advantage of this. ‘It’s possible for people not on salaries to arrange it so that you are income-light and thus tax-light. One can organise oneself efficiently and entirely legitimately so that you arrive in France receiving a sufficient sum, but it qualifies as capital, not income.’ This may require you to capitalise assets, but it will save a considerable sum.
According to Eason, ‘Sarkozy actually recognised that it was no good for France to lose its wealth and talent, and France has decided to become a tax haven for everybody. But does it have a shelf-life?’ It remains to be seen whether the bouclier fiscal outlasts Sarkozy or goes the way of Marie Antoinette and student protests. If France is rather demonstrative in its revolutions — the barricades never gather dust for long — a recent development has slipped largely under the financial radar may prove key in transforming la Republique from poison to perfection for HNWs.