22.37 MARSHALL ISLANDS

Like Liberia the Republic of the Marshall Islands is an incorporation haven . Its legislation is very similar to that of Liberia although more recent. The name of the corporation may be written in any language which uses the latin alphabet with any of the following suffixes indicating that it is a corporation: Corporation, Corp., Company, Co., Limited, Ltd., Société Anonyme, S.A., Sociedad Anonima, Incorporated, Inc., Limitada, Ltda., Aktiengesellschaft, AG, NV, A/S, Société par actions.

Find the contact names, addresses, numbers and information for local government offices, banks, accountants, company formation services, investment and management companies, advisors, experts, maildrops, real estate agents and other useful local contacts in the THE OFFSHORE MANUAL & DIRECTORY .

22.38 MAURITIUS

At present, there are two main fiscally advantageous companies in Mauritius: "Ordinary offshore Companies" (Governed by the General Companies Act, 1984 as amended by the Mauritius Offshore Business Activities Act, 1992) and "International Companies" (Governed by the International Companies Act, 1994). In synopsis, the former can avail of the Mauritian double taxation treaty network whilst the latter are directly analogous to West Indian 'Tax Free' IBC Companies and do not enjoy tax treaty benefits. To enjoy the substantial benefits afforded by the Mauritian/Indian Double Taxation Treaty, which interestingly was signed in 1983 and hence before much of the Mauritian tax planning legislation, it is necessary to prove that the recipient is resident. Under Article 4 of the Treaty a company, including an ordinary offshore company, will be deemed so resident if:

(i) The undertaking is liable to indigenous tax, and

(ii) there is genuine proof of local management and control.

Mauritius has a significant number of local lawyers and accountants who can provide resident directors, maintain local bank accounts, record official "minutes", hold board meetings and submit the annul audited accounts. In respect to the liability to local tax there would of course be no benefits if fiscal liability was merely extrapolated from India to Mauritius. The full normal corporate tax rate for the latter being a very non Tax Haven" 35%. However, under S.59D of the Income Tax Act the proscribed rate of tax for an Ordinary Offshore Company is 0% unless otherwise elected up to a maximum rate of 35%. This provision existing for tax planning and anti-avoidance reasons. In other words, it is quite possible for a Mauritian Ordinary Offshore Company to have no indigenous tax consequences. The question therefore becomes at what level will India impose withholding taxes on investments. Under the Treaty, once a Mauritian company holds an investment stake of 10% or more in an Indian company - known as a participation exemption - India will only impose a withholding tax rate of 5% on dividend distributions. In addition, tax on realised capital gains from the disposition of shares are fully exempted from Indian taxes. Of course, it would be wrong to give the impression that Mauritius is the ubiquitous solution for investments into India. Cyprus may provide a more successful catalyst especially where a Cypriot company wishes to grant a loan to an Indian subsidiary. The withholding tax on interest payments merely being 10% as opposed to the 20% rate levied in the case of Mauritius. Cyprus can also provide protection against the imposition of capital gains taxes.

Mauriitius permits the incorporation of companies under the International Companies Act of 1994 and exempts them from all taxes except for a $100 annual fee. Bearer and no par value shares are permitted. No information need be given to the authorities prior to incorporation or prior to exempt tax status being granted. There is no information open to the public about exempt companies and there is no restriction on where meetings may be held. A registered office and a representative is required and certain documents must be kept at the agent's office. Exempt companies can not however take advantage of double taxation treaties, the most important of which is with India.

As can be seen from the above, Mauritius offers substantial advantages for investors who are active in India. In addition, exempt companies, which may not avail themselves of the double tax treaty, are nevertheless private and inexpensive and may be appropriate in may other situations.
(Courtesy of the Baltic Banking Group).

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22.39 MONACO

The Principality of Monaco is one of the most favored residency locations for the wealthy primarily because of the lack of income taxes, ideal geographic position and absolute safety. Apart from the ability to pay local rents, which are proportionally higher than those in London, there are no artificial constraints placed upon non-Monegasque nationals. To become an official resident it is necessary to obtain a Carte de Séjour (residency permit) which can normally be obtained within 3 months of the original application date: Documents required include:

(a) A 'Police Certificate' from the appropriate country confirming that the applicant(s) have no known criminal record(s).
(b) A valid French Visa issued by the French Embassy in the jurisdiction of current residence.
(c) A 'Medical Certificate' provided by an approved physician again in the jurisdiction of current residence.
(d) Proof of property acquisition or rental providing either the requisite property deeds or lease (Bail à loyer). In addition, the type of property must correspond to the size of the applying, if applicable, family unit.
(e) The completion of multiple application forms outlining the full personal details and circumstances of all applicants.
(f) Proof (Attestation) from a Monegasque bank that, at least, FF 2,000,000, or its equivalent have been deposited. This 'Attestation' must be given on each subsequent renewal date for the residency permit.
(g) A local Monegasque reference. Normally the local lawyer or immigration consultant.

Additional factors that should be borne in mind before relocating to Monaco are that:

(a) It is expensive and time consuming to establish a local company. When more than 25% of a business' revenue derives from external trade a 33.3% tax will be levied on all profits.
(b) There may be constraints on what activities an applicant can conduct from the Principality.
The 1963 Tax Treaty between Monaco and France prevents French nationals from enjoying any of the indigenous fiscal benefits. Nevertheless, Monaco is often an ideal personal location especially if employed in conjunction with an external tax planning structure.
(Courtesy of the Baltic Banking Group).

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22.40 MONTSERRAT

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22.41 NAURU

Nauru offers the possibility of setting up a bank with no requirement for local directors or any local presence apart from a registered office and company secretary in Nauru. These services would normally be provided by a management organization.

