How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
As noted above, trusts are considered to be pass-through entities for the purposes of tax. If the trustee of the foreign trust is resident in India, then as per the residence-based rule of the IT Act, the foreign trust may be regarded as being controlled and managed from India and be regarded as resident in India. Consequently, the income of such a foreign trust will be taxable in India.
Further, if a foreign trust is a discretionary trust and has Indian resident beneficiary, the Indian resident beneficiary will not be taxed unless a distribution is received from the foreign trust. However, if the beneficiary’s interest in the foreign trust is determinate, it will have to not only pay taxes on such income in India but also report his determinate interest in its annual tax returns in India regardless of receipt of any distribution in a particular tax year.
The IT Act requires an Indian tax resident individual to appropriately disclose in his annual tax returns if he is a trustee or settlor of a foreign trust or has signing authority in any account located outside India or is a beneficiary of any asset located outside India.
WHT comments applicable in case the foreign structure does not have a permanent establishment (“PE”) in Bulgaria
Certain types of income (e.g. interest, royalties, remuneration for consultancy, marketing research and asset installation services, rental of moveable property, franchise and factoring fees and fees for management and supervision of Bulgarian legal entities) accrued by Bulgarian resident entities in favor of a foreign entity will be subject to 10% WHT.
Subject to 10% WHT are also foreign entities’ income or capital gains from disposal of financial assets issued by Bulgarian legal entities, municipalities and the state (subject to certain exemptions) as well as rental income or capital gains from disposal of immovable property located in Bulgaria.
Dividends distributed by Bulgarian entities towards foreign entities are subject to 5% Bulgarian WHT on their gross amount in the general case and 0% WHT if distributed to legal entities resident in an EU/EEA member state.
The domestic WHT rate may be reduced or eliminated under the provisions of an applicable double tax treaty (if any) between Bulgaria and the country of residence of the beneficiary of the income subject to certain formalities.
CIT comments applicable in case the foreign structure has a PE in Bulgaria
Subject to additional analysis should be whether the activity of the foreign structure results in creation of a Bulgarian PE. If a PE is created the profits attributable to the Bulgarian PE would be subject to 10% CIT.
As foreign non-personified entities are not considered transparent for Bulgarian PE purposes, in case of a PE, the immediate CIT effects (10% CIT on profits) would arise at the level of the structure and not at the level of its participants.
According to the Bulgarian domestic legislation a PE is: (i) a fixed place, through which a foreign person wholly or partially carries out business in Bulgaria, such as: a place of management, a branch, a representative office, registered in the country, an office, a bureau, a studio, a plant, a workshop (a factory), a retail shop, a wholesale storage facility etc.; or (ii) the conduct of activities in Bulgaria by persons authorized to conclude contracts on behalf of a foreign person, except for the activities of independent agents in accordance with chapter six of the Commerce Act; or (iii) the permanent execution of commercial transactions with a place of performance in Bulgaria, even where the foreign person has no permanent representative or a fixed place. According to the Bulgarian tax authorities practice a PE is created if the activities continue for 5-6 months or more.
The definitions of PE under Bulgarian tax treaties are generally in line with the OECD Model Tax Convention (treaties override domestic law). However, in some cases they may differ from the OECD Model. Thus, the relevant tax treaty should always be checked in each specific case.
There is no special taxation envisaged for the individuals (settlors, founders, directors, etc.). They will be obliged to tax under the general rules of taxation on the effectively received income.
There are specific anti-avoidance provisions of Irish tax law which operate to tax the gains and / or income of non-Irish resident companies and trusts to Irish resident participators, settlors and / or beneficiaries as the case may be.
Finance Bill 2017 proposes significant changes to Irish tax anti-avoidance legislation for offshore structures. Going forward, the motive for establishing a trust or disposing of an asset are irrelevant, and the anti-avoidance provisions will only be disapplied where it can be shown that the offshore trust or company is carrying on ‘genuine economic activity’ within the EU / EEA. This is quite a significant restriction. The relieving provisions no longer apply to income or capital gains arising within structures located outside the EU / EEA. Indeed, it could potentially have ramifications for structures established in the United Kingdom post-Brexit.
The US Person settlor of a foreign trust is taxed on all of the trust’s income and capital gains. For foreign trusts that are not taxed to the settlor, income and capital gains must be distributed each year (and are subject to tax if distributed to a US Person). Any income and capital gains not so distributed accumulate and are subject to punitive tax and interest charges if ultimately distributed to US Persons. Income earned by certain foreign entities held in a foreign trust are taxed currently to the US beneficiaries, even if trust income is not itself taxed currently to US Persons.
If a foreign private foundation is considered a charitable entity, it is generally not subject to US taxation. If it is considered privately-owned by a US Person, a US Person owner may be taxed on the private foundation’s income as though the foundation were a corporation. No income tax charitable deduction is permitted for contributions by a US Person to a foreign private foundation. A charitable contribution to a foreign private foundation is deductible against estate and gift taxes in certain circumstances.
As already explained trusts, private foundations and any other similar arrangements are treated as trusts for French tax purposes. The tax treatment of trust is explained in § 20.
See 20. The same regime applies to foreign family foundations.
See Question 18 and 20.
