You would have to be living isolated on a desert island not to have heard about the international moves towards tax transparency and the automatic exchange of information on tax matters. There have been many government announcements and much press commentary on this subject. Huge resources are being allocated by financial institutions to collect information which will soon start to be transmitted between tax offices worldwide.
At the same time under the impetus the G8, the G20 and David Cameron (in turn under public pressure from the NGOs) there is also a move towards registering and even making public the details of the beneficial ownership of companies.
Rosemont International has discussed these topics in more detail in articles here on tax transparency or beneficial ownership registries - but how will this affect the yacht owner?
Most large yachts are owned by corporate entities, for many good reasons, such as separation of liabilities, practicality, flagging, and particularly for privacy. So you need to consider the effect of these new rules on the companies.
Under the new Common Reporting Standard rules (“CRS” - the exchange of tax information rules) the main points to consider are:
- What will be the Entity Classification for the Yacht Owning Company? Will it be considered as a Financial Institution (FI) itself, or will it be a Non-Financial Foreign Entity (NFE)?
- If the company is considered to be an NFE will it be considered to be Active or Passive? See further comments on this below.
- Is there a crew employment company? If so, how will this be classified?
- Which country/ies are the bank account/s held in?
- Are there any reportable loans to the company from the Owner?
- What is the residence of the Ultimate Beneficial Owner (Controlling Party or Account holder) under CRS?
- What is the jurisdiction of yacht holding company, and or the ultimate owning entity/trust or foundation?
- What will be the timing of adoption of the new rules by the relevant jurisdiction? Is it an early or late "adopter"?
- What will be the manner of adoption and interpretation of the new CRS rules in each of the participating countries, and what will be the relevant reporting jurisdictions?
- What is the classification of the entity that manages the yacht owning company, or trust, and in what jurisdiction is it based? If this entity (like some Corporate Services Providers, or Asset Managers) is an FI then this may make the yacht owning company an FI entity itself.
An NFE is essentially any Entity that is not a Financial Institution. NFEs are then split into Passive NFEs or Active NFEs.
A Passive NFE is an NFE that is not an Active NFE. The definition of Active NFE essentially excludes Entities that primarily receive passive income or primarily hold assets that produce passive income (such as dividends, interest, rents etc.). Trading companies will generally be Active NFEs. Under CRS account information may not be reported for Active NFEs.
It is not clear today how each country will consider a Yacht Owning Company, or a Crew Employment Company? It would be logical that a commercially run vessel should be considered to be an Active company. What about a vessel held for Private Use that does not generate any income? Is that also considered to be Active? The OECD guidelines and the few specific country guidelines that have been issued so far do not address this matter. The closest that we have seen so far is the BVI interpretation for Real Estate owning companies. It is hoped that jurisdictions with a history of involvement with the Maritime Industry will provide clarification soon.
Risks surrounding CRS for the Yacht Owner:
Due to the lack of clarity surrounding the legislation which has not yet even been issued by most countries, there is a lack of certainty today about the nature and quality of the information that will be reported to home jurisdiction tax office.
Risks exist that information will be reported to jurisdictions where it is not held safely, with consequent risks of kidnapping or bribery
Information will be reported to tax offices, where that information might not normally be available under local tax legislation. For example CRS ignores the distinction between “domicile” and residence.
What should Yacht owners do next?
To the extent that this is possible with the current state of the legislation and guidance, the Yacht Owner should understand the reporting that will be made, to whom, and when;
The Yacht Owner should determine what information is held on file by the relevant Financial Institution, how they have identified and classified the relevant reportable persons and Controlling Persons, and what account balances will be reported prior to reporting taking place;
The Yacht Owner should take advice to ensure affairs are in order, so that when information is exchanged this will not cause any difficulty, bearing in mind that a Yacht Owning Company is often a loss making vehicle;
Review the current asset holding structure to ensure that it is the most appropriate structure, taking into account home jurisdiction legislation, such as Corporation or Income taxes, Wealth taxes, Controlled Foreign Company (CFC) rules, Double Taxation Agreements, as well as Estate duties;
There are many reasons for holding assets outside your home jurisdiction, whether for commercial reasons, for asset protection, or succession planning. Review these structures to determine whether they are still relevant and whether any changes are necessary to take into account changing circumstances;
Consider the use of Voluntary Disclosure Schemes where appropriate.
