Aircraft Ownership and Malta

When the time comes to buy your private jet, how do to you go about it?

Aircraft Ownership and determining the best jurisdiction for the registration and operation of the aircraft can be a daunting exercise. Choice of jurisdiction, method of financing, choice of operation and choice of type of registration must all be determined prior to the conclusion of the sale of aircraft.

Advances in Malta’s aviation law have brought about a new legal system for the registration, ownership, and operation of aircraft, primarily via the 2010 Aircraft Registration Act, itself transposing the provisions of the Cape Town Convention [The Cape Town Convention on the International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in mobile Equipment on matters Specific to Aircraft Equipment].

Malta’s EU membership also provides owners and operators of aircraft with a relatively cost effective and efficient manner of financing, owning, registering and operating aircraft in an EU jurisdiction.

On a broader scale, Malta’s political stability, access to over 70 double tax treaties, and attractive corporate tax regime allows for owners of aircraft to acquire and operate the aircraft in a tax efficient manner.

What does this mean in practice for Aircraft Ownership?

Three elements to take into account are:

Different methods of ownership and operation of aircraft;
Value Added Tax (VAT) treatment; and
Income Tax Treatment of aircraft ownership structures.

Ownership and Operation of Aircraft in Malta

Owner Operator

Under Maltese law, the direct owner of the aircraft may also be the operator of the same aircraft. Actively operating the aircraft would in this case require the owner to also obtain an Air Operator’s Certificate (AOC) and meet the AOC’s ongoing obligations

Owner with third party operator

Alternatively, the owner of the aircraft may enter into a dry lease agreement with an already established and licensed operator, who would then take over all activities with regard to the operation of the aircraft.

Value Added Tax Treatment of Aircraft

For VAT purposes, the leasing of the aircraft is deemed to be the supply of a service. Whilst this service would therefore be subject to VAT, this essentially entails the right of the owner of the aircraft to apply for a deduction of input VAT.

VAT on the leasing of the aircraft is charged at the normal rate of 18% on the consideration of the lease. VAT is however only charged pro rata according to the time that the aircraft is deemed to have been used within EU airspace. Seeing as the time spent in or out of EU airspace cannot accurately be determined a priori, the Maltese Tax Authorities have adopted the practice of estimating the percentage portion of the lease based on the time the aircraft is deemed to be used in EU airspace. The standard VAT rate is therefore then calculated against this established percentage and applied accordingly.

The percentage of time spent in EU territory is calculated on a variety of factors:

Max Take-Off Mass (MTOM);
Maximum Fuel Capacity;
Fuel Burn Rate;
Optimum Altitude (at ISA conditions); and
Optimum Cruising Speed (True Air Speed).

Based on these factors, a typical mid-size private aircraft could be calculated to be considered as spending around 75% of its time used within EU airspace. As a brief example the standard 18% VAT rate would be charged on 75% of the consideration of the lease. The effective VAT charge in this respect would therefore be reduced to effectively 13.5%.

Once the lease comes to an end, and the lessee exercises the option to purchase the aircraft (should this have been included in the agreement), the VAT Department will issue a “VAT Paid” certificate. This will essentially grant the aircraft free movement within the European Union. It is important to note that the application of this tax treatment is subject to a number of conditions, most important perhaps is that for this reduction in tax to apply, both the lessor (owner) and lessee of the jet must be established in Malta. The lessee must also not be eligible to claim any input tax in respect of the lease. Further to this are the following:

The lease agreement shall not exceed 60 months (5 years);
Lease instalments shall be payable every month;
The Tax Authorities reserve the right to require the lessor to submit details regarding the use of the aircraft; and
Prior approval in writing must be obtained from the VAT Department, and each application is decided on its own merits.

Income Tax Treatment of Aircraft Owners and Operators

Any income by a Malta company received as a result of leasing of an aircraft or service fee relating to the operation of an aircraft could be subject to an overall effective corporate tax rate of around 5%.

