Open System Prepaid Cards

Generally, there are two types of prepaid cards: related to closed (or semi-closed) systems, and open systems prepaid cards. Merchant gift cards, which replaced traditional gift certificates, are a good example of closed system cards. They are accepted only at a single merchant. Semi-closed system prepaid cards (mall cards, university cards) are issued by a third party, rather than the retailer who accepts the card.

Open system prepaid cards (sometimes referred to as network branded prepaid cards) are endorsed by a retail electronic payments network such as Visa, Visa Electron, MasterCard or Maestro, and are accepted anywhere where debit cards with the same logo can be used.

They are sometimes marketed as “prepaid debit cards” or instead “prepaid credit cards”, which is explained by two main features of such cards. It is a debit card in the first turn, as no credit is offered and you can spend only what you prepaid to your card. On the other hand, most prepaid cards can be used in many similar situations as traditional credit cards.

Prepaid cards are different from Charge cards that always require security deposit and have a specific settlement mechanism between the card’s holder and the issuing bank. They are also not the same as Stored-Value cards, as their value is not physically stored on the card and the card number only refers the merchant to the central database for information on the card’s balance.

How You Can Use a Prepaid Card

Prepaid cards is a very flexible payment instrument, which you can use for:

• withdrawal of cash from ATM;
• purchases anywhere, where you see the according logo of Visa, MasterCard or Maestro is accepted;
• purchases on the Internet; prepaid cards have a verification number, CVV – a security number on the back of credit cards that you need to make online payment;
• online booking and reservations of tickets, hotel, etc.;
• recurrent payments;
• subject to certain conditions, prepaid cards are accepted by PayPal, Ebay, Google AdSense.

5 Benefits of Prepaid Payment Cards

Same as with any debit cards you get a safe alternative to keeping your cash (in particular, when traveling), plus you are in full control of your spending (since no credit line is provided).

Comparing to regular credit cards you get:

• No credit report verification – you can get a prepaid card even with bad credit;
• No risk of incurring into debt – you cannot spend more than you deposited on the card, so you will not accumulate debt and interest charges to pay.
• Availability of online shopping, tickets and hotel reservations, same as with credit cards.
• Security – most prepaid cards come with built-in security and protection against unauthorized use. Same as with regular credit cards, using the chargeback mechanism you may be able to claim back any transactions that you didn’t make.

Sure, There Are Disadvantages

• No credit history — prepaid card issuers do not report your payments to the credit bureaus, so you cannot build your credit history by using a prepaid card. Unless it is a special customized “credit builder” card, which is a rather rare thing to meet and you should check specifically if this feature included.
• You cannot overdraft your prepaid card. Your spending limit is strictly limited with what you have put on the card.
• Unlike with regular credit cards, you cannot rent a car with the prepaid card or use it as a security deposit in hotels, or in any other place where the provider wants to be assured for a case of damage of his property.
• Some businesses involving payment of monthly subscriptions (for example, on the Internet) may refuse dealing with prepaid cards as they are afraid there will be no money on the card when it’s time to pay next monthly fee.
• Expenses associated with obtaining and maintenance of this type of cards are sometimes estimated as more expensive. However, this aspect is subject to separate consideration in each particular case.

Clarify These Points Before Applying for a Prepaid Card

Multiple branded prepaid cards are issued by different providers (where the word “prepaid” is not even present), each one may offer very different terms and conditions. Therefore, it’s important to know the key features of prepaid cards and clarify all aspects with the proposed card issuer in advance:

Whether the security deposit is required. Cards like Visa Gold, Visa Platinum, MasterCard Gold and others often require security deposit, even if they are offered as debit cards.

If the card is re-loadable or disposable. Disposable cards have certain purchase value and are valid only until you spend that amount of money. Re-loadable cards are more like regular credit or debit cards with the lifetime for several years and which you can re-load from time to time according to your needs. Reloadable prepaid cards are often used for recurring payments.

Will it be a personal card (in your name) or a corporate card (in company name). If you need a prepaid card for business purposes, you can have it issued on your company name.