Nauru will accept applications for unrestricted licenses or for in-house type banks but in practice the authorities are unwilling to grant unrestricted licenses to anybody other than an existing bank and would also impose a requirement that the applicant set up an office and associated infrastructure in Nauru. The capital requirements for an in-house bank are low - USD 100,000 - and the time scale is in the order of one to three months.

A Nauru in-house bank is prohibited from dealing with anybody other than associated companies and individuals but it would be possible for your client to set up a finance company which conducted a broader range of activities. For example, the finance company could take deposits from third parties and would then deposit the money with the bank. Any literature which was drafted could make clear reference to the fact that the finance company was a wholly owned subsidiary of XYZ Bank Ltd. and contain further details about the bank. The costs for obtaining this type of license would be in the order of USD 20,000 and the time-scale would be one to two months.
(Courtesy of the Baltic Banking Group).

Find the contact names, addresses, numbers and information for local government offices, banks, accountants, company formation services, investment and management companies, advisors, experts, maildrops, real estate agents and other useful local contacts in the THE OFFSHORE MANUAL & DIRECTORY .

22.42 NETHERLANDS

The Netherlands (Holland) Income Tax Treaty.

Most of the bilateral income tax treaties that the United States has entered are not with tax haven countries. In fact, very few tax havens have double taxation agreements with the U.S. Most U.S. tax treaties are with industrial nations like the UK and the Netherlands. Nevertheless, the tax planner should not pass over these high tax jurisdictions when drafting a business plan. The Dutch tax system is famed for the benefits offered the "holding company". The Netherlands Participation Exemption can lead to substantial tax savings when combined with the tax benefits offered under the U.S.-Netherlands tax treaty.

Tax treaties are " reciprocal agreements ". Under the U.S.-Netherlands tax treaty the U.S. dividend withholding tax rate is reduced from 30%to 15%, and to 5% when a Dutch company has a "substantial holding" in the U.S. Company paying the dividend. A "substantial holding" is 10% of the U.S. Company's stock.

To compensate for the USA's reduction in rates, the regular Dutch dividend withholding rate of 25% is reduced to 15%, with a further reduction to 5%if the U.S. recipient corporation owns at least 25% of the voting stock of the paying company, or if the U.S. recipient and another U.S. company together own at least 25%, and each owns at least 10% of the voting stock of the Dutch company.

Dutch "Participation Exemption"

In 1995, the top Dutch corporate income tax rate of about 42% was significantly higher than the USA's 34%, but Dutch tax reform goes much further than U.S. tax reform in providing tax relief for its corporations. A Dutch " holding company " that owns "at least 5%" of the par value of the paid-in capital in another foreign or domestic company from the beginning of the fiscal year can receive dividend distributions from the "subsidiary" 100% tax free. To qualify for the "participation exemption" the "downstream subsidiary" must meet the following conditions:
  • In the case of a foreign subsidiary, the company must be subject to a corporate income tax comparable to the Netherlands corporate tax, but the rate and amount of corporate tax paid is immaterial.
  • The "participation" in the foreign subsidiary must be held for a business-related purpose, not as a mere "portfolio" investment. In this respect, if the Dutch parent company has a director on the board, or is actively engaged in the supervision of the subsidiary, then the company will qualify for the Participation Exemption, provided the foreign subsidiary is not directly or indirectly merely an investment company.
Combining the Dutch Participation Exemption with the treaty benefits can and does lead to substantial tax savings for Dutch based holding companies. It's not surprising than that by years-end 1987 the Netherlands with some $48 billion in U.S. investments could claim the second highest direct investments in the U.S., surpassing Japan's $32 billion, Canada's $22 billion, West Germany's $19 billion, and Switzerland's $14 billion, and trailing only the United Kingdom's $76 billion investments in the USA.

Treaty Benefits for Dutch Finance Companies

Under the U.S.-Netherlands tax treaty the 30% U.S. interest withholding tax is reduced to 0%. Moreover, under the Dutch tax system no interest withholding taxes on payments made to any nation (even to tax haven companies) are imposed on any Dutch company, as interest withholding taxes are unknown in the Netherlands. Because the Dutch maintain a network of tax treaties with many industrial nations reducing those nation's interest withholding tax rates, the Netherlands make a first-rate base for the formation of an international bank or finance company. Other reasons for basing in Holland include:

  • The willingness of the Netherlands corporate tax inspector to grant special tax rulings in favor of Netherlands based finance companies.
  • Interest payments made to foreigners are fully deductible when computing Dutch corporate income taxes so long as the payment is made at "arms length". Usually the Dutch corporate income tax inspector will "fix" the net taxable income of the company at a certain percentage of the total outstanding debt, or require that a certain "interest spread" between interest received and interest paid-out be used to calculate the tax. A " spread ruling " from the tax inspector of 1/8% or ¼% can usually be " negotiated " by the tax advisor
  • So called "back-to-back loan arrangements" between a Dutch company and a tax haven entity is common, and not looked on unfavorably by the Dutch tax authorities.
New U.S. - Dutch tax treaty

A new U.S./Netherlands income tax treaty was signed in Washington D.C. on December 18, 1992 after more than 10 years of negotiations. The new treaty replaces the current treaty, which has been in force since 1947, a period of 45 years.

The new treaty will take effect on or after January 1st of the year following its ratification and exchange of documents, consequently the new treaty will not be effective for fiscal year 1993. Anti-treaty shopping provisions aimed at limiting who can benefit from the new treaty are of great concern to international taxplanners. Under the current U.S./Netherlands tax treaty, any company that could meet the Dutch or U.S. residency requirements would qualify for treaty benefits. Not so under the newly signed treaty.

The negotiations for the new treaty took some ten years to iron out because the Dutch resisted the U.S. efforts to insert its treatyshopping provisions. Generally speaking, the new treaty denies benefits to corporations owned by third-country shareholders, unless they can pass one of four special tests.

