Wealth & Estate Planning August 2014 Indian & International Perspectives © Copyright 2014 Nishith Desai Associates www.nishithdesai.com MUMBAI SILICON VALLEY BANGALORE SINGAPORE MUMBAI BKC NEW DELHI MUNICH © Nishith Desai Associates 2014 Dear Friends, India has witnessed a steady growth in its high net worth population as a consequence of increasing globalization not only by families and individuals in Tier I cities but also from Tier II and Tier III cities. Although economically the Indian HNI may be a mirror of his/her counterpart in the developed nations, culturally there appears to be a difference in approach. The Financial Times had reported in 2013 that Asian families in particular suffered from a cultural reluctance to discuss succession. The report stressed on the need for greater awareness for succession planning since a lot of wealth was locked up in family businesses which needed to be effectively devolved to the next generation. This observation certainly echoes in India where the majority of businesses today are family-run but most Indian businesses families do not have succession plans in place for personal and/or business wealth. After the liberalization of India, a new breed of mobile, highly-skilled, entrepreneurial high net-worth individuals has emerged. Changing social relationships now pose emerging issues such as inter-family relationships between people spread over multiple countries. Businesses have grown across jurisdictions at an astronomical pace but also faltered where accompanied by leadership crises. There are growing risks in a shrinking world where the legal systems of various countries increasingly overlap. Effective estate and wealth planning ensures that families retain control over their businesses and a smooth transition of leadership of businesses between generations of families. It balances the needs of businesses with the interests of family members. Effective planning of the wealth of high net-worth individuals can prevent long and expensive legal disputes between heirs based in multiple jurisdictions. Various structures provide different degrees of control over the purpose for which the wealth can be used and the manner in which it may be used. For instance, the setting up of a trust to manage wealth offers several advantages such as bypassing the probate process, giving heirs the benefit of property without losing control of it and creating a large pool of funds for making investments. Court systems, legal frameworks and tax laws do not always keep up with socio-economic aspirations and this gap poses challenges to managing the wealth of business families and high net-worth individuals. Future amendments to tax laws may spread the net of the wealth tax wider, which could achieve part of the objective behind levying an inheritance tax. The increase of such a tax could lead to increase of investments abroad in jurisdictions with more favourable tax laws. Laws are also changing to keep pace with new forms of assets such as intellectual property rights. With the growth of technology, intellectual property rights are becoming increasingly valuable and complex and also need to be devolved carefully to maximize their value for future generations. Some challenges that are usually encountered in estate and wealth planning include restrictions imposed by community specific laws, limits on transfer of wealth abroad, ensuring tax efficiency and flexibility for beneficiaries located in various jurisdictions and overcoming compliance issues. In the light of these complexities in estate and wealth planning, building governance models for management of family businesses and wealth of high net-worth individuals assumes great importance. Keeping in mind the above concerns, NDA’s Private Client practice is pleased to present this research publication. This publication, a compilation of select issues, aims to provide you legal and tax guidance on cross-border wealth and succession planning. I hope you find this publication useful. Please feel free to contact me ([email protected]) or my team ([email protected]) for feedback, queries and further information. Best wishes and warm regards, Nishith Desai © Nishith Desai Associates 2014 NDA Private Client Practice Our Approach At Nishith Desai Associates, we are mindful of the special relevance of personal wealth planning to each individual and the confidentiality or sensitivity concerns it can involve. We endeavor to act as trusted advisors to our international private clients, who primarily consist of high net worth individuals, global business families with residency/assets/family or obligations across countries, or the banks, trustees and other institutions representing such persons. We are typically called upon to assist with the accomplishment of a broad blend of objectives ranging from succession planning, asset protection, philanthropy, maintenance of dependents to other specialized individual, family and business related concerns. Wealth planning law in India is complex and multi-layered as it requires simultaneous consideration of various laws including community specific succession laws (which treat Hindus, Muslims, Christians and other religions differently for the purposes of testamentary as well as intestate succession), currency control regulations (which impose restrictions on the manner in which non-residents can own/transfer Indian property or Indian residents can plan their offshore wealth) and tax laws (which are constantly changing and broadening in scope). These, combined with conflict of law principles applicable to family members dispersed across countries, makes the structuring exercise complex and challenging. Our personalized solutions aim to provide options that are workable in the long term and satisfy the wishes of our clients while at the same time being administratively simple, cost effective and compliant with applicable laws. While we are only authorized to practice Indian law, our private client team comprises of professionals who are qualified in India, UK and the US and who have an understanding of foreign estate, trust and tax laws as well as conflict of laws issues. As a research based law firm, we also constantly update our capabilities through comparative research and analyses, which enable us to manage wealth planning projects spanning multiple jurisdictions and which may require the reconciliation of a personal wealth plan with applicable Indian and non- Indian laws. Scope of Services Our private client team provides structuring and advisory services to individuals, business families, trustees, banks and funds on cross border wealth management. Examples of previous instructions are: structuring of carried interest in relation to the use of hybrid entities such as US LLCs/ S-corps for investment holding; structuring for succession of IP assets; characterization of Hindu Undivided Families from a US trust law perspective or civil law private foundations for Indian succession law purposes. Primary Contacts Nishith Desai [email protected] Nishith Desai is the founder of the multi-skilled, research based international law firm and has over 40 years of experience in cross-border transactional and advisory practice. He is an international tax and corporate law expert, researcher, published author and lecturer in leading academic institutions around the world. He has advised extensively on cross-border tax and regulatory implications of wealth transfer and succession planning. © Nishith Desai Associates 2014 Provided upon request only Shreya Rao [email protected] Shreya Rao leads the Private Client practice at NDA and divides her time between Mumbai and Bangalore. She has extensive experience in advising on cross-border issues in private client law, particularly in relation to India- US matters, HNI incentive and investment structuring and cross-border business succession. She is a regular speaker at international conferences and was a Visiting Professor (income tax and international tax) at the National Law School, Bangalore from 2009-2012. She was awarded a Masters in Law by the Harvard Law School and her graduate law degree by the NALSAR University of Law, Hyderabad. Megha Ramani [email protected] Megha Ramani is a senior member of the Private Client practice at NDA, based in Mumbai. She is a qualified Solicitor, England & Wales (non-practicing) and trained at a Magic Circle firm in London prior to joining NDA. Megha continues to focus on cross-border India-UK issues. She has contributed to publications such as the International Comparative Guide to Private Client and the Legal 500 Tax Directors Handbook. She was awarded a Masters in Law by the Harvard Law School and her graduate law degree by the NALSAR University of Law, Hyderabad. Mahesh Kumar [email protected] Mahesh Kumar leads the Private Client practice in Asia and is based in Singapore. He advises clients in complex international tax litigation matters and also focuses on trusts and estates. He is a member of the Inter-Pacific Bar Association and is licensed to practice Indian law by the Attorney General of Singapore. He has written extensively in reputed Indian and international journals, newspapers, and has been a speaker at various international fora. He is a graduate of the NALSAR University of Law, Hyderabad. Rajesh Simhan [email protected] Rajesh Simhan leads the International Tax practice at NDA and is based in Mumbai. His practice areas include international taxation and tax litigation. Prior to joining Nishith Desai Associates, he has had extensive experience working with a Big 4 accounting firm. He was awarded an LL.M in Taxation from the Georgetown University Law Center, Washington D.C. and his graduate law degree from the National Law School of India University, Bangalore. Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning Nishith Desai Associates (NDA) is a research based international law firm with offices in Mumbai, Bangalore, Silicon Valley, Singapore, New Delhi, Munich. We specialize in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner. We focus on niche areas in which we provide significant value and are invariably involved in select highly complex, innovative transactions. Our key clients include marquee repeat Fortune 500 clientele. Core practice areas include International Tax, International Tax Litigation, Litigation & Dispute Resolution, Fund Formation, Fund Investments, Capital Markets, Employment and HR, Intellectual Property, Corporate & Securities Law, Competition Law, Mergers & Acquisitions, JVs & Restructuring, General Commercial Law and Succession and Estate Planning. Our specialized industry niches include financial services, IT and telecom, education, pharma and life sciences, media and entertainment, real estate and infrastructure. Nishith Desai Associates has been ranked as the Most Innovative Indian Law Firm (2014) and the Second Most Innovative Asia - Pacific Law Firm (2014) at the Innovative Lawyers Asia-Pacific Awards by the Financial Times - RSG Consulting. IFLR1000 has ranked Nishith Desai Associates in Tier 1 for Private Equity (2014). Chambers and Partners has ranked us as # 1 for Tax and Technology-Media-Telecom (2014). Legal 500 has ranked us in tier 1 for Investment Funds, Tax and Technology-Media-Telecom (TMT) practices (2011/2012/2013/2014). IBLJ (India Business Law Journal) has awarded Nishith Desai Associates for Private equity & venture capital, Structured finance & securitization, TMT and Taxation in 2014. IDEX Legal has recognized Nishith Desai as the Managing Partner of the Year (2014). Legal Era, a prestigious Legal Media Group has recognized Nishith Desai Associates as the Best Tax Law Firm of the Year (2013). Chambers & Partners has ranked us as # 1 for Tax, TMT and Private Equity (2013). For the third consecutive year, International Financial Law Review (a Euromoney publication) has recognized us as the Indian “Firm of the Year” (2012) for our Technology - Media - Telecom (TMT) practice. We have been named an ASIAN-MENA COUNSEL ‘IN-HOUSE COMMUNITY FIRM OF THE YEAR’ in India for Life Sciences practice (2012) and also for International Arbitration (2011). We have received honorable mentions in Asian MENA Counsel Magazine for Alternative Investment Funds, Antitrust/Competition, Corporate and M&A, TMT and being Most Responsive Domestic Firm (2012). We have been ranked as the best performing Indian law firm of the year by the RSG India Consulting in its client satisfaction report (2011). Chambers & Partners has ranked us # 1 for Tax, TMT and Real Estate – FDI (2011). We’ve received honorable mentions in Asian MENA Counsel Magazine for Alternative Investment Funds, International Arbitration, Real Estate and Taxation for the year 2010. We have been adjudged the winner of the Indian Law Firm of the Year 2010 for TMT by IFLR. We have won the prestigious “Asian-Counsel’s Socially Responsible Deals of the Year 2009” by Pacific Business Press, in addition to being Asian-Counsel Firm of the Year 2009 for the practice areas of Private Equity and Taxation in India. Indian Business Law Journal listed our Tax, PE & VC and Technology-Media-Telecom (TMT) practices in the India Law Firm Awards 2009. Legal 500 (Asia-Pacific) has also ranked us #1 in these practices for 2009-2010. We have been ranked the highest for ‘Quality’ in the Financial Times – RSG Consulting ranking of Indian law firms in 2009. The Tax Directors Handbook, 2009 lauded us for our constant and innovative out-of-the-box ideas. Other past recognitions include being named the Indian Law Firm of the Year 2000 and Asian Law Firm of the Year (Pro Bono) 2001 by the International Financial Law Review, a Euromoney publication. In an Asia survey by International Tax Review (September 2003), we were voted as a top-ranking law firm and recognized for our cross-border structuring work. Our research oriented approach has also led to the team members being recognized and felicitated for thought leadership. Consecutively for the fifth year in 2010, NDAites have won the global competition for dissertations at the International Bar Association. Nishith Desai, Founder of Nishith Desai Associates, has been voted ‘External Counsel of the Year 2009’ by Asian Counsel and Pacific Business Press and the ‘Most in Demand Practitioners’ by Chambers Asia 2009. He has also been ranked No. 28 in a global Top 50 “Gold List” by Tax Business, a UK-based journal for the international tax community. He is listed in the Lex Witness ‘Hall of fame: Top 50’ individuals who have helped shape the legal landscape of modern India. He is also the recipient of Prof. Yunus ‘Social Business Pioneer of India’ – 2010 award. We believe strongly in constant knowledge expansion and have developed dynamic Knowledge Management (‘KM’) and Continuing Education (‘CE’) programs, conducted both in-house and for select invitees. KM and CE programs cover key events, global and national trends as they unfold and examine case studies, debate and About NDA © Nishith Desai Associates 2014 Provided upon request only analyze emerging legal, regulatory and tax issues, serving as an effective forum for cross pollination of ideas. Our trust-based, non-hierarchical, democratically managed organization that leverages research and knowledge to deliver premium services, high value, and a unique employer proposition has now been developed into a global case study and published by John Wiley & Sons, USA in a feature titled ‘Management by Trust in a Democratic Enterprise: A Law Firm Shapes Organizational Behavior to Create Competitive Advantage’ in the September 2009 issue of Global Business and Organizational Excellence (GBOE). Disclaimer Contact This report is a copyright of Nishith Desai Associates. No reader should act on the basis of any statement contained herein without seeking professional advice. The authors and the firm expressly disclaim all and any liability to any person who has read this report, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this report. For any help or assistance please email us on [email protected] or visit us at www.nishithdesai.com Please see the last page of this paper for the most recent research papers by our experts. Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 1. INTRODUCTION 01 I. Residence and Domicile: India, USA and UK 01 2. SELECT ESTATE PLANNING TECHNIQUES 09 I. Indian Law on Wills & Probate 09 II. Trusts in India 14 III. Trusts in Singapore: An Overview 19 IV. Estate Planning Through Foundations in Switzerland and Liechtenstein 21 3. TAXATION ISSUES 23 I. Estate Duty in India: Re-introduction and Consequences 23 II. Gift Tax in India 24 III. Federal Estate Tax and Gift Tax in the US 26 IV. Inheritance Tax in the UK 28 4. CERTAIN SPECIFIC CONCERNS 30 I. Wealth Planning For Global Families 30 II. Intellectual Property and Succession Planning Under Indian Law 32 III. Foreign Accounts Tax Compliance Act (FATCA) with Special Reference to NRIs and Fund Managers 34 IV. Non-Profit Entities in the USA 37 V. Acquisition of Property in the UK: Impact of LRS and UK’s New Tax Regime for Immovable Property 41 Contents Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 1 I. Residence and Domicile: India, USA and UK A. Introduction In everyday usage, ‘residence’ and ‘domicile’ are often mistaken to mean the same thing. However, they are two separate connecting factors on the basis of which a jurisdiction exercises the authority to impose its laws on persons. A third connecting factor is citizenship which is a political concept and is linked to the immigration laws of a country. Eritrea and the US are the two countries who tax individuals on the basis of citizenship. In most countries, residence is relevant for the purposes of determining liability to income tax whereas domicile is relevant for the purposes of other taxes (such as estate duty or inheritance tax) and for non-tax purposes such as eligibility to inherit property. In very broad terms, residence refers to physical presence or stay of an individual within the territorial limits of a jurisdiction. In the context of non-natural persons, residence is usually linked to either place of establishment/incorporation or of control and management, or both. Laws of most jurisdictions specify a minimum number of days of presence which, once met, subject the individual to that jurisdiction’s laws. Those who do not meet that day-count test are either completely out of the purview of those laws or subject to a limited extent. Domicile on the other hand is a concept that incorporates both physical stay and mental element of intention to stay within the territorial limits of a jurisdiction. To that extent, it is more difficult to prove compared to residence. Determination of domicile involves wide ranging factors such as lifestyle, tastes, habits etc. which must all indicate where the relevant individual intended to stay long enough such that it would justify imposing the laws of a particular jurisdiction on him/her. Here, we discuss ‘residence’ under the laws of India, the United States1 (“US”) and the United Kingdom (“UK”). The next section will discuss ‘domicile’ for the above three countries. B. Residence in India In India, the basis for imposing Indian tax and exchange control regulations is the residence of an individual as opposed to domicile or citizenship. Domicile is important in cases of succession, whether testamentary (i.e. under a will) or intestate (i.e. where the person dies without leaving a will). i. Residence for Tax Purposes Under the Income Tax Act, 1961 (“ITA”), persons who meet the test of residence in India are taxed on their worldwide income whereas non-residents are taxed only on income that is sourced in India. These rules vary depending on the entity involved and different residence criteria apply to individuals, companies and unincorporated entities. a. Individuals Resident: Section 6(1) of the ITA which provides for Indian tax residency rules in relation to individuals states that an individual is considered a tax resident of India for a Financial Year (“FY”) in two cases: i. If he spends an aggregate of 182 days or more in India during the relevant FY; or ii. If he spends an aggregate of 60 days or more in India during the relevant FY and an aggregate of 365 days or more during the four FYs preceding the relevant FY. However, as per Explanations (a) and (b) to Section 6(1), the 60 day period prescribed in (ii) above would be extended to a 182 day period in cases where an individual is a Non-Resident Indian (“NRI”) or citizen of India who comes to India for recurring visits, but not for permanent stay. This extension of period is only applicable: i. as regards any citizen of India who leaves India for employment or as a crew member of an India ship; 1. Introduction 1. We are qualified to advise on Indian law only. Any statement with respect to laws of other jurisdiction should be confirmed by the local counsels of the respective jurisdictions and should not be considered as legal advice. © Nishith Desai Associates 2014 Provided upon request only 2 ii. as regards any person who was himself/herself born in India or his/her parents or grandparents were born in India2, who lives outside India and comes on a visit to India. An Indian resident individual would be taxed on income at progressive tax rates of either 10%, 20% or 30% depending on the relevant slab of income under which he/she will fall. An Indian resident is taxable on his worldwide income, i.e., income: (i) which is received in India; (ii) which accrues or arises in or outside India; and (iii) which is deemed under the ITA to be received or to accrue or arise in India. Resident but not ordinarily resident: As per Section 6(6)(a) of the ITA, an individual is considered ‘resident but not ordinarily resident’ in India if he has been a non-resident for 9 out of 10 FYs preceding the relevant FY or if he has spent an aggregate of 729 days or less in India during the preceding 7 FYs. As per proviso to Section 5(1) of the ITA, a person who is ‘not ordinarily resident’ is liable to tax as a resident with the exception that income received or accrued outside India that is taxable is limited to income from a business controlled or set up in India. Non-resident: In every other case, an individual would be considered a non-resident for Indian tax purposes. A non-resident is taxed only on income that is sourced in India, i.e., income received, accrued or arisen in India and income which is deemed under the ITA to be received, to accrue or arise in India. b. Companies Section 6(3) of the ITA provides that a company is to be considered a tax resident of India in one of two situations: i. a company that is formed and registered under the Companies Act, 1956; or ii. a company whose control and management are wholly situated within India for the concerned FY. Thus, if an offshore company is wholly controlled and managed in India, there would be a risk that it is classified as an Indian tax resident, taxable on worldwide income. However, this risk should be mitigated if a part of the control and management is conducted outside India. The ITA does not specify a minimum threshold of what would constitute ‘control and management partly outside India’. However, it should also be