Be it on a global or European level – this latter in the name of a dubious intention to eliminate any tax competition between EU countries – states are continuing their efforts to eliminate any form of bank secrecy.

If the European Savings Guidelines of June 2003 opened the first breach in the walls of bank secrecy, the decisions taken by the G20 in April 2009 carried the attack into the vault.

Scarcely a few hours after the G20’s declarations on tax transparency in April 2009, the OECD published, alongside its black list, a grey list. This grey list identified states which, even though no one would call them tax heavens (Belgium, one of the most heavily taxed countries in the EU, was part of this list), did not meet the criteria of transparency required by OECD, in particular with respect to the exchange of information.

Under such pressure, the last ramparts of bank secrecy ended up yielding. First Switzerland, then other concerned states, decided to lift the veil on their banks within the framework of their international relations.

The efforts made in order to join the knights of the white list had at least one perverse effect: many states in their zeal to comply adopted provisions which sometimes went further than the minimum imposed by OECD. In other cases, several states moved to relax their own internal rules protecting bank secrecy.

For example, Switzerland recently reviewed its criteria of information exchange at the international level, stating that the identification of the taxpayer could, from now on, also be done on the only basis of an account number.

Of the countries that grabbed the opportunity to alter their internal bank secrecy rules, Belgium is an excellent example. After having started to apply the guideline on the taxation of savings, the Belgian parliament passed a law by which taxpayers had to make a special statement when paying more than €100,000 to individuals or companies established in tax havens – knowing full well that the definition of ‘tax haven’ as well as the concept of ‘establishment’ are so extensive that they do not meet the legal criteria.

In addition, by a recent law, bank accounts in Belgium will be indexed in a data bank which the tax administration can access in the event of signs of fraud – or even if it simply considers that a taxpayer is living beyond their means.

The progressive disappearance of banking secrecy, combined with the continuous increase of tax pressure, puts taxpayers in a very difficult situation.

Instead of behaving as passive spectators, taxpayers need to act more creatively to deal with these ceaseless attacks against their property and private life – knowing that in any event, tax fraud is not an option.
With the assistance of their counsels, taxpayers have to identify the most suitable solution for their personal situation or company.

Relocation
Certain taxpayers will finally leave their country of residence in order to settle elsewhere, under more friendly tax skies.

For example, a major shareholder should consider settling in Belgium, where he will not be taxed more than 15 percent on the Belgian-source interest and 25 percent on the dividends, while avoiding taxation on capital gains and wealth tax.

Other high-income and professionally inactive taxpayers will benefit from the Swiss taxation on expenditure system (the so called lump sum taxation), under which a fixed amount is paid every year based on the value of the rent paid or the rent value of the taxpayer’s property in Switzerland; and this, under certain conditions, without any consideration of real income or wealth.

Or the taxpayer could consider settling in Israel, a country which encourages immigration and the return of its nationals with a 10 year tax exemption on all income generated outside Israel – irrespective of the national origin of the taxpayer.

Older taxpayers desiring to reduce or even eliminate estate taxes will want to consider becoming resident of certain Swiss cantons or of Spain – where, in the majority of the autonomous communities, there is total exemption of estate tax on movable property if the heir is not a Spanish resident.

Asset transfer
However, it is not always possible to settle elsewhere, and sometimes relocation is even inadvisable. Thus, some taxpayers will remain in their country and only their property will travel abroad.

These assets will often be transferred to or acquired by structures of a foreign jurisdiction, such as the private wealth management company (SPF) of Luxembourg, designed for individuals and patrimonial entities, and ideal for important holders of shares and equity portfolios wishing to benefit from a zero percent constitution capital duty and an exemption of income, communal and wealth tax.

As for the shareholders, they can benefit from several other advantages: the use of an SPF can contribute, after a tax planning stage, to reduce the amount of withholding tax to pay, to render (in presence of bearer shares), legally, the owner invisible to the eyes of the tax administration and open very interesting prospects on real estate tax.

The inheritance can also be transferred to a discretionary and irrevocable trust.

In order to manage his family assets, the taxpayer could thus constitute an Israeli trust, benefitting in this way from a very advantageous taxation system, since, as the settler and beneficiaries are foreign residents, the assets held by the trust are considered to be held by a foreign resident.

The consequence is that the income and non-Israeli benefit (and sometimes certain investment income of Israeli origin) of the trust will not be taxed in Israel. Furthermore, for taxpayers who desire a clearer separation between the assets of the administrator/trustee and those of the trust, the Israeli law allows the constitution of a TOV, a ‘flow through’ company pertaining to a trust, whose assets and income will be regarded by the Israeli tax administration as those of a foreign resident and are thus tax exempt.

Considering companies, one could explore the tax planning opportunities for groups of companies in Belgium and Luxembourg, as well as the use of Luxembourg corporate structures intended for investment professionals (such as SICAV) and specialist investment funds (FIS-Funds and FIS-SICAV), which are completely exempt from income, communal commercial and wealth tax.

One could also consider the company of financial participations (Soparfi) of Luxembourg, which can benefit from the provisions of double taxation convention and those of the directive mother-subsidiary guideline, and whose financial transactions (perception of dividends and capital gains) can, under certain conditions, be exempt from any kind of taxation.

Efficiencies at home
Lastly, taxpayers can explore the favourable legal provisions of their country of residence.

For example, in Belgium the taxpayer can profit from the little known principle, unique in Europe, of ‘choice of the least taxed way.’ This provides that any taxpayer has the right to choose the most suitable route in order to generate the least taxes – as long as the legal consequences of this way are respected. This principle prevails in Belgium over the more common ‘substance over form’ principle.

Furthermore, Belgian holding companies can benefit, under certain conditions, from the exemption of dividend and capital gains from withholding tax, while at the same time deducting the interest on loans taken out by the company, even if these loans were taken in order to acquire shares.

Another pole of attraction of a foreign company in Belgium is the notional interest system, under which a company subject to Belgian tax can deduct from its taxable income a fictitious interest calculated on the basis of its shareholder’s equity (net assets).

In conclusion, taxpayers do still have effective means to act against the increasingly aggressive attitude of national and international tax provisions.

In order to develop an effective strategy of tax and asset planning, taxpayers – whether companies or individuals – are more and more seeking the advice of ultra specialised advisers, such Afschrift Lawyers, which can take advantage of not only its particular expertise in this field, but also of offices in Europe’s key financial hubs. With these two elements Afschrift Lawyers is able to set up one or more structures to enjoy the simultaneous application of tax legislation from several European countries.

Thierry Afschrift is managing partner of Association Afschrift and Professor at the Free University of Brussels. For more information: www.afschrift.com