The anti-treaty shopping provisions [Limitation of Benefits Article (Article 28)] of the new treaty were based on the 1981 U.S. Treasury Department's Model Treaty which stated that a corporation is not resident of a country for treaty purposes unless (1) at least 75% of its shares are owned - directly or indirectly - by individuals who are residents of that country, and (2) is not a conduit company to pass on deductible interest and royalties to residents of a third country. The new U.S.-Netherlands treaty reduces the stock ownership test to more than 50%. One loophole under the 1981 U.S. Treasury Model Treaty was that the 70% stock ownership requirement could be met if the shares of the company were listed and its stock regularly traded on a recognized stock exchange in either country. Tax practitioners should note, the new U.S.-Netherlands income tax treaty contains this valuable loophole.

The new treaty applies in general to residents of either the Netherlands or the U.S. The term "resident" also includes exempt pension trusts and other exempt organizations (i.e., charitable, scientific, religious and educational type organizations). Generally, interest and dividends paid by unrelated U.S. companies to a Netherlands pension trust would be 100% free of U.S. withholding tax, normally 30%.

Four main tests for treaty benefits

The Limitation of Benefits Article (Article 28) provides that a resident corporation is a resident for treaty purposes if it passes any one of the following tests:

  • The Stock Exchange Test
  • The Shareholder test
  • The Active Trade or Business test
  • The Headquarters test
Stock Exchange Test

The Stock Exchange test is somewhat discriminatory in that it favors large, well capitalized companies that can afford the time and expense to get its shares listed (or are already listed) on one of the recognized Stock Exchanges. Nevertheless, the Stock Exchange test is probably the single most important test to consider, because once corporation goes to the trouble of being listed on the NYSE, NASDAQ, AMEX, Dutch, London, Paris or Frankfurt Stock Exchanges it will qualify for all the treaty benefits, even if it is a mere conduit company channeling interest into an offshore affiliate based in a tax haven.

Conduit companies - bank & finance companies

A conduit company typically borrows money from an offshore company domiciled in a tax haven country and relends the money to a U.S. company. Under both the new and the current U.S.-Netherlands tax treaty, the 30% U.S. interest withholding tax is reduced to 0%. Additionally, under the Dutch tax system no interest withholding taxes on payments made to any nation (even to companies domiciled in tax havens) are imposed on any Dutch company. Interest withholding taxes are unknown in the Netherlands.

The new tax treaty restricts the use of third party conduits, unless the conduit's stock is regularly traded on one of the recognized stock exchanges, or unless the conduit meets other rather stringent tests described below.

Stock Exchange Test for Subsidiaries

Non-publicly traded companies also qualify for treaty benefits if (1) more than 50% of the aggregate vote and value of their shares are owned by five or fewer companies, each of which meets the stock listing an trading standards, and (2) they are not conduit companies (or if they are conduits, they pass either the "conduit test", "the base reduction test", or the "conduit base reduction test").

"Conduit test"

Under the new U.S.-Netherlands treaty, a conduit company is one that, in any year, makes deductible payments of interest and royalties equal to 90% or more of its aggregate receipts of interest and royalties.

A conduit traffics in treaty withholding rates, and may be unrelated to either the payer or the payee of interest and royalties in back-to-back loan and royalty arrangements. The conduits is compensated by a thin spread between the payment it receives and the payments it makes. In Rev-Rule 84-153 and 84-154, the U.S. unilaterally attacked conduit arrangements be denying treaty benefits on the basis that the conduit did not have dominion and control over the payments that quickly pass through its hands.

Under the new U.S.-Netherlands treaty, a conduit passes the base reduction test if its payments of deductible interest and royalties to companies that are not entitled to benefits of the treaty (i.e., third-country residents) are less than 50% of its gross income.

"Base reduction test"

The treaty provides that a conduit gets treaty benefits if it passes the "base reduction test". A company passes the test if its payments of tax deductible interest and royalties to companies not entitled to the benefits of the treaty (i.e., third-country residents) are less than 50% of its gross income. This means that companies of substance can have offsetting interest income and interest expense (or royalty income and royalty expense) without losing their treaty benefits.

"Conduit base reduction test"

This test is easier than the conduit test and can be used as an alternative for the Stock Exchange test for subsidiaries or publicly listed companies (more than 50% ownership by 5 or fewer public companies). The test is the same as the base reduction test except that deductible interest and royalties are taken into account only if they are made to associated enterprises in whose hands they will be taxed at a rate less than 50% of the Dutch rate (the Dutch corporate rate is 40% on profits up to Dfl 250,000 and 35% thereafter). Consequently, payments made to most tax haven companies are the only ones that will be considered.

Non-publicly traded companies

A non-publicly traded company qualifies for treaty benefits if (1) more than 50% of its shares are owned, directly or indirectly, by "qualified persons" (i.e., U.S. citizens and residents of the Netherlands and U.S., and (2) it meets the "base reduction test".

Active Trade or Business Test

A company not qualifying for treaty benefits under one of the above tests, can still qualify if it is engaged in a trade or business in the residence country that is complementary to its (or a related party's) activities in the treaty partner.

A trade or business in the residence country is "substantial" if the average of the following three ratios exceeds 10% and each exceeds 7.5% for the preceding year.
  • The value of the assets in the residence country to the value of assets in the source country;
  • The gross income in the residence country to the gross income in the source country;
  • The payroll expense in the residence country to the payroll expense in the source country.

Since the activity in the source country qualifies if it is carried on by a commonly controlled company (i.e., member of the same multinational group), an example of the benefit would be manufacturing subsidiary of a Japanese multinational in The Netherlands (i.e., Toyota Netherlands) licensing know-how to a related manufacturing company in the U.S. (i.e., Toyota USA) that is in the same business. Withholding on royalties would be zero instead of 30% (the U.S. statutory rate).