For over 20 years, Malta has had a well-regulated and efficient Tax Refund System. Tax is first paid by the Malta company at a flat rate of 35%. On a distribution of dividends, part or all of the tax paid is refunded to the shareholders, resulting in an overall effective tax rate of 5%. The percentage of the refund depends on the type of income generated by the relevant company.

Further tax considerations include:

There is no further taxation in Malta on dividends distributed from the Malta company to the shareholder, as well as on the tax refund received by the shareholder on conditions being met;
Malta levies no withholding tax on the distribution of dividends;
Refunds are typically paid within 14 days from when a valid claim is made; and
Any tax due and refunds are paid in any convertible currency, based on the currency in which the share capital of the Malta company is denominated. https://corriericilia.com/about-us/team/michael-gauci-2

These archived articles are written by authors no longer participating in the Family matters on line project. These articles may still be relevant however. If you want more information please do not hesitate to contact us and we will try to put you into contact with the original author or another expert in family matters.

What do you need to know about Polish inheritance and donations tax?

Under Polish inheritance and donations tax law, a private foundation or a trust could be tax efficient if the Polish beneficiary fulfills some requirements.

Does the private foundation or trust qualify for the tax-exempt status under Polish law?

Even though Polish legal system does not know the institution of a private foundation whose purpose is to manage assets to the benefit of private individuals, or the institution of trusts, it is possible to use either of them to avoid the tax on inheritance and donations on the part of a Polish beneficiary if he changes his tax residence into the place at which the funds received are exempt from taxation.

Inheritance and Donations Tax in Poland

The inheritance and donations tax is regulated by the Polish Law on Inheritance and Donation Tax dated July 28, 1983 (consolidated text: Journal of Laws of 2009 No 93, item. 768 as amended).

According to the above-mentioned Law, the acquisition of property located within the territory of Poland or of property rights exercised within the territory of Poland is subject to the inheritance and donations tax if such acquisition results from:

- inheritance, normal provision, latter provision, specific bequest, testamentary mandate;
- donation, benefactor’s mandate;
- usucaption;
- annulment of joint ownership without consideration;
- compulsory portion of inheritance, if an eligible heir has not received it as a donation made by the bequeather, or in a way of succession, or provision;
- allowance, usufruct or easement without consideration

An acquisition of property located abroad or of property rights exercised abroad is subject to taxation if the acquiring party is a Polish citizen or has a permanent place of residence within the territory of Poland at the moment the inheritance is opened or a deed of donation is entered into.

As a rule, the taxation basis is the value of acquired property and of property rights, after deduction of debts and burdens, determined according to the status of the property or of the property rights on the acquisition day, and the market prices of the day the tax obligation arises. If there is a property damage caused by force majeure prior to the income tax assessment, the assessment shall be made on the basis of the property condition as on the day the assessment is carried out, the insurance compensation for the damage being included in the assessment base.

The applicable tax free-amounts and tax rates depend upon the allocation of the beneficiaries to one of the respective “tax groups”, as defined below.

Tax groups, as set forth by the Polish Law on Inheritance and Donation Tax Law:

spouse, descendants, ascendants, stepchildren, son-in-law, daughter-in-law, step parents, parents-in-law;
2^nd Group – the siblings’ descendants, the parent’s siblings, the stepchildren’s descendants and spouses, the siblings and siblings of spouses’ spouses, the spouse’s siblings’ spouses, other descendants’ spouses;
3^rd Group – other acquiring parties, including unrelated parties.

An acquisition of property or of property rights by a spouse, descendants, ascendants, stepchildren, siblings, or parent-in-law, step parents (i.e. persons from the “1^st tax group”, defined in detail below) is tax free, provided that:

the beneficiaries have reported the acquisition to the competent head of tax office within 6 months since the day the tax obligation has arisen, and especially in the case of acquisition by succession within the period of 6 months following the date at which the court decision stating the acquisition of inheritance became binding, and
in cases where the subject of acquisition from donation or upon donor’s instruction is money, and where the total value of the property acquired from the same person during the period of 5 years which precede the year of the most recent acquisition added to the value of the property and to the value of the property rights most recently acquired exceeds the respective tax-free amount, the beneficiaries evidenced the acquisition thereof with a proof of transfer to the acquiring party’s bank account or the acquiring party’s account kept by a savings and credit institution, or via postal order.