noted that the proposed Direct Taxes Code Bill, 2010 (“DTC”), proposed to be enacted in the next couple of years, prescribes a ‘place of effective management’ test for tax residence of a company. In such a situation, the company would be considered tax resident of India if all or majority of the commercial and strategic decisions are taken in India. c. Unincorporated Entities As per Sections 6(2) and 6(4) of the ITA, Hindu Undivided Families (“HUFs”), partnership firms, any association of persons or other persons as under the ITA would be considered Indian tax resident if even a part of their control and management is situated within India. This will also apply to trusts. Therefore in a situation where an offshore trust is even partly managed from within India, there is the risk of it being considered resident in India. Thus, in respect of all entities other than companies, even a minor element of management or control could lead to them being considered Indian tax residents. ii. Residence for Regulatory Purposes The Foreign Exchange Management Act, 1999 (FEMA) regulates inbound and outbound transactions involving movement of foreign exchange into and out of India. FEMA extends to the whole of India and applies to all branches, offices and agencies outside India owned or controlled by a person who is a resident of India and also to any contravention committed outside India by any person to whom this Act applies. The expression, ‘person resident in India’ is defined under Section 2(v) of FEMA as follows: i. a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include - a) a person who has gone out of India or who stays outside India, in either case- ■■ for or on taking up employment outside India, or ■■ for carrying on outside India a business or vocation outside India, or 2. S. 115C of the ITA defines a ‘non-resident Indian’ to mean an individual, being a citizen of India or a person of Indian origin who is not a ‘resident’. Further, it clarifies that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. Introduction Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 3 ■■ for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; b) a person who has come to or stays in India, in either case, otherwise than- ■■ for or on taking up employment in India, or ■■ for carrying on in India a business or vocation in India, or ■■ for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; ii. any person or body corporate registered or incorporated in India, iii. an office, branch or agency in India owned or controlled by a person resident outside India, iv. an office, branch or agency outside India owned or controlled by a person resident in India.” Thus, an individual is considered a resident of India under the FEMA if he has been residing in India for more than 182 days in the course of the preceding financial year (April 1 - March 31). However, in addition to this primary test, it is also necessary to consider the intention of such person to stay in India for an uncertain period. As clarified by the Government in a Press Release, dated February 1, 2009: “To be treated as a person resident in India under FEMA, a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of preceding financial year) but also his purpose of stay as well as the type of Indian visa granted to him to clearly indicate the intention to stay in India for an uncertain period. In this regard, to be eligible, the intention to stay has to be unambiguously established with supporting documentation including visa.” From a reading of the scheme of FEMA including its objects and purposes, it is possible to take the view that even if an individual is in India for a few hours, it should be treated as a day for the purpose of determining whether the 182 day period threshold is satisfied. However, as explained above it will be necessary to also establish that the individual intends to stay in India for an uncertain period. iii. Interplay between ITA and FEMA The difference between the residence tests for tax and for exchange control purposes is that for tax, the duration of stay matters, not purpose. However, for exchange control purposes, both duration and purpose of stay matter. So, it may happen that an individual may be resident in India for tax purposes but not for exchange control purposes and vice-versa. C. Residence in the United States1 i. Residence for Tax Purposes3 a. Individuals Any person who is not a US citizen or a US national is considered an alien as per US law. An alien can be of two types for tax purposes: resident alien and non-resident alien. All resident aliens have the same tax treatment as US citizens and are taxed on their worldwide income. Any person who is not a US citizen and not a resident alien is a non-resident alien and is taxed only on US sourced income. An individual is considered a resident alien if he/she meets one of the following two tests for the calendar year: (i) the green card test; (ii) the substantial presence test; or (iii) the first year choice 1) The Green Card Test ‘Green card’ holder is the term used in everyday language to mean a person who is a lawful ‘permanent resident’ of the US. If an individual was, at any time during the calendar year, a lawful permanent resident of the United States according to immigration laws, and this status has not been rescinded by him/her or revoked by the administration or by a Court, he/she is considered to have met the green card test. A green card can be obtained through family, job, refugee status etc. Anyone who wishes to become an immigrant based on an employment or a job offer may apply for permanent residence or green card, as per availability, according to the following employment based preferences: 3. Overview of US tax law has been sourced and summarized from information publicly available on the website of the US IRS: http://www.irs.gov/ Individuals/International-Taxpayers/Introduction-to-Residency-Under-U.S.-Tax-Law © Nishith Desai Associates 2014 Provided upon request only 4 2) The Substantial Presence Test To meet this test, an individual must have been physically present in the United States for: i. at least 31 days during the current year, and ii. 183 days during the 3 year period that includes the current year and the 2 years immediately before. The ‘183 day requirement’ is fulfilled by counting the following days: i. All days of physical presence during the year in question; ii. One-third of the days of physical presence during the previous year; and iii. One-sixth of the days of physical presence during the year prior to the previous year. Certain days and types of visit do not qualify to be counted for the purpose of this test: i. Days the individual travels from Canada or Mexico to the US, if such travel occurs on more than 75% of working days a year; ii. Days the individual is in the US for less than 24 hours, while in transit; iii. Days spent in the US as a crew member of a foreign vessel in transport between the US and a foreign country, as long as the individual does not engage in any trade or business in the United States on those days; iv. Days spent in the US because of a medical condition or problem that prevented the individual from leaving the US on the planned date; and v. Days for which the individual is an exempt individual. An exempt individual refers to: ■■ An individual temporarily present in the United States as a foreign government-related individual; ■■ A teacher or trainee temporarily present in the United States with a J or Q visa who substantially complies with the requirements of the visa; ■■ A student temporarily present in the United States with an F, J, M, or Q visa who substantially complies with the requirements of the visa; or ■■ A professional athlete temporarily present to compete in a charitable sports event. The substantial presence test can be disregarded if the individual is a tax resident of another country and has a closer connection to that other country during such year. 3) The First Year Choice Test If an individual does not meet either the green card test or the substantial presence test for 2 years preceding the current FY4, but he meets the substantial presence test for the present FY, he may choose to be treated as a US resident for part of the previous year. To make this choice, he must: i. Have been present in the US for at least 31 days in a row in the preceding year, and ii. Have been present in the US for at least 75% of the number of days beginning with the first day of the 31-day period and ending with the last day of the preceding year.5 The exceptions to the day count as contained in the substantial presence test would be applicable for the first-year choice test as well while counting days. B. Non-Natural Persons There is no concept of ascribing artificial residence to entities in the US based on control and management. As far as corporations and partnerships are 4. And if no similar choice was made for the second preceding year. 5. For purposes of this 75% requirement, one may treat up to 5 days of absence from the United States as days of presence in the United States. Order of Preference Category3 First Priority Workers, including aliens with extraordinary abilities, outstanding professors and researchers, and certain multinational executives and managers Second Members of professions holding an advanced degree or persons of exceptional ability (including individuals seeking a National Interest Waiver) Third Skilled Workers, professionals and other qualified workers Fourth Certain special immigrants including those in religious vocations Fifth Employment creation immigrants (investors or entrepreneurs) Introduction Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 5 concerned, in order for them to be considered domestic entities, they must be organized in the US or under US laws or any state within.6 However, specific definitions have been ascribed to the terms ‘foreign estate’ and ‘foreign trust’ and any estate/trust that does not fall within these definitions would be considered a domestic estate/trust in the US. A foreign estate is defined under the Internal Revenue Code (“IRC”) as an estate, the income of which is: i. From sources outside the US; ii. Not effectively connected to the conduct of a trade of business in the US; iii. Not includible within gross total income as computed under the IRC. A foreign trust is defined as all trusts that do not fall within the definition of ‘US Person’ as under the IRC. A trust is considered a US Person only if: i. A US Court has primary supervision over the administration of the trust; ii. US person(s) have the authority to control all substantial decisions in relation to the trust. In 1997, owing to the failure of previous methods used for classification of unincorporated entities, ‘check-the-box regulations’ were introduced as part of the US Treasury Regulations. The ‘check-thebox’ system is a simple and innovative system by which an unincorporated business entity, such as a partnership, limited partnership or an LLP, is referred to as an ‘eligible entity’. The regulations also list out certain foreign-incorporated entities that are deemed to be corporations for US tax purposes.7 Such entities are automatically considered as ‘not eligible’. Any eligible entity can elect to be taxed as a corporation or as a partnership for tax purposes. Therefore, LLCs or LLPs became attractive business vehicles for investors since they gave them both limited liability and pass-through status on election. Once such an entity elects to be treated as a pass-through entity, several substance requirements are to be fulfilled with regard to allocation of income to partners.8 D. Residence in the United Kingdom1 i. Residence for Tax Purposes9 a. Individuals Tax residence in the UK is different from residence as per immigration laws and depends on the satisfaction of certain conditions. Up to 5 April 2013, the concept of a person being ‘ordinarily resident in the UK’ existed in UK tax law. However, from 6 April 2013, the new ‘Statutory Residence Test’ has been added to UK tax law by which the concept of ordinary residence has largely been abolished. As per the present regime, there are automatic tests provided for both establishing tax residence in the UK and for being excluded from residency for tax purposes. There are three automatic tests by which a person is automatically considered to be a ‘non-resident’ for the relevant fiscal year. These are as follows: i. If one is a resident in the UK for one or more of the three tax years preceding the relevant FY, and one spends fewer than 16 days in the UK in the relevant FY10; or ii. If one were resident in the UK for none of the three tax years preceding the relevant fiscal year year, and one spends fewer than 46 days in the UK in the relevant FY; or iii. If one works full-time overseas over the tax year, without significant breaks during the relevant FY, and11 : ■■ one spends fewer than 91 days in the UK in the relevant FY; the number of days in the relevant FY on which one works for more than three hours in the UK is less than 31. If the conditions mentioned in any of the above 3 automatic tests are met, then the person is automatically considered a non-resident for tax purposes. However, if none of these tests are met, there are 3 automatic residency tests that need to be 6. Including the District of Columbia. 7. See Treasury Regulation Section 301.7701-2(a). 8. The ‘substantial economic effect’ rules are found in Treasury Regulation Section 1.704-1. 9. Overview of UK tax law has been sourced and summarized from information publicly available on the website of HMRC. See the HMRC Guidance note for the ‘Statutory Residence Test’, available at: http://www.hmrc.gov.uk/international/rdr3.pdf; HMRC guidance on Company residence, available at: http://www.hmrc.gov.uk/manuals/intmanual/INTM120030.htm 10. This test does not apply if an individual dies in the relevant fiscal year. 11. This test will not apply if one is involved in a relevant job on board a ship, aircraft or vehicle and if at least six of the cross-border business trips taken by one being/end or begin and end in the UK. © Nishith Desai Associates 2014 Provided upon request only 6 looked at to determine whether the person would be considered a tax resident. These are as follows: i. If one spends 183 days or more in the UK in relevant FY; ii. If one has a home in the UK for a consecutive period of 91 days (out of which 30 days are in the relevant FY) and one is present in this home for 30 days or more in the relevant FY and has no overseas home where he spends over 30 days in the relevant FY; iii. If one works full-time in the UK for any period of 365 days, with no significant break and: ■■ all or part of that 365-day period falls within the relevant FY; ■■ more than 75% of the total number of days in the 365-day period when one does more than three hours of work are days spent in the UK doing such work; and 12. If such place is the home of one’s parents/grandparents/brother/sister/child or grandchild, the requirement is that 16 nights or more must be spent there. Days spent in the UK (present at midnight) Number of UK ties required 16-45 At least 4 46-90 At least 3 91-120 At least 2 >120 At least 1 However, if one has not been a tax resident for any of the preceding three years, the number of UK ties required are as follows: Days spent in the UK (present at midnight) Number of UK ties required 46-90 At least 4 91-120 At least 3 >120 At least 2 One is said to have a ‘UK Tie’ if one has any one of the following: i. a family tie i.e. husband/wife/partner/child in the UK; ii. an accommodation tie i.e. a place to live in the UK that is available for a continuous period during the relevant FY and you spend one or more night there during the relevant FY12; iii. a work tie i.e. if you work in the UK for 3 hours or more a day at least 40 days in the relevant FY; iv. a 90 day tie i.e. if one spends 90 days in the UK for either or both of the previous two FYs; v. a country tie i.e. if the country in which one was present most number of times in the FY at midnight was the UK. Apart from the above, there are other tests involving return to the UK for temporary residence which may create certain tax implications, although it does not create tax residency as such. b. Non-Natural Persons A resident company in the UK would be subject to corporation tax on the whole of its worldwide income, while non-resident companies are subject to tax in the UK only if they conduct business in the UK through a permanent establishment. A company is said to be resident of the UK if: i. It is incorporated in the UK (except in cases where such company has migrated with special consent of the Treasury); ii. The place of central management and control of the business is in the UK. However, if a company is tax resident in the UK under these tests, but is also considered resident of another country under a tax treaty, the HMRC will respect the tie-breaker rule provided for in the tax treaty. As far as classification of other entities is concerned, every other entity such as a trust, partnership etc. is considered fiscally transparent for UK tax purposes. Introduction Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 7 Her Majesty’s Revenue and Customs (“HMRC”) has released a list of foreign entities and has provided clarification as to their classification.13 If the foreign entity does not fall within this list, the six tests laid down by the Court of Appeal in Memec PLC v. CIR14 become applicable. Any entity that: i. issues share capital; ii. is the recipient of profits/gains; iii. has legal existence; iv. carries on business; v. is responsible for its own debts; and vi. beneficially owns its assets; Is fiscally opaque, falling under the definition of ‘company’ for UK tax purposes. As laid down in Swift v. HMRC 15, the tests are still applicable and if the entity (a US LLC in this case) hasn’t issued share capital and if the profits belong to the members, it is considered fiscally transparent and the profits are taxed in the hands of their hands. Thus, the first two conditions are considered paramount for this determination. Guidelines for classification of an entity as transparent or opaque have been provided by the HMRC subsequent to Memec.16 E. Domicile in India Indian law generally follows English common law principles on issues of conflict of laws. Domicile usually is determined by the place of birth of individuals; and may subsequently be changed by a conscious act of the individual. Indian law lays down a specific test for “domicile of origin”, and domicile of origin may not necessarily be the same as the place of birth. Sections 6 to 18 of the Indian Succession Act, 1925 lay down some general principles as to domicile. Section 7 provides that the “domicile of origin” of every legitimate child is the country where the father was domiciled at the time of birth of the individual. Section 9 provides that the domicile of origin prevails until a new domicile is acquired. Section 10 provides that a new domicile is acquired by “taking up... fixed habitation” in a country other than the domicile of origin. “Fixed habitation” in this context does not mean merely a fixed place of residence. The intention to acquire a new domicile, and the intention of residing in that fixed habitation permanently (and not merely by way of employment etc.) is also relevant. In Central Bank v. Ram Narain17, the Hon’ble Supreme Court of India held that the domicile of origin adheres to an individual even if the individual leaves the country with the intention of never returning till the person acquires domicile elsewhere. In Yogesh Bharadwaj v. State of Uttar Pradesh18, the Court held that domicile of origin is not easily shaken off: domicile of origin may be transmitted through several generations even if no member of the succeeding generation has ever resided in the country of origin. Unless a definite intention to permanently reside elsewhere is demonstrated (and mere factual residence would not be sufficient for this purpose), the domicile of origin continues. One could thus say that there is a strong presumption that the domicile of origin continues to be the current domicile of an individual; unless it is clearly shown that the individual has given up the domicile by residing abroad with the intention of permanently settling abroad and with the intention of never returning. Whether such a new domicile (domicile of choice) is acquired or not is a mixed question of law and fact. The burden of proof of establishing that a person has acquired a domicile of choice (giving up the domicile of origin) is on the person who asserts that a domicile of choice has been acquired.19 Domicile of choice is a combination of residence and intention. The intention must be to “reside permanently” or for an unlimited time. In determining such intentions, particularly when one is concerned with the domicile of a deceased person, “it must be ascertained whether at some period in his life, (the deceased) had formed and retained a fixed and settled intention of residence in a given country. One has to consider the tastes, habit, conduct, actions, ambition, health, hopes and projects of a person, because they are all considered to be keys to his intention to make a permanent home in a place...”.20 13. Available at: http://www.hmrc.gov.uk/manuals/intmanual/INTM180030.htm 14. 71 TC 77. 15. (2010) UK FTT00399. 16. Available at: http://www.hmrc.gov.uk/manuals/intmanual/intm180010.htm 17. AIR 1955 SC 36 18. AIR 1991 SC 356 19. Kedar Pandey v. Narain Sinha, AIR 1966 SC 10. 