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Articles and opinion

First published in World Finance Magazine

New international fiscal and enhanced anti-money laundering requirements mean that private family offices enter 2016 under the spotlight with little room to escape close examination.

Rosalyn Breedy, a corporate and financial services lawyer with Wedlake Bell, explains the drivers behind the transparency agenda, the obligations and implications for private family offices and their options.

Although the financial crisis of 2007 is almost a decade behind us, the complexity of implementing global financial reform to prevent its repetition means that 2016 sees the advent of two critical developments that may cause some family offices to consider re-location.

First, from 1 January 2016, 50 jurisdictions will implement new account opening procedures to record tax residence as part of a global reporting standard for the automatic annual exchange of financial account information between relevant tax authorities. This new fiscal disclosure model is built upon the success of the innovative US Foreign Account Tax Compliance Act 2010, commonly known as FATCA. The 50 countries are committed to information exchange in relation to new accounts and pre-existing individual high value accounts from September 2017.

Second, from April 2016 in the UK, companies will be required to maintain a central register with information on people with significant control (PSC) over that company and to file PSC information with Companies House from June 2016 prior to incorporation and annually.

This requirement represents the UK implementation of a key provision in the 4th Anti-Money Laundering EU Directive (AML D) 2015 which EU member states have two years to implement.

The relevance of this AML D requirement for family offices is that each Member State is now required to set up a central register with information on beneficial ownership of companies and other legal entities, to make such information to be available to Financial Intelligence Units of Member States without restriction and to ‘obliged entities’ (formerly known as ‘designated persons’ and including financial institutions) on request.

Furthermore, any person or organisation who can prove a legitimate interest in the information may also be able to access information.

Access to such detailed ownership information will be of concern to family offices, particularly as the legislation states that any person or organisation who can prove a legitimate interest in the information may also be able to access information.

The definition of ‘beneficial ownership’ is widened in a number of ways and will include trusts (that is, express trusts which generate a tax consequence in a particular Member State) requiring disclosure of the identity details of the settlor, trustee, protector (if any), beneficiaries or class of beneficiaries and any other person who may have an influence on the trust.

The disclosure rules also apply to foundations and other similar arrangements.

For companies and other legal entities, in addition to the 25 per cent shareholding interest, disclosure will be required relating to indirect and direct control by other means, including bearer shares other than a company listed on a regulated market subject to equivalent disclosure requirements .

The UK implementation has gone slightly further with UK companies being required to seek out and report information on persons with significant control to Companies House from 30 June 2016.

The international hunt for money

Governments have worked hard to restructure since the financial crisis, but political appetites to cut public spending have been curtailed by weak economic recoveries. This has left governments hunting for other sources of finance.

In seeking to boost tax revenues, a government would usually turn first to businesses. However, they cannot risk jeopardising economic activity by raising corporation tax. The Financial Times recently reported that corporation tax raised only 7.7 per cent of all UK taxes last year – less than the OECD average of 8.5 per cent and the lowest share since 1994.

Instead, and following a number of headline cases, governments are turning their attention to transfer pricing. Research by the OECD estimates that between 4 per cent and 10 per cent of global corporate income revenues, amounting to $100 to 240 billion annually, is lost due to multinational groups ‘artificially’ shifting profits to low tax jurisdictions.

For the first time ever OECD and G20 countries are working together on an equal footing with more than forty developing countries (who are particularly affected because of their reliance on multi-national corporate tax revenues) to develop a package of tools to ensure that taxes are paid proportionately where economic activity is generated. It is anticipated that the multi-lateral instrument to implement tax treaty change will be signed in 2016.

Common reporting standard inspired by success of FATCA

The US government introduced FATCA in 2010 with the aim of ensuring that US taxpayers with financial income and assets outside the US pay their full share of US tax. Congress estimated that FATCA could bring in $800 million annually.

It was an innovative piece of legislation as it did not impose any additional taxes instead it built on existing reporting requirements for persons required to file US tax returns and foreign financial institutions with US financial accounts. FATCA imposed a certification and compliance programme based on a contract with the IRS for foreign financial institutions by adding a penalty of a 30 per cent withholding obligation on payers of US source interest, dividends and proceeds from sale of US property (excluding business income generated by US businesses) to non-compliant foreign financial institutions and non-financial foreign institutions who did not provide the necessary declarations.

FATCA's success led firstly to the Finance Ministers of France, Germany, Italy, Spain and the UK (the countries that developed the FATCA intergovernmental agreement with the US) announcing their intent to exchange FATCA type information amongst themselves in addition to exchanging information with the US.

Secondly, it led to the G20 leaders in their 2013 summit fully endorsing the OECD proposal for a global model of automatic exchange with G20 endorsement of the Standard in February 2014 such that by September of that year nearly 50 jurisdictions had committed to early adoption of the standard.

The Standard differs principally from FATCA in that consists of a fully reciprocal automatic exchange system based on tax residence as opposed to citizenship, does not have a threshold for pre-existing individual accounts and has special rules for certain investment entities who are based in jurisdictions that do not participate in automatic exchange under the standard.

Family office investors with multinational structures will find themselves deluged with differing reporting requirements and forms from banks and investment managers from the start of 2016.

Family office investors may also see in alternative fund documentation the requirement to make representations and warranties as to the accuracy of the information provided with penalties such as forced redemption and side pocketing for non-compliant investors.

Voluntary disclosure of non-compliant income and/or assets

The OECD has been a supporter of voluntary disclosure programmes which encourage non-compliant persons to come forward, while discouraging non-compliance in the first place.

In practice, voluntary disclosure programmes can be of particular use to inheritors of wealth and divorcing spouses who find joint filing may not have been made correctly during probate or separation.

However, not all disclosure programmes are the same and they must be carefully reviewed to check applicability, time limits, whether full and accurate disclosure brings an end to the matter? Will criminal charges be brought? Will settlement terms be reasonable? Will the discloser be targeted by enforcement in the future? Wil the disclosure be kept confidential?

Conclusion

Rosalyn Breedy concludes that two new regulatory burdens mean that compliance costs are set to increase, unless a family office can simplify the advisory structure and identify any remediation actions.

Family offices should consider using onshore authorised fund structures which have inherent tax reporting, often capital gains tax roll up and privacy built in.

Rosalyn Breedy, Partner, Wedlake Bell

Click here to view the article in World Finance Magazine.