October 03, 2023

British Virgin Islands Economic Substance Requirements

October 03, 2023/ Ruchelman P.L.L.C.

Just as water flows downhill, action to prevent aggressive tax planning flows from (i) the O.E.C.D. in its B.E.P.S. Action Plan, especially Action 5 applicable to no or nominal tax jurisdictions (“N.T.J.’s”) to (ii) the E.U. Code of Conduct Group (“C.O.C.G.”), in its scoping paper identifying nine relevant activities and economic substance criteria for N.T.J.’s to avoid the E.U. blacklist, to (iii) the N.T.J.’s, themselves, in steps taken to police economic substance requirements of local law. The B.V.I. heard the message and has implemented a robust information reporting system for relevant entities. In their article, Joshua Mangeot, a partner in the B.V.I. office of Harneys and Kiril Pehlivanov, a member of the investment funds and regulatory team in the B.V.I office of Harneys, explain the effect of the B.V.I. economic substance regime on companies and limited partnerships registered in the B.V.I. and provide practical guidance for compliance and reporting.

May 30, 2023

Economic Substance: Views From the U.S., Europe, and the B.V.I., Cayman, and Nevis

May 30, 2023/ Ruchelman P.L.L.C.

Like concepts of beauty, the presence or absence of economic substance in the tax context often is in the eye of the beholder. More importantly, economic substance means different things to tax authorities in different jurisdictions and the approaches in taxpayer obligations varies widely. This article looks at the concept of economic substance in three separate localities. Stanley C. Ruchelman and Wooyoung Lee look at the U.S., addressing case law establishing the requirement and the 2010 codification of the concept into the tax code. Werner Heyvaert, a partner in the Brussels Office of AKD Benelux Lawyers, and Vicky Sheik Mohammad, an associate in the Brussels Office of AKD Benelux Lawyers, look at the Danish Cases that establish an abuse of rights view for aggressive tax planning – the taxpayer abused rights granted to it by E.U. law – and the Unshell Directive designed to remove certain tax benefits from shell companies. David Payne, Global Head of Governance for Bolder Group, looks at the self-certification rules that have been adopted in the B.V.I., Cayman, and Nevis.

January 30, 2023

Anti-Abuse Developments: A New Normal in the Netherlands

January 30, 2023/ Ruchelman P.L.L.C.

“Doe normaal” is practical advice in the Netherlands encouraging one to act normal. In the past, that phrase would describe commonly used plans to reduce tax. Today, if the old normal is followed by a multinational group effecting an acquisition, the group could end up facing unintended tax consequences. Legislators and tax authorities are increasingly examining traditionally “normal” acquisition structures and financing arrangements in a quest to combat deemed abusive tax arrangements. Like its fellow E.U. Member States, the Netherlands has shifted its tax policy agenda in recent years in line with international and E.U. initiatives to target perceived abuse. In a similar way, the U.S. has targeted abusive arrangements for several decades via common law doctrines and codified anti-abuse rules, including the economic substance doctrine and conduit financing regulations. Michael Bennett, a U.S. attorney, recounts recent developments in the Netherlands based on a two-year assignment as a U.S. tax adviser in the Amsterdam Office of a major international law firm. He also addresses “economic substance” rules followed for close to a century in the U.S. This is Mr. Bennett’s first article for Insights as an associate of Ruchelman P.L.L.C.

May 03, 2022

The Economic Substance Doctrine: A U.S. Anti-Abuse Rule→

May 03, 2022/ Ruchelman P.L.L.C.

Re-printed as part of LexisNexis’s Practical Guidance product on April 26, 2022.

April 30, 2019

It’s Time for Cayman Shell Entities to Come Out of Their Shells and Show Economic Substance

April 30, 2019/ Ruchelman P.L.L.C.

· It is said that beauty is in the eye of the beholder. The same can be said about economic substance. In a step to adopt a standardized definition in the context of business arrangements that are typical for Cayman Islands companies, the country enacted the International Tax Cooperation (Economic Substance) Law, 2018 (“E.S. Law”) on December 27, 2018, and issued supplemental guidance on February 22, 2019. Neha Rastogi and Galia Antebi address relevant aspects of the new rules, including (i) entities that fall within the ambit of the E.S. Law, (ii) entities that are exempt, (iii) identified business activities under the E.S. Law, and (iv) steps that may be taken to meet the economic substance test.

January 28, 2019

Insights Vol. 6 No. 1: Updates & Other Tidbits

January 28, 2019/ Ruchelman P.L.L.C.

This month, Rusudan Shervashidze and Stanley C. Ruchelman look at several interesting items, including (i) the publication of draft legislation by the Crown Dependencies of Guernsey, Jersey, and Isle of Man calling for the existence of economic substance for resident companies engaged in certain businesses and defining what that means, (ii) the denial of benefits incident to foreign earned income for a military contractor in Afghanistan who maintained a place of abode in the U.S., (iii) an increase in fees charged by the I.R.S. to issue residency certificates, (iv) the establishment of a working group to combat transnational tax crime through increased enforcement collaboration among tax authorities in several countries, and (v) changes to China’s residency rules and the sharing of taxpayer financial information under C.R.S.