20. Sankaran Govindan v. Lakshmi Bharathi, AIR 1974 SC 1764 © Nishith Desai Associates 2014 Provided upon request only 8 Thus, the first step is to ascertain the domicile of origin by the rules in the Indian Succession Act, 1925. The second step is to determine whether such domicile of origin is overriden by a domicile of choice. There is a strong presumption in favour of the domicile of origin. For establishing domicile of choice, evidence is required of residence coupled with an intention to reside permanently. The mere fact that there is a business established in the country does not establish the necessary intention of permanently residing. The fact that there are family or economic ties to persons or properties in the country of origin may strengthen the presumption in favour of origin, and would militate against an establishment of a domicile of choice outside. However, the concept of domicile is hardly relevant for tax law purposes as a ‘residence’ based test is applicable for residence under the ITA and India does not impose estate or gift taxes. However, since the Government has recently proposed the reintroduction of estate duty in India, the concept of ‘domicile’ based on the above principles would be of relevance. F. Domicile in the United States1 Although residence for income tax purposes in the US works on the ‘resident alien’ criteria depending on time spent in the US, residence for transfer taxes such as federal estate and gift taxes is based on ‘domicile’. A person is considered domiciled in the US for the purpose of federal estate and gift taxes if he is living in the US and shows no active intention to leave the US. The concept of domicile depends on the facts and circumstances in each case. Some of the important factors that have been considered by the Internal Revenue Service and Courts in the US are: i. Statements made by the person through legal documents such as tax returns, testamentary documents etc.21 ii. Time-spent in the US as compared to time-spent abroad and frequency of travel22; iii. Place where business/professional links are closer23; iv. Location of personal property24; v. Place where personal relations are present.25 G. Domicile in the United Kingdom1 The concept of ‘domicile’ is significant from both an income tax and an inheritance tax perspective. If a person is resident in the UK and is domiciled in the UK, then he/she is taxed on the ‘arising basis’. This means he is taxed on both UK and foreign sourced income and capital gains. If one is considered a resident of the UK and is not domiciled in the UK and has foreign income and/or gains then he is taxed on UK sourced income and capital gains, but has a choice to pay foreign sourced income and capital gains on ‘remittance basis’ i.e. when money is brought back to the UK or on all of his/her worldwide income. Liability to inheritance tax in the UK also depends on domicile status at the time of transmission. The different types of ‘domicile’ that are provided for in the context of inheritance tax are: i. Domicile of origin i.e. affinity to location acquired from one’s father at birth; ii. Domicile of dependency i.e. affinity to location owing to domicile of the person who one is legally dependent on; iii. Domicile of choice i.e. affinity to location if one settles in a country and shows intention to live there permanently/indefinitely. For inheritance tax purposes, there is also a concept of ‘deemed domicile’ where one is deemed to be domiciled in the UK at the time of transmission if: i. One was domiciled in the UK within the three years immediately preceding the transmission, or ii. One was tax resident in the UK in at least 17 out of the 20 FYs ending with the year of transmission The determination of ‘domicile’ is very subjective and depends on the facts and circumstances of each case. The HMRC has provided that all facts relevant to an individual’s background, lifestyle and habits shall be examined on a case by case basis for the determination of domicile. 21. Fokker Est. v. Commissioner., 10 T.C. 1225 (1948). 22. Paquette Est. v. Commissioner, T.C. Memo. 1983-571. 23. Supra, Note 6. 24. Farmers’ Loan & Trust Co. v. US, 157 U.S. 429 (1895). 25. Nienhuys Est. v. Commissioner, 17 T.C. 1149 (1952). Introduction Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 9 I. Indian Law on Wills & Probate If an individual desires to leave his property to certain persons / relations, he can do so by means of a will. A will gives effect to the wishes of the individual on his death, once the will is proved in a court of law in accordance with law. If a person dies without leaving a will (i.e. intestate), this triggers rules under the laws of intestate succession under which the deceased’s properties pass to relations specified under the laws. However, these default rules will not apply26 with respect to the property bequeathed under a valid will. A will has been defined under the Indian Succession Act, 1925 (ISA) as “the legal declaration of the intention of the testator, with respect to his property, which he desires to be carried into effect after his death.” In other words, a will or a Testament means a document made by a person whereby he disposes of his property (such individual is called a testator), but the disposal comes into effect only after his death. Persons to whom property is bequeathed under a will are called legatees. In India, the law governing substantive rights in relation to wills is tied to the religion of the individual. Therefore, the respective personal law will apply based on the religion of the testator. Personal laws may be wholly codified (i.e. enacted into statutory law) or partly codified and partly customary. However, for wills made by Christians, Parsis, persons married under the Special Marriage Act, 1954 or under the Foreign Marriage Act, 1969, the provisions of the Indian Succession Act, 1925 will apply. Testamentary succession in respect of moveable properties is governed by the law of the domicile of the owner while succession to immoveable properties is governed by the law where the immovable property is situated. Procedural aspects (such as probate) are governed by provisions of the Indian Succession Act, 1925 (with some exceptions in case of Muslims). We discuss below certain threshold considerations for drafting a will followed by the process governing probate and letters of administration. A. Who can make a Will? Every individual who is major, of sound mind and with free consent is capable of making a will. Under the Indian Majority Act, 1875 majority is attained at the age of 18 years (21 years, if a guardian is appointed by the Court). Under Muslim personal law, majority is attained at the age of 15 years but the provisions of the Indian Majority Act will apply for the purpose of legal capacity to make a will. Sound mind refers to such a mind and memory as would enable a person to understand the elements of which the will is composed and the disposition of his property in simple forms.27 Courts have considered factors such as history of mental illness, testimony of medical witness, relations with family members, state of sobriety etc. in determining whether a person could be said to be of sound mind. An ordinarily insane person can make a will during an interval in which he is of sound mind. A will made with fraud, coercion or importunity is void. B. Who can Inherit Property under a Will? Under Muslim personal law, any person who is capable of holding property may be made a legatee. A bequest may be made for the benefit of an institution or for a charitable object. A bequest in favour of an unborn person is void but if the child is born within six months (Sunni law) or ten months (Shia law) of the date of making the will, then the bequest is valid. For non-Muslim testators, a will can be made in favour of a person or a class of persons. It cannot be made in favour of an unborn (i.e. not born at the date of testator’s death), subject to certain exceptions. A bequest in which the vesting of the property is delayed beyond the lifetime of one or more persons is not valid. However, charitable bequests are an exception to this rule. C. What Property May be Disposed off? A Hindu may dispose of by will or other testamentary disposition any property (including his share in undivided coparcenary property), which 2. Select Estate Planning Techniques 26. An exception to this principle is forced heirship. Forced heirship refers to laws which specify a share of property that mandatorily must pass on the deceased’s heirs and cannot be disposed by free will of the individual. 27. ‘Banks v. Goodfellow 180 LR 5 QB 549’, in Subramani & Kannan, The Indian Succession Act (Lexisnexis Butterworths, New Delhi) 9th ed, 1995. © Nishith Desai Associates 2014 Provided upon request only 10 is capable of being disposed of by him. Muslim law has forced heirship rules under which Muslims are permitted to dispose only one-third of their estate under a will. However, more than one-third may be bequeathed if all heirs agree to such disposal either before the testator’s death (under Shia law) or after the testator’s death (under Sunni and Shia law). Sharia-compliant trusts may be used to sidestep the limitation on testamentary disposition unless the settlement is made in anticipation of death. India does not have forced heirship rules except under customary Muslim law and under Goan community law. Regardless of the religion of the deceased, the Portuguese Civil Code of 1860 applies to residents of Goa, which provides for forced heirship and community property. 50% of the intestate’s estate devolves to the spouse automatically on death while the other 50% devolve upon legal heirs. The rule of forced heirship in the Portuguese Civil Code is as follows: (i) Spouse only (one-half of estate); (ii) descendants and spouse (two-thirds); (iii) descendants only (one-half or two-thirds, depending on number of descendants), (iv) ascendants and spouse (two-thirds); (v) parents only (one-half); and (vi) other ascendants only (one-third). The remainder is freely disposable. D. What are the Formalities for Making a Will? Formalities for making a will depend on the religion of the testator. Wills made by persons of all religions including those who marry under the Special Marriage Act, 1954 (except Muslims who marry under customary law) must meet the conditions below: ■■ The will must be in writing made by a person who is a major, of sound mind and with free consent; ■■ The will must be signed by the testator or by some other person in the testator’s presence and at his direction; ■■ The will must be attested by two or more persons; ■■ The document must be a declaration of intent of the testator with respect to his property; ■■ The document must specify that his intent should be carried out after the testator’s death; ■■ There must be a disposition of property under the document. The will should clearly set out the properties intended to be transferred and should also set out that the document has been executed without coercion or undue influence. Case law has held that where one of the natural heirs is to be disinherited, the testator must set out clear reasons as to why the testator wishes to disinherit such individual. A will must be dated; otherwise proof of the day on which the will was executed is to be given at the time when the petition for probate is filed. Registration of a will is optional and no adverse inference can be drawn against the will in case of non-registration. Registration of a will is optional under the provisions of Indian Registration Act and no adverse inference can be drawn against the will in case of nonregistration. 28 E. Procedural Aspects When a person dies, there must be somebody to deal with / administer the estate of the deceased, e.g. sell property, collect debts, repay debts, close bank accounts etc. Estate and succession laws provide for administrative procedures so that actions taken in relation to the matters of an individual after his death are legally effective. Legal systems broadly divide estate administration procedures into two situations: i. Where a person has died leaving a will; and ii. Where a person has died without leaving a will, i.e. intestate. A person named in the will to administer the estate is called an executor(s). An executor derives the authority to act from the will but this authority must be confirmed by a legal procedure called probate which establishes the genuineness of the will. Where a person has died intestate, the court (on an application by an interested party) appoints a person called the administrator. An administrator is also appointed (upon application) where the will is invalid or an executor is not named in the will or the executor is unable or unwilling to act. Unlike an executor, an administrator’s authority to administer the estate is both conferred by and confirmed under the court-issued document called Letters of Administration (LoA). Executors or administrators are called personal representatives of the deceased. A third document important for estate administration is called the Succession Certificate which has limited application. Approximately it takes about 8-10 months to 28. MSP Rajesh v. MSP Raja (1994) 1 Mad LJ 216. Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 11 obtain a grant of probate from the court if it is uncontested or between 6-9 years if it is contested. The time limit also depends on whether the matter is before the district court or the High Court. The process for obtaining an LoA or a Succession Certificate is estimated to take between 6-9 months if it is uncontested. If it is contested, the number and location of other parties will also have to be considered. The process may then extend to between 2 to 5 years (or even more). F. Probate Probate is mandatory where the testator is a Hindu, Sikh, Jain, Buddhist or Parsi and the will is: (i) executed in certain specified territories; or (ii) is executed outside those territories but relates to immoveable property located within such territories. These territories are the cities of Calcutta, Chennai and Mumbai. Probate is not mandatory where the testator is a Muslim or Indian Christian even if conditions (i) and (ii) above are satisfied. Probate is essential because no right as executor or legatee can be established in any court unless the relevant court has granted probate of the will under which the right is claimed.29 However, a person who sets up a will which does not mandatorily have to be probated (as per the conditions above) can establish his right without obtaining a probate. In such a case, obtaining of probate is optional. But if a person applies for a grant of probate, then the court must determine the genuineness of the will. It cannot refuse to grant probate only on the ground that the will does not fall within the categories of wills that require to be mandatorily probated.30 G. To whom can a Probate be Granted? Probate can only be granted to an executor appointed by will either expressly or by implication. When there is more than one executor, probate must be granted to all those persons who have applied, unless those who do not apply renounce their right as an executor. Probate will not be granted to minors, persons of unsound mind, or to any association of individuals unless it is a company, which satisfies the rules prescribed by the State Government to be an executor. To obtain a grant of probate, the following procedure is prescribed but there may be some variations depending on the rules of the particular court which has jurisdiction over the matter. H. Procedure to Apply for a Probate An application/petition for probate must be filed in court along with the original will in question. The application should be made before the district judge (or High Court depending on the property value and also depending on whether the High Court has original jurisdiction for testamentary matters) in whose jurisdiction the testator at the time of his death had fixed abode or had some property situated. The application should contain the following facts: ■■ The time of the testator’s death; ■■ a declaration that the will attached is the last will and testament; ■■ a statement that the will was duly executed, ■■ the value of assets which are likely to be inherited; ■■ Title deeds pertaining to the immovable property mentioned in the will, if any. ■■ Documents pertaining to movable property in the will, if any; and ■■ a statement that the executor making the application is named in the will. On receipt of the application, the court issues notices to the next of kin of the deceased to file their objections, if any, to the grant of probate. A general public notice is also given in a newspaper. The executor is thereafter asked to establish the (a) proof of death of the testator; (b) proof that the will has been validly executed by the testator; and (c) proof that the will is the last will and testament of the deceased. Proof of death is usually shown by submission of original death certificate. In order to assess whether the will has been validly executed and is a genuine document, it must be shown that that the will was signed by the testator and that he had put his signatures to the testament of his own free will; that he was at the relevant time in a sound disposing state of mind and understood the nature and effect of the dispositions and that the testator had signed it in the presence of two witnesses who attested it in his presence and in the presence of each other.31 29. Bhaiyaji v. Jageshwar Dayal Bajpai, AIR 1978 All 268; Bhaiyalal v Kashi Bai; 2001(1)MPLJ429 30. Vidhayaram v Devlal, MP High Court, 1981 JLJ 203; 31. Daulat Ram and Ors. v. Sodha and Ors.; (2005)1SCC40 © Nishith Desai Associates 2014 Provided upon request only 12 There may, however, be cases in which the execution of the will may be surrounded by suspicious circumstances. In such cases the court would see that all legitimate suspicions are completely removed before the document is accepted as the last will of the testator. Case law32 has identified some of these circumstances: ■■ The alleged signature of the testator may be very shaky and doubtful and evidence in support of the argument that the signature is the signature of the testator may not remove the doubt created by the appearance of the signature; ■■ the condition of the testator’s mind may appear to be very feeble and debilitated; and evidence adduced may not succeed in removing the legitimate doubt as to the mental capacity of the testator; ■■ the dispositions made in the will may appear to be unnatural, improbable or unfair in the light of relevant circumstances; or, ■■ the will may otherwise indicate that the dispositions may not be the result of the testator’s free will and mind. I. Revocation of a Probate A person who is adversely affected by the grant of a probate has a right to avoid the grant by making an application to the court to revoke the probate. Probate once granted can be revoked by the court which has the jurisdiction to grant the probate. The grant of probate can be revoked or annulled for just cause. A just cause shall be deemed to exist where: ■■ the proceedings to obtain the grant was defective in substance; or ■■ the grant was obtained fraudulently by making a false suggestion, or by concealing from the Court something material to the case; or ■■ the grant was obtained by means of an untrue allegation of a fact essential in point of law to justify the grant, though such allegation was made in ignorance or inadvertently; or ■■ the grant has become useless and inoperative through circumstances; or ■■ the person to whom the grant was made has willfully and without reasonable cause omitted to exhibit an inventory or account or has exhibited an inventory or account which is untrue in a material respect. J. Validity of Foreign Wills and Foreign Grants of Probate The ISA provides for the grant of an ancillary probate, i.e., the resealing of probate granted by a foreign court. If a foreign will has already been proved and deposited in a competent court abroad, an Indian court is permitted to grant letters of administration with a copy of the will annexed, this does away with the necessity of proof of the original will. Where a foreign will has not been proved, the Indian court is required to take evidence as to the due execution of the will according to the applicable law based on domicile. The applicable law will depend on whether the will relates to moveable or immoveable property. The ISA provides that no right as an executor or legatee can be established in any court unless probate or LoA have been obtained of the will under which the right has been claimed. For wills executed outside India in respect of which a foreign probate has also been obtained, the above requirement can be met by obtaining an ancillary grant of probate. Further, a judgment stated to be a probate granted by a foreign Court would come within the purview of the Code of Civil Procedure as any other foreign judgment. Under this Code, a foreign judgment is conclusive except: 1. where it has not been pronounced by a Court of competent jurisdiction; ii. where it has not been given on the merits of the case; iii. where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable; iv. where the proceedings in which the judgment was obtained are opposed to natural justice; v. where it has been obtained by fraud; vi. where it sustains a claim founded on a breach of any law in force in India. K. Practical Issues to Keep in Mind The executor must within six months of the grant of probate or letter of administration exhibit inventory and accounts relating to and containing the full and true estimate of all the property in possession and all the credits related to it and also all debts that are 32. Surendra Pal and Ors. v. Dr. (Mrs.) Saraswati Arora and Anr. [1975]1SCR687; Smt. Guro v. Atma Singh and Ors [1992]2SCR30; Meenakshiammal (Dead) Through and Ors. v. Chandrasekaran and Anr. AIR2005SC52 Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 13 owed to the executor in his character. The accounts exhibited must show the assets that have come under the executor’s hands and must also depict the manner in which they have been applied or disposed of. Keeping in mind compliances that must be adhered to by an executor, it would be advisable if the executor was an Indian resident. Probate being a court process at times requires the deposit of a portion of the property with the court. For this reason, individuals avail the remedy of creating a trust structure prior to their deaths in order to reduce the hassles relating to administration upon death and execution of the testament. However, there is stamp duty cost for setting up a trust33 and at times setting up a trust is not recommended especially when immovable property is involved. The income that is generated from a trust that is set up for charitable purpose is exempted from the computation of income tax from the total income of the person in receipt of such income34 and such a trust may be created through a testamentary disposition. However when the income from the property held under a trust is for private religious purposes which does not enure for the benefit of the public or if the trust or institution has been created or established for the benefit of any particular religious community or caste or if any part of the income enures or any part of such income or any property of the trust or institution is used directly or indirectly applied for the benefit of any person, then such exclusion from computation from income does not apply35 and thus a creation of a trust may not always be the best way to avoid administrative hassles. L. Letters of Administration Where an individual governed by the ISA dies intestate, a person must be appointed to administer his estate. A person who has an interest in the property of the deceased must apply to the relevant court for the grant of letters of administration. The court would examine documents to determine the relationship between the applicant and the assets of the deceased. Grant of an LoA establishes the administrator as the legal representative of the deceased. A grant of an LoA does not decide any question of title, it only decides the right to administer. However, the above provisions are not mandatory where the deceased intestate is a Hindu. For such cases, the ISA contains an enabling provision providing for the grant of an LoA. In such a case, the applicant for an LoA may be a person who would be entitled to the whole or any part of the deceased’s estate according to the rules applicable to the distribution of the deceased’s estate. In the event there are other persons who also apply for an LoA, it is the Court’s discretion to grant the LoA to any one or more of the applicants. If no such person applies for an LoA, it may be granted to a creditor of the deceased (if those persons primarily entitled did not respond after notice/advertisements were issued). M. Procedure to apply for an LoA A petition must be filed before the relevant court (depending on the value of the estate) in the format prescribed for such a petition. The relevant court is the court within whose jurisdiction the deceased ordinarily resided at the time of his death or within whose jurisdiction any part of the property of the deceased may be found. The petition must state particulars about the deceased, his time of death, the petitioner’s right to claim and a statement of the value and location of assets. The petition must also state that to the best of the petitioner’s belief no application has been made to any other court for LoA of the same estate or where such application has been made, the person has no knowledge of the persons by whom it was made and the proceedings thereon, if any. The court would issue a public notice or place an advertisement in newspapers (in English and the local language, for a period of about 30-45 days) to which a person may respond if he has any objection to the grant of the LoA to the applicant. The court may refuse grant of an LoA for any of the following reasons: i. the applicant is not the right person to the grant; ii. the deceased had no property to which grant could be given; iii. the deceased did not reside or did not have property in the court’s jurisdiction, or iv. the estate has been fully administered and grant of an LoA will be nugatory. Therefore, it would be advisable to support the 33. Article 64 of Schedule I of Indian Stamp Act, 1899. 