- There is no tax imposed upon the assets held by foreign trust and private foundations. Generally, the Greek framework of tax rules applied in these structures is targeting the distributions, “fruits”, income and liquidation proceeds.
- Distributions made to beneficiaries, in their capacity as settlors/founders, are treated as income from dividends [see notes in question 2 above].
- Capital returned to settlor is not subject to tax.
- Non distributed income may, subject to CFC rules, be taxed upon beneficiaries.
- The dissolution and liquidation proceeds of such entities may be treated as scalable “other-sourced income” or as –usually lower cost- dividends, depending on whether the entity was dissolved and liquidated pre or post 1.1.2014 respectively and depending on whether the liquidated amount superseeded the contributed capital.
- Distributions made to beneficiaries are taxed as gifts [if settlor is alive] or inheritance [if settlor is deceased]; notes made in question 5 are applicable here.
The tax treatment very much depends on the individual structure. If the settlor or beneficiaries have significant control over the foreign trust’s or foundation’s assets, the entity may be completely disregarded for German tax purposes and assets, income and gains may be directly attributed to the controlling individual(s) for all tax purposes. In case of a fully discretionary and irrevocable structure without significant control of the settlor or beneficiaries, the foreign entity will generally be recognized for German tax purposes. German gift tax may apply to transfers to and from this entity in case German resident or property located in Germany is involves (see above No. 5). Accumulated income or gains of the entity will generally be attributed to a settlor or beneficiary with German residence according to his or her “share”. However, there is an escape clause for entities within the European Union or European Economic Area if it can be demonstrated that the settlor and beneficiaries have no control over the trust’s or foundation’s assets. Distributions at least of income or gains (yet unclear whether this would also apply to a distribution of assets) to beneficiaries with German residence may also trigger German income tax (if the relevant income or gains have not been attributed already as the escape clause did not apply).
Tax inspectors sometimes struggle with the tax treatment of trusts, especially in the field of inheritance taxes. Although some take the position that any distribution by a trust upon or even after the death of the settlor should be taxed with inheritance tax, the opposite can be argued for certain types of trusts.
For income tax purposes, Belgian resident founders and third-party beneficiaries of a ‘legal construction’ must report its existence in their annual income tax return. Trusts and low-taxed foreign legal entities (including foundations) are considered as such legal constructions. In addition to this reporting obligation a look-through tax (commonly referred to as the ‘Cayman-tax’) has been introduced in 2015 for these legal constructions. Their founders (which is a broadly defined concept) or third-party beneficiaries are taxed as if they themselves received the income generated by these legal constructions. It should however be noted that this Cayman-tax will be modified (again) shortly (probably as from 1 January 2018), eliminating a.o. the notion of third-party beneficiaries. Any distribution by a trust or low-taxed legal entity will be taxed as a dividend in the hands of the receiver. The look-through approach will therefor only apply to the founders if no distribution was made in a specific year.
British Virgin Islands
These would essentially be taxed in the same way as the equivalent BVI structures and persons.
All foreign structures are deemed tax neutral.
The key to taxation of a foreign structure turns on the residence of the settlor/founder and the beneficiaries. Foreign structures established by New Zealand tax residents are taxed in New Zealand on their New Zealand sourced and worldwide income.
A foreign company which is owned by a New Zealand foreign trust (which by definition is tax-free) or a non-qualifying trust is not treated as a controlled foreign corporation (“CFC”) and is therefore not taxable in New Zealand on that basis.
In the first instance, provided the company is owned by less than 40% NZTR’s (in the case of individuals) and there are no other controlling interests from New Zealand, the company’s shareholders will not be treated as taxable in New Zealand on the company’s overseas income, except on income distributions.
Alternatively, if the company is owned by a vehicle which is treated as tax exempt in New Zealand, such as a New Zealand foreign trust, the company will be exempt from the CFC rules because, by definition, the shareholder is not taxable in New Zealand. It should be ensured that there are no other control interests in relation to the company which would otherwise make it taxable. By utilization of these structures, a New Zealand entity can hold part or the whole of the participation in a foreign company without incurring a tax liability in New Zealand.
Regarding foreign trusts, the rules provided by Law 1.381 apply. See question 20.
Please see answers in question 18 above.
22.1 Generally, the governing law of a trust (§19.1) makes no difference to the treatment of its settlor (§19.1), trustees (§19.1) and beneficiaries (§19.1) for UK tax purposes, and the rules set out in §20 will apply.
22.2 Structures which are not trusts (§19.1) must generally be characterised as either trusts or companies for the purposes of UK taxation, and are taxed accordingly.
The taxation of foreign foundations, trusts etc depends on their structure and design, in particular in light of their comparability with an Austrian private foundation. This is relevant in light of eg an Austrian resident making gifts to such foreign entity (with respect to levying foundation transfer tax) as well as a potential shielding effect of such structure. If such structure is seen as transparent for Austrian tax purposes, income earned may be attributed directly to an Austrian resident settlor, beneficiary, etc and may be subject to Austrian (corporate) income tax. This may apply irrespective of any distributions. Generally, only if the foreign structure is recognized from an Austrian tax perspective, distributions may become taxable in Austria on the level of the receiving beneficiary. It is worth noting that structures are available which may reduce/avoid the tax burden on the level of the beneficiary in light of distributions effected.