Will it be attached directly to your main bank account, or a special sub-account. The latter option is more secure as you will be transferring the funds designated for the card to that special sub-account and only those will be available to spend with your card.

What are the fees and expenses associated with maintenance of your prepaid card. Most of the time, these are mainly fees for replenishment, ATM withdrawals/purchases and monthly fees.

Check if you can use it for online purchases. Most prepaid cards are suitable for this purpose, but may require preliminary activation of this feature with the card issuer. To ensure there are no problems with online payments using a prepaid card, you must have a verifiable name and address associated with the card. Most merchants want your name and billing address to match the name and address you have on file with your card issuer.

For re-loadable cards, what are the ways to load funds on the card – by cash at a bank branch, Post Office or at Payzone or PayPoint terminals, by credit card or bank transfer. Not all prepaid providers offer all of these loading options.

Ask what are the loading and spending limits! Prepaid cards providers may (and usually do) establish certain limits of how much and how often you can load funds to your card and spend them. There may also be set a minimum and/or maximum amount for each purchase.

Prepaid Cards for PayPal, E-Bay, Google AdSense

Now, this is a topic that generates tons of discussions. Generally, PayPal does not recommend adding prepaid cards to your PayPal account. However, certain types of prepaid cards will be accepted. The main requirement to the card is to be available for address verification systems, which PayPal uses to validate credit cards. You must have the card registered in your name. Make sure you also have your card registered for use on the Internet with the card issuer (if this feature is not active by default). Remember to register a new account on PayPal with the same address details that you have for your prepaid card. Otherwise you may have problems with registration or verification of your account. It is recommended to use a prepaid card that allows online viewing of transactions, so that you can see a PayPal test charge and a 4-digit verification code.

You will meet similar requirements for using prepaid cards with E-Bay, Google AdSense and other online services accepting payments by cards.

Anonymous Prepaid Cards (a Perfect Hook for Scams)

Anonymous prepaid card is a tempting vehicle for many people wishing to keep confidentiality and protect themselves from potential ID thefts.

Completely anonymous prepaid cards still exist, but they are more like gift cards, having certain purchase value of US$ 20-500 and they are not re-loadable. You can use them for online purchases, where your real name and address information are not required. Sometimes they are offered as virtual cards, to be used only for purchases on the Internet, but not available for withdrawal of cash at ATMs. Obviously, you will not be able to use them in serious places like PayPal or Google AdSense.

In all other cases, even if there is no name on the plastic, it still doesn’t mean the card is anonymous. In any case, the cardholder has been identified and known to the issuer of the card.

We would be very suspicious of organizations, which offer anonymous prepaid cards with unlimited load amounts without some form of ID check.

So, What Card Will Work for My Business?

Considering the above said, a decent prepaid card for business should be re-loadable, including by means of international wire transfer; requiring no security deposit; with high loading and spending limits; issued in your name or in the company name, but with a particular holder name and address associated with the card; attached to a separate account with no access to the main bank account of the company; having online access to view all payment transactions.

Where to Get One?

There are a lot of intermediary prepaid card providers on the Internet, readily assisting you by email, but whose name you’ve never heard before and whose phones never answer. You have no idea who these guys are, but you might be very tempted by their terms and conditions. In particular, if they don’t ask for much ID check. Without mentioning scams, for which this area is a fertile ground, you simply risk to get slow, bad quality service and unreasonable fees and charges. You also never know if you will be able to renew the card for another term when the first one is expired. A smaller unknown provider can simply wind up his business one day because of economical reasons. You will get left with no card and with some of the most needed services cut off (for example, if they were based on recurring charges on your prepaid card).

At the same time, many well-established offshore and onshore banks working with international clientele offer a very good choice of prepaid card products.

It is always advisable to order your prepaid card directly from the card issuer. And it is highly recommended that this issuer would be a company or a bank with an established name, or the one that you can verify its existence, whether it holds a proper license and where it is located.