34. Section 11 of Income Tax Act, 1961. 35. Section 13 of the Income Tax Act, 1961. © Nishith Desai Associates 2014 Provided upon request only 14 petition with documents to address each of the possible grounds of opposition above. The applicant would be required to be present in person to be examined by the court. If the LoA is granted to the petitioner, the petitioner must furnish a bond to the court with one or more surety/sureties. The bond is to be given before the grant and not after. Any person above 18 years of ages may act as surety. The bond is to be given for the amount as specified by the court for which grant is received except where an insurance or other approved class of company is accepted as surety. N. Succession Certificate A Succession Certificate has limited effect. The certificate does not give any general powers of administration of the estate of the deceased. The certificate is limited to the collection of debts which were in existence at the lifetime of the deceased and enables the applicant to have shares transferred in his name if he is otherwise entitled to it. Further, the grant of a certificate does not establish the title of the grantee as the heir of the deceased. It only confers on the grantee authority to collect debts and allows debtors to make payments to the grantee. That said, a Succession Certificate (together with the death certificate) is usually requested by authorities when a change in title records has to be carried out. Therefore, in terms of practical use, a Succession Certificate serves as a supporting document and would be a useful document to have. If the certificate granted is with respect to debt or securities for which previously an LOA has been granted and such grant is in force, the certificate granted after it shall be invalid. O. Procedure to Apply for a Succession Certificate The petitioner must file a petition before the relevant court (depending on the value of the estate) in the format prescribed for such a petition. The relevant court is the court within whose jurisdiction the deceased ordinarily resided at the time of his death, within whose jurisdiction any part of the property of the deceased may be found. The petition must contain particulars like time of death of the deceased, ordinary residence of the deceased, right of the petitioner to claim, details of family and other relatives of the deceased, debts and securities for which the certificate is being applied for. Upon application, the judge may extend the certificate to any debt or security not specifically covered under the original application. The extension shall also cover any power to receive interest or dividends or negotiation of transfer. The judge may require additional bond or security to be furnished for such extension. If the court is satisfied with the application it fixes a date of hearing of the application. The court would issue a public notice or place an advertisement in newspapers (in English and the local language, for a period of about 30-45 days) to which a person may respond if he has any objection to the grant of certificate. If no one contests the petition, the applicant must lead evidence to support the relationship of the deceased and the applicant to the assets. After this examination, the court may order a Succession Certificate to be issued. If there is a person who raises any objection, the applicant will be given the opportunity to counteract the allegations of the person objecting. After the parties are examined, the court would then decide if the applicant has proved his case. II. Trusts in India Trusts originated at the end of the middle ages as a means of transferring wealth within the family and have remained the characteristic device employed for organizing intergenerational wealth transmission in situations where the transferor has substantial assets or complex family affairs.36 Modern day private trusts are used to carry out this function in India. Public trusts, on the other hand, may be used to contribute property towards religious and charitable purposes. The first attempt to regulate the management and administration of trusts was made by the British Government in 1810 by passing a regulation, followed by many such regulations. Currently, the legislations governing trusts in India are among others The Indian Trusts Act, 1882, The Charitable and Religious Trusts Act, 1920, The Religious Endowments Act, 1863, The Charitable Endowments Act, 1890 and The Societies Registration Act, 1860.37 36. John H Langbein, “The Contractarian Basis of tire Law of Trusts”, 105 YALE L.J 625. 632-43 (1995) cited in The 1 John H Langbein “Secret Life of the Trust: The Trust as an Instrument of Commerce” Available at: http://www.law.yale.edu/documents/pdf/Faculty/Langbein_Secret_Life_of_Trust.pdf 37. Indian Trusts Act, 1882; Commentary by H.C. Johari Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 15 A. Reasons for Setting up a Trust ■■ Providing for family and protecting, in particular, the interests of very young children and adults with special needs; ■■ Attaching certain conditions to gifts; ■■ Bypassing the probate process while ensuring succession from one generation to another; ■■ Giving children the benefits of family wealth without losing control over key assets; ■■ Creating a single relatively large pool of investment funds which has more scope to perform well than a series of smaller pools; ■■ Creating a legal framework and a tax effective structure for the family assets which will last for a long time; ■■ Protecting these assets against actual and potential creditors; ■■ Allowing administrative, investment and recordkeeping functions and possibly also property management functions to be centralised &handled more efficiently and at a lower cost; ■■ Managing tax risks that may arise on the devolution of the trust property; B. The Indian Trusts Act Trusts in India are governed by the provisions of the Indian Trusts Act, 1882 (“Trusts Act”). A Trust as per the Trusts Act is “an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another, or of another and the owner”. The person who reposes or declares the confidence is called the “author of the trust” (commonly referred to as a ‘settlor’). The person who accepts the confidence is called the “trustee”. The person for whose benefit the confidence is accepted is called the “beneficiary”. The subject matter of the trust is called “trust property”. The “beneficial interest” or “interest” of the beneficiary is the right against the trustee as owner of the trust property. The instrument, if any, by which the trust is declared is called the “instrument of trust” (commonly known as the ‘trust deed’ or ‘indenture of trust’). Settlement Settlor Distributions Trustee Beneficiaries Fiduciary Obligation and Services Trust Trust Deed Trust Property Beneficial Interest The property in case of a trust is not transferred directly to the transferee but is put in control of the trustee for the benefit of the transferee. The trustee depending upon the nature of the trust either transfers the property or its earnings to the transferee at the happening of certain events or applies the property and /or its gains for the benefit of such a transferee. C. How to Create a Trust Four essential conditions are necessary to bring into being a valid trust.38 ■■ The person who creates a trust (settlor) should make an unequivocal declaration of an intention on his part to create a trust. In order to create 38. Section 5 of Indian Trust Act, 1882. © Nishith Desai Associates 2014 Provided upon request only 16 a trust, the settlor must properly manifest his intention by an external expression of it ( by written or spoken words or by conduct) as opposed to an undisclosed intention. ■■ The settlor must clearly define and specify the purpose. Since the purpose has to be accomplished by a trustee, who may not always be the author himself, it is necessary that the purpose is clearly declared so that the trustee can faithfully accomplish the author’s purpose, for which the author has reposed confidence in the trustee. ■■ The settlor must specify the beneficiaries. Where there is no transfer of ownership, there is no trust.39 The settlor gives up the ownership of the property thus resulting in transfer of legal ownership of the property to the trustee and transfer of beneficial ownership to the beneficiaries of the trust. The concept of ownership in the case of a trust is different under Indian and English Law. India does not recognize duality of ownership in the case of a trust, i.e. it recognizes only legal ownership and not equitable ownership as is provided for under English law which recognizes duality of ownership i.e. legal and equitable. Under Indian law, the trustee is both the legal and beneficial owner of trust property. ■■ The settlor must transfer identifiable property under an irrevocable arrangement and totally divest himself of the ownership and the beneficial enjoyment of the income from the property. D. Types of Trusts As discussed, trust may be private or public: i. Private Trust A private trust is created for the benefit of specific individuals i.e., individuals who are defined and ascertained individuals or who within a definite time can be definitely ascertained. A private trust does not work in perpetuity and essentially gets terminated at the expiry of purpose of the trust or happening of an event or at any rate on eighteen years after the death of the last transferee living at the time of the creation of the trust. Private trusts are governed by the Trusts Act. This Act is applicable to the whole of India except the State of Jammu and Kashmir and the Andaman and Nicobar Islands. That apart, the Trusts Act is not applicable to the following: i. Waqf; ii. Property of a Hindu Undivided Family; and iii. Public or private religious and charitable endowments; A person can be a settlor of a private trust if he has attained majority (i.e., has completed 18 years of age or in case of a minor, for whom a guardian is appointed by the court or of whose property the superintendence has been assumed by the court of wards the age of majority is 21 years) and is of sound mind, and is not disqualified by any law. But a trust can also be created by or on behalf of a minor with the permission of a principal civil court of original jurisdiction. Apart from an individual, a company, firm, society or association of persons is also capable of creating a trust. A family trust set up to benefit members of a family is the most common purpose for a private trust. The purpose of the family trust is for the settlor to progressively transfer his assets to the trust, so that legally the settlor owns no assets himself, but through the trust,beneficiaries get the benefit of these assets. A family trust can be set up either while one is still alive (by a declaration of trust contained in a trust deed) or upon death, in terms of a will. The Foreign Exchange Management Act, 1999 (“FEMA”) of India has granted general permission to a person resident in India to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such ‘Foreign Currency Assets’ have been acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. Such person may set up a trust in such jurisdiction or any other jurisdiction to which he could contribute the Foreign Currency Assets. However, a trust receiving foreign contribution in India would need approval under the Foreign Contributions Regulations Act 1976, which is administered by the Ministry of Home Affairs in India. However, such trust can only be a trust, the objects of which are dedicated to cultural, economic, educational, religious or social purposes. Family (private) trusts may be set up either inter vivos i.e. during a person’s lifetime or under a will i.e. testamentary trust, either orally or under a written 39. Nadir Shaw v. Times of India, AIR 1931 Bom 300 Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 17 instrument, except where the subject matter of the trust is immovable property, the trust would need to be declared by a registered written instrument. Private trusts may also be used as a collective pooling vehicles for individual retail investors. a. Mutual Funds All mutual funds in India are set up in the form of trusts which are registered under the Securities and Exchange Board of India (Mutual Fund) Regulations. Mutual Funds are portfolios of stock market shares and other financial instruments built with funds collected from usually small investors whose primary concern is security of investment. These funds are run by government trusts, banks, and now private financial institutions as well. These funds can be open–ended or closed–ended. b. REITS (Real Estate Investment Trusts) A REIT is an entity which pools in money and invests in real estate assets. It provides a similar structure for investment in real estate as mutual funds provide for investment in stocks. A REIT can be publicly or privately held and is generally listed on a stock exchange. Assets of such a trust are managed by a fund manager. Further to the 2014 Budget, REITs are eligible for a pass-through status for taxation purposes (although this is a partial passthrough). The consequence is that long term capital gains on sale of units as well as dividends received by the REIT and distributed to the investor shall be tax exempt. Interest income received by the REIT is tax exempt and foreign investors shall be subject to a low withholding tax of 5% on interest payouts. A trust can be set up either as: i. Revocable: A trust that can be revoked (cancelled) by its settlor at any time during this life; ii. Irrevocable: A trust will not come to an end until the term / purpose of the trust has been fulfilled; iii. Discretionary: An arrangement where the trustee may choose, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent; iv. Determinate: The entitlement of the beneficiaries is fixed by the settlor at the time of settlement or by way of a formula, the trustees having little or no discretion; or v. Combination Trusts namely: of (i) - (iii)/(iv), (ii)- (iii)/(iv) ii. Public Charitable or Religious Trust A public trust is created for the benefit of an uncertain and fluctuating body of persons who cannot be ascertained at any point of time, for instance; the public at large or a section of the public following a particular religion, profession or faith. A public trust is normally permanent or at least indefinite in duration. As regards public trusts, there is no Central Act governing formation and administration of such trusts. But various states such as Bihar, Maharashtra, Madhya Pradesh, Orissa, etc., have enacted their own legislations prescribing conditions and procedures for the administration of public trusts. These Acts are more or less similar in nature though there may be certain variations. A public trust is generally a non-profit venture with charitable purposes and in such cases it is also referred to as the charitable trust. A trust created for religious purposes is termed a religious trust and it can be either a private or a public trust. A religious endowment made via trustees to a specified person is a private trust and the one to the general public or a section thereof is a public trust. The creation of religious charitable trusts is governed by relevant personal laws.The administration of these religious trusts can either be left to the trustees as per the dictates of the personal law or it can be regulated to a greater or lesser degree by statute such as the Maharashtra Public Trusts Act, 1950. In case of Hindus, the personal law provisions regulating religious trusts have not been codified and are found dispersed in various religious books. There are four essential requirements for creating a valid religious or charitable trust under Hindu Law, which are as follows: i. valid religious or charitable purpose of the trust as per the norms of Hindu Law; ii. capability of the author of the trust to create such a trust; iii. the purpose and property of the trust must be indicated with sufficient precision; and iv. the trust must not violate any law of the country. E. Taxation of Trusts Income tax in India is governed by the Income Tax Act, 1961 (‘ITA’), which lays down provisions with respect to chargeability to tax, determination of residence, computation of income, transfer pricing, © Nishith Desai Associates 2014 Provided upon request only 18 etc. Residents are ordinarily subjected to tax on their worldwide income, whereas non-residents are taxed only on their Indian source income, i.e. income that accrues or arises to them in India. i. Private Trust For the purpose of Indian taxes, a private trust is not regarded as a separate taxable unit. However, a trustee under the ITA acquires the status of the beneficiaries and is taxed in the role of the beneficiaries in a representative capacity. The provisions relating to taxation of trusts are laid out in Section 161-164 of the ITA. a. Irrevocable Determinate (Specific) Trust In such a trust, the beneficiaries are identifiable and their shares are determinate, a trustee can be assessed as a representative assessee and tax is levied and recovered from him in a like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him (i.e. the beneficiary). The tax authorities can alternatively raise an assessment on the beneficiaries directly, but in no case can tax be collected twice. While the income tax officer is free to levy tax either on the beneficiary or on a trustee in his capacity as representative assessee, the taxation in the hands of a trustee must be in the same manner and to the same extent that it would have been levied on the beneficiary, i.e., in the role of the beneficiaries. Thus, in a case where a trustee is assessed as a representative assessee, he would generally be able to avail all the benefits / deductions, etc. available to the beneficiary, with respect to that beneficiary’s share of income. There is no further tax in the hands of the beneficiary on the distribution of income from a trust. b. Irrevocable Discretionary Trust A trust is regarded as a discretionary trust when a trustee has the power to distribute the income of a trust at its discretion amongst the set of beneficiaries. In case of an onshore discretionary trust, with both resident and non-resident beneficiaries, a trustee will be regarded as the representative assessee of the beneficiaries and subject to tax at the maximum marginal rate i.e. 30%. In case of an offshore discretionary trust with both resident and non-resident beneficiaries, a trustee should not be subject to Indian taxes or reporting obligations. However, if all the beneficiaries of such discretionary trust are Indian residents, then a trustee may be regarded as the representative assessee of the beneficiaries and can be subject to Indian taxes (on behalf of the beneficiaries) at the maximum marginal rate i.e. 30%. In this regard, an offshore charitable organisation can also be one of the beneficiaries to the offshore discretionary trust. As a matter of precaution, it would be preferable if the charitable organisations selected have not originated in India, have not been created to benefit Indian residents as a compulsory class and are applied towards a cause which is not specific to India. c. Revocable Trust Under the ITA, a transfer shall be deemed to be revocable if it contains any provision for the retransfer directly or indirectly of the whole or any part of the income or assets to the transferor or it in any way gives the transferor a right to re-assume power directly or indirectly over the whole or any part of the income or assets. Thus, where a settlement is made in a manner that a settlor is entitled to recover the contributions over a specified period, and is entitled to the income from the contributions, the trust is disregarded for the purposes of tax, and the income thereof taxed as though it had directly arisen to the settlor. Alternatively, even in a situation where a settlor has the power to re-assume power over the assets of a trust, the trust is disregarded and the income is taxed in the hands of the settlor. In the case of a revocable trust, income shall be chargeable to tax only in the hands of the settlor. If there are joint settlors to a revocable trust, the income of the trust will be taxed in the hands of each settlor to the extent of assets settled by them in the trust. This arrangement is not specifically required to be recorded in a trust deed. F. Public Trusts Subject to conditions, income from property held in trust or other legal obligation, for a religious or charitable purpose is tax exempt.40 “Charitable purpose” as defined in S. 2(15) of the Income Tax Act includes relief of the poor, education, medical relief, preservation of environment and preservation of monuments or places or objects of artistic or historic interest, and 40. Sec 11 of ITA Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 19 the advancement of any other object of general public utility. However, when the aggregate value of receipts is more than INR 25 lakhs or more, the advancement of any other object of general public utility is not regarded as a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity.41 Also, income of a revocable charitable or religious trust is chargeable to income tax in the hands of the settlor.42 Income derived by such a trust from voluntary contributions not being contributions made with a specific direction that it shall form part of the corpus of the trust or institution, is also tax exempt.43 The above mentioned exemptions are allowed only to the trusts which are registered in accordance with the provisions given in the ITA.44 The ITA also provides certain grounds on which the exemption to the income of such trusts is not allowed, for example, income from property held under a trust is for private religious purposes and not for the benefit of the public; or in the case of a charitable trust established after the commencement of the ITA, any income thereof if the trust is established for the benefit of any particular religious community or caste, etc.45 Further, subject to the fulfillment of certain conditions, any income of an institution constituted as a public charitable trust or registered under the Societies Registration Act, 1860 or under any law corresponding to the ITA and existing solely for the development of khadi or village industries or both, and not for the purposes of profit, to the extent such income is attributable to the business of production, sale, or marketing, of khadi or products of village industries, is not included in the total income of the trust.46 III. Trusts in Singapore: An Overview47 Over the last 8-10 years, the Singapore Government, principally through the sponsorship of the Monetary Authority of Singapore (“MAS”) has pursued a series of policies intended to make Singapore a key international private banking and investment management centre and a base for private client wealth planning. The most common method of wealth planning is by setting up a trust so that the individual can keep aside part of the wealth for the benefit of his dependents during his lifetime and after. Over the years, Singapore has positioned itself as a major global centre for the administration of international trusts, whether established under Singapore law or the law of other trust jurisdictions. The tax laws of Singapore make the Singapore foreign trust an attractive planning vehicle for the international private client to achieve tax effective wealth preservation, estate planning, and succession planning objectives. A. Trusts in Singapore The principal statutes governing trusts that are most relevant to the private banking and wealth management industry the Trust Companies Act48 and the Trustees Act.49 Singapore’s trust law is broadly based on English trust principles. Some of the trusts that are frequently used in Singapore are: (i) private family trusts; (ii) statutory trusts; (iii) charitable trusts; and (iv) collective investment trusts. While private family trusts are used by high net-worth individuals to plan their financial affairs, protect their assets and provide for the transfer of their wealth to future generations; statutory trusts are established for statutory compliance. For instance, a trust structured for insurance policy holders and their beneficiaries. Some benefits provided to trusts under the Singapore trust regime are: 41. Section 2(15) of ITA 42. Section 11 and 61 of ITA 43. Section 12 of ITA 44. Section 12A and Section 12AA of ITA 45. Section 13 of ITA 46. Section 10(23B) of ITA 47. We are qualified to advise on Indian law only. Any statement with respect to laws of other jurisdiction should be confirmed by the local counsels of the respective jurisdictions and should not be considered as legal advice. 