The above-mentioned obligation to report does not involve cases in which:

the total value of the property acquired from that person or inherited from that person during the past 5 years since the year of the last acquisition added to the value of the property and of the property rights acquired on the last order does not exceed the respective tax-free amount, or
the acquisition takes place on the basis of an agreement executed in the form of a notarial deed.

An acquisition of property and of property rights from one person is subject to taxation where the agreed value thereof exceeds:

PLN 9,637 – if the acquiring party is a person from the “1^st tax group” (defined below);
PLN 7,276 – if the acquiring party is a person from the “2^nd tax group” (defined below);
PLN 4,902 – if the acquiring party is a person from the “3^rd tax group” (defined below); * [currently EUR 1 = approx. PLN 4.2]

The excess amount constitutes the basis for the calculation of:

Excess amount in PLN:		Amount of tax due in PLN:
1) from the acquiring parties belonging to the “1^st tax group”
up to 10,278	3%	Amount of tax due in PLN:
over 10,278	up to 20,556	308.30 and 5% of the amount exceeding PLN 10,278
over 20,556		822.20 and 7% of the amount exceeding PLN 20,556
2) from the acquiring parties belonging to the “2^nd tax group”
	up to 10,278	7%
over 10,278	up to 20,556	719.50 and 9% of the amount exceeding PLN 10,278
20,556		1,644.50 and 12% of the amount exceeding PLN 20,556
3) from the acquiring parties belonging to the 3^rd tax group”
	up to 10,278	12%
over 10,278	up to 20,556	1,233.40 and 16% of the amount exceeding PLN 10,278
over 20,556		2,877.90 and 20% of the amount exceeding PLN 20,556

Trusts and private foundations have been lately among those most desirable remedies against increasing taxation all over the world. It seems that the above-said institutions are the best legal options to avoid the uncomfortable burden. However, regarding Polish taxation reality, those legal options may only by profitable if a taxpayer changes his/her residence in order to decrease the tax obligations. When it comes to making a decision, for example, Switzerland is an excellent jurisdiction of choice not only because it is generally considered to be a tax-friendly country but also due to its political stability and the various tax exemptions or reductions available.

Trusts

A trust – a common law institution derived from the Middle Ages feudal system is a type of a tax entity created by an individual person, legal person or organisational unit without legal personality to protect or to preserve the assets, and to distribute income to beneficiaries. Trusts are created primarily either by means of trust clauses in a will, the so-called testamentary trust, or a written agreement between the founder and the trustees during the founder’s lifetime (inter vivos trust) to manage the assets with the necessary care, to the benefit of the trust beneficiaries. A trust seller (founder of trust) transfers assets to a selected trustee, which means that from the date of transfer on, due to the settlement, the trustee is responsible for managing the trust and is obliged to transfer profits to beneficiaries of any kind including the founder of the particular trust. Trusts encompass all types of estate – money, properties, tangible and intangible assets. Trusts are created not only as a strategy of estate protection from creditors but also for international financial planning and preserving the beneficiaries privacy as well as for concealing assets and protecting heirs one from another.

Private interest foundation

A private foundation has nearly nothing do with its Polish definition. According to Polish law, private foundation may only be established to pillar upstanding goals, subordinate to public administration rather than the founder. A private interest foundation based on European civil law jurisdictions, is an interesting alternative to trusts. The private interest foundation registered as a legal personality could be defined as a legal entity, formally constituted, to acquire a patrimony that should be managed and protected in accordance with the will of the founder. Private interest foundations are established mainly in Lichtenstein, Panama and Austria and The Netherlands. The foundation has beneficiaries who are ultimately entitled to the assets and income of the foundation. The creator of the foundation is allowed to steer the foundation by being appointed as a financial adviser or protector[1]. A private interest foundation is considered to be a very interesting finance-managing tool due to:

security,
favoured inheritance taxation,
profitable taxation of future gains from existing firms.

A contribution to the foundation does not mean that any shares or stocks will be accomplished. Therefore, all privileges are purely personal and neither the founder nor beneficiaries are submitted to execution.

The major difference between a foundation and a trust is that in the case of a foundation the legal owner of the foundation’s assets is the foundation itself, a separate legal entity (usually) based in a nil tax jurisdiction. This is different to the situation of a trust where the underling owners of trust assets are the (presently entitled) beneficiaries, which causes a significant impact in terms of tax liability.

It is important to note that the establishing of a foreign (i.e. non-Polish) private interest foundation is not beneficial to Polish residents from a purely tax perspective, as any benefits paid out to the Polish resident would be qualified as a benefit obtained from an unrelated party, thus falling into the 3^rd tax group, mentioned above. As a result, any payment from such source would fall under the progressive taxation, reaching up to 20%. However, such a foreign private interest foundation may be used if other, non-tax-related considerations are of prime importance for the interested parties, or of the future beneficiaries would consider change of their tax residence prior to obtaining of any payments.

Lump sum taxation

As already mentioned, trusts and private interest foundations may only be profitable to Polish taxpayers considering future change of their tax residence. The noticeable solutions in tax optimization for individuals with high income is a lump-sum taxation regime in Switzerland, which may be chosen instead of the normal progressive income tax. Foreigners with absence of more than 10 years or who take up residence in Switzerland for the very first time, and do not carry out any profitable activity in this country, will be deemed eligible to taxation under this special regime, also called forfait fiscal (French) or Pauschalbesteuerung (German). Several Swiss cantons have unofficial minimums fixed for the taxable income before they grant particular residence, which as a rule, is not less than CHF 150,000 a year to be eligible. As part of the fiscal arrangement between the taxpayer and authorities of the taxpayer’s residing canton, particular taxpayers indicate the costs of living expenses and then individually negotiate the amount of tax to be paid. However, it is common that the tax amount is usually the quintuple of the annual housing rent value paid by the taxpayer. Moreover, the advantage of the lump sum taxation is that there is no obligation to disclose the actual amount of income or the value of property owned by such a taxpayer to the Swiss fiscal authorities. Since the Swiss legislation imposes limitation to minimum tax amount, the attractiveness of the lump sum taxation might be appreciated by taxpayers receiving high income from non-Swiss sources. https://gessel.pl/en/in-memoriam-dr-janusz-fiszer-2/

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland?

Is immigration to Switzerland still attractive to persons with no gainful activity in Switzerland? Switzerland is an attractive country and is granting substantial tax benefits to immigrating foreigners. The advantages of Switzerland include: (1) Residence permit granted to EU-citizens without major problems, (2) Purchase of real property possible, (3) Low tax rates in certain cantons, (4) Lump-sum taxation, (5) No inheritance tax for spouses and children in most cantons.

Is immigration to Switzerland still attractive to persons with no gainful activity there?

If a person thinks about leaving his home country permanently and taking up residence in Switzerland, he will have to think about his desires for life in the future at first and then about the legal requirements to be met and the taxation ramifications. When I am asked by potential immigrants about the best place in Switzerland to live from a tax point of view, I always recommend them to take a car and to drive through Switzerland. Then they should come back to me and tell me which place they like best. It will normally be possible to find acceptable tax solutions in most of the places in Switzerland.

In a second step, the following main issues need to be addressed:

Residence permit;
Purchase of property;
Taxation.

Residence permit in Switzerland

As a general rule, only persons aged 55 and above who have a close association with Switzerland and are not gainfully employed in Switzerland can obtain a residence permit with non-employed status. They must have the necessary financial means at their disposal. As an exception, foreigners without a close association with Switzerland can be granted a residence permit since 2008 if they are of particular financial interest to the canton.

This means, in practice, that a minimum tax, which may range from CHF 400’000.00 to CHF 1 mio., always depending upon the canton of residence, is agreed and annually paid. According to NZZ (24 May, 2014), 389 such permits have been granted until present.

