Optimal Tax Structures

 

Home Efficient Wealth

Design Optimal Structures

Every individual has a different plan on how the wealth should be put to use but as a general rule, overall taxation of the investments should be as low as possible. We design an initial investment structure taking into account non-tax objectives (family succession, wealth protection, exibility, monitoring, philanthropic purposes, etc.), which we will discuss with you and your legal team to ultimately provide you with an optimal structure for your specific goals.

From a tax point of view, we usually differentiate between three different investment levels: your residence country, an intermediate investment location and the source country of investment.

Residence Country

There are many issues affecting the total tax burden of an HNWI from his / her global investments. Within the area of ongoing taxation the HNWI's home jurisdiction might favor a transparent investment vehicle to offer reduced rates for certain investment income. Such is the case for US investors. For investors residing in other jurisdictions (e.g. most European and Asian countries) a foundation in a nil tax jurisdiction or entity-type vehicle could lead to an optimal tax result in the home jurisdiction of the investor as it would defer taxation until distribution to the investor / beneficiaries as long as the legal vehicles features and the nature of the investment activities do not trigger a CFC (or look-through taxation) treatment in the HNWI home country. Additionally, entry and exit taxation arising from a transfer of the investment assets into and - possibly - out of the investment vehicle have to be considered at home country level. Another important structuring issue at home country level is the adequacy of the investment vehicle for home country inheritance tax or succession tax optimisation.

Investment Holding Location

An investment holding location is a location, where a legal investment vehicle is set-up and / or being managed, which holds either directly or via other investment holding locations the ultimate investment assets. While there are many favoraable locations, Singapore is a typical investment holding location. Singapore complies with most of the required features of an investment holding locations as it:

Has an extensive number of double tax treaties to reduce withholding tax and capital gains taxation in the investment assets' jurisdictions;

Offers foreign tax credit pooling between various foreign income types;

Exempts specific foreign-sourced investment income based either on source-rules or special incentives for the fund /financial service industry;

Exempts income of philanthropic and charitable trusts from tax:

In principle regards capital gains realised by investment vehicles as capital in nature or non-trading income and thus non-taxable and has additionally introduced a safe-harbour rule for capital gains from investments held over 24 months;

Imposes no withholding tax on outgoing dividends;

Offers transparency regimes for certain trusts (e.g. real estate investment trusts) to allow taxation at beneficiaries' level instead of trustee level.

Choosing the Appropriate Legal Entity

Legal vehicles are important for structuring private wealth for various purposes. They might either be the platform for the family of ce itself or hosting key family persons (as well as external management resources) to decide on investments or they are necessary to ensure continuity/succession planning (such as trusts and foundations), whereas companies might be interposed as intermediary holding companies or special purpose vehicles to separate investment types/ projects.

The investment vehicle should not become subject to an additional level of taxation. Therefore selecting the right mix of entities within a structure serves to obtain applicability of double taxation treaties thus reducing withholding taxes at source and mitigating capital gains tax. The choice of vehicle(s) should also not lead to look-through taxation (CFC) at the level of the original investor/settlor/beneficiary, and the activities within the interposed vehicles should not raise 'substance' concerns at the level of the source investment countries.

A further and most notable consideration in selecting the investment vehicle(s) is that the mix should accommodate commercial purposes. For example, the legal form of the family office may focus on joining the common objectives and decision making of its stakeholders, especially if the family is large. Whereas for long-term vehicles such as trusts and foundations, the exercise of control on the trust management is important, including possibilities to replace the management. A natural wish for privacy puts focus on mandatory reporting obligations associated with certain legal types as well as jurisdictions. Also the legal requirements limiting distribution of funds to beneficiaries/shareholders favour trusts over companies as companies require accounting profits to enable distribution of profits.

Limited liability partnerships (LLP) can be structured quite exibly to determine the distribution of income to partners and the mechanics of decision making. An Ineternational Business Company (IBC) is widely used as an intermediate business entity for efficient cash flows. Protecting all of this is achieved through architecting the right entity structures - Foundations, Trusts, Off Shore LLC's and IBC's for your needs.

A private limited company is widely used as an intermediate investment holding for underlying investments in light of its entitlement to use double tax treaties and be recognised as a Singapore resident if certain requirements are fulfilled.

A family investment holding company is a new concept to attract HINW individauls and family offices to be set-up in the form of a Private Limited Company but enjoy the same tax exemption treatment as an example for a Singapore individual with regard to investment income.

A registered business trust is a trust which is treated as a company for tax and residency purposes, but offers the possibility to distribute cash proceeds to the beneficiaries/unit holders based on the discretion of the trust managers without the requirement of an accounting profit.

A real estate investment trust enjoys tax transparency treatment for certain income provided that the proceeds from the investments are regularly cleared out to the unit holders.

Other special trust types for charitable and philanthropic purposes as well as foreign trusts, which are in principle not taxed.


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