48. Chapter 336 of Singapore 49. Chapter 337 of Singapore © Nishith Desai Associates 2014 Provided upon request only 20 i. Trustee Supervision Singapore trusts allow the appointment of a protector who can supervise the activities of the trustees in certain areas. ii. Registration and Confidentiality Singapore trusts do not require formal registration. Singapore tax law does not require the disclosure of the identity of the settlor nor the beneficiaries of a foreign trust. There is no requirement for the foreign trust to be registered, nor for the trust ‘Deed of Settlement’ to be filed with any Government authority. The trustee company of a foreign trust is required to file with the Controller of Income Tax in Singapore, an annual declaration confirming the tax exempt status of all foreign trusts and eligible holding companies administered by it. iii. Investment of the Trust Fund The Trustees Act sets out the powers that a trustee may delegate to an agent. These include the power of distribution from the trust, the power to decide whether distributions or payment of fees should be made out of income or capital; the power to appoint another person as a trustee and any other power permitted by the trust instrument to be delegated. Beneficiaries are, however, not allowed to act as agents of the Trustee. iv. Perpetuity Period The perpetuity period for a Singapore trust, i.e. the maximum period during which the trust can continue, is now 100 years. Further, the Civil Law Act also provides for a “wait and see”50 period after 100 years to see whether the trust would be able to vest in a beneficiary after that time. v. Forced Heirship Forced heirship gives the surviving spouse, children and/or other relatives of a deceased person fixed shares of his estate. Under most forced hership regimes, such an entitlement is indefeasible and unavoidable in the sense that it trumps any contrary disposition that the deceased person may have made in his lifetime of under his will. The Administration of Muslim Law Act governs the issue of succession for Muslims in Singapore. Consequently, Islamic laws of forced heirship apply in Singapore. However, under the Singapore trust law regime, there is a specific provision which seeks to avoid an attack upon the trustees of a trust on the grounds of foreign rules of forced heirship. Forced heirship laws are not enforceable against a Singapore trust if the transfer of property is made in accordance with the provisions of Section 9051 of the Trustee Act. It provides that at the time of the transfer of the property, the settlor must have the capacity under the law of either Singapore, his home jurisdiction or the jurisdiction in which the transfer was made, to effect such transfer. Accordingly, a non-Singapore citizen or a non-Singapore domicile is excluded from forced inheritance and succession rules, provided the trust is governed under Singapore law and the trustees must be resident in Singapore. Singapore trust law also permits the use of a Private Trust Company (“PTC”) to act as trustee of a specific trust, or a group of related trusts. PTCs are popular with wealthy families who wish to retain control of the management of the assets within a trust. However, the PTC can only act as trustee of such a trust if each beneficiary of the trust is a ‘connected person’ to the settlor of that trust (a ‘connected person’ meaning a relationship established by blood, marriage or adoption). A PTC is exempt from licensing by the Monetary Authority of Singapore; but under anti-money laundering rules the PTC must engage the services of a licensed trust company to 50. Section 34 of the Civil Law Act 51. 90.(1) Subject to subsection (3), where a person creates a trust or transfers movable property to be held on an existing trust during his lifetime, he shall be deemed to have the capacity to so create the trust or transfer the property if he has capacity to do so under any of the following laws: a) the law applicable in Singapore; b) the law of his domicile or nationality; or c) the proper law of the transfer. (2) No rule relating to inheritance or succession shall affect the validity of a trust or the transfer of any property to be held on trust if the person creating the trust or transferring the property had the capacity to do so under subsection (1). (3) Subsection (1) — a) does not apply if, at the time of the creation of the trust or the transfer of the property to be held on trust, the person creating the trust or transferring the property is a citizen of Singapore or is domiciled in Singapore; and b) applies in relation to a trust only if the trust is expressed to be governed by Singapore law and the trustees are resident in Singapore. (4) In subsection (1), the reference to “law” does not include any choice of law rules forming part of that law. (5) No trust or settlement of any property on trust shall be invalid by reason only of the person creating the trust or making the settlement reserving to himself any or all powers of investment or asset management functions under the trust or settlement. Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 21 provide administration services. B. Tax Implications The territorial principle of tax applies to the income of a trust; accordingly, tax is charged on income that is earned or received in Singapore. Such income is the statutory income of the trustee and is chargeable to tax at the trustee level at the rate of 17%; therefore, when distributed, this income is not subjected to further tax in the hands of the beneficiaries. However, it should be noted that tax treaty relief may only be claimed by persons who are residents and Singapore based trusts may face difficulties in claiming treaty relief since trusts in Singapore are considered to be fiscally transparent entities. Beneficiaries under the Singapore trust regime are accorded tax transparency treatment if :(i) they are resident in Singapore; and (ii) entitled to trust income under the trust. In such a case, tax is not applied at the trustee level but the beneficiaries are subject to tax on the distributions received. Further, they are also entitled to enjoy the concessions, exemptions and foreign credits that may be available to them. However, this treatment is not available in case of resident beneficiaries who are not entitled to the trust income. In a discretionary trust, beneficiaries are only ‘entitled’ when the trustee distributes the income. If the income of discretionary trusts is distributed, it is trust income in the hands of the beneficiaries.52 If the income is accumulated,the trustee has to pay the tax.53 In case there are non-resident beneficiaries of a Singapore domestic trust, the trustee will have to pay tax on their shares of entitlement at the prevailing trustee rate for the year of assessment.54 The tax levied at the trustee level would be considered as final. Any distribution received by beneficiaries should be treated as capital in nature. Exemption is also available on income of a foreign trust.55 Section 13G of the Income Tax Act exempts from income tax in Singapore, income prescribed under the Income Tax [Exemption of Income of Foreign Trusts] Regulations 1994 (“Regulations”). Under these Regulations, specified income from specified investments derived by an eligible holding company56 or a foreign trust, which is administered by a trustee company is exempt from tax. It is also relevant to note that there is no capital gains tax in Singapore. Further, since estate duty was abolished in 2008, the distribution of capital from Singapore trusts is also exempt from tax and successors of a Singapore trust can be included as beneficiaries without any estate duty. However, distribution of income from the estate is taxable. There is also no exchange control which facilitates funds to be remitted free to and from Singapore. IV. Estate Planning Through Foundations in Switzerland and Liechtenstein A foundation is a hybrid between a company and a trust, generally prevalent in civil law jurisdictions. Like a company, it is a body corporate with a separate legal entity, and owns assets in its own name. But, unlike companies, it does not have any members / shareholders. Like a trust, it has a founder who has contributed the assets towards a specific purpose for the benefit of identifiable beneficiaries. But, unlike trusts, the founder is specifically permitted to reserve for himself or herself various powers – powers to revoke, powers to change the by-laws, powers to add or remove beneficiaries, powers to remove the management (the foundation council / board). Foundations can be established for a fixed or indefinite period of time and can be used for charitable, commercial or for family purposes. The duties of those managing the foundation are contractual – not fiduciary as in the case of trustees. Further, beneficiaries have contractual rights to enforce the operation of the foundation in accordance with its constitutive document – rather than proprietory rights in its assets. Therefore, most jurisdictions prescribe a degree of official control or scrutiny for foundations. Most jurisdictions alternatively or simultaneously also permit a protector, a guardian or an adviser to watch over the management of the foundation. The founder has the choice between having the foundation supervised 52. http://www.iras.gov.sg/irasHome/page04.aspx?id=2160 53. http://www.iras.gov.sg/irasHome/page04.aspx?id=2350 54. http://www.iras.gov.sg/irasHome/page04.aspx?id=2344 55. Section 13G of the Income Tax Act 56. An “eligible holding company” is a company incorporated outside of Singapore that is formed by the trustee of a foreign trust specifically to hold assets of that foreign trust. © Nishith Desai Associates 2014 Provided upon request only 22 by the beneficiaries and being subject to official supervision.57 The Interogo foundation in Liechtenstein and the Stichting INGKA foundation in Netherlands set up by Ingvar Kamprad, the founder of IKEA, are some prominent examples of the use of foundations. A. Switzerland Stiftung A private foundation (Stiftung) is an endowment for carrying out the wishes of the founder, as expressed at the time of devolution of assets. Normally the assets devoted cannot revert to the founder. The foundation has no members but only beneficiaries / consignees. There is no distribution of profits. The purpose of the foundation cannot generally be modified after its formation. A foundation needs only a management structure (Stiftungsrat) to execute the founders’ intention and a supervisor. A foundation is supervised by cantonal or federal authorities to ensure that the assets and returns are properly used for the benefit of the beneficiaries. Although a foundation should not have a commercial purpose, Swiss law does not prohibit devolution of an enterprise or a substantial shareholding in a company. B. Liechtenstein Foundations A stable political environment, a solid tax framework and superior quality of services make Liechtenstein an attractive location for financial planning. The following aspects of the tax regime of Liechtenstein foundations make them particularly attractive: i. Tax on Devolution The tax law, as recently revised in 2011, eliminates the levy of inheritance and gift taxes. Now, assets devolved while establishing a foundation require only a payment of a formation tax at 0.2% of the value of the assets originally devolved, up to a maximum capital value of CHF 1 million. The transfer of assets into the foundation does not generally trigger any additional tax consequences for a foreign founder except where these assets constitute a Liechtenstein permanent establishment or Liechtenstein real estate. ii. Tax on Income Revocable and irrevocable foundations, being body corporates, are subject to corporate income tax. However, foundations not engaged in any active economic activity are only subject to a minimum corporate income tax of CHF 1,200 annually. Economically active Liechtenstein foundations are subject to the regular corporate income tax rate of 12.5%. However, the effective tax rate is substantially reduced by a notional interest deduction of 4% of the foundation’s average equity. Furthermore, the taxable basis for purposes of corporate income tax is lowered by a favourable holding regime, by which dividends and capital gains from domestic and foreign entities are fully tax-exempt in Liechtenstein. In addition, income from foreign permanent establishments and foreign real estate is not subject to tax in Liechtenstein. In case of income deriving from intellectual property rights, 80% is deductible as a notional expense. C. Taxation of Distributions Distributions by a revocable foundation are treated as contributions directly made by the founder to the beneficiaries, which is not subject to tax in Liechtenstein as gift taxes have been eliminated. Distributions by irrevocable foundations paid to beneficiaries not domiciled or not having a habitual abode in Liechtenstein are also not subject to tax in Liechtenstein. D. Wealth Tax Wealth tax is imposed only on Liechtenstein residents. Therefore, in case of irrevocable foundations, it can be imposed only if the value of the beneficiary’s privileges can be determined and the beneficiary is a resident. In case of revocable foundations, it is imposed on the founder. E. Possible Concerns Recently, Liechtenstein has adopted several bilateral tax information exchange agreements (TIEAs). Accordingly, on receiving a request to that effect, with regards to a foundation, Liechtenstein would be required to provide information on the founder, the members of the board and the beneficiaries.58 57. Philip Baker, Beneficiaries of Trusts and Foundations, GITC Review, Vol. VI No.2 (June 2007), accessible at http://www.taxbar.com/documents/Beneficiaries_ of_Trusts_and_Foundations_PB.pdf. 58. Roland A. Pfister and Patrick Knörzer, Taxation of Liechtenstein foundations, STEP Journal (April 2011). Select Estate Planning Techniques Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 23 I. Estate Duty in India: Re-introduction and Consequences A. Background Estate Duty in India was introduced in 1953 under the Estate Duty Act, 1953 (“Act”) with the object of imposing estate duty on property passing or deemed to pass on the death of a person. The Act provided for the imposition of estate duty at certain specified rates upon the principal value ascertained of property owned by each deceased person, whether or not such property was settled, including upon any agricultural land situated in certain territories in India. The levy started at a threshold of INR 1 lakh with a rate of 7.5%. The maximum rate was 40% of the principal value of the estate in excess of INR 20 lakh. However, certain exemptions such as: (i) movable and immovable property owned and situated outside of India; (ii) delay on the imposition of estate duty on property jointly owned by spouses until the death of both spouses; (iii) property held by the deceased as a trustee for another person where the deceased person had made a bona fide disposition to a beneficiary at least two years prior to the deceased person’s death. Further, exemption was also given to one residential house, subject to a limit of INR 1,00,000. B. Abolition of Estate Duty Estate Duty was abolished on June 16, 1985. The government cited excessive administrative costs as against the actual tax yields (only about 20 crores) as the primary reason for abolishing estate duty. Consequently, estate duty was not payable in respect of the estate of a person who died after March 16, 1985. At that time, the exemption limit was only INR 1,50,000 and the rate of estate duty was on a progressive basis, with a maximum rate of 85% for estate exceeding INR 20,00,000. C. Present Position It is pertinent to note that even though estate duty has been abolished, India continues to impose Wealth Tax at the rate of 1% in case the value of ‘net wealth’ (total value of assets minus total debt related to such assets) exceeds INR 30,00,000. However, productive assets are out of the purview of wealth tax. Under the Direct Taxes Code Bill 2010, the wealth tax net is proposed to be spread wider, which arguably should achieve at least part of the objective behind the levy of an inheritance tax. Property passing to heirs on succession is subject to stamp duty and also probate/succession fees and tax thereon being collected not by the Central Government, but by the State Governments. D. Justification for Re-Introduction & Consequences With re-introduction of estate duty,the Government expects to raise a considerable amount of revenue than when the earlier Act was in force because of the immense amount of wealth generated after the removal of India’s license raj in early 1990s. It also expects that by re-introducing estate duty, it will reduce income disparity (and therefore the inequality) between two different generations and also between members of the same generation; consequently bridging the widening gap between the ‘possessed’ and the ‘dispossessed’. Apart from the risk of India losing its momentum of investment generation (both domestic and foreign), the imposition of an estate tax in India will lead to a flight of capital (and along with it, entrepreneurs) to more tax-friendly jurisdictions offshore. Therefore, this move is unlikely to help the Government achieve its objectives of greater revenue and economic equality. The objective driving the re-introduction of estate duty may not necessarily be revenue compulsions but the reduction of disparities, which is laudable. However, given India’s dismal growth rate, this would be a difficult proposition. The re-introduction of estate duty may actually impact philanthropy. What happens if estate duty is levied when a large part of the wealth is left for charity? Would that mean that a significantly lower amount would go to charity? Net financial savings of households was only 7.8% of GDP in 2011-12 as compared to 12.2% in 2009- 10. It may thus be worthwhile for policy makers to 3. Taxation Issues © Nishith Desai Associates 2014 Provided upon request only 24 consider employing tax breaks to incentivize savings in financial assets. However, this problem is further compounded by increasing imports of gold, since Indian households seem to be wanting to hedge by buying gold against rapidly rising prices. An estate duty would mean a further disincentivisation for investing in financial savings. E. Concerns that the New Legislation Should Address If estate duty is re-introduced, it should provide for appropriate exemptions for financial assets. Estate duty would clearly be a disincentive for investments in financial assets, the small quantum of which, in any case, is a worry for the Government. One residential house should not fall within the ambit of estate duty and the rate at which estate duty is applicable should also be reasonable. If shares/financial assets are included within the ambit of estate duty it could cause serious upheavals in shareholding structures and the running of companies. Notably, the earlier Act did contemplate that assets could be sold to pay estate duty and indeed, provided a set-off of capital gains against estate duty payments. The new legislation should aim to integrate estate duty, gift tax and the concept of exit tax. The Government should also carefully consider the time when estate duty should be reintroduced. II. Gift Tax in India A. An Introduction to Notional Income Taxation, as a general rule, is on the accrual / receipt of income. However, with the objective of taxing incomes that would otherwise go untaxed, taxing statutes have evolved the concept of ‘notional income’. Notional income is a legal fiction by which the law deems / presumes certain kinds of income to have accrued to the taxpayer (as it could have potentially accrued) although there is no actual accrual of income.59 The tax legislation in India uses this legal fiction to tax certain gifts. B. History of Gift Tax in India