Headquarters test

"Headquarters" status gives a company full treaty benefits, but most small and medium size enterprises won't be able to meet the treaty's strict requirements to qualify as a "headquarters company".

A "headquarters company" must provide a substantial portion of the supervision and administration of the group, which can include group financing (although financing cannot be its principal function).

A "headquarters company" consists of at least five companies operating in at least five different countries, each of which generates 10% of the gross income of the group. The gross income generated in any one of the countries (other than the residence country) cannot exceed 50% of the gross income of the group, and not more than 25% of its gross income can be from the source country.

Dividends

Both the new and the current U.S.-Netherlands tax treaty lowered the U.S. 30% dividend withholding rate to 15% and 5% respectively. But the new treaty is actually superior to the current treaty in that to qualify for the lowest 5% dividend withholding rate, the recipient company need only own 10% of the payers voting stock. Under the current treaty, the recipient company has to own 25% of the payers voting stock.

Dividend withholding is 15% for all other shareholders (including individual shareholders and corporations owning less than 10% interest in the payer).

Interest and royalty withholding taxes are reduced to 0% under both the current and the new treaty.

Demise of the Swiss branch of a Dutch company

A long-standing tax planning device takes advantage of the fact that the interest and royalty income of a Swiss branch of a Dutch company is lightly taxed in Switzerland and not taxed at all in the Netherlands. The "Basis of Taxation" article of the new treaty takes dead aim at this technique by disallowing treaty benefits for interest and royalties paid by the finance branches or intangible property ownership branches of Dutch companies operating in tax havens. Switzerland is the main target, but other low-tax countries also will be affected.

IRS Rev. Ruling 87-89 attacks some back-to-back loan schemes

Back-to-Back loan schemes have been attacked by the IRS in the past under RevRul 84-152 & RevRul 84-153, which purport to "look through" conduit type loan arrangements involving Netherlands Antilles finance companies and U.S. companies in certain limited cases where the Service believed the tax planning was overly abusive of the U.S. tax rules. Following the Tax Reform Act of 1986 , Congress again felt that back-to-back loan schemes should be collapsed by the IRS, and the ultimate recipient, if not treaty protected, should be subject to U.S. tax. The IRS responded to Congress's concern by issuing RevRul 87-89 which defined three types of arrangements that will be collapsed. In the first, a foreign parent company located in a non-treaty jurisdiction places $100x dollars as a demand deposit at an unrelated bank located in a treaty country. The bank then lends $80x dollars to the foreign company's U.S. subsidiary under terms allowing for a 1% interest rate spread. The ruling states as facts that during the term of the loan the amount of the parent deposits with the bank exceeded the outstanding loan balance, and further, that the interest rate charged by the bank would have different in the absence of the parent's deposit.

The IRS asserts through this ruling that under these conditions the loan arrangement is to be collapsed based on the fact that the "collateral monies left on deposit" by the U.S. subsidiary's foreign parent was not an "independent transaction". RevRul 87-89 is not meant to imply that a back-to-back loan made through an independent Netherlands bank or Dutch Finance Company (even through a Cayman or Bahamian affiliate which provides the money) to an unrelated U.S. company will be collapsed by the IRS, as the ruling is not to apply to " independent transactions " such as these. Consequently, a Dutch finance company that is unrelated to the U.S. borrower has nothing to fear from RevRul 87-89. IRS Example #3 reinforces this hypothesis as it directs its attacks to the CFC of a U.S. company, which makes the bank deposit with a non-US bank, which in turn lends the money to the domestic U.S. parent. In example #3, both the bank and the CFC are in the same treaty jurisdiction. In case #1 the IRS will collapse the loan and apply the 30% U.S. withholding tax to the non-treaty protected recipient, but in case #3 the IRS will consider the loan by the offshore CFC to be a direct investment by the CFC in its U.S. parent, thus an investment in U.S. property under IRC §956. In case #3 the U.S. parent will be held taxable on the CFC profits.

The "new" Barbados-U.S. Income Tax Treaty

Just a few hundred miles east of the Antilles lie Barbados, another Caribbean low tax haven. The tax rate here tops out at just 2.5% for International Business Corporations (called IBC's ). Barbados' recent signing on December 31, 1984 of a tax treaty with the United States, followed by the U.S. Senate's ratification on February 28, 1986, makes Barbados one of the few tax havens in the world to have a tax reducing treaty with the U.S. Without question, the Barbados treaty offers many of the same benefits found under the canceled Antilles treaty, though admittedly the Antilles treaty contained bigger and better exemptions. Still, Barbados will benefit from the loss of business to the Antilles. Operators such as Prince Talal Bin Abdul-Aziz el Saud's (P.O. Box, Riyadh, Saudi Arabia) Vanguard N.V. (Handelskada 8, Curacao, Netherlands Antilles) and many other foreigners hold billions of dollars worth of U.S. real estate through Antilles holding companies, where once favorable treaty benefits provided extensive tax relief.

A tactic utilized prior to the Tax Reform Act of 1986 called dividend stripping was often practiced by Antilles real estate holding companies. Dividend stripping entailed incorporating a wholly owned U.S. subsidiary, which would channel its U.S. profits to its Antilles parent disguised as a dividend subject only to a 5% U.S. withholding tax. Often the U.S. real estate company would take on a large debt to pay out the dividend. Since the interest it would be deductible against Federal Income taxes, the tax liability of the U.S. real estate company was sometimes reduced to nothing.