September 20, 2017

The Economic Substance Doctrine: A U.S. Anti-Abuse Rule

September 20, 2017/ Ruchelman P.L.L.C.

While the O.E.C.D. and the European Commission have only recently discovered the “principal purpose” test as a tool to combat aggressive tax planning, U.S. case law has enforced an economic substance rule for over 85 years and that rule was codified in 2010. Fanny Karaman, Neha Rastogi, and Stanley C. Ruchelman explain the hurdles that must be achieved in order for a plan to have economic substance.

January 26, 2017

S.T.A.R.S. Transactions – Jury Is In, Foreign Tax Credit Disallowed

January 26, 2017/ Ruchelman P.L.L.C.

As a litigation strategy, a large corporation that is important to a community may decide that it is better to pay the tax and demand a jury trial in U.S. District Court as part of its claim for refund, rather than to defer payment while it argues the case before the Tax Court. The basic theory is that the jury will not be sympathetic towards the I.R.S. In a recent jury trial involving Wells Fargo, it found that the strategy did not work when the issue involved a tax shelter knows as a S.T.A.R.S. (structured trust advantaged repackaged securities) transaction. Rusudan Shervashidze and Galia Antebi explain.

July 15, 2015

S.T.A.R.S. Transactions – Interest Deduction Allowed but Foreign Tax Credit Disallowed

July 15, 2015/ Web Admin

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In a partial reversal of the I.R.S. position, a U.S. financial institution was allowed to deduct interest expense on borrowings that formed part of a S.T.A.R.S. transaction in Salem Financial, Inc. v. United States. While the Appeals Cout held that the taxpayer could not claim foreign tax credits for the U.K. taxes paid pursuant to the S.T.A.R.S. transaction, it allowed deductions for interest paid on a loan.

Branch Banking & Trust Corporation (“BB&T”), a North Carolina financial holding company, and Barclays Bank PLC (“Barclays”), a U.K. bank were the participants in a financial product transaction BB&T entered into a structured trust advantaged repackaged securities (“S.T.A.R.S.”) transaction with Barclays from August 2002 through April 2007. Generally, the economic benefit of a S.T.A.R.S. transaction is to increase yields on investments by affixing an interest expense deduction and a double dip of foreign tax credits to the total return of the investor. Barclays invented the S.T.A.R.S. transaction structure along with the international accounting firm based in the U.K., KPMG L.L.P.

May 15, 2015

U.K. Implements 25% “Google Tax” on Diverted Profits

May 15, 2015/ Web Admin

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The U.K. has implemented the controversial diverted profits tax on the profits of multinational companies that are “artificially diverted” from activity within the country. This 25% levy became effective on profits arising on or after April 1, 2015. At this point, it is unclear whether the outcome of the Parliamentary election on May 7 will impact the enforcement of the diverted profits tax, which was enacted without thorough examination by Parliament.

U.K. officials claim multinational corporations are manipulating the tax system and have imposed the 25% levy to prevent companies from avoiding a taxable presence in the U.K. This corporate diversions tax is aimed at entities that transfer profits to lower tax jurisdictions, away from the U.K. The diverted profits tax is being called the “Google tax” because it addresses the practices of well-known international entities such as Google Inc., Amazon.com Inc., and Starbucks Corp. that have used the U.K.’s permanent establishment and economic substance rules to craft tax advantages within the bounds of the law. Legislators have held hearings within the last year on how these three companies in particular have been able to generate billions of dollars in revenue in the U.K. but report little or no taxable profits.

The U.K. tax authority, Her Majesty’s Revenue and Customs (“H.M.R.C.”), introduced a draft of the diverted profits tax last fall and quickly implemented the legislation ahead of the May 7 election. There is great concern about the legislation’s complexity and that its hasty enactment will only result in future revisions, which will further complicate the matter. On the whole, the government is targeting transactions that it does not favor even though they are legal, and the tax itself is being criticized for undermining the Base Erosion and Profit Shifting project executed by the Organization for Economic Cooperation and Development.

November 15, 2014

Insights Vol. 1 No. 10: Updates & Other Tidbits

November 15, 2014/ Web Admin

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ISRAEL ANNOUNCES ADOPTION OF O.E.C.D.’S COMMON REPORTING STANDARD

Israel has announced that it will adopt the Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard (“C.R.S.”) issued by the O.E.C.D. in February 2013.

The C.R.S. establishes a standardized form that banks and other financial institutions would be required to use in gathering account and transaction information for submission to domestic tax authorities. The information would be provided to domestic authorities on an annual basis for automatic exchange with other participating jurisdictions. The C.R.S. will focus on accounts and transactions of residents of a specific country, regardless of nationality. The C.R.S. also contains the due diligence and reporting procedures to be followed by financial institutions based on a Model 1 F.A.T.C.A. intergovernmental agreement (“I.G.A.”).

At the conclusion of the October 28-29 O.E.C.D. Forum on Transparency and Exchange of Information for Tax Purposes, about 50 jurisdictions had signed the document. The U.S. was notably absent as a signatory to the agreement. In addition to the C.R.S., the signed agreement contains a model competent authority agreement for jurisdictions that would like to participate at a later stage.