This is a pretty solid piece of information we gave you about prepaid cards. Questions and comments are appreciated!

Read more articles on Offshore Advisor.

Prepaid Cards That Work for Offshore Business

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When you open an offshore bank account you most probably look to be able to operate in several currencies. The latter often results in holding separate accounts in different currencies. Many banks oriented to international clientele will certainly provide you with the necessary currency facilities, but not all of them secure the most efficient way for you to handle your transactions through these facilities. Your banking flexibility and maintenance expenses are not the last items to contribute to your commercial success.

Advantages to Holding Multiple Currency Accounts in One Bank

Once you operate in several currencies and have to hold separate accounts for each currency, holding all of them in one bank would be a perfect solution by a number of reasons:

• it makes your life easier in terms of the paperwork you have to prepare to open each new account comparing to opening them in different banks. One set of documents opens you several bank accounts;
• it simplifies foreign exchange conversion and minimizes foreign exchange risks. You get extra flexibility to switch from currency to currency and employ any currency diversification strategy to the best of your economic interests;
• as a rule, you can manage all your accounts within one Internet-banking session. Once you logged in, you have access to all of them, instead of keeping separate passwords and login details, which might be inconvenient and insecure.

Still, you should remember that holding separate accounts multiplies your banking expenses. Each account may involve a separate initial deposit requirement or a minimum account balance thereafter, plus extra bank fees for account maintenance, being charged monthly, quarterly or annually, depending on or regardless of the volume of transactions on the account.

From this point of view, holding one multi-currency account might be even a better solution.

Multi-Currency Accounts

With multi-currency accounts you can have a combination of foreign currency accounts under one account number. It gives you all the benefits of foreign exchange flexibility as with multiple currency accounts. Herewith, you have balances in different currencies on one and the same account and can wire money in and out in any currency including international SWIFT transfers with no restrictions or limitations.

Your expenses for maintenance of a multi-currency account are normally more favorable comparing to keeping multiple currency accounts. One account – one service fee, one minimum deposit to keep on it. The latter is especially actual for current commercial accounts.

With one multi-currency account you can normally handle as much currencies as you need, including USD, EUR, GBP, other major currencies and more. Just make sure your bank has a corresponding account in the needed currency.

For those who are looking to diversify from one main currency, for example, the US Dollar, but not sure at that particular moment, which other currencies he might want to have in a while, opening a multi-currency account is the most logical choice.

How to Open a Multi-Currency Account

Opening of a multi-currency account is not something really different from a regular offshore bank account. Some banks open you an account in multiple currencies by default, once you open an account with them.

You can always visit the bank in person. Quite often it is possible to open an account by mail.

Some banks do not open namely multi-currency accounts as described above. However, you are welcome to open a currency account in one currency of your choice, for the start, and you can add more currency accounts at any time later at your convenience with no extra paperwork involved.

Information on specific banks offering this service is available on the Internet, as well as from our consultants. Professional recommendation is never extra. We can consider your personal situation and introduce you to decent banks where we have long-term working relationship as business introducers.

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No Tax on Offshore Profits

Taxes are rather high in Guatemala. But the system of taxation is based on the territoriality principle, which means that none offshore income is chargeable with tax in Guatemala. Companies are subject to income tax only on their Guatemala source income. This rule equally refers to capital gains and distribution of dividends.

Regular monthly, quarterly and annual financial reporting is to be submitted to the local tax authorities. At the same time, offshore bank accounts of Guatemalan companies are not subject to local reporting.

Anonymous Corporations

A type of corporation you can register in Guatemala is “Sociedad Anonima”, having the abbreviation S.A. in the end of its name. The owners are not registered in any public register and are not part of information available to public.

The corporation may issue bearer shares.

Confidential and Safe Banking

The legal system of Guatemala is based on the civil law, which actually means that statute and legislative acts are the only source of law for judiciary decisions.

There are no treaties between Guatemala and any other country that would allow for exchange of information on the ownership of the company and its financial activity (no double tax agreements, nor tax information exchange agreements). It has mutual legal assistance treaties only with several Central American nations (USA and European countries are not on this list).