The Gift Tax Act was first introduced in 1958 and was subsequently repealed in 1998. Under the 1958 Act, gifts that were worth more than INR 25,000 were subject to tax. For the purpose of gift tax, cash, cheques and drafts received from someone who was not a blood relative were reckoned as gifts. The Finance Act (No. 2) 2004 introduced a tax on any sum of money exceeding INR 25,000 received without consideration under the head ‘income from other sources’. C. Income from Other Sources The Income Tax Act, 1961 (“ITA”) imposes tax under various heads, one of which is ‘income from other sources’ provided for under section 56. The Finance Act, 2009, introduced clause (vii) to section 56(2) with a view to check avoidance of tax on transfer of assets without consideration which was in respect of taxation of individuals and Hindu undivided family (“HUF”). i. Money Consideration Under the ITA, where a sum of money exceeding INR 50,000 is received without consideration, the entire sum of money is liable to tax in the hands of the recipient as income from other sources. ii. Immovable Property In respect of immovable property, where an individual or HUF receives immovable property (having a stamp duty value exceeding INR 50,000) without consideration, the recipient would be taxed on the stamp duty value of the immovable property. The position in respect of immovable property was revised by Finance Act, 2013. As per the revised law, any immovable property that is received for a consideration that is less than the stamp duty value of the immovable property by an amount exceeding INR 50,000, the difference between the stamp duty value and the consideration would be taxed in the hands of the recipient. iii. Moveable Property Similar rules are applicable to moveable property. Where an individual or HUF receives moveable property whose aggregate fair market value (“FMV”) exceeds INR 50,000 without consideration, the whole of the aggregate FMV of the moveable property will be taxed as income from other sources. Where moveable property is received for a consideration 59. The constitutionality of bringing such notional income to tax has been upheld by the Supreme Court of India in Bhagwan Das Jain v. Union of India. (1981) 128 ITR 315 Taxation Issues Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 25 that falls short of the aggregate FMV by more than INR 50,000, the difference between the aggregate FMV and the consideration will be taxed as income from other sources. iv. Exemptions There are certain exceptions to the application of Section 56(2)(vii). For instance, money or property that is received from specified relatives or on the occasion of marriage will not be taxed as income from other sources. Similarly, money or property that is received under a will or by inheritance or in contemplation of the death of the payer is exempt from tax under section 56(2)(vii). Further, money or property that is received from any local authority (as defined under section 10(20)) or from any fund / foundation / university or any trust / institution referred to in section 10(23C) or registered under section 12AA will not be taxed as income from other sources. v. Relative As mentioned above, money or property received from specified relatives will not be taxed as income from other sources. For the purpose of section 56(2) (vii), relatives are defined differently in the case of individuals and in the case of Hindu Undivided Family. In the case of individuals, relatives include spouse, brothers, sisters, parents, uncles, aunts, lineal ascendants or descendants among others. In the case of an HUF, relative includes any member of the HUF. D. Distribution on Trust Dissolution Not Subject to Tax In view of section 56(2)(vii) being designed to tax any income received by individuals/HUFs without consideration, there was some debate about whether distributions received by the beneficiary of a private discretionary trust could be taxed as income from other sources. In Ashok C. Pratap v Additional Commissioner of Income Tax,60 the Income-Tax Appellate Tribunal held that any money received by a beneficiary on the dissolution of a trust would not be taxed as income from other sources. The Tribunal took the view that the distribution received by the beneficiary would constitute consideration for the dissolution of the trust and thus would not attract section 56. This however is not a settled position till date. E. Unlisted Shares Transferred Without Consideration or Without Adequate Consideration A new clause was added to section 56 by Finance Act, 2010 to expand the coverage of persons under the provision. The Memorandum to the Finance Bill, 2010 states that under the anti-abuse provisions contained in section 56 (as it then stood), there were measures to check avoidance only in the case of property received by an individual or an HUF. In other words, the transfer of shares of a company to a firm or a company would not attract the anti-abuse provision even though the consideration for the shares is nil or lower than the fair market value. Accordingly, section 56(2) was amended to insert a new clause (viia) to remedy the mischief of transferring shares for inadequate or no consideration. However, the amendment was careful to exclude transfer of shares that arise because of a business reorganization, amalgamation or demerger. Further, section 56(2)(viia) was limited to cases where the receiver firms/companies are closely held companies and receive shares of a closely held company. F. Taxation of Share Premium in Excess of FMV as Income from other Sources A new sub-clause (viib) was added to section 56(2) by the Finance Act, 2012. The Memorandum explaining the provisions of the Finance Bill, 2012 does not state the reason for introducing the amendment except for classifying the amendment under the heading “Measures to Prevent Generation and Circulation of Unaccounted Money”. This provision seeks to curb the practice of setting up a closely-held company and issuing shares at a hefty premium to legitimize unaccounted money. The operation of section 56(2)(viib) is subject to certain limitations. The proviso to clause (viib) expressly states that the clause shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund or by a company from a class, or classes of persons, that may be notified by the Central Government. 60. [2012] 139 ITD 533 (Mum). This decision sparked some discussion in view of the fact that a trust is not an independent taxable entity and income of the trust is effectively taxed in the hands of the trustee as a representative assessee or in the hands of the beneficiaries. Accordingly, once tax has already been paid on the income of the trust, any distribution to the beneficiaries should not be subject to further tax. © Nishith Desai Associates 2014 Provided upon request only 26 III. Federal Estate Tax and Gift Tax in the US Apart from income tax, the United States of America (“US”) also imposes certain transfer taxes at both federal and state level. Amongst these, the most significant are the estate tax and the gift tax. The US follows a unified federal estate and gift tax system by which tax at graduated rates apply to the estate of a deceased individual and to gifts of property made by individuals. A. Federal Estate Tax61 The US imposes estate tax on the gross total of assets held by individuals at the time of his/her death. Estate tax is made applicable on the ‘taxable estate’ of an individual which would comprise his/her gross estate less any deductions that may be applicable.62 Federal estate tax in the US is applicable in two cases: ■■ Where a person is a US citizen or domiciliary i.e. he has domicile in the US: For US income tax purposes, residence is determined on the basis of the number of days of physical presence or stay in the US. As opposed to this, transfer taxes in the US work on the concept of domicile. Any individual who is living in the US without displaying the intention to leave the US may be considered as being domiciled in the US for estate and gift tax purposes. However, no litmus test has been laid down for determining domicile and several factors are taken into account for the determination of whether a person is domiciled in the US.63 Where a person is a US citizen or considered to be a US domiciliary, estate tax is applicable on the fair market value of worldwide assets owned by such person at the time of death. Estate tax on US citizens or domicilaries range from 18% to 40% depending on gross value of assets. However, as of 2014, US citizens and residents are entitled to an estate tax exemption of USD 5.34 million (recalibrated annually from USD 5 million based on inflation).64 ■■ Where a non-US citizen or resident has US situs property at the time of death. As far as non-US citizens/domiciliaries are concerned, estate tax is applicable on fair market value of US situs assets, which include primarily real and tangible personal property situated in the US (as determined under the Internal Revenue Code (“IRC”) read with applicable estate tax treaties) and shares of a US corporation. Estate tax in the case of non-US citizens/domiciliaries also extend from 18% to 40% depending on gross value of US situs assets and as of 2014, are entitled to an exemption of USD 60,000 (inflation benefits are not applicable).65 However, certain deductions may be made and exemptions may be availed on the gross total value of assets before determining the ‘taxable assets’, as below66: ■■ Deductions may be made for funeral and administrative expenses, debts, taxes and losses67; ■■ Deductions may be made for the value of a property donated to a qualifying charitable institution anywhere in the world; ■■ All transmission of property to a US citizen spouse is exempt, while estate taxes payable on transmission to a non-US citizen spouse (including a US domiciliary) may be deferred till the death of such spouse if effected through a Qualified Domestic Trust mechanism. ■■ As mentioned above, an exemption from estate taxes upto USD 5.34 million is available for US citizens and domiciliaries while an exemption upto USD 60,000 is available for non-US citizens/ domiciliaries. Further, under the IRC, certain assets, although transferred by the deceased person prior to death will be added to his ‘taxable assets’ on death. This would be applicable to revocable transfers (as in case of a grantor trust), transfers with retained life estate, gifts made within 3 years prior to death, transfers actuated after death etc. All persons subject to federal estate tax must file a federal estate tax return in Form 706 (for US citizens/ domiciliaries) and Form 706-NA (for non-US citizens/ 61. We are qualified to advise on Indian law only. Any statement with respect to laws of other jurisdiction should be confirmed by the local counsels of the respective jurisdictions and should not be considered as legal advice. 62. IRS guidance on estate tax, available at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax. 63. IRS FAQs on estate tax, available at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Estate-Taxes 64. Ibid. 65. CCH, US Master Estate and Gift Tax Guide, 2013, CCH Tax Law Editors. 66. Ibid. 67. Non US citizens/domicilaries may only claim deduction for the fraction applicable to US situs property. Taxation Issues Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 27 domicilaries) within 9 months from date of death of the deceased.68 B. Federal Gift Tax Similar to estate tax, gift tax is applicable to US citizens and domiciliaries, on any transfer of property without full consideration. Unless there is retention of intention on transfer, gift tax is applicable to the donor for transfer of any cash, shares, real estate or other tangible/intangible property.69 Like estate tax, gift tax is applicable as per the unified graduated rates ranging from 18% to 40% depending on the value of the gift. As of 2014, while the unified exemption of USD 5.34 million (recalibrated based on inflation) is applicable in case of all taxable gifts made during one’s lifetime, a yearly exemption is also available for every calendar year. For the year 2014, the annual gift tax exemption is USD 14,000.70 However, certain gifts are not considered taxable gifts for the purpose of gift tax. These are71: ■■ Gifts to political organizations; ■■ Gifts to charitable organizations; ■■ Gifts made to US citizen spouse (Gifts made to a non-US citizen spouse are exempt only upto USD 145,000 in the year 2014); ■■ Medical or education expenditure incurred on behalf of someone and paid directly to the institution. The recipient of a gift generally has no tax liability in the US. Although no gift tax is to be paid by the donee, gifts received by US citizens or domicilaries from non-US citizens/domiciliaries in excess of USD 100,000 must be reported in Form 3520. Although gifts are generally not included in income for the determination of income tax payable, certain gifts such as gifts received in promotional events and gifts received from employers that are beneficial are taxable as income tax under the IRC.72 Every donor who has a taxable gift must file a gift tax return in Form 709 before the April 15th following the year where the gift was made.73 As of 2014, the graduated rates applicable for both Federal Estate tax and Federal Gift Tax (based on value of assets/property gifted) are provided in the below table. Rates specified below have a graduated application such that each rate would apply to each band and then aggregated. 68. Which may be extended by 6 months upon request; See IRS guidance on Filing Estate and Gift Tax Returns, available at: http://www.irs.gov/ Businesses/Small-Businesses-&-Self-Employed/Filing-Estate-and-Gift-Tax-Returns. 69. IRS FAQs on Gift tax, available at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes#2. 70. Ibid; CCH, US Master Estate and Gift Tax Guide, Supra, Note 4. 71. Ibid. 72. IRS Guidance on Gifts from a Foreign Person, available at: http://www.irs.gov/Businesses/Gifts-from-Foreign-Person. 73. Supra, Note 7. Value of ‘taxable assets’/gifts in USD Rate 0-10,000 18% 10,000-20,000 20% 20,000-40,000 22% 40,000-60,000 24% 60,000-80,000 26% 80,000-100,000 28% 100,000-150,000 30% 150,000-250,000 32% 250,000-500,000 34% 500,000-750,000 37% 750,000-1,000,000 39% >1,000,000 40% © Nishith Desai Associates 2014 Provided upon request only 28 IV. Inheritance Tax in the UK In addition to income tax, the United Kingdom (“UK”) also imposes inheritance tax. UK inheritance tax is payable on the demise of an individual with respect to the estate owned by such individual. It is also payable on trusts or gifts made during someone’s lifetime, if the cumulative value of such gifts and settlement into trusts in the immediately preceding 7 years exceeds the threshold applicable in case of estate passing on at the time of one’s death. A. Applicability Inheritance Tax is applicable to an individual’s worldwide property if the individual is UK domiciled and deemed domiciled at the time of transfer of assets. With respect to other individuals, it is applicable only to the extent of their properties located in the UK. The country of domicile of an individual is generally the domicile of one’s father at the time of birth. However, that could change after attaining the age of majority if the individual settles down in a different country with an intention to reside permanently in such country. In addition, individuals would be deemed to be UK domiciled if: ■■ they were domiciled in the UK within the 3 years immediately before the transfer, or; ■■ they were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year of transfer. The India-UK Inheritance Tax Treaty does not offer much relief except with respect to specifically laying down clear rules with respect to determining the situs of different kinds of property. B. Computation Inheritance tax is applicable on the estate of a deceased person valued at more than the prescribed threshold, which is revised from time to time (£325,000 in 2013-14). Inheritance tax is payable at 40% on the value of the estate in excess of such threshold or at 36% if the estate qualifies for a reduced rate as a result of a charitable donation. The estate is valued by adding up the value of all the assets in the estate - such as a house, possessions, money and investments; and deducting any debts the deceased may have owed, including household bills and funeral expenses. An estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in trust. Since October 2007, married couples and registered civil partners can effectively increase such threshold when the last of the two of them dies (to as much as £650,000 in 2013-140). Their executors or personal representatives must transfer the unused inheritance tax threshold or ‘nil rate band’ of the spouse or civil partner whose demise occurs first to the other spouse or civil partner when they die. In case of gifts and trusts, where they are subject to inheritance tax as described above, tax is liable to be paid at 20%. In case the settlor of the trust dies within 7 years of settling the trust, an additional 20% tax becomes payable from his estate. Finance Act 2014 has introduced a measure that impacts individuals who are non-UK domiciled and non-UK resident who have deposited borrowed sums in UK bank accounts denominated in a foreign currency. Under the new measure, there will be no deduction allowed for the purposes of inheritance tax, from the value of an estate where the borrowed funds have been put into a foreign currency bank account, either directly or indirectly.74 C. Important Exemptions Even if one’s estate is over the threshold, the individual can pass on assets without having to pay inheritance tax in the following circumstances: ■■ Spouse or civil partner exemption: There is generally no inheritance tax payable on any part of the estate passing on to one’s spouse or civil partner who has his / her permanent home in the UK; the exemption is also applicable to gifts made during the individual’s lifetime. ■■ Charity exemption: Any gifts made to a ‘qualifying’ charity either during one’s lifetime or under one’s will, will be exempt from inheritance tax. ■■ Wedding and civil partnership gifts: Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount. ■■ Business, Woodland, Heritage and Farm Relief: If the deceased owned a business, farm, woodland or National Heritage property, some relief from inheritance tax may be available. 74. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293805/TIIN_9002_inheritance_tax_liabilities_and_foreign_ currency_bank_accounts.pdf Taxation Issues Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 29 D. Liability to Pay Generally, the executor or personal representative pays the inheritance tax using funds from the deceased’s estate. However, in case of inheritance arising from transfer of assets into a trust, the trustees are usually responsible for paying inheritance tax on assets transferred into a trust. E. Reporting An inheritance tax form needs to be filled out as part of the probate process even if no inheritance tax is due. Different forms are to be filled out depending on where the deceased lived, and whether there is any inheritance tax to pay. Person/(s) claiming grant of probate must pay some or all of any inheritance tax due before being able to obtain grant of probate. © Nishith Desai Associates 2014 Provided upon request only 30 Wealth Planning For Global Families ■ Indian Ultra High Net Worth Households increased by 16% in FY 2013-14 (‘Top of the Pyramid 2014’ Report) ■ Almost 90% of Indian businesses are family run ■ More than 66% of business families in India do not have succession plans in place WEALTH PLANNING OBJECTIVES BUSINESS SUCCESSION PLANNING ■ Control: Retaining family control over business, managing overlap between family and business ■ Governance: Effective governance of family and business holdings ■ Value: Maintaining value of the business and individual shares of family members ■ Conflict: Exit options and dispute resolution SUCCESSION PLANNING FOR THE FAMILY ■ Balancing personal wishes with bequeathals required by community specific succession laws ■ Maintenance obligations in a joint family ■ Provision for and protection of dependents ■ Religious and charitable endowments INCREASING GLOBAL ASPIRATIONS ■ Governance model for multi-jurisdiction business ■ Achieving tax efficiency and flexibility from an Indian regulatory perspective with beneficiaries and assets across jurisdictions CHALLENGES TO WEALTH PLANNING COMMUNITY SPECIFIC SUCCESSION LAWS ■ Hindu joint family property can be disposed only for family “benefit” ■ Muslim law permits only 1/3 property to be bequeathed EXCHANGE CONTROL REGULATIONS ■ Only up to USD125,000 p.a. per person may be remitted offshore for specific purposes. ■ Settling an offshore trust with certain non-cash assets may require prior regulatory approval. LIMITED STRUCTURING VEHICLES ■ Foundations and life insurance policies as asset holding vehicles not recognized in India ■ Foreign hybrid entities e.g. S Corps, LLCs, may not be recognised for pass-through taxation TAX AND COMPLIANCE BURDENS ■ Reinvestment into offshore residential property ineligible for capital gains tax relief; separate disclosure of foreign and Indian assets TYPICAL STRUCTURING OPTIONS USE OF MIRROR TRUSTS ■ Restrictions on settlement of Indian property into an offshore trust or offshore property into an Indian trust leading to parallel trust structures for Indian and non-Indian assets ■ Mirror trusts require close thought to be paid to governance issues to ensure that the two trusts work in tandem to accomplish a single set of objectives ■ Gradual acceptance of institutional trustees and protectorship structures USE OF CORPORATE HOLDING STRUCTURES ■ Wealth pooling in offshore holding company more efficient, usually in Mauritius or Singapore due to treaty advantages ■ Option of having company shares held by a trust for flexible governance and planning around possible introduction of CFC rules ■ Greater certainty on Indian taxability of offshore companies as compared to offshore trusts [email protected] www.nishithdesai.com © Nishith Desai Associates 2013 MUMBAI SILICON VALLEY BANGALORE SINGAPORE NEW DELHI MUNICH 4. Certain Specific Concerns I. Wealth Planning For Global Families Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 31 MUMBAI SILICON VALLEY BANGALORE SINGAPORE NEW DELHI MUNICH Global Families: Control, Governance, Valuation, Conflict Inter-Generational Issues First Generation ■ Specific vision ■ Certain values ■ Sacrifices to set up business Second Generation ■ Different values/vision ■ Sibling rivalry ■ Challenges of growing established business Third & Later Generations ■ Reducing shares ■ Cousin rivalry ■ Desire for independence ■ Feeling of entitlement ■ Incompetence ■ Division into core and non-core family members ■ Impact of foreign matrimonial property laws ■ Maintenance of dependents Tools ■ Family Constitution: Document outlining business and family values ■ Family Meeting/Assembly/Council: Governance structures as per needs of family size and spread, may also be a forum for conflict identification & resolution ■ Family employment policy: One