Russian Yacht Owners
Two recent changes in Russian tax legislation are the introduction of Controlled Foreign Companies, ‘CFC’, and Federal law N° 140 relating to the voluntary disclosure of assets and bank accounts by physical persons, both of which will especially have an impact on Russian tax residents who own foreign companies and assets. Russian Yacht owners should consider how this might affect them, and can read more on this subject here.
PRIVACY FOR YACHT OWNERS
The next area which needs special attention from Yacht Owners relates to a threat to the privacy of their Corporate Ownership structures. This is initially most relevant for UK owning structures, but will also potentially affect EU owning structures, and others.
This has been under attack since the G8 agreement in Ireland in June 2013, followed quickly by the G20 in the same year, and in Brisbane the following year.
Whilst the principle of transparency of beneficial ownership has been endorsed at G20 level, at the moment it is the UK and the EU that is putting this into practice.
UK
The UK, through the Prime Minister, David Cameron, has taken the lead with a decision to make the registry of ownership public.
The UK Crown Dependencies, comprising Jersey, Guernsey and Isle of Man, plus Gibraltar and the British overseas Territories, including typical yacht registration nations such as the Cayman Islands and the BVI are taking steps to ensure that the beneficial ownership information is readily available in their jurisdictions, but have stepped back from making this information publicly available.
With respect to the UK from 6 April 2016, companies and LLPs will be required to hold, and keep available for inspection, a register of people with significant control over the company (PSC register).
The PSC register should be maintained at its registered office or other inspection address and be available for public inspection. Information will be publicly accessible on the company register at Companies House.
There are look-through rules where the ownership is held through intermediate entities, although there are special rules for Trusts and possibly Foundations.
EU
In May 2015 the Fourth Anti-Money Laundering Directive (directive no. 2015/849/EU, hereinafter, the “Directive”) was passed strengthening the EU Anti-Money Laundering (“AML”) legal framework. More details can be found here. Under the Directive is that each EU Member State will be obliged to implement a central register with the data collected by the legal entities subject to the AML legislation and related to the beneficial owner information of companies and other legal entities (including trusts).
The Directive requires that:
The register will be accessible not only to regulators, financial institutions and other entities subject to the AML legislation but also to anyone that has a legitimate interest. The information collected in the register will be that which legal entities have to collect from their customers’ beneficial owners—name, date of birth, nationality, country of residence, and the interests they have in the transaction.
The Directive must be transposed by the Member States into national legislation by 26 June 2017 and will be directly applicable in any Member States from the same date.
It will be important to follow how other EU states, such as Malta, France, Italy of Greece will implement this legislation. It is understood for instance that the Dutch legislation creating a compulsory register of company beneficial ownership will not impose a 'legitimate interest' test on public access to information.
Added to this the EU has just announced at the beginning of February that it wants member states to accelerate the introduction of the 4th Directive to end June 2016 (instead of June 2017), and wishes to introduce further amendments to enhance controls, such as the creation of central registers of bank accounts.
The Yacht Owner who wishes to maintain a semblance of privacy and confidentiality around the ownership of a superyacht should quickly consider the effect of this on what might unexpectedly come into the public domain.
CREW
A final yacht related area to consider, which is not covered in detail in this article, is the effect of these new rules on crew who might hold financial assets outside of their “home” countries. What will be the reporting for these assets and when? Are the crew prepared for the effect of this information being transferred to their home country?
If you need help understanding these rules please contact Rosemont in Monaco: Peter Brigham.