Guatemala has no such customs as secuestration order (secuestro), or similar instruments, by means of which the uncharitable people would be able to segregate and freeze your funds in the bank on the basis of mere allegations.

Guatemala does not honor civil judgments or fraudulent conveyance actions from civil judges in other countries. Same as it does not cooperate on collection of judgments from other countries.

The Central Bank of Guatemala (Banguat) regulates the activity of the country’s banking system, which is maintained by several largest local banks, having branches all over the region of Central America. Many world name foreign banks are also represented in Guatemala.

Spanish is the official language, but English is widely spoken by lawyers and bank personnel. Internet-banking in English is available, same as a wide range of popular bank products required by any business.

All in one, Guatemala offers very interesting opportunities to assist business owners expand to the growing global marketplace.

Feel free to contact us for assistance.

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Taxation of Worldwide Income

Every country has its tax specifics, but the key trend is the same. Countries taxing worldwide income of their residents, always want to be aware of all sources of your income and want you to pay proper taxes on every income from every source. For these purposes, most often they oblige you to submit the according personal reports annually. Except for a few countries, only a part of income not related to your home country neither by its source nor by your residence is tax-exempt.

As a matter of example, you may accumulate savings in an offshore bank account while working overseas as a non-resident. This is legal. When you return home, you again become a resident of your home country and need to declare the interest on your offshore account to meet your home tax obligations.

Transactions and Activities Beyond Concern of Tax Authorities

When it comes to individual transactions with tax havens, tax authorities are generally not concerned about such transactions as tourist expenditure on travel and accommodation; genuine gifts and inheritance from close relatives, where source of the funds has no connection to residents of your home country; earnings from your overseas employment (providing they are exempt from your home taxes); repatriation of offshore savings by former residents accumulated while working overseas; transfer of assets and capital to the country by immigrants, investments in real estate in a tax haven (provided rental and capital gains are properly reported and taxed in your home country).

Same as tax authorities do not question your right to take advantage of tax benefits available in low-tax jurisdictions when conducting offshore business activities. Thanks to modern communication methods and general people’s mobility, it is possible now to provide many services from remote locations.
It became so common and popular to make some transactions offshore, that many low-tax jurisdictions even acquired certain specialization and profile, for example, in financial holding activities, or as location for investment funds, captive insurance business, licensing and franchising, ship management and maritime operations. Even in case of trading and producing enterprises, no one is surprised to learn that they have offices, subsidiaries or parent companies in traditional international offshore financial centers.

Concealment is the Main Concern of a Taxman

What always makes a concern of your home tax authorities is concealment. It implicates that you intend to use secrecy laws to conceal the true ownership of assets and avoid declaring the related offshore income.

You surely have the right to protect your privacy, but if your only aim is to avoid taxes that would otherwise be payable, then no simple or complex arrangements, interposing offshore companies and trusts, trustees or nominees, offshore accounts in the most secret jurisdictions will make it legal.

Sham Doctrine

Inappropriately used offshore legal entities may be disregarded for tax purposes. Under the sham doctrine, a civil law concept, only the real intention of the parties to a transaction prevails in case it deviates from the formal wording of the contract or deed. What it means is that any alleged transaction by the offshore entity should be able to prove it on the basis of reliable documentation (contracts, balance sheets and other books and records), otherwise it might be recognized as “simulated” or sham.

Revenue authorities can also disregard certain transfers of income-producing assets (shares, other securities, intellectual property rights, cash and so on) to a foreign entity, which is subject to a privileged tax treatment (meaning to substantially lower tax rates or tax exemption), if the taxpayer is not able to prove the transaction had genuine business or financial purposes.

“Not Wholly Artificial” Test

Whatever offshore transactions you undertake, as a taxpayer you are supposed to be able to justify them on the basis of genuine economic and financial reasons. That is to say, you should be able to prove that the main purpose of incorporating offshore rather than in your home country was anything but avoidance of your home taxes; that the offshore company is not a “wholly artificial arrangement”, a company on paper, created solely for tax evasion, instead, it has a real business purpose, sometimes including a real business office in the country of incorporation; at least, that tax optimization was not the only aim.