Under Article VII of the treaty, if the Netherlands company controls directly or indirectly 95% or more of the voting power of the United States corporation, withholding tax at a rate of 5% will be levied by the U.S. only on dividends paid by the latter to the former, while in the Netherlands Antilles the low tax rates of 2.4% to 3% will be applicable. This special U.S. withholding tax rate is denied in the case where the special relationship between the NA company and its U.S. subsidiary has been created especially with a view to obtain this rate or where not more than 25% of the company's income is derived from passive interest and dividends (other than from its own subsidiaries) . - from " An Introduction to taxation of OFFSHORE COMPANIES in the Netherlands Antilles ", by the Curacao International Trust Company N.V. (pg 12.). Under Article 10(2)(a) of the current Barbados-U.S. income tax treaty the U.S. dividend withholding rate is reduced to 5% if the Barbados parent company owns at least 10% of the voting stock of the U.S. company paying the dividend.

Article 11 (Interest) of the Barbados-U.S. Income Tax Treaty

While the Tax Reform Act of 1984 eliminated the 30% interest withholding on corporate and governments bonds issued after July 18, 1984, bonds issued before that date are subject to the full rate of withholding unless a tax treaty provides for a lower rate. Article 11 (Interest) of the Barbados treaty, which appears below, provides for a reduced withholding rate of 12,5% on U.S. corporate and government bonds. Thus, pre 7-18-84 issued bonds will be subject to a 12,5% U.S. withholding tax.

[§ 579N] Article 11 (Interest)

  1. Where interest is derived from sources within a Contracting State and beneficially owned by a resident of the other Contracting State, the rate of tax imposed thereon in the first-mentioned State shall not exceed 12,,5% of the gross amount of the interest. Notwithstanding the preceding sentence, interest derived from sources within a Contracting State, beneficially owned by a resident of the other Contracting State, and paid in respect of a bond, debenture or other similar obligations issued, guaranteed or insured by the government of that Contracting State or by a political subdivision, local authority or instrumentality thereof shall be taxable in that other State.
The First U.S. Income Tax Treaty

The first U.S. tax treaty was signed on April 27, 1932 with France, and promptly ratified by the U.S. Senate. France, however, did not ratify the treaty until after 1934 when Congress enacted legislation authorizing the President to double the rate of tax on any country who was imposing an unfair, discriminatory or extraterritorial tax on U.S. citizens or corporations (which France was doing at the time). France, seeing that President Roosevelt could thereby tax French citizens and corporations at rates as high as 80% , quickly ratified the treaty. The treaty became effective shortly thereafter on January 1, 1936.

Model Income Tax Treaties

Bilateral Tax treaties drafted today with the United States follow the scheme set-down by the Organization for Economic Cooperation and Development (OECD) and the U.S. Treasury's Model Income Tax Treaty . The U.S. treasury's model describes how a treaty shall be negotiated from a U.S. point of view, so the other side knows what they are bargaining with beforehand. The Treaty itself includes a preamble , a title , and a set of articles . The title tells you the names of the two countries to which the treaty applies, and the type of assets covered (i.e., income, estate or gift taxes).

The preamble states the purpose of the treaty, the names of the governmental representatives that were present, and the fact that an agreement was made. The articles of a typical treaty deal specifically with tax questions and are organized into paragraph form.

One of the most important concepts found in the articles of every treaty is the definition for Permanent Establishment. If a foreign corporation doesn't meet the treaty's definition for having a permanent establishment, its commercial and industrial profits from dealings with the United States will often escape all taxation.

What entails a permanent establishment is not found in the Internal Revenue Code and is peculiar to the tax treaties. While treaty definitions vary, Article 5 of the 1986 Barbados definition is typical…

[§ 579G] Article 5 (Permanent Establishment)

  1. For the purposes of this Convention, except as otherwise specified in this Article, the term "permanent establishment" means a regular place of business through which the business of an enterprise is wholly or partly carried on.

  2. The term "permanent establishment" shall include especially;
    1. a place of management;
    2. a branch;
    3. an office;
    4. a factory;
    5. a workshop;
    6. a store or premises used as a sales outlet;
    7. a warehouse, in relation to a person providing storage facilities for others;
    8. a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources;
    9. a building site or construction, assembly or installation, or drilling rig or ship used for the exploration or development of natural resources within a Contracting State…..
    10. the furnishing of services, including consultancy, management, technical and supervisory services within a Contracting State by an enterprise or employees or other persons, but only if:
    11. activities of that nature continue within the State for a period or periods aggregating more than 90 days in a 12 month period, provided that a permanent establishment shall not exist in any taxable year in which such services are rendered in that State for a period or periods aggregating less than 30 days in the taxable year; or
  3. Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include any one or more of the following:

    1. the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise, other than goods or merchandise held for the sale by such enterprise in a store or premises used as a sales outlet; …… abridged due to the length of Article 5…

  4. Notwithstanding the provisions of paragraphs 1 & 2, a person acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed a permanent establishment of that enterprise in the first mentioned State, if:

    1. he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a regular place of business, would not make a permanent establishment, or
    2. he habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise…. Abridged due to length.

  5. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that state through a broker, general commission agent, or any other agent of an independent status , provided such person are acting in the ordinary course of business. However, when the activities of such person are devoted substantially on behalf of that enterprise, he shall not be considered an agent of independent status, if the enterprise and agent do not deal under "arms length" conditions.
"In Revenue Ruling 80-222 a foreign company reinsuring U.S. risks was held not to be doing business in the U.S. In the ruling's facts, the reinsurance policies were neither signed nor countersigned in the U.S. by an agent of the foreign company, and no personal services were performed on a regular basis in the U.S. on behalf of the foreign company. As a rule, to avoid being considered engaged in a U.S. trade or business, a company must not have an agent or employee actively carrying on business in the U.S."

The treaty with Barbados permits a greater degree of U.S. activity than this before "permanent establishment" status is reached. And the activity threshold is clear-cut. In general, if a Barbados insurance company does not have an office in the U.S., it will not have a permanent establishment unless it has an employee (or agent who is not an "independent" agent) in the U.S. who "habitually exercises… an authority to conclude contracts on behalf of the enterprise…" Thus, under the treaty, a Barbados insurance company with no U.S. office can solicit business in the U.S. through employees or dependent agents without being taxed in the U.S., unless the employees have and habitually exercise the authority to conclude contracts.