method to ensure competent family members manage the business ■ Dividend Policy: Transparent policy to manage income expectations of core and non-core family members ■ Trusted Advisor: May be an institution or family friend to advise the family ■ Family Office: Company that manages investments for a single family [email protected] www.nishithdesai.com © Nishith Desai Associates 2013 Founder(s): Patriarch & Matriarch Elder Child & Spouse Resident Child & Spouse Resident Child & Spouse Non Resident Child & Foreign Spouse Unmarried Daughter Minor children Non Resident Child & Spouse Younger Child & Spouse Trusted Advisor No Heirs © Nishith Desai Associates 2014 Provided upon request only 32 II. Intellectual Property and Succession Planning Under Indian Law Intellectual property is today as important, if not more, as traditional physical assets for a number of reasons. To name but a few, these reasons would be increasing use of technology in personal and business activities, globalization, targeted investment in research and development and the proliferation of start-ups. As a consequence, intellectual property (“IP”) and rights in such IP have become precious sources of value and are being treated and managed like any other financial asset. A. Need for Succession Planning in Case of IP IP is a generic term encompassing specific types of property, each with their special characteristics. For example, copyright, trademark, design, patent, each are different types of property. The nature of IP rights and the kinds of protection available for each such right are different across countries. This gives rise to the need for active vigilance and management to ensure that the IP rights are not infringed and to provide for remedies when infringed. Given that such varied property and rights are involved, it is important for creators and assignees of IP to plan in advance for the management of their IP after their demise. This will ensure that their hard work is preserved and available for their successors and heirs like other traditional forms of wealth. IP owners will need to consider issues such as the ability to monetize such intangible assets; accumulate value in them; pass on benefits in such assets to desired beneficiaries; protect such assets against third party claims; guard against external risks including privacy violation and identity dilution. Death may actually cause a surge in an individual’s popularity and the associated income from the licensing of their image or likeness. This phenomenon was most clearly illustrated with the estate of Michael Jackson, who received an intense amount of interest (and a large surge in income) following his death.75 Michael Jackson leads the Forbes list of top-earning dead celebrities in 2013.76 Since IP rights are country-specific, it is imperative to understand the nature of protection afforded to IP rights in each jurisdiction to exploit and derive commercial gains out of an IP across the globe. For example, an ‘image right’ (i.e. right of a celebrity to protect the use and exploitation of one’s name, brand, identity etc.) is protected under the laws of Guernsey. Even India appears to have taken steps towards the recognition of such rights. For instance, in the case of DM Entertainment Pvt. Ltd. v. Baby Gift House 77, where popular singer, Daler Mehndi alleged that the importation and sale of dolls resembling Daler Mehndi’s likeness without his prior permission were an infringement of his right to control the commercial exploitation of his persona, the Delhi High Court recognized his “proprietary interest in the profitability of his public reputation or persona”. However, this liberal stance taken by the Court was facilitated to a large extent by the fact that the celebrity had proactively taken steps to protect his interest in his personality. The plaintiff company was incorporated with the object of managing Daler Mehndi’s career and all the rights, title and interest in his personality inherent in his rights of publicity along with the trademark “DALER MEHNDI” as well as the goodwill vested therein had been assigned to the plaintiff company. This might not always be the case. Since the jurisprudence on such issues is limited, Indian law in respect of such rights continues to remain in its nascent stage and the protections are not very extensive. In case of certain kinds of IP (like patents), statutory protection is available only on registration of the IP with the relevant regulatory authorities. However, in case of other kinds of IP (like trademark and copyright), such registration is not mandatory and registration, if made, only leads to a rebuttable presumption with respect to rights on the IP in question. Further, in lieu of statutory reliefs, relief could also be claimed under the general principles of common law in case of certain IPs (like the relief with respect to passing off for trademark). Certain kinds of IP like trade secrets and know-how, for which there is no protection offered by any specific statutory law in India, are also protected under the common law (under the doctrine of breach of confidentiality). Further, the nature of the rights, including aspects such as the duration for which rights are available, the persons entitled to such rights and the restrictions applicable to their exercise are also different across countries and across different kinds of IP. For example, in case of cinematographic films, both the producer are entitled to the copyright in the 75. http://www.srr.com/article/right-of-publicity-an-often-overlooked-asset-in-estate-planning 76. http://www.forbes.com/sites/dorothypomerantz/2013/10/23/michael-jackson-leads-our-list-of-the-top-earning-dead-celebrities/ 77. MANU/DE/2043/2010 Certain Specific Concerns Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 33 film; in case of lyricists, scriptwriters and composers, whose work is utilized in the making of the film, are also entitled to copyright in their work except when the work used for the purposes of the film; in case of trademarks, there is no upper limit on the period for which the protection is available; in case of patents, the protection is available for 20 years and is subject to compulsory licensing in certain circumstances. B. Succession Planning Methods There are various methods that could be used for succession planning. The most commonly used methods in India are bequeathing of properties under a will or settlement into a trust. i. Bequeathing Property under a Will In the case of a will, the devolution takes effect on the death (and not before) of the person writing the will and with respect to the properties of such person outlined in the will. wills could either directly confer properties on the persons named in the will or provide for the named properties to be settled into a trust. Such a trust is called a testamentary trust. In case of direct bequest of an IP right to more than one heir, it is important to note that in case of IP rights like copyright, in India, the rights therein can only be exercised jointly by heirs and/or others who co-own the rights, and not individually by each of them with respect to their proportionate share in the rights. This gives rise to the possibility of underutilization of the IP rights on account of differences between the heirs and/ or others to whom it has been so bequeathed. ii. Settling Property in a Trust Instead of a testamentary trust, a trust could also be created during the lifetime of the IP owner with such person being the sole beneficiary of the trust during his lifetime and rights of other beneficiaries arising only upon the demise of such person. Whether the trust is a testamentary trust or a non-testamentary trust, these mechanisms create an obligation on the trustee to manage the trust property (here the IP) in good faith and for the benefit of the beneficiaries. The creation of a trust separates the management of the IP rights from the heirs or others who are entitled to enjoy the benefit from the commercial exploitation of the IP rights. The role of the management of the IP rights is placed in the hands of the trustee named in the will or trust deed who would be required to act in accordance with the terms and conditions prescribed in the will or trust deed. This will help address the concern over the possibility of differences arising between such heirs and/or other beneficiaries. Further, trusts also offer the flexibility to ensure accumulation of income arising from the IP rights up to a certain specific point of time. In case of appointment of trusts, either by way of a will or directly, important considerations to be decided upon involve the choice of trustee – whether it should be a person known to the owner of the IP rights or whether it should be a professional trusts. The advantages of appointing a professional trustee are: i. Minimising risk of bias towards any one/more beneficiaries to the exclusion of others; ii. Expertise in management of finances and maintenance of detailed paperwork required for being able to protect itself as a trustee against challenges by beneficiaries and for substantiating compliance with tax liabilities; iii. Experience in handling situations not envisaged by the settlors in the will or trust deed. Keeping in mind the nature of the IP rights and the protection available thereof in different countries, it may be advantageous to have the ownership of the IP rights held by a trustee so as to be able to access the robust dispute protection mechanisms in place in such country or other important institutional framework put in place for comprehensive protection of IP rights. It is also important to outline guidelines to be adhered to by the trustee in commercially exploiting the IP rights. For example, the primary mechanism to be utilized by the trust in exploiting the IP – whether it should be licensed for payment of royalty in return or whether it should leave the exploitation of the IP rights to a copyright society and merely collect royalties from them and distribute them to the beneficiaries; the circumstances in which the IP rights should/ could be disposed/ assigned to a specified person or third party; etc. C. Digital Inheritance With the growth of electronic modes of communication, there is an increasing debate on the right to online accounts and other forms of digital property left behind by an individual post his/her demise. The concerns arising from conflict between privacy rights and inheritance rights are being increasing debated. Further, concerns such as © Nishith Desai Associates 2014 Provided upon request only 34 preventing identity theft and preventing spam are also important considerations. The battle by the parents of Benjamin Stassen to gain access to their deceased son’s Facebook account shows that these issues have become a reality. Benjamin Stassen committed suicide in late 2010 without leaving a note. Just like most youngsters, much of his personal information and data was held online. His parents wanted to look through his accounts to try and find some explanation for his suicide. However, Facebook and Google refused to assist, citing client confidentiality. The parents of Benjamin Stassen obtained a court order in 2012 forcing Google and Facebook to allow them access to the accounts of their late son.78 Some states in the US79 have enacted laws to address the above contingency. Connecticut, Idaho, Indiana, Oklahoma, and Rhode Island have enacted laws on the subject in the past few years. In Connecticut, Indiana, and Rhode Island, the law requires a death certificate and proof of an executor’s appointment to allow a representative to see accounts, according to the National Conference of State Legislatures. Idaho gives the executor or a personal representative the right to control the deceased’s social media, text messaging, and e–mail accounts. A will or formal order can open accounts in Oklahoma, while in Idaho, a will or court order can restrict access.80 Other than the above, there are no specific laws globally governing the rights associated with the digital property of an individual; they are predominantly only governed by the contracts that the individual enters into with the various digital service providers. In this light, it becomes important to explore the possibility of succession planning for such digital property (which includes listing out the digital assets one wants deleted), determining the best suited method thereof (will/ trust/ trust created under a will) and to be simultaneously mindful of the issues surrounding them such as ensuring secrecy with respect to handing over passwords, etc. III. Foreign Accounts Tax Compliance Act (FATCA ) with Special Reference to NRIs and Fund Managers 78. Nicola Plant, Test Case for Facebook and Digital Legacies, Pemberton Greenish (June 2012), available at: http://www.pglaw.co.uk/news/news-16-07- 12.html 79. We are qualified to advise on Indian law only. Any statement with respect to laws of other jurisdiction should be confirmed by the local counsels of the respective jurisdictions and should not be considered as legal advice. 80. Sarah Kellogg, Managing Your Digital Afterlife: Cyber Footprint Ownership, and Access, DC Bar (January 2013), available at: http://www.dcbar.org/ for_lawyers/resources/publications/washington_lawyer/january_2013/digital_afterlife.cfm IRS 100$ 100$ 100$ 70$ 70$ 70$ 70$ 100$ 70$ 70$ US CITIZEN US CITIZEN NFFE US CITIZEN US CITIZEN FFI INTERMEDIARY ENTITY NFFE US CITIZEN Reporting Obligations Ownership/Interest Withholding for Non-compliance NFFE NFFE FFI INTERMEDIARY ENTITY Certain Specific Concerns Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 35 Initially introduced under the Hiring Incentives to Restore Employment Act (“HIRE”), FATCA forms part of the US tax-regulatory framework that subjects virtually any entity, even if: (i) remotely invested in the US market; or (ii) dealing with US citizens / green-card holders living in India; or (iii) subsidiary of a US person, to strict due diligence and reporting compliances with the US Internal Revenue Services (“IRS”). These compliance burdens could include the requirement to engage with and enter into an agreement with the IRS, undertaking additional due diligence to identify US taxpayers invested / proposed to be invested in the entity, periodically reporting to the IRS and setting in place documentation and verification processes to undertake any or all of the above. A. FATCA Obligations Obligation Foreign Financial Institution Non-Financial Foreign Entity Impact On Private Client Structures 1. Identification Obligations ■■ Must identify the status of each of its accounts to determine if it is a US account, a Non-US account, or an account held by a recalcitrant holder of a non-participating FFI ■■ Must identify the ownership interest of each entity and determine if any such interest exceeds 10% (substantial ownership) under FATCA ■■ As regards US account holders and NRIs, there exist direct reporting obligations to the FFI with which accounts are held. In case of individuals investing through trusts (entities that are NFFEs), there would similarly be an identification obligation where ownership exceeds 10% 2. Documentation Obligations ■■ Documentation of the abovementioned US accounts ■■ Documentation of accounts of payees (other than account holders) ■■ No documentation obligations ■■ No direct documentation obligations 3. Withholding Obligations ■■ 30 percent on any withholdable payment made to a recalcitrant account holder or nonparticipating FFI ■■ Withholding must take place at the time of making payment ■■ No withholding obligations ■■ Withholding on payments made to recalcitrant individuals, imposed by the respective FFI. 4. Reporting Obligations ■■ A participating FFI agrees to report on specified U.S. individuals, specified U.S. owners of accounts held by owner-documented FFIs, and substantial U.S. owners of accounts held by passive NFFEs ■■ Reporting is also required with respect to aggregate payments made to non-participating FFIs in 2015 and 2016, and aggregate payment information on payments made to recalcitrant account holders ■■ Each NFFE has an obligation to provide its ‘Withholding Agent’ with details of substantial US owners, in any, and if none exist, a certificate to that effect. ■■ Reporting obligations imposed qua the FFI. © Nishith Desai Associates 2014 Provided upon request only 36 B. Important Considerations i. NRI’s Investment in India Primarily, Non-Resident Indians (“NRIs”) based in the US who are involved in India owing to investments or assets need to be wary of payments made out of the US for such investments. Several high net worth NRIs have planned their wealth through several investments involving India and unless financial institutions or funds or trusts used for such purpose are compliant, all payments would be subject to heavy withholding tax owing to the income being US sourced. Moreover, banks in India are looking to alienate American residents in order to avoid involvement of US sourced payments. Thus, NRIs will face difficulty in maintaining their accounts in India through which payments are routed. Furthermore, several NRIs have Indian roots in the form of Hindu Undivided Families (”HUFs”). If an NRI becomes the Karta (manager) of an HUF owing to succession, such HUF may very well be classified as an FFI based on its investments. In such a scenario, income received by the Karta from the HUF could be subject to 30% withholding tax. ii. Impact on Banks On an industry-wise approach, the banking industry in India will face a challenge in ensuring FATCA compliance. As of today, Indian banks have a Know- Your-Customer system established for verifying the identities of its customers. It has been opined that all processes related to opening of accounts and transactions as they are at present will have to be completely revamped by Indian banks to ensure compliance. The banks also need to ensure a continual system of monitoring US source payments and reporting of the same to ensure compliance. Apart from this, it is also important that all banks have a system in place to determine whether several accounts can be treated as one while calculating balance. In a situation involving several accounts, including joint accounts, as is seen in the case of several NRIs, this would be extremely difficult to implement. iii. Impact on the Investment Funds Industry The private equity and venture capital funds industry will also face a major brunt of the compliance burden imposed by FATCA. The final regulations have broadened the scope of ‘investment entity’ in such a way that fund managers, investment advisors and general partners in a limited partnership structure are bound to be affected. As per the definition of FFI, any entity that acts primarily for investment or that holds financial assets for another qualify under the Act. Therefore, all fund managers need to carry out preparatory work on their existing client base, client take-on procedures and on due diligence requirements under the FATCA. Since a lot of US sourced investments into India come through off-shore funds managed by Indian or Indian-affiliated fund managers, such entities need to ensure compliance to avoid the withholding tax. iv. Other Considerations Likewise, the definition of ‘holding company’ is also of relevance as all private equity structures or similar investment vehicle structures will fall under the purview of the FATCA. In addition, several Indian companies with substantial US interests, although not classified as an FFI, might be classified as an NFFE that needs to comply with FATCA requirements. Owing to the same, US based NRIs who have investments in India through mutual funds or hedge funds need to be wary as to whether such funds have subscribed to this regime. C. FATCA Compliance Timeline The important dates for FATCA compliance are: ■■ April 25, 2014: Registration timeline for all entities to first determine if they are in fact FFIs and consequently if they are, to register with the IRS; ■■ July 1, 2014: Payers of withholdable payments to have put in place processes and procedures to identify and categorise non-US payees for FATCA purposes; ■■ January 1, 2015: FFIs begin withholding on US FDAP payments (ie.fixed or determinable annual or periodical payments) to recalcitrant high-value account holders; ■■ July 1, 2015: Complete due diligence on preexisting accounts to be performed; ■■ December 31, 2015: Complete due diligence to be carried on for all accounts by FFIs; and ■■ January 1, 2016: Begin withholding on all accounts. While India has not signed a formal intergovernmental agreement or IGA with the US in relation to FATCA, an ‘in-substance’ agreement was signed between the countries on and with effect from 11 April, 2014. Due to this, financial institutions in Certain Specific Concerns Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 37 India are now required to make FATCA disclosures (through the Central Board for Direct Taxes) to the US Internal Revenue Service – this would primarily relate to investments by account holders liable to tax in the US. India’s market regulator, the Securities and Exchange Board of India (“SEBI”) plans to issue guidelines to help financial institutions in India to identify accounts of persons liable to tax in the US, for the purpose of compliance with FATCA. Indian financial institutions receiving funds from offshore sources might have to undertake thorough searches of highvalue individual accounts to identify the nationality or residence of the account holders involved. According to news reports, SEBI plans to put in place a quantum-based system categorization — balances up to $50,000; between $50,000 and $1 million; and those exceeding $1 million – with the lower category likely to be exempt (along with products related to retirement) and the degree of scrutiny being the highest for the last category. SEBI might require financial institutions to complete identification of high-value investors before December 2014 and thereafter, report to SEBI on an annual basis. The review of relatively lower-value accounts could be extended to next year. The RBI, India’s banking regulator, also issued a notification (on 27 June, followed by SEBI’s circular of 30 June on similar lines) requiring financial institutions in India to be registered with US authorities and obtain the Global Intermediary Identification Number (GIIN) by 31 December 2014. However, the notification also refers to requirements applying only once a formal IGA has been signed, on which more details are expected from the regulators soon. The notification and circular also contain rules for Indian institutions with overseas branches in jurisdictions which have IGAs with the US or do not. IV. Non-Profit Entities in the USA In India, charitable activities are carried out by three forms of entities namely trusts, societies and section 2581 companies. These entities get regulatory relaxations and fiscal interventions in the form of tax exemptions from the State in recognition of the fact that the motive behind such operations are purely charitable and public benefit purposes. Principles governing structural governance of non-profit entities across the globe are more or less the same. In India, the Income-tax Act, 1961 governs taxation issues of non-profit entities. Similarly, in US the Internal Revenue Code (“IRS”) governs the taxation issues of such entities. Under the IRS, only two forms of voluntary organizations are recognized, namely public charity and private foundation. The most common types of organizations that work in the field of non-profit sectors are charitable, educational and religious organisations. Internal Revenue Code 501(c)(3) (“Code”) provides that a corporation, community chest, fund or foundation may qualify for exemption if it is organized and operated exclusively for charitable purposes. A. Basic Framework for United States “Non-profits” For a charitable organization to be tax-exempt under 501(c), it must be organized and operated exclusively for the exempt purposes listed in 501(c)(3). 