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Lawful Use of Tax Havens

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A huge number of people from countries that, for one reason or another, have an unfavorable international image, dream of another nationality, which would allow them to travel freely and expand their potential for international employment. Perhaps, not a smaller number of websites offer them to solve this problem within a reasonable fee – get second citizenship and passport of a European country.

Currently, there is only one European country where you can obtain citizenship through economic citizenship program – Austria. You can invest in the country’s welfare and get Austrian citizenship and passport without permanent residence requirement. You have to make the investment before you apply for naturalization and still there is no guarantee you will be granted citizenship. There is no statutory requirement for the investment amount, but the recommended one to have chances to qualify is 2-3 millions Euro. These cannot be passive investments in governmental bonds or personal real estate and should bring real innovations to the country. Dual citizenship is not allowed. The program is not really encouraged or promoted by the government.

Knowing this, isn’t it surprising to hear that you can get a Swiss or Belgian passport for a little over than EUR 30,000 with processing time of 2-3 months?

Second Citizenship and Passport in Belgium

As a matter of example, if you are attracted by one of such proposals to get a citizenship in a European country, say, in Belgium, let’s look closer at Belgian residence and citizenship laws.

Dual citizenship is allowed in Belgium since 28 April 2008. If you become a citizen of Belgium, you don’t need to renounce your other citizenship.

Foreign nationals may be naturalized as a Belgian citizen only after 3 (three) continuous years residence in Belgium. Meanwhile, a permanent residence permit in Belgium (EU residence permit) gives you the right of free movement and residence throughout the EU/EEA countries, with stay up to 90 days in any Schengen zone country.

To apply for residence, an applicant must have certain ties to Belgium, personal or business. Legal ways to establish such ties with a country is a separate matter to discuss.

Following the technical formalities, first you are to get a long-stay residence visa (if you are not from an EU country), arrive to the country, within 8 days to register with the local authorities and get your temporary residence permit (mauve card), normally valid for 3 months. Once you have a fixed address and a regular income, within two weeks of moving to a permanent residence, you must apply for a foreigner identity card and to be officially registered in the foreign population register and get your permanent EU residence permit (blue card).

Then, after three years of residence in Belgium, you are entitled to naturalize as a citizen of Belgium. You can do it by way of declaration. The nationality declaration can only be signed in front of the registrar in the applicant’s municipality in Belgium. This declaration cannot be approved by a Belgian embassy or consulate. Herewith, you are to provide a proof of residence in Belgium along with the other documents supporting your case, and submit them to the administration of the commune where you live.

Your file will be processed by the Service des Naturalisations and the national House of Representatives (Chambre des Représentants), which may conduct further investigations, if needed. Finally, your request for naturalization becomes part of a legislative act to be sanctioned by the King and published in the “Moniteur belge”, the official journal of the national legislature. This is the moment when you get citizenship (from the date of publication) and then your Belgium passport.

On different stages you will be required to provide a whole bunch of personal documents, including certificate of birth (duly translated and legalized), marriage/divorce certificates, medical certificate from an approved doctor, police record, proof of financial situation, and sometimes get fingerprinted.

It’s hard to imagine how all that can be done in a legal way without you providing the necessary paperwork and especially without your personal presence in the country at least from time to time.

There is no “economic citizenship” or “citizenship-by-investment” program in Belgium, which would allow you to bypass the above mentioned residency requirement.

Under any legal option, you would be required to at least present personally within all institutions in Belgium for performance of formalities, and to provide a long list of personal documents in original.

Sometimes, the Internet proposal comes with “residency and passport” concept. Passport is a proof, or, better say, a “consequence” of naturalization. If you get a passport without a certificate of naturalization, this is an illegal document.