Due to the bilateral Agreement on the free movement of persons between Switzerland and the EU and a similar agreement between Switzerland and the EFTA (“the Agreement”), EU/EFTA-citizens are entitled to obtain a residence permit in Switzerland provided that:

they have sufficient financial resources; and
health and accident insurance equivalent to Swiss health and accident insurance.

It is accordingly rather easy for an EU/EFTA-citizen to be granted a residence permit in Switzerland at present.

The situation may, however, change due to an amendment of the Swiss Federal Constitution caused by a federal vote of the Swiss people on the so-called Mass Immigration Initiative. 50.3% of the votes were in favour of this initiative, which provides that Switzerland shall control the immigration of foreigners itself in the future.

The result of this vote is in contradiction to the Agreement. Under the Agreement, the EU has the right to cancel essential parts of the bilateral agreements with Switzerland, unless a mutual understanding can be found within the next three years.

For the time being, nothing has changed in practice. Immigration of EU/EFTA-citizens is still covered by the Agreement until Switzerland has released a law introducing limits to the immigration of EU/EFTA-citizens. The Swiss government hopes to be able to find a solution for continuing the bilateral agreements with the EU in the future.

Purchase of property in Switzerland

Switzerland had traditionally heavy restrictions on the acquisition of real property by foreigners. Some years ago, the restrictions in respect of the purchase of commercial property were abolished. Foreigners with no residence in Switzerland do, however, still need a permit for the purchase of private property in Switzerland. A permit will only be granted in special cases, e.g., vacation apartments in certain parts of Switzerland (maximum 200 m2).

A citizen of the EU/EFTA is entitled to acquire commercial and private real property without limits, if he is a resident of Switzerland. For other foreigners resident in Switzerland, certain restrictions apply until they have been granted a C-permit.

Taxation – Income and Net Wealth Tax – Lump-Sum Taxation

A person resident in Switzerland is subject to unlimited tax liability in Switzerland. He will have to pay income taxes at rates ranging between 20% and more than 40% as well as net wealth taxes ranging from 0.1% to 1% on his worldwide income and net wealth. Real estate and permanent establishments abroad are exempt from Swiss taxation.

The tax rate heavily depends upon the canton and commune of residence. Whilst the overall income tax rate in Wollerau, Canton of Schwyz, is at present 18.5%, cities like Zurich, Geneva and Lugano have maximum income tax rates between 40% and 46%.

A special tax system, the so-called lump sum taxation, can be elected by foreigners who, for the first time or after an absence of at least ten years, take up tax residence in Switzerland and do not engage in any gainful activity in Switzerland. Under this system, Swiss income tax is levied on the basis of the living expenses rather than on actual income. Under federal regulations, the living expenses must amount to at least five times the annual rent or rental value of the owned property at present.

Due to new legislation, this amount will be increased to seven times of the annual rent and must not be lower than CHF 400’000.00 for federal tax purposes. Whilst the new rules will come into force as of 1 January, 2016, persons who are already subject to lump sum taxation will be granted a grandfathering until 1 January, 2021.

Some cantons have, abolished the lump sum taxation for cantonal tax purposes (most importantly Zurich), whilst other cantons have introduced similar provisions as the Federation. In addition, a net wealth tax is levied by the canton, the basis of which is normally determined by a capitalisation of the taxable income at a rate of 5%.

For each year, a comparative calculation between the agreed lump sum tax and the tax on Swiss source income, foreign source income for which treaty benefits have been claimed and Swiss net wealth has to be made. The higher amount will be the basis for the annual tax.

Several double taxation treaties concluded by Switzerland (Belgium, Germany, Italy, Canada, Norway, Austria and the US) only grant treaty benefits to a person resident in Switzerland, if such person is subject to the generally imposed income taxes in Switzerland with respect to all income from the respective state. As a consequence, Switzerland introduced the so-called modified lump sum taxation.

Under this system, which can be elected for each state separately, the income from sources of the respective state needs to be included in the aforementioned comparative computation with the result that such income is deemed taxed in Switzerland under the respective treaty. According to my experience, this method seems, however, not to work with the US. In case of US source income, it is, therefore, recommended to agree with the cantonal tax administration to have such income subject to ordinary Swiss taxes.

On 19 October, 2012 a federal initiative regarding the abolition of the lump sum taxation on the federal and cantonal level has been filed. It is expected that the vote on this initiative will take place in 2015.

Should the majority of the voting people and cantons accept this initiative and thereby cause an amendment of the Swiss Federal Constitution, a law concerning the abolition of the lump sum tax will have to be released within three years. The acceptance of this initiative would, therefore, mean that the lump sum tax system would be abolished in Switzerland in 2018. It is not yet known, whether there will be any grandfathering rules.

Social security contributions

Persons who are resident in Switzerland and do not exercise any gainful activity in Switzerland are subject to Swiss social security contributions until age 64 for women and age 65 for men. The annual contribution per person depends upon the living expenses and the net wealth of the individual and amounts for the time being to a maximum CHF 24’800.00.

Inheritance and gift tax

For the time being, inheritance and gift taxes are only levied by the cantons. In most of the cantons, spouses and descendants are exempt from inheritance and gift tax, whilst the tax rates can be higher than 50% for third persons.

The canton of the last residence of the testator is entitled to levy the inheritance tax from the heirs. The residence of the heirs is not relevant for Swiss inheritance tax purposes. If the testator lives, e.g., in Monaco and gives a large portfolio to his heir resident in Switzerland, Switzerland is not entitled to levy any inheritance tax. Should the testator, however, be a Swiss resident and the heir a Monaco resident, the heir in Monaco would be subject to Swiss inheritance tax.

In 2011, an initiative for an amendment of the Federal Constitution was launched according to which inheritances exceeding CHF 2 mio. and gifts exceeding CHF 20’000.00 per year and person shall be taxed on the federal level at a rate of 20%. The competence of levying inheritance taxes would thereby be transferred from the cantons to the federation. This initiative is not family friendly at all due to the fact that descendants and third parties will pay inheritance taxes at the same rates. Only spouses shall be exempt from inheritance tax.

It is very difficult to foresee, whether this initiative will be accepted in the federal vote which will most likely only take place in 2019 due to several complex issues. https://allemann-recht.ch/

Possible Tax consequences for emigrating Mexican families

This topic will focus on the issues that emigrating Mexican families may face as a result of having members with dual or even multiple nationalities, such as United States or Spanish nationality, or from changing tax residency.

Emigrating Mexican Families

The closeness of Mexico to the United States, as well as the Spanish origin of many Mexicans, makes it each day more often to see Mexican families having members with double or even more nationalities. This has some advantages but also a downside especially when we are talking about taxes and estate planning.

It is a common practice for Mexican families to move to the United States to give birth to their children so these can have United States citizenship, regardless of the fact that they live all their lives in Mexico and are also Mexican nationals.

In the case of Spain, the nationality policy of Spain allows the decedents of Spanish emigrants to Mexico to obtain Spanish citizenship even if the person requesting this nationality has never been to Spain and regardless of the fact that his/her Spanish relative died many years ago.

Tax Issues with emigrating

Regarding the United States, tax laws require its citizens to file tax returns in that country regardless of their tax residency (in this case, in Mexico). However this is not known by most Mexicans also having United States citizenship, thus they may face problems at some point in time if for some reason the United States Internal Revenue Service decides to request the tax returns that have never been filed.

FATCA makes this situation even more complex, since now United States citizenship might also expose Mexicans with this to suffer the effects of FATCA (i.e. withholdings from banks, deeper Know Your Client controls, sharing of information with the United States authorities or even a refusal to open bank accounts in the United States), even though they are also Mexican nationals.

Change of Tax Residency

Other adverse effects can also arise in Mexico if Mexican children move from Mexico to another country leaving his/her family in Mexico. These effects are mainly triggered as a result of changing the state of residency rather than as a consequence of dual nationality. Conversely if a foreign resident becomes Mexican tax resident no step up on his/her assets basis occurs but the original tax cost is considered for taxation purposes.

Mexican tax law follows a tax residency criterion, which means that residents in Mexico are taxed on a worldwide basis regardless of nationality. There are strict tie-breaking rules in Mexican domestic tax legislation that allows the tax authorities and taxpayers to know whether they are tax residents in Mexico or not.

The main criterion to be considered as a Mexican resident for tax purposes is the case of individuals having a dwelling in Mexico. If an individual also has a dwelling in another country he/she is considered a Mexican resident if he/she has his/her center of vital interests in Mexico. This is so, when for instance more than 50% of his/her total income during the year is obtained in Mexico or when his/her center of professional activities is located in Mexico.

If a Mexican individual moves its dwelling abroad, as a general rule he/she are no longer taxpayers in Mexico thus are not subject to fulfill tax obligations. However if the individual moves to a country that has no a treaty for information exchange in force with Mexico (“TIE”), and in that jurisdiction is entitled to apply a preferential tax regime (régimen fiscal preferente)[1] the tax residency will remain in Mexico for that year and the following three years, provided that a tax notice of change of residency is properly filed.[2]

It is important to mention that there is no an “exit tax” for individuals moving abroad, thus wealthy individuals are entitled to change its tax residency to a country with a more favorable tax regime with no tax implications, provided that the appropriate conditions are met. In these cases, before moving abroad it is important to determine the type of assets that the individual has, since in some cases foreign residents are subject to higher taxes than Mexican residents at the disposal of certain assets, such as real estate located in Mexico.

Estate Tax

If a member of a family (child) moves his/her tax residency abroad, that circumstance must be considered for the estate planning of the parent, since the tax circumstances may suffer a dramatic change.

Although Mexico does not have a particular estate or inheritance tax, the Income Tax Law (“ITL”) taxes any income obtained by foreign residents from a source of wealth located in Mexico, even as a result of inheritance. For example, if a foreign resident (regardless if he/she has Mexican nationality) inherit shares of a Mexican company or a property located in Mexico, the income obtained by the foreign resident (considering the fair market value of the assets at that time) is taxed in Mexico at a 25% rate without allowing for deductions.

Notwithstanding the above, in the case of Mexican residents (regardless if they are nationals or citizens of another country), the ITL exempts the income derived as a result of inheritance, provided that such income is declared on the annual tax return. However, this exemption is not available to foreign residents (including a Mexican national who has moved his/her tax residence abroad).

Nevertheless, in the case of foreign residents, the ITL does not tax all income, but only certain specific items, such as income derived from the sale of shares, real estate and securities that represent the ownership of real estate. Therefore, the inheritance of cash, movable property (i.e. cars), jewelry, and goods different from the above mentioned are not taxed in Mexico regardless of the fact that they are located in Mexico. In the case of shares, real estate, and securities, these are taxed at 25% of the gross, without allowing any deduction.

Considering the burden of income tax in this regard, there are estate planning opportunities for parents looking to leave these types of assets to their children living abroad, such as a gift of property during the lifetime, directly or even through trusts, and the granting of bare title while keeping the right to use.

[1]A “preferential tax regime” is deemed to exist if the income obtained by the individual is not subject to tax in the other country or the tax to be paid is less than 75% of the tax that should be triggered and paid in Mexico.

[2] If no tax notice is filed, the tax residency could remain in Mexico indefinitely. https://basham.com.mx/en

Legal and Tax restraints for Chinese HNWI Offshore trusts

Issues arising from setting up an offshore trust for a Chinese HNWI include the recognition of the trust itself and other legal and tax constraints.

As more Chinese HNWIs have realized the unique benefits of offshore trust, especially in the areas of asset protection and succession planning, the number of Chinese HNWIs using offshore trust for wealth planning is increasing fast. However, setting up an offshore trust for a Chinese HNWI can be a complex task due to the Chinese legal and tax constrains.

The recognition of offshore trust in China

The first big question about offshore trust is always whether it is even legally recognized in China. Offshore trust is not specifically recognized by any of the written laws including the Chinese Trust Law. There is also no court case providing any guidance or clarification. However, just like that offshore holding companies are recognized in China, the general understanding based on the Chinese legal principles is that offshore trust should be recognized in China if it meets all the legal requirements in the jurisdiction where the foreign trust is formed.

The community property issue

Under the Chinese Marriage Law, the property obtained by a couple or either spouse during their marriage period is generally considered community property. Community property is jointly held by both the husband and the wife, which means that, even if only a small portion of the community property is disposed of by one spouse without the consent of the other spouse, such a transfer would be invalid. There are already enough court cases in China enforcing such rules.

As such, securing the consent of the other spouse is the essential precondition for contributing community property by one spouse to an offshore trust. Without such consent, the contribution could be held invalid under Chinese law (assuming China has the jurisdiction), which means the relevant assets may thus need to be returned by the trustee. This issue normally arises when a husband sets up an offshore trust for the benefit of his second family or when he intends to hide assets from divorce.

A related issue is when the consent of the other spouse is not obtained, whether the trustee shall have any liability. This issue will most likely come up when the trust assets are ordered by a Chinese court to be returned to the couple but the value of such assets under the trustee’s management has decreased significantly. Although there is no clear rule in China and there hasn’t been any court case in China providing any guidance, the answer to that question would likely depend on whether the trustee has acted with malice. Unfortunately, the term “malice” is not defined by Chinese law in the trust context. Trustees thus should exercise enough caution before taking on the trustee role.

The regulatory restrictions on putting assets into an offshore trust

Dependent on the location and type of the asset, there could be Chinese regulatory restrictions on contributing such assets to an offshore trust. For offshore assets, there is generally no Chinese regulatory restriction on the contribution of such assets to an offshore trust. If those assets are onshore assets, the contribution of such assets to an offshore trust is extremely difficult under the Chinese foreign exchange control rules, banking rules, foreign investment rules, and outbound investment rules.

For example, a Chinese individual is legally allowed to remit out only USD 50,000 annually. Another example is that a foreign entity (e.g. a trust company) is not allowed to own real property in China unless it is for self-use (e.g. used as office space for its Chinese representative office). As a result, the offshore trusts we have seen typically do not directly own onshore assets.

The uncertain tax treatment of an offshore trust

There are no specific tax rules on either domestic or offshore trust. By applying the existing general tax rules, until specific rules on trust come out, one could argue that technically a settlor would not be taxed on the contribution of assets to an offshore trust even if such assets have appreciated in the hands of the settlor.

Also, a Chinese non-settlor beneficiary would not be taxed on trust distributions as China doesn’t tax gift income yet. Lastly, the trustee would not be taxed on accepting or holding the trust property as long as it is a non-Chinese entity and operates outside China. However, whether such technical analysis could be respected by the Chinese tax authorities is an open question as, to our knowledge, there hasn’t been any actual administrative case on this.

The uncertainty regarding the withholding and reporting obligations of the trustee

While the existing Chinese anti-avoidance rules apply to enterprises, not individuals, they could come into play in the offshore trust context, especially when a special purpose holding company is formed underneath the trustee and controlled by the Chinese settlor. In that case, the SPV could be considered a Chinese tax resident if it is considered effectively managed in China. If so, the SPV would be subject to Chinese income tax on its worldwide income and need to file a tax return in China.

Even if the SPV is not considered a Chinese tax resident, if the trust property is Red Chip company shares, there could still be a technical requirement under Circular 698 that any transfer of the SPV should be disclosed to the Chinese tax authorities through an information filing. Failure to comply with this reporting requirement would be subject to a fine. In practice, a number of foreign trustee companies are reluctant to follow this rule because they take a position that such Red Chip companies are formed with bond fide business purposes. However, whether the SAT would respect this position has not been tested up till now. https://www.zhonglun.com/

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