501(c)(3) states: Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.82 An entity must be organized as a corporation, trust, or association for IRS to recognize the entity’s exemption,83 however, a partnership will not be 81. Indian Companies Act, 1956 will be replaced by the Companies Act, 2013 and the relevant section will be Section 8: formation of companies with charitable objects, etc. 82. 26 U.S.C. 501(c)(3) 83. IRS website, Life Cycle of a Private Foundation – Starting Out © Nishith Desai Associates 2014 Provided upon request only 38 exempt. Most non-profits are organized in the form of corporations, as formation of an association involves almost the same formalities as formation of a corporation, a corporation will provide a more certain legal structure, and in many jurisdictions, an un-incorporated association does not shield its members from liability.84 All organizations that qualify for tax exemption under 501(c) are designated private foundations unless specifically excluded from the definition under 509(a)(1-4).85 In effect, IRC 509 divides non-profits into two separate and distinct classes: “private foundations” and “public charities”.86 The latter class is favorable for tax purposes, since private foundations are subject to various reporting requirements and taxes on net investment income.87 Unlike public charities, private foundations risk various excise taxes.88 Under 509(a)(1-4), organizations considered public charities rather than private foundations (the default designation) include churches, educational organizations which maintain regular faculty and regular curriculum, hospitals or medical research facilities, and organizations which test for public safety. Further, public charities include organizations which have an active program of fundraising and receive contributions from many sources, including the general public, government agencies, corporations, private foundations or other public charities, or receive income from the conduct of activities in furtherance of the organization’s exempt purposes or actively function in a supporting relationship to one or more existing public charities.89 For such organizations to be considered public charities the aggregate of contributions should exceed 50% of a taxpayer’s contribution base for the taxable year.90 84. 2E-2E:5 Lexis Tax Advisor – Federal Topic § 2E:5.03 85. A private foundation is also a charitable entity and described in the IRS by section 509. The IRS issues a 509(a) ruling to every organization with a 501(c)(3) tax-exempt ruling. Section 509(a) of IRS, which includes references to Section 170(b), is called both a public charity ruling and a private foundation ruling. While the 501(c)(3) ruling designates an organization’s tax-exempt status, the 509(a) ruling further categorizes the organization as either a public charity or a private foundation. This designation is important to a potential grantor because it indicates whether the granting organization will be required to exercise expenditure responsibility for the organization’s grant. IRS website, Private Foundations 86. Id. 87. Id. 88. Id. 89. IRS website, Public Charities 90. 26 U.S.C. § 170(b)(1)(A)(viii). IRC 501(c) TAX EXEMPT ORGANISATIONS (Figure 1: Tax exempt entities) Private Foundations (default) * Subject to various reporting requirements & taxes on net investment income * Risk of various excise taxes Private Operating Foundation Grant Making Foundation Exempt Operating Foundation Public Charities *To qualify must be specifically excluded from “private foundation” definition under IRC 509 Unless excluded under 509(a)(1-4) Certain Specific Concerns Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 39 Generally, public charities draw their support from a variety of sources, while private foundations typically “have a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and most have as their primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs.”91 If an organization is appropriately designated a private foundation, it is further classified as either a private operating foundation, an exempt operating foundation, or a grant-making foundation. The private operating foundations are those which contribute the majority of their resources to the active conduct of exempt activities. Such foundations are subject to the same restrictions and risks as other forms of private foundations (including the tax on net investment income), except that private operating foundations are not subject to an excise tax for failure to distribute income.92 Further, contributions to private operating foundations described in Code section 4942(j)(3) are deductible by the donors to the extent of 50 percent of the donor’s adjusted gross income, whereas contributions to all other private foundations are generally limited to 30 percent of the donor’s adjusted gross income.”93 A private operating foundation is only classified as an exempt operating foundation—and thus not subject to the tax on net investment income subject to the condition that :(i) it has been publicly supported for 10 years; (ii) governing body consists of individuals less than 25 percent of whom are disqualified individuals and is broadly representative of the general public; and (iii) has no officer who is a disqualified individual during the year.94 In case private foundations that do not qualify as private operating foundations, they are generally referred to as grant-making foundations or private non-operating foundations.95 B. United States Regulation of International NGOs A United States non-profit may conduct all or part of its charitable activities in a foreign country without jeopardizing its tax-exempt status96 (subject to the laws and regulations of the country of origin). Further, an organization’s tax-exempt status will remain unchanged even if it distributes funds to individuals or other organizations that are not charities, so long as the distribution is charitable and aimed at achieving the organization’s purpose.97 Interestingly, the U.S. government does not interfere with how the NGO accomplishes its purposes. NGOs are free to recruit participants for their organizations as they wish, and need not provide notification to any government agency about its membership, activities, or outreach. Like other U.S. organizations and companies, U.S. NGOs must refrain from working with governments or individuals under U.S. sanctions, as well as with groups designated as foreign terrorist organizations, but otherwise, they are free to collaborate with foreign NGOs or foreign governments to achieve their purposes. There are no regulations that restrict U.S. NGOs from attending conferences abroad, finding donors overseas, or performing work internationally.98 Accordingly, United States non-profits may exercise significant flexibility in conducting affairs abroad without foregoing tax-exemption. Contributions to such non-profits are only deductible however, if the contribution is in fact to or for the use of the domestic organization and the domestic organization is not serving as an agent for, or conduit of, a foreign charitable organization.99 C. 501(c)(3) Entities Operating in India and Entitlement to Treaty benefits Taxation of income in India is governed by the provisions of the Income Tax Act, 1961 (“ITA”). The ITA contains separate rules for the taxation of residents and non-residents. Residents are taxable on worldwide income, while non-residents are taxable only on Indian-source income (i.e. only and to the extent that such income accrues or arises, or is deemed to accrue or arise in India or is received or deemed received in India). 91. IRS.gov, Life Cycle of a Public Charity/Private Foundation 92. 26 U.S.C. § 4942(j)(3). 93. IRS.gov, Private Operating Foundations 94. IRS.gov, Exempt Operating Foundations 95. IRS.gov, Grant Operating Foundations 96. IRS Memorandum (hereinafter “IRS Memo”), Office of Chief Counsel, 200504031 at p. 2 (28/01/2005) (citing Rev. Rul. 63-252, 1963-2 C.B. 101). 97. Id. 98. Fact Sheet: Non-Governmental Organizations (NGOs) in the United States, U.S. Dept. of State, http://www.humanrights.gov/2012/01/12/fact-sheetnon- governmental-organizations-ngos-in-the-united-states/ 99. IRS Memo, p.2. © Nishith Desai Associates 2014 Provided upon request only 40 Such taxability of non-residents on their Indiansource income is however subject to the provisions of the applicable tax treaty to the extent they are more beneficial to the non-resident. In addition to the conditions prescribed under the relevant tax treaty regarding the applicability of such tax treaty, the ITA prescribes certain additional conditions for availing the benefit of a tax treaty entered into by India.100 The foremost requirement for the applicability of the India-US tax treaty (“Treaty”) to a charitable organization which is a tax exempt entity under the Code, is that it should qualify as a person as defined in the Treaty. Article 3.1(e) and 3.1(f) of the Treaty provides that the term “person” includes an individual, an estate, a trust, a partnership, a company, any other body of persons, or other taxable entity and the term “company” means, any body corporate or any entity which is treated as a company or body corporate for tax purposes respectively. If the charitable organization does not qualify as either of the specific entities (particularly trust, company, any other body of persons), it is important to analyze the meaning of the terms ‘taxable entity’. The term should not mean an entity actually taxed, but an entity that may be ‘liable’ to tax under the relevant domestic regime. To the extent that the tax free status of a charitable organization is derived from a specific exemption provision pursuant to a 501(c)(3) registration, we can assume that the charitable organization would otherwise have been considered a taxable entity in the United States. However, this position has not been free of doubt and there have been judicial views to the contrary. But, the position would not be relevant if the charitable organization qualifies as either of the specific entities (particularly trust, company, any other body of persons), in which case it should qualify as a ‘person’ irrespective of its tax-exempt status. The next requirement for availing the benefit of the Treaty is that the charitable organization should be a resident of the US as defined in Article 4.1 of the Treaty.101 In this context, the nature of the entity the charitable organization is set up as – body corporate, trust, foundation, etc becomes important. If the charitable organization is established as an entity (for example, a body corporate) which is not one of the entities referred to in Article 4.1(b) above (particularly a trust), to qualify as a resident of the US for the purposes of the Treaty, it would have to satisfy only one test – it should be ‘liable’ to tax in the US in the manner outlined above – i.e., by reason of domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. Also, as already highlighted above, it should possess a tax residency certificate issued by the US government with respect to the period for which it proposes to claim Treaty relief. However, if it is established as either of the entities referred to in Article 4.1(b), it will also have to satisfy the additional test of being actually subject to tax in the US. Therefore, given that its income is exempt from tax under Section 501 of the IRC, to satisfy the condition, its income should be subject to tax in the hands of its beneficiaries. D. Concluding Comments To avail of the tax-exemptions, a growing number of new ventures have elected to be non-profit organizations. Many of these ventures depend on federal tax exemption to scale-up their business and conduct charitable work at the same time. 501(c) (3) provision, besides being used for charitable activities, can also be used by entities to gain new forms of capitalization and business plans. However, the Code prescribes strict regulatory requirements and adherence to IRS Regulations. In addition, statewise compliances are also required to be followed. Non-filing of paper work or mis-stating the records of funds may jeopardize the tax-exempt status. Moreover, all due care must be taken to ensure that no lobby is conducted in the name of charity and activities arising out of such charitable work does not benefit any private citizen. 100. The non-resident should obtain a tax residency certificate (“TRC”) from the government of which he is a resident pertaining to the relevant period; the non-resident should furnish certain prescribed particulars to the extent they are not contained in the TRC; the non-resident should obtain a tax id in India (called the permanent account number); and the non-resident should file tax returns in India 101. Article 4.1 of the Treaty, reads thus: For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, provided, however, that (a) this term does not include any person who is liable to tax in that State in respect only of income from sources in that State; and (b) in the case of income derived or paid by a partnership, estate, or trust, this term applies only to the extent that the income derived by such partnership, estate, or trust is subject to tax in that State as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. Certain Specific Concerns Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning 41 V. Acquisition of Property in the UK: Impact of LRS and UK’s New Tax Regime for Immovable Property High-net worth individuals (“HNIs”) in India have often looked at acquiring immovable property abroad, and amongst various destinations such as Dubai, New York and Singapore; UK has remained to be a constant favorite. These acquisitions could be investment oriented (due to the expected price appreciation in the value of property) or luxuryoriented as the property serves as a holiday home for HNIs frequenting Europe on a regular basis. The most common route for acquisition of immovable property in UK has been through setting up offshore company or trust structures in a tax friendly jurisdiction like Guernsey or Jersey. Resident Indian individuals make use of the Liberalized Remittance Scheme (“LRS”) for remitting funds for acquiring this foreign property. However, changes in UK tax law and in Indian capital control measures over the course of 2013 had adversely affected the otherwise popular investment choice. That said, the attraction of UK (especially London) properties for Indian HNIs has not diminished and the recent relaxation of Indian capital control measures this year may help to facilitate this further. A. Acquisition of Immovable Property in UK The use of holding company structures used to be a common practice for acquiring immovable property in UK. Apart from maintaining confidentiality of the holder of property, primary advantages of an offshore holding company structure include the mitigation of stamp duties, and inheritance tax in UK. However, this is no longer tax advantageous, owing to the recent changes in the UK tax regime that were made particularly to tackle such structures. Under the new regime, with effect from 1 April 2013, companies that own high value residential property must pay a tax called the the Annual Tax on Enveloped Dwellings (“ATED”). Charitable companies using the property for charitable purposes are exempt. The ATED applies to property valued at more than £2 million as on 1 April 2012, or at acquisition if later.102 However, Finance Act 2014 has introduced lower thresholds. From 1 April 2015 a new band will come into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. For those persons who fall into this new threshold there will be a transitional rule where returns will be due by 1 October 2015 and payment by 31 October 2015. From 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500 .103 Further, a capital gains tax is also imposed on offshore companies on sale of immovable property on the increase in value of the property between 6 April 2013 and the date of sale. A punitive stamp duty of 15% (as opposed to 7%) is also levied on an offshore company, in case of any purchase of a residential property having a value of over £2 million that has been purchased on or after March 21 2012. Owing to the above mentioned changes, nondomiciled UK individuals, including Indian resident individuals have been looking to either migrate to offshore trust structures, or own the property in their own personal name, instead of owning through an offshore company. While the new UK tax regime has hampered property acquisition in UK making it less cost efficient, changes in Indian exchange control regulations are also to be kept in mind. B. Capital Control Measures in India Despite the liberalisation of the Indian economy, exchange control norms continue to regulate the inflow and outflow of money from the country. One such measure, the LRS restricts the purposes for and extent to which resident individuals can remit money outside India. Since the introduction of the LRS in 2004, the ceiling for remittances by an individual has been progressively increased and had remained steady from the year 2007 to 2013 with an upper limit of USD 200,000 per individual per year. However, in August 2013, reflecting the poor economic position of the rupee, capital controls were enhanced and the above remittance cap was reduced to USD 75,000 coupled with a a prohibition on resident individuals from acquiring foreign immovable property directly or indirectly under the LRS. Any gifts and loans provided by Indian resident individuals to their close relatives abroad was also subject to the cap of USD 75,000. The LRS circular 102. http://www.hmrc.gov.uk/ated/basics.htm 103. http://www.hmrc.gov.uk/ated/basics.htm © Nishith Desai Associates 2014 Provided upon request only 42 clarified that resident Indian individuals could set up joint ventures/ wholly owned subsidiaries overseas within the limit of USD 75,000. Prior to this, an Indian resident individual could establish shareholder control over a foreign entity only by way of third party acquisitions. However the joint venture / wholly owned subsidiary should be an operating entity and no step down subsidiaries are permitted to be set up. In view of the recent stability that the rupee has seen in the foreign exchange market, the RBI on 3 June 2014 had enhanced the LRS cap to USD 125,000 per individual per year. This minor revision provides very little relief as it was widely expected that the upper limit of USD 200,000 would be restored. That said, permission to invest in offshore immoveable property has been restored which is certainly a welcome change. Along with increasing the cap for offshore remittances by individuals, the RBI has also restored the cap for overseas direct investment by Indian corporates to pre-2013 limits. Indian corporates can invest offshore upto 400% of the net worth as per the last audited balance sheet. However, any investment greater than USD 1 billion in a financial year (even if within the 400% cap) will require prior RBI approval. Indian exchange controls are a determinative factor in private wealth structuring and opening up of capital controls will provide much more flexibility in terms of global wealth planning for modern day HNIs who are likely to have multi-jurisdictional wealth. It is hoped that there may be further relaxation in the LRS limits with greater stability in macroeconomic conditions. Certain Specific Concerns © Nishith Desai Associates 2014 Provided upon request only The following research papers and much more are available on our Knowledge Site: www.nishithdesai.com NDA Insights TITLE TYPE DATE Jet Etihad Jet Gets a Co-Pilot M&A Lab January 2014 Apollo’s Bumpy Ride in Pursuit of Cooper M&A Lab January 2014 Diageo-USL- ‘King of Good Times; Hands over Crown Jewel to Diageo M&A Lab January 2014 File Foreign Application Prosecution History With Indian Patent Office IP Lab 02 April 2013 Warburg - Future Capital - Deal Dissected M&A Lab 01 January 2013 Public M&A's in India: Takeover Code Dissected M&A Lab August 2013 Copyright Amendment Bill 2012 receives Indian Parliament's assent IP Lab September 2013 Real Financing - Onshore and Offshore Debt Funding Realty in India Realty Check 01 May 2012 Pharma Patent Case Study IP Lab 21 March 2012 Patni plays to iGate's tunes M&A Lab 04 January 2012 Vedanta Acquires Control Over Cairn India M&A Lab 03 January 2012 Corporate Citizenry in the face of Corruption Yes, Governance Matters! 15 September 2011 Funding Real Estate Projects - Exit Challenges Realty Check 28 April 2011 Real Estate in India - A Practical Insight Realty Check 22 March 2011 Hero to ride without its 'Pillion Rider' M&A Lab 15 March 2011 Piramal - Abbott Deal: The Great Indian Pharma Story M&A Lab 05 August 2010 Bharti connects with Zain after two missed calls with MTN M&A Lab 05 June 2009 The Battle For Fame - Part I M&A Lab 01 April 2010 Doing Business in India July 2014 Fund Structuring & Operations July 2014 Wealth & Estate Planning August 2014 Dispute Resolution in India February 2014 Private Equity and Debt in Real Estate July 2014 Corporate Social Responsibility & Social Business Models in India July 2014 Investment in Education Sector February 2014 International Commercial Arbitration January 2014 Investment in Healthcare Sector in India December 2013 Indian & International Perspectives © Nishith Desai Associates 2014 Wealth & Estate Planning Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering, research by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him provided the foundation for our international tax practice. Since then, we have relied upon research to be the cornerstone of our practice development. Today, research is fully ingrained in the firm’s culture. Research has offered us the way to create thought leadership in various areas of law and public policy. Through research, we discover new thinking, approaches, skills, reflections on jurisprudence, and ultimately deliver superior value to our clients. Over the years, we have produced some outstanding research papers, reports and articles. Almost on a daily basis, we analyze and offer our perspective on latest legal developments through our “Hotlines”. These Hotlines provide immediate awareness and quick reference, and have been eagerly received. 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