If you get both citizenship and passport, but by methods other than legal, including correctly issued passport but on the basis of fake documentation, it poses a significant problem to you. One day your citizenship may be deprived and you can get into even more troubles with the law.

European Citizenship and Passport

Laws governing naturalization of foreign nationals in other European countries are pretty similar. Normally, there are provisions in place in each country giving privileges to stateless persons, refugees, persons having close ties with the country, who can apply for citizenship without any prior residence requirement, subject to proof and documentary evidence of ancestry, ethnicity, family, marriage etc.

Otherwise, you may be entitled to naturalization under common rules based on residency requirements. It’s only the qualifying number of years of residence that differs from country to country. Herewith, you are to hold a permanent residence permit, legally issued and maintained. A substantial strictly physical presence during that period is required, as well as sufficient knowledge of the country’s official language and proof of the financial welfare.

Additionally, a number of countries do not recognize dual citizenship, meaning that you would have to relinquish your current citizenship before or following acquisition of the second one. The below summary should be of help in this regard.

• Austria: maintains official citizenship-by-investment program. Other than that, a permanent residence in the country during 10 years is required. Dual citizenship is NOT allowed.
• Belgium: requires 3 years of residence, dual citizenship is allowed.
• Bulgaria: 5 years of residence, dual citizenship is NOT allowed.
• Cyprus: 5 accumulated years of residence in the last 8 years period, dual citizenship allowed.
• Czech Republic: 5 years of residence, dual citizenship is NOT allowed.
• Denmark: 9 years of residence, dual citizenship is NOT allowed.
• Estonia: 5 years of residence, dual citizenship is NOT allowed.
• Finland: 6 years of residence, dual citizenship is allowed.
• France: 5 years of residence, dual citizenship is allowed.
• Germany: 8 years of residence, dual citizenship is NOT allowed.
• Greece: 10 years, dual citizenship is allowed.
• Hungary: 8 years, dual citizenship is allowed.
• Iceland: 7 years, dual citizenship is allowed.
• Ireland: abolished its citizenship-by-investment program in June 2001. Now a permanent residence in the country during 4 out of 8 years is required. Dual citizenship is allowed.
• Italy: 10 years of residence, dual citizenship is allowed.
• Latvia: 5 years of residence, dual citizenship is NOT allowed.
• Lithuania: There is no formal “citizenship-by-investment” program in Lithuania, but its current legislation provides for opportunities similar to those of Austria, with applications to be considered on a case-by-case basis and citizenship granted in very special occasions. Other than that, 10 years of residence are required. Dual citizenship is NOT allowed.
• Luxembourg: 10 years of residence, dual citizenship is NOT allowed.
• Malta: 5 years of residence, dual citizenship is allowed.
• Netherlands: 5 years of residence, dual citizenship is NOT allowed.
• Norway: 7 of the last 10 years, dual citizenship is NOT allowed.
• Poland: 5 years of residence, dual citizenship is NOT allowed.
• Portugal:  10 years of residence, dual citizenship is allowed.
• Romania: 5 years of residence, dual citizenship is allowed.
• Slovakia: “Citizenship-by-investment” provisions, similar to those of Austria, exist in legislation of Slovakia, but there is no established practice. Other than that, 8 years of residence are required. Dual citizenship is allowed.
• Slovenia: 10 years of residence, dual citizenship is allowed.
• Spain: 10 years of residence are required. This requirement can be reduced to 2 years (but not waived) in case of nationals from a former colony of Spain (it covers a number of Latin American countries and the Philippines). Dual citizenship is allowed.
• Sweden: 5 years of residence, dual citizenship is allowed.
• Switzerland: 12 years of residence, dual citizenship is allowed.
• United Kingdom: 5 years of residence, dual citizenship is allowed.

In practice, you may encounter a situation where corrupt officials of a country sell passport blanks, and pushful black marketers position this opportunity to you as a legitimate option.

