Friday, September 20, 2013

Tax haven Luxembourg sets up yet another secrecy facility for ownerless assets

We have described Luxembourg, a nasty little tax haven at the heart of Europe, as the European "Death Star" of financial secrecy. It's not for nothing that it ranked #3 on our last Financial Secrecy Index (note: our next Index is coming out in a few weeks.)

Look at this latest offering, via KPMG, dripping with tax evasion and criminal possibilities: the Luxembourg Private Foundation. As KPMG approvingly states:
"The private foundation has its own legal personality. However, since it has no shareholders nor members it is said to be an “orphan entity”.

A high level of confidentiality is guaranteed since the founder, beneficiaries and amounts contributed to the private foundation do not have to be disclosed to the public (even if the creation of a private foundation must be published in the Official Gazette and registererd with the Trade Register). In the same direction, although the private foundation has to prepare annual accounts, it is not required that those are filed with the Luxembourg Trade Register.

More generally, the number of requirements to be met to set up a private foundation has been opportunely reduced to a minimum."
Our emphasis added. If that isn't a potential vehicle for financial crime being peddled by one of the Big Four accounting firms, well, we don't know what is.

We have spoken with increasing concern in recent years about so-called 'ownerless assets' where wealthy people's assets (which might be a bank account, a stock portfolio, a yacht, a painting, or whatever) are legally separated from their original owners, so they can't be taxed on them - or, in most cases, even identified with them in any ascertainable way.

Crucially, even though the assets have been given away, legally speaking, nobody has received them yet, so they sit in an 'ownerless' limbo. Literally nobody owns them, legally speaking: so nobody can be taxed on their income (or capital), and nobody can find the link to the real, warm-blooded true economic owners of the assets. (These wealthy warm-bloods, of course, typically have devious side-arrangements with the managers of these structures that allow them to retain a healthy measure of control over - and even power to enjoy - the assets and income, even while they are, at least legally speaking, separated from them.)  The assets would eventually, perhaps decades in the future, leave these particular legal limbos and end up in the hands of others - the beneficiaries, perhaps: but quite often these payouts are timed just right, or paid out in just the right way, so that the (usually also wealthy) beneficiaries also avoid tax altogether: for example, the assets may well be injected into another 'ownerless' legal limbo somewhere else. Very often, however, the assets and accrued income or a portion of them end up back in the hands of the original owner. Which, of course, raises the question of whether the legal owner really was separated from them, and whether the whole structure is a sham. 

While sitting in these 'ownerless' limbos, of course, the assets and income generally grow, free of tax. In this Luxembourg case, while there is in fact a normal corporate tax rate charged on the foundation itself, but there are exemptions for such trivial details as wealth taxes, investment income, capital gains, capital transfers to beneficiaries, and more. As KPMG gushes:
"As far as Luxembourg residents are concerned, the private foundation still constitutes an attractive inheritance vehicle."
'Attractive' for some. Not for the citizens of those wealthy owners' countries being stiffed by their élites' tax evasion and other crimes, via Luxembourg private foundations. 

KPMG also bills this as a vehicle for attracting rich people to come flocking to Luxembourg: playing London's non-dom game, but in a different way.

With respect to 'ownerless' or 'orphan' assets we have been most exercised on the subject of discretionary trusts: the bread and butter of abusive tax and secrecy arrangements, particularly in British tax havens. We have seen reports of Jersey trust company officials saying that 90 percent of their business involves discretionary trusts; privately, we've heard figures that range between 80 percent and 95 percent for offshore structuring.

With a discretionary trust, assets are put into the trust, then the trustee who manages those assets is given 'discretion' to pay out to some or all of a range of potential beneficiaries, at some point in the future. But because the trustee supposedly has 'discretion' as to which beneficiaries will receive what, and when - then none of those potential beneficiaries (until they are actually earmarked to receive something) can claim that they are a beneficiary. So they are, legally speaking, not beneficiaries: they are invisible and untaxed too. Assets held in private foundations are the other classic example - though not the only example - of 'ownerless assets' (or 'orphan assets' as KPMG so innocently puts it.) As KPMG helpfully explains that this private foundation structure "has no shareholders nor members." The amendments to the EU Savings Tax Directive, (currently blocked by the transparency-spoilers Luxembourg, Switzerland (on the outside) and - yes - Luxembourg,) would tackle this problem by rejecting the idea of 'ownerless' assets and, in effect, saying that until a distribution to a beneficiary has been made, the original owner hasn't given away the asset (s). End of story, it should be - but Europe seemingly can't find it in itself to steamroller these abusive nations.

KPMG is peddling all sorts of other weaselly facilities offered by these structures, such as this one:
"It may also create other public or private foundations or trusts or be the beneficiary of such vehicles."
What purpose would such a possibility serve, other than opacity and subterfuge?

Finally, KPMG note that
"An initial capital contribution of EUR 50,000 paid in cash or in kind is required."
In other words: no small fry, please.

We have written a lot about race-to-the-bottom problems of tax competition, and financial regulatory competition. This Luxembourg private foundation, which KPMG describes as "a new wealth management vehicle inspired by comparable vehicles existing in other countries", is an example of 'secrecy competition' or 'secrecy wars' - quite as pernicious as the other two. While G20 leaders make a lot of noise about cracking down on financial secrecy, 'secrecy wars,' egged on by Big Four accountants and other assorted vested interests, are pushing the world in exactly the opposite direction.
This new Luxembourg law, if and when it comes into force, will add about three points to Luxembourg's secrecy score, a component in our Financial Secrecy Index.

Final note:: KPMG describes the Luxembourg Private Foundation as "the bill of law 6595 submitted to the Parliament on 22 July 2013." So as far as we can tell, it hasn't gone through yet and solidified into law. But bear in mind that Luxembourg is a strongly 'captured' state, so the chance of this not getting nodded through is, we feel, rather remote.

Update: For the current version of the Financial Secrecy Index, see here.




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