"Absent a treaty, such solicitation could be deemed to be doing business in the U.S." - Alan S. Woodberry, partner Price Waterhouse

Brokers and Independent Agents

Use of a bona-fide commission agent, broker or independent agent can result in unlimited volume of sales without U.S. tax liability. Moreover, according to IRS Revenue Ruling 55-617, an absolute exemption from U.S. taxes is conferred when an independent agent is engaged through a substantial amount of trade or business is carried on within the U.S.

Rev-Rul 55-617: "The corporation does extensive business through the medium of a commission agent and is engaged in trade or business through the medium of a commission agent and is engaged in trade or business within the U.S. as defined by Section 871(c) of the Internal Revenue Code of 1954. However, the corporation has no permanent establishment in the United States."

Tax planners should not overlook the independent agent exemption provided under all the U.S. tax treaties as it opens the door to a whole host of activities and trade with little worry of IRS scrutiny, providing the agent is truly an independent . The following lists the functions an independent agent must adhere to secure the exempt status:

  1. An independent agent is a broker, commission agent or public warehousemen, but also includes processor, real estate management agents and other independent agents and intermediaries.
  2. His rates are published, standard, customary and openly offered to the trade.
  3. His services are provided openly to all in the trade.
  4. Authority to negotiate and sign contracts in the name of the foreign principal must be obtained from, or contracts approved by, the foreign principal (a commission agent must take title in his name) - alternatively, agent has general authority to conclude specific class of contract, but only at preset terms determined by foreign principal.
Treaty Shopping

Treaty shopping is the act of relocating your corporate entity (or assets) or operation to a U.S. treaty partner's jurisdiction to take advantage of the tax relief offered under one of the U.S. income tax treaty. Treaty shopping provisions are aimed at third party users of a tax treaty, i.e., entities not normally resident of either of the countries a party to the tax treaty.

How the IRS views treaty shopping has been the subject of many discussions and articles. While no provisions under the Internal Revenue Code directly seek to prevent treaty shopping, the IRS has addressed treaty shopping through its letter rulings .
Oddly enough, some rulings issued by the IRS have been favorable to the taxpayer, sometimes even condoning treaty shopping. A few rulings denied the exemption from interest withholding tax, but this was not meant to apply to portfolio investment interest, which has never been challenged by the IRS.

Revenue Ruling 75-73 permitted persons who were not residents of the Netherlands Antilles to form N.A. corporations to invest in U.S. real estate through a U.S. partnership. Ironically, the IRS recognized the arrangement even though the participants (who could have invested directly in the U.S. partnership) supplanted the N.A. corporation to avoid having to file an income tax returns. Two rulings in 1984 (Rev-Rul 84-152 & 84-153) went against the taxpayer in a blatant "back-to-back" loan scheme. On closer inspection these rulings applied to deny the U.S. interest withholding exemption only for a specific type of abuses involving Netherlands Antilles Finance Companies. It wasn't meant to apply to portfolio interest received by offshore holding companies.

Barbados' Anti-Treaty Shopping Provision Article 22

Article 22 of the Barbados-U.S. treaty contains an anti-treaty shopping provision that is innocuous. While paragraphs 1(a) and (b) reserve the treaty benefits for the most part to residents of the U.S. and Barbados, paragraph 3(a) and (b) provides for an "exception" where the shares are substantially traded on a recognized NASDAQ type stock exchange. In such a case paragraph 1 of article 22 is not to apply.

[§ 579Z] Article 22 Limitation on Benefits

  1. A person which is a resident of a Contracting State and which derives income from sources within the other Contracting State, to the benefits of Article 6 (Income from Real Property (Immovable Property) through Article 23 (Relief from Double Taxation) if:

    1. 50% or less of the beneficial interest in such person or in case of a company, 50% or less of the number of shares of each class of the company's shares) is owned, directly or indirectly, by any combination of one or more individual residents of a Contracting State or citizens of the U.S.; or
    2. the income of such person is used in substantial part, directly or indirectly, to meet liabilities (including liabilities for interest or royalties) to persons who are residents of a State other than a Contracting State, or who are not citizens of the U.S.

  2. The provisions of paragraph 1 shall not apply if the income derived from the other Contracting State is derived in connection with, or incidental to, the active conduct by such person of a trade or business in the first-mentioned Contracting State (other than the business of making or managing investments). The preceding sentence shall not apply with respect to a person engaged in the business of banking or insurance in a Contracting state, if the income of such person is subject to tax in the Contracting State in which it is resident at a rate of tax which is substantially below the rate generally applicable to business income in that State. Notwithstanding the preceding sentence, the income of such a bank which is not derived from the conduct of a banking business (including but not limited to income attributed to the taking of deposits and making of loans, managing of investments and performance of trust or other services as fiduciary) shall be subject to the provisions of the first sentence of this paragraph.

  3. The provisions of paragraph 1 shall not apply if the person deriving the income is a company, which is a resident of a Contracting State in whose principal class of shares there is a substantial and regular trading on a recognized stock exchange. For purposes of the preceding sentence, the term "recognized stock exchange" means:

    1. The NASDAQ System owned by the National Association of Securities Dealers, Inc. and any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Act of 1934; and (b) any other stock exchange agreed upon by the competent authorities of the Contracting States.
Paragraph 3 above is part of the treaty shopping provision of Article 22. It permits any company that registers its stock on a stock exchange to qualify for the other treaty benefits by causing paragraph 1 of Article 22 not to apply.