Having all this in mind, it’s obviously wiser to focus your attention on legally existing programs based on a special statute and guaranteed by the Government. Depending on your immediate goal, you can find a suitable solution. Commonwealth of Dominica and Federation of Saint Kitts and Nevis are two Caribbean states with a very favorable international image. Passports of these countries provide an opportunity to move freely around the world, with visa-free access to many first-world countries, including Schengen member countries in case of St. Kitts and Nevis.

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• How to Easily Obtain Instant Alternative Citizenship

Scope of International Instruments for Information Exchange

As of today, several types of agreements between states govern procedures of information exchange: double tax treaties (DTT, or double tax conventions, DTC), tax information exchange agreements (TIEA), mutual legal assistance treaties (MLAT) and some multilateral agreements.
Treaties for mutual legal assistance (MLAT) deal with criminal matters but not necessarily cover tax matters. MLATs that cover tax matters provide for efficient exchange of information for these purposes.

With double tax treaties, Article 26 of the OECD Model Tax Convention on Income and on Capital provides the most widely accepted legal basis for bilateral exchange of information. Parties to the treaty are obliged to share information relevant to application of the treaty as well as to enforcement of domestic tax laws of the parties. There’s no way for the requesting party to go for fishing expeditions or make inquiries irrelevant to the tax affairs of a given taxpayer. However, domestic tax interest principle and bank secrecy provisions are no longer the ground for the requested party to refuse sharing information.

Bank secrecy appears to be incompatible with the Article 26 provisions. Consequently, countries with traditionally strong bank secrecy position have to review their existing agreements to withdraw the according reservation to this article. The list includes Austria, Belgium, Luxembourg, Singapore, and Switzerland.

Tax information exchange agreements (TIEA) are designed for cases, where DTT is considered inappropriate due to the fact that other party has different taxation base or no tax at all, or where the DTT contains certain reservations to the Article 26 and does not provide for efficient exchange of information.

TIEAs are based on the OECD Model Agreement on Exchange of Information on Tax Matters and allow for exchange of information between tax authorities on request, lifting bank secrecy, domestic tax interest and dual incrimination principles that might be exercised by the requested party in other situation. Herewith, each contracting party shall ensure that its competent authorities have the authority to obtain and provide upon request:

• information held by banks, other financial institutions, and any person acting in an agency or fiduciary capacity including nominees and trustees, as well as
• full information regarding the ownership of companies, partnerships, trusts, foundations and other entities and all persons in an ownership chain, including settlers, trustees, beneficiaries, founders, members of foundation council and so on, as the case may be.

Under Tax Examinations Abroad provision, the requested party may even allow representatives of the competent authority of the applicant party to enter the territory of the requested party to interview individuals and examine records.

Nevertheless, such seemingly well-elaborated instruments are not really efficient in practice, running into a number of problems.

Practical Difficulties of Tax Information Exchange

No interest. Obviously, secrecy jurisdictions are hardly interested in exchange of information on their customers. Model OECD treaties only serve as templates for the countries wishing to sign an agreement. The parties can amend the recommended provisions and still introduce certain reservations to supplying the information.

About 3,000 of existing DTTs are based on the Model Convention. At the same time, many existing DTTs are based on older redactions, which allow interpreting the information exchange provision to serve strictly for the purposes of double tax avoidance, rather than with a view of tax evasion or avoidance in general. The newest version of the Model Convention appears to support mostly the investor’s interests, rather than of the accepting country. So far, many developing nations generally contest it and gravitate to original redactions, including the older Article 26.

Domestic barriers and practical unfitness. All tax havens have committed to the OECD principles of transparency, but to be able to conclude information exchange agreements following the OECD template, they might need to firstly make substantial changes to their current domestic legislation and practices. Some changes are that serious that they need political approval, involving such procedures as referendums. Besides the domestic barriers, negotiation and signing of the agreements is a very time- and resource-consuming process.

