Category Archives: Global Structuring

Global Structuring and Business Expansion

WHY CHOICE OF LAW IS IMPORTANT IN CROSS BORDER CONTRACTS

Global business means global contracts.  Each of the parties are resident or domiciled in different countries.  As laws and legal language differs from country to country contracts need to reflect language that accommodates and clarifies provisions that might not be familiar in that foreign jurisdiction.  In addition, the cost of litigating in a foreign jurisdiction can exceed all expectations and thus is difficult to quantify.

The choice of law can be dictated by the contract itself, yet the choice of law can also be different than the place chosen for resolution of the dispute.  Thus, a foreign court could be in the position of, for example, an English court interpreting U.S. law.  In this example, parties before an English court are permitted to present experts to assist the court in interpreting U.S. law.  This can become a battle of the experts. 

Where a standard form is used, which is meant to provide a uniform interpretation providing some certainty, however, foreign courts are not necessarily familiar with such universal interpretation and may alter the operation and effect of the underlying agreement.

Contracts provide certainty in business.  Such potential alteration eliminates this certainty and creates risk that is difficult to quantify.  With regard to specific provisions, U.S. courts generally takes a broad view and interpretation of contract provisions and are willing to imply provisions, for example, good faith.  Yet courts in other jurisdictions are not willing to imply what is not spelled out by specific language.  Interpretations also varying with regard to specific legal concepts.  “Gross negligence” is a well-recognized legal concept in U.S. law, however, in England for example, there is no concept of gross negligence, rather this concept is replaced by a notion of serious error or conduct falling significantly short of expectations. 

Whenever possible, check with a lawyer in the foreign jurisdiction to ensure the differences are fully understood and clarified wherever possible.  If possible carefully draft provisions keeping in mind a foreign court may be interpreting the terms should a dispute arise.

 

 

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EU-US Privacy Shield: Legal Certainty for US Companies

A new data privacy protection agreement has been tentatively reached between the U.S. and the EU. This new agreement to be called the “EU-EU Privacy Shield” replaces the 15 year old EU-US Safe Harbor Program that US companies have relied on to ensure legal certainty when personal data from the EU to the US.  The EU-US Safe Harbor was struck down late last year as not providing sufficient protection of personal information.

One of the most difficult obstacles to overcome in reaching this new agreement was the scope of access and transfer by U.S. government intelligence agencies. This new agreement should replace current uncertainty with clearer limitations and robust oversight and enforcement powers given to the Federal Trade Commission.  US companies will be subjected to vigorous obligations on data processing guaranteeing individual rights.   The new agreement also provides new redress options to any citizen who believes their personal information has been misused.

The EU-US Privacy Shield must now be approved by the European Union’s 28 member states. There will be both detractors and advocates, but it is nevertheless expected to pass muster.  Details of the new agreement should be drafted over the next two weeks and if approved it would be effective from early April.

 

 

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HOW FATCA REPORTING IS MAKING FOREIGN INVESTMENT CHALLENGING

U.S. citizens and permanent residents are required to report all income wherever earned together with the existence of foreign accounts and certain investments. In an effort to prevent U.S. citizens and permanent residents from avoiding taxation of foreign held assets, the U.S. government has obtained the agreement of many foreign governments to require local financial institutions to report account existence and activity.  FATCA, the Foreign Account Tax Compliance Act requires financial institutions that offer accounts to U.S. citizens and permanent residents identify and report account information to the Internal Revenue Service.  As a result, FATCA has made it increasingly more difficult to open a foreign account since it requires foreign financial institutions to undertake these reporting efforts, at their own expense, effectively making opening such an account extremely difficult and, often, those accounts are now unavailable.

Financial institutions, including, banks, stock brokers, insurance companies, mutual fund companies, are now required to report the following assets owned by U.S. citizens and permanent residents: cash accounts, stocks, bonds, options, derivatives, mutual funds, interests in foreign partnerships, pension plans and any financial instrument that has a foreign issuer, and real estate held by a foreign entity.  Financial institutions that do not participate in will be penalized by a withholding tax of an additional 30% on all U.S. source fixed and determinable, annual or periodic income. Other penalties may also apply making foreign financial institutions shy away from offering accounts to U.S. citizens and permanent residents.

There foreign assets that are exempt from the FATCA reporting requirements. Cash accounts with less than $10,000, gold, silver or other tangible assets held in foreign safety deposit boxes, real estate held in the name of the individual, personal property located in foreign countries provided these are owned directly in the individual’s name and some foreign investments held by a retirement plan, IRA, SEP or 401(k).

Investments in foreign countries are a very good way to diversify your portfolio and can provide excellent returns. If this strategy is attractive to you, consider investing in real estate or obtaining a safety deposit box where you can accumulate gold, silver or other tangible asset, such as diamonds or other gems. Please contact us if you have any questions or would like to discuss your options to discover great returns through foreign investment.

 

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Tips For Drafting Enforceable Contracts

Ensuring your Contracts are Enforceable.

Often when negotiating a contract the parties are on friendly terms and understand the intention behind each provision whether express or implied. The difficulty lies somewhere down the road should the parties dispute the meaning of one or more of those terms.  When drafting a contract you should be keenly aware that it will likely be construed by a court who has little knowledge of the party’s intentions and will have to assess the contractual language objectively, setting aside any subjective notion of the party’s intention.

Although the court is entitled to consider the objective commercial purpose, the origin of the transaction, and often its context in the marketplace. But it is prevented from looking at prior drafts, notes, emails, or other indicia of the negotiations.  The court interprets the contractual language in a clear and natural meaning of the language used.  The court will rely on the express terms, as drafted, providing clarity to those terms that are, perhaps less clear resulting in the dispute.

There is some precedence that the court may recognize implied terms in very specific and highly restrictive circumstances. The court will not conclude a term is implied unless a reasonable reader would consider the term to be so obvious as to go without saying or be necessary for business efficacy.  It seems the reasonableness standard is not applied lightly, rather the exercise of construction applying traditional notions of interpretation.

Thus when drafting a contract you should keep in mind the importance of the language used as well as what might be interpreted by a reasonable reader as obvious and necessary to fulfill the terms of the contract. One example of this might be, termination fees for early termination of a contract.

Here are a few tips:

  • Draft clearly using plain language and eliminate any ambiguity
  • Address issues that may be implied by the circumstances
  • Define the meaning of specific words to avoid confusion later
  • Use recitals to outline the background the more detail set out the more information the court has to determine relevant circumstances
  • When using dates, monetary payments, cure periods etc be very specific rather than language such as “On or before” or “commencing on”
  • When reviewing make certain there are no conflicts between the various provisions
  • Ensure all section/provision number references are correct

Please contact us if you would like any assistance with drafting your contracts, we would be happy to help.

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Double Irish Take Break to End in 2020.

Bowing to pressure from the OECD and the European Commission, Ireland has agreed to close a loop hole that exploited the differences between U.S. and Irish tax law. France, too, has been particularly outspoken in its attempt to bring attention to unfair tax competition. The Double Irish loophole is used by large companies with significant royalties arising from intellectual property holdings. Ireland recognizes a company’s tax residence as the place where the company is operated from, while the U.S. focuses on where a company is registered. Thus, an Irish registered company being controlled from a tax haven like Bermuda, is considered, by Ireland, to be tax-resident in Bermuda. However, the U.S. considers that same company to be a tax resident of Ireland. Leaving royalty payments made to the Irish company untaxed or minimally taxed.

Starting in 2015, newly registered Irish companies will be regarded as Irish tax resident. The tax rate for an Irish tax resident company is either a 12.5% rate on trading income or otherwise 25%. This is still one of the lowest tax rates in the EU. Pre-existing companies using the double Irish structure can maintain that structure and its advantages until 2020, after which all Irish registered companies will be deemed Irish tax resident.

Because of its already low corporate tax rates, you may not see a rush to move from Ireland. Ireland’s Minister of Finance has also hinted at additional potential tax breaks or credits that might ease the loss of this loophole.

 

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Update: FATCA Compliance

The push by the IRS to persuade countries around the world to get onboard with the Foreign Account Tax Compliance Act (“FATCA”) has been quite successful. As part of the Hiring Incentives to Restore Employment Act of 2010, FATCA requires bank and financial institutions to disclose U.S. assets being held outside the U.S. on behalf of U.S. taxpayers. Currently, over 70 countries and 77,000 banks and financial institutions have now registered under FATCA. Banks and financial institutions that fail to comply may be frozen out of U.S. markets since a 30% withholding tax penalty will be imposed on payments of U.S. source income to these foreign institutions.

Foreign holding companies formed as an integral part of global structuring strategies may be declared a foreign financial institution, based on private equity investments, and therefore would be required to register and comply with disclosure requirements. Each foreign financial institution will be required to comply with FATCA even if it has no U.S. investors or invests in U.S. markets. FATCA Regulations obligates the foreign financial institution to identify its investors or account holders, and if any are “specified U.S. persons” defined as U.S. citizen, U.S. resident, domestic corporation, or trust. As a U.S. taxpayer with investments in foreign financial institutions, including possibly foreign holding companies, you will no doubt have received a request for completion of a declaration, whether from a foreign financial institution or from the holding company local registered agent.

The information required to be disclosed includes, account numbers, balances, and identification of the U.S. taxpayer. The U.S. taxpayer with a foreign bank account with a value of over $10,000 must also disclose the particulars of the account and any assets held each year.

U.S. taxpayers can still comply with FATCA regulations by participating in the Offshore Voluntary Disclosure Program and be willing to reopen up to 8 previous tax years, paying taxes, interest and penalties. Foreign banks, including Credit Suisse and UBS are still recovering from steep fines and penalties for failure to disclose assets held by U.S. taxpayers. Foreign banks and foreign registered agents will be expected to disclose to remain in compliance with FATCA or face increased scrutiny, fines and penalties, potentially closing off the market to U.S. customers. Moving forward foreign banks and foreign financial institutions will have more stringent due diligence requirements to open accounts, form companies and purchase assets.

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Cayman Islands Companies.

For those wishing to form an offshore business, the Cayman Islands is probably the first place considered, and for good reason. One of the most well known major offshore financial centres, the Cayman Islands, a British Overseas Territory attracts businesses and individuals trying to take advantage of the island’s tax policy. For some companies incorporated in the Cayman Islands, there is no corporate income tax. For this reason, many others top businesses list their address with the Securities and Exchange Commission as George Town, Cayman Islands. So many companies find it advantageous to be incorporated in the Cayman Islands, in fact, that there are more registered companies in Cayman than there are people!

The biggest benefit to incorporating in the Cayman Islands shouldn’t be thought of as tax avoidance, but rather as raising capital and becoming a global business. If a business is able to take the money that would have gone to taxes and invest in their business, there is an obvious benefit. For years, the US government in particular, has been trying to find a way to get these clever companies to pay taxes in the US and has painted them as unpatriotic and tax-avoiding, but it is completely legal.

If you are interested in incorporating your business in the Cayman Islands, then please contact us. Not only do we have years of experience on the Island but retain many contacts that can prove helpful during the incorporation process. Please, don’t hesitate to contact with questions.

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Africa Takes a Stand Against Base Erosion and Profit Sharing.

Africa has historically been a place where foreigners come and take; take people, take land, take resources and opportunity. Unfortunately, even as we progress into modern times, Africa is still a place where foreigners come and take advantage. Tax avoidance is not unique to Africa or other developing countries, but African nations recently banded together to take a stand against tax avoidance by foreign nationals and domestics as part of a worldwide new global tax agenda action plan set out by the Organisation for Economic Cooperation and Development (hereinafter “OECD”).

The OECD’s 15-point action plan was recently considered in a historic meeting by the council of the African Tax Administration Forum (hereinafter “ATAF”).  The ATAF joined twenty-nine African nations to deliberate the action plan assuring Africa’s participation in the new rules of the global tax agenda.

High on the list of matters discussed by at the ATAF conference was the developing nations’ struggle with base erosion and profit shifting (hereinafter “BEPS”). BEPS is a practice usually associated with large, multinational corporations where taxable income is shifted to other low-tax locations thus eroding the taxable base of the country. This practice has resulted in overall lower prices for natural resource in Africa paired with tax incentives to multinational corporations working in those industries. The result is that African nations are robbed of good prices for their resource wealth, and taxes they would have been able to collect if profit shifting had not been occurring, thus keeping them as developing nations always reaching for developed status.

South Africa, in particular, has come up with three measures to defend against foreign tax evasion. The first, transfer pricing rules to ensure that any foreign debt is introduced at a reasonable interest rate and that the capitalisation of the local company does not rely too heavily on that debt. Second, an interest withholding tax that will impose a tax rate of 15-percent on non-resident South African earnings. Finally, a new rule applying to interest earned by non-residents where the debtor in the arrangement is a connect person to the creditor and where the non-resident creditor is not subject to South African tax on the interest earned. There may be a specific exemption for the non-resident depending on the double tax agreements between their country and South Africa.

If you are involved with a multinational corporation with ties to Africa or specifically South Africa and would like more information about these changes and their coming impact, then please contact us for help navigating the ever-changing domestic and global tax agenda.

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What Impacts will the Crimea Crisis Have on Businesses?

The world stood absolutely shocked when Russia invaded the territorial sovereignty of Ukraine this late February staking claim to the Ukrainian Territory of Crimea, a peninsula in the Black Sea with no land border with Russia. All reasons aside, Crimea is now faced with a massive change: time zone, flag, anthem, water and power supply, laws, currency, and military. These aren’t the things that an international business or a former Ukrainian business turned into an international business because of contracts and business activities carried out in Crimea will be worried about. These businesses need to know how the life of the business will continue and whether or not the Russian courts will continue to honour their business contracts.

Many countries have issued sanctions and as the situation develops, it is a near certainty that more sanctions will be issued. In more specific cases, some countries and its citizens have essentially embargoed 18 individuals that the EU has determined to be deeply rooted in the cause of the occupation. The US has issued visa bans for 20 individuals involved in the crisis. Export licenses have been suspended for military equipment or equipment to be used internally to continue the suppression.

For impacted businesses it is essential to continually monitor the situation. The divorcing of a country and remarrying of another is a painstakingly difficult process and will take a long time, especially with overseeing groups such as the European Union and the United Nations. Exchange controls will be imposed to prevent a runaway with the currency, a business can prepare for this. Whilst the negotiations will take place in the background of the developing law, the courts will find one voice. Russia stands in the face of major worldwide opposition to its actions and will almost certainly make decisions now to make Crimeans happy. If a business is currently involved in products used for military or suppressive purposes then exportation limitations will have to be managed for the meantime. If a business is involved with any of the sanctioned and restricted individuals, a further limitation will be imposed. As negotiations continue and more things are resolved, then some of these important and burning questions about businesses will take place. In the meantime, finding a professional to help guide a business through this transition period will make a very real difference.

If you or your business has been impacted by the Russia takeover of the Crimea Peninsula and you require assistance or more information about what this means for you and your business, how to proceed or whether or not you must just let go, please contact us immediately as swifter actions can make a difference.

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Spotlight on China, Aggressive on Tax Evasion, Incentives Still Available

Last year China agreed to join the effort to combat tax avoidance and evasion.  With this agreement, China joins the G20 countries in their cooperation on tax avoidance.  China has now announced it will step up its efforts even further.  It seems tax reform is on the agenda.

Before tax reform can take effect, it is expected that renewed efforts will be made to investigate tax fraud.  China, is discovering the importance of greater tax transparency.  For many years China has grappled with the difficulty of ensuring compliance and enforcing disclosure obligations.  The current tax administration has proven successes, recovering taxes worth USD $5.7 billion, 30 times more than in 2008.  As more countries enter into information conventions local governments will have better information and can carry out more thorough investigations.

Tax rates in China range from 3% to 45% for individuals, 25% for domestic and foreign companies although companies in the high tech industry can benefit from a lower 15% corporate tax rate; and VAT is 17%.  Capital gains recognized by an individual are taxed at the rate of 20%, while capital gains recognized by a Chinese company are taxed at the regular income tax rate.

China continues to use economic and technological development zones to encourage manufacturing and other businesses.  Tax incentives provided to companies operating in one of these 50 zones are attractive and have been successful in attracting businesses.  The local economies have benefitted tremendously and are fueling continued growth.

Contact us if you would like to learn more.

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