"Portfolio Interest" - defined

Portfolio interest is interest paid on two kinds of obligations. One is called Bearer Shares as described in IRC §163(f)(2)(B), and the other is called Registered Obligations with respect to which the U.S. withholding agent (a securities clearing house, bank or other financial institution) has been presented a statement saying in effect that the beneficial owner is not a U.S. person.

Bearer Shares under IRC §163(f)(2)(B)

An instrument will qualify for the "portfolio interest exemption" if the interest is paid on a foreign targeted bearer obligation not issued by a natural person, and of the kind offered to the public, and one that has a maturity of more than one year.

Obligations issued in bearer form by the U.S. government-owned agencies of government sponsored agencies (i.e., Federal Home Loan Banks, FNMA, Federal Loan Mortgage Corporation) are not considered to meet these requirements, thus they will not qualify as "portfolio interest" exemption.

A bearer obligation must also have the following legend in English on the face of the obligation and on the interest coupons which may be detached therefrom stating: " Any U.S. person who holds this obligation will be subject to limitations under the U.S. income tax laws, including limitations provided in IRC §165(j) & IRC §1287(a) of the Internal Revenue Code. " Without this inscription on the certificate the portfolio interest exemption will be lost on bearer obligations not in registered form. See the definition for Registered Obligations that follows.

Bearer obligations are not limited to those corporate bonds that have been registered under the Securities Act of 1933. An obligation could be issued pursuant to one of the special security exemptions of the Securities Act, such as Regulation D. This means you could float your own bond issue without paying the Commissioner of the SEC a large fee, required when registering a public bond issue. Interest on such a private type non-tradable bond is considered tax exempt. Physical delivery must be made to the purchaser outside the U.S., and a signed statement must be gotten from him saying he is not purchasing it on behalf of a U.S. person. Lastly, it is required that interest payments be made outside the U.S. by the U.S. issuer or his agent by way of the presentation of a coupon, or upon making a demand for payment.

Registered Obligations

An obligation is in Registered form if it is registered as to both principle and any stated interest, and any transfer of the obligation may be accomplished only through the surrender of the old instrument and the re-issuance by the issuer of a new instrument to the new holder; or , in a second case, if the right to the principle of, and stated interest on, the obligation may be transferred only through a book-entry system .

An obligation is considered transferrable only through a book entry system. Ownership of an interest in the obligation is needed to be reflected in a book entry whether or not securities are issued A book entry is a record or ownership that identifies the owner of an interest in an obligation. The U.S. Treasury uses a book entry system.

Exceptions

Not all interest will qualify for the portfolio interest exemption under the Tax Reform Act of 1984. Interest effectively connected with a recipient's U.S. trade or business through a permanent establishment does not qualify as portfolio interest. Furthermore, none of the U.S. tax treaties can be relied on to exempt such "business profits".

Interest received by a 10% shareholder is not considered portfolio interest either. Unless reduced by a tax treaty such interest would be subject to the full 30% U.S. withholding. For example, under the Swiss treaty this type of interest would incur a 5% U.S. withholding tax. See tables 1 & 2 below.
(Courtesy of New Providence Press: Tax Havens of the World ).

Find the contact names, addresses, numbers and information for local government offices, banks, accountants, company formation services, investment and management companies, advisors, experts, maildrops, real estate agents and other useful local contacts in the THE OFFSHORE MANUAL & DIRECTORY .

22.43 NETHERLANDS ANTILLES

The fact that the six islands making up the Netherlands Antilles were one of the first offshore financial and tax planning centers offering a combination of low tax rates and a tax treaty network has proved an attractive feature to international investors, notwithstanding the unilateral termination of the U.S.-Antilles Income Tax Treaty in 1987.

The Caribbean island of Aruba, located 15 miles off the coast of Venezuela and some 78 miles square miles in area, was annexed by the Dutch in 1860. On January 1, 1986, Aruba assumed a separate status within the Kingdom of the Netherlands with full internal autonomy. The legal system is based on the law of the Kingdom of the Netherlands.

According to research from American investments bankers Goldman Sachs, the Netherlands Antilles accounted for the third highest net purchase of US shares in the second quarter of 1995, with deals worth $4bn and the UK with $2.8bn.

With a population of just 170.000, the purchase of $2.1bn worth of US equities may seem astonishing, but as Ms Abbey Cohen analyst at Goldman Sachs suggests "many financial intermediaries are based in these locations. Hence net purchase attributed to them may well be on behalf of individuals or institutions domiciled in other countries."

But why, even though the favorable U.S. tax treaty with the islands was repealed nearly ten years ago, are investors still accessing the US via Curacao'? Braham offers the following explanation: "Because companies incorporated here has been used so much in the past. The Lawyers and everybody in the US are very familiar with a Netherlands Antilles company." And he adds there are "additional benefits such as confidentiality and some tax advantages."

Offshore companies incorporated in the Netherlands Antilles are taxed at between 2.4% and 3% on offshore income and are exempt of capital gains tax. Companies have to obtain authorization to be formed but it appears there are rarely any difficulties in obtaining permission. Apart from purchasing shares, companies formed in the Netherlands-Antilles are often used to buy real estate in the US.

US clients remain important for a company like CITCO, but the operation also draws on its origins in the Netherlands, to exploit an important client base of European nationals.

Dutch names such as ABN Amro, Meespierson and ING still dominate the Antilles business directories. The Dutch connection goes back a long way, with Curacao, the largest of the islands that make up the Netherlands Antilles, having been in Dutch possession since 1634, apart from a brief period during the Napoleonic Wars. And Dutch is also the official language.

The financial services industry was kickstarted by the Dutch in the 1940s when Dutch corporations moved their assets to the region to escape seizure by the Nazis. After the war, many of the companies returned their headquarters to the Netherlands but left behind the infrastructure of an offshore center.

That infrastructure includes around 70 banks, more than 50 of them international, an established fund management industry with around $60bn of assets under administrations, trusts and insurance companies.

All the major international audit firms are here doing both international and local work and there are numerous law firms. Most of these institutions are based in and around Willemstad, the capital of Curacao, about 30 miles off the coast of Venezuela.

Aruba (Tax) Exempt Corporation

On Janurary 1, 1988 the Government of Aruba introduced a new companies ordinance to attract foreign investors. The preamble to the legislation reads: "… in connection with the further development of Aruba as a financial center it is desirable that there shall be in addition to the limited liability company a new form of legal entity, the Aruba (tax) exempt corporation, of which the structure compared to that of the limited liability company shall be simplified. "

The National Ordinance for the registration of the Aruba (Tax) Exempt Corporation (or AVV) was promulgated on June 30, 1988. An AVV is a legal entity with limited liability and an authorized capital divided into shares. It is similar to the International Business Corporations (IBCs) in use in the Bahamas, the BVI and other offshore centers, but it is based on Dutch civil law, as opposed to English common law statutes.

Some of the more important features, aside from complete income tax exemption, of the AVV are:

(1) Freedom from exchange controls;
(2) A minimum authorized capital of US$5,600 and only one share is needed to start-up an AVV;
(3) Shares of an AVV can have full, limited, par or no par, voting or no voting rights, bearer or registered;
(4) Directors can be of any nationality;
(5) No requirement for annual financial statements or annual shareholders meetings, if "Articles" permit;
(6) Shareholders meetings can be held anywhere in the world and shareholders can be represented by proxy;
(7) An AVV cannot operate as a bank or insurance company, and does not qualify for any benefits under the tax regulations of the Kingdom of the Netherlands (i.e., the Participation Exemption).
(8) No withholding taxes on any payments by an AVV to its shareholders, and no estate, inheritance, gift or wealth taxes on the shares.

Company formation

An AVV is incorporated by notarial deed executed by at least one incorporator before a civil law notary in Aruba. Before the Deed of Incorporation can be passed, a draft must be submitted to the Ministry of Justice for a Declaration of No Objection.

The Deed of Incorporation should be in the Dutch language, but it is standard practice that the Deed is accompanied by a certified translation.

Costs for Aruba Exempt Company (AVV)

- Notarial expenses and first year Government Registration fee = $US$710.
- Annual Government charges = US$285.
- Contribution to the Chamber of Commerce = US$35.
- Professional fee for incorporation = US$450.
- Annual fee for registered office, registered agent = US$500.
- Managing Director's (optional) fee = US$350.

Naamloze Vennootschap or NV

Limited liability companies called NVs can still be incorporated in the "Antilles". Minimum annual maintenance costs of about US$1,500 can be expected. Such companies, if fully owned by non-resident shareholders, pay a profits tax of 2.4% to 3%. The advantages of paying a small tax (as opposed to none at all for AVVs) is important for purposes of obtaining the Netherlands "Participation Exemption". Dutch based holding companies that own shares in an NV can receive dividends and other distributions (including capital gains and liquidations) from an NV free of Netherlands income tax if it owns at least 5% of the NV's stock. AVVs are not eligible for this tax exemption.

Offshore companies are not allowed to carry on any business within the Netherlands Antilles unless they get approval from the Central Bank. The N.A. profits tax is 32-39% on incomes drawn from the locally economy.

Netherlands Antilles Mutual Funds

Under the Profits Tax Ordinance (PTO), the tax payable by mutual funds is limited to US$10,000 per annum, irrespective of the funds (realized) gains or profits. The $10,000 profits tax is reached when the net asset value of the fund reaches approximately US$43,000,000. More than 45 mutual funds were registered in the Antilles through June, 1988. Famous Wall Street money managers George Soros and Michael Steinhardt run N. Antilles funds. Recently, these managers have run into a streak of poor stock picks after years of outperforming the markets.

Federation of five islands

The Netherlands Antilles, an autonomous part of the Netherlands, is a self-governing federation of five Caribbean islands. Aruba had been the sixth member of the federation until Jan. 1, 1986, when it gained autonomy. The total land area is 1,821 sq km (703 sq mi), and the population is 176,000 (1987).

The two largest and most populated islands -Curacao, and Bonaire - lie off the Venezuelan coast. The other three - Saint Martin (whose northern half belongs to France), Saba, and Saint Eustatius

- are about 800 km (500 mi) to the northeast, approximately 350 km (220 mi) east of Puerto Rico. These three small islands, with a total area of 88 sq km (34 sq mi), are part of the Leeward Islands group. The annual mean temperature in the Netherlands Antilles is 27 deg C (80 deg F), and the rainfall varies from 560 mm (22 in) in the southern islands to 1,015 mm (40 in) per year in the northern group. The capital, Willemstad, is on Curacao. The Federation is governed by a prime minister and a legislative council.

The generally prosperous economy of the federation is based on tourism. Oil refining, which was once the principal industry, declined considerably in the 1980s. Natural resources are phosphates (Curacao) and salt (Bonaire). Corn and pulses are grown.

The inhabitants are descendants of Indians, Dutch, Portuguese, Jews, and former African slaves. The inhabitants of the southern islands speak Papiamento (mixture of Dutch, Portuguese, Spanish, and African), and those of the northern group speak English. Illiteracy is almost nonexistent, and the standard of living is the highest in the Caribbean.

Originally inhabited by Arawak (in the south) and Caribbeans (in the north), the islands were conquered by the Dutch in the 17th century. They have been self-governing since 1954, and referendums on independence are scheduled to be held.
(Courtesy of New Providence Press: Tax Havens of the World ).

Find the contact names, addresses, numbers and information for local government offices, banks, accountants, company formation services, investment and management companies, advisors, experts, maildrops, real estate agents and other useful local contacts in the THE OFFSHORE MANUAL & DIRECTORY .