No automatic exchange of information. Finally, the necessary agreements are signed. Now, both Article 26 of DTT and TIEA provide for exchange of information only on request. Herewith, both are very well protected against fishing expeditions – the form and contents of the information request are strictly specified. For example, the TIEA requires the applicant party to demonstrate the relevance of the request, providing the following information from its side:

• “(a) the identity of the person under examination or investigation;
• (b) a statement of the information sought including its nature and the form in which the applicant Party wishes to receive the information from the requested Party;
• (c) the tax purpose for which the information is sought;
• (d) grounds for believing that the information requested is held in the requested Party or is in the possession or control of a person within the jurisdiction of the requested Party;
• (e) to the extent known, the name and address of any person believed to be in possession of the requested information;
• (f) a statement that the request is in conformity with the law and administrative practices of the applicant Party, that if the requested information was within the jurisdiction of the applicant Party then the competent authority of the applicant Party would be able to obtain the information under the laws of the applicant Party or in the normal course of administrative practice and that it is in conformity with this Agreement;
• (g) a statement that the applicant Party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.”

In practice, it turns out that the inquiring party is already to have a case with significant evidence on a taxpayer in question before making the inquiry, rather than to count on information to be obtained from the requested secrecy jurisdiction basing on a mere suspicion.

No information to share. The above mentioned instruments rely on the obligation of each party to provide information, which is held by its authorities or in the possession or control of persons who are within its territorial jurisdiction, as well as to use all relevant information gathering measures to provide the information requested, notwithstanding that the requested party may not need such information for its own tax purposes. However, not every secrecy jurisdiction has proper domestic mechanisms in place to gather and keep the necessary information on customers. Consequently, it may appear that there is simply no information to exchange. And there are no efficient legal mechanisms for the applicant party to deal with this problem.

Multilateral Automatic Information Exchange

Experts suggest that a solution is in reaching multilateral automatic information exchange agreements between countries. EU Savings Directive, in conjunction with the automatic exchange policy of the Isle of Man, may serve a good example of what might work better, if to extend the jurisdiction of such multilateral agreements to other taxes and countries. There are no certain prognoses though, if and how soon that might happen.

References:

• OECD Model Agreement on Exchange of Information on Tax Matters
• Article 26 of OECD Model Tax Convention on Income and on Capital

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Availability of Bearer Shares

First of all, today bearer shares are hardly available in tax haven jurisdictions. Mere five to ten years ago legislation of practically each tax haven allowed for issue of bearer shares. Today most of them backwatered and substantially improved the related laws to comply with the OECD principles of transparency.

Many, like Bahamas, simply eliminated bearer shares as institute and prescribed the existing companies to exchange their bearer shares to the registered ones. Others, like Belize, British Virgin Islands or Dominica, still let you have bearer shares but require to immobilize them.

The latter generally means that the share is to be deposited with an authorized custodian, to never leave the country, and that you get only a notarized copy of it in hands. The purpose of immobilization is exactly to restrict the bearer share from free circulation. It’s still safe to hold it, but it does not play its free transfer function any longer. Herewith, it can be more a problem to you than a benefit.

Bearer Shares and Anonymity of Holder

This is true that your name does not appear on the share certificate or in the register of shares. However, the law of each and every tax haven jurisdiction obliges the registered agent to fully identify the beneficial owner of the company. You do not appear on paper, but you are fully known to the provider. That means that if you intend or happened to break the law, whether in your home country or elsewhere, you may not feel safe by screening yourself behind an “anonymous corporation with bearer shares”.

Attitude of Banks to Bearer Shares

Here the situation is quite predictable. Banks do not like bearer shares at all. They are obliged by the law to always know the ultimate owner of the funds on the company’s bank account. With bearer shares it’s difficult to track the change of the owner, no matter how many promising declarations have been signed by the clients in this regard. The result is that many well-established banks simply refuse to open an account to a corporation with bearer shares. Others open accounts but under condition that you place your share certificate in custody with the bank.

“Presumption of Owner”

Even when available, too much anonymity is not that good.

There are still places promoting secrecy and the use of bearer shares. Panama would be a good example here. As of the moment, you can use bearer shares with no restrictions. Plus, what’s important, Panama do not share tax information with any other countries, at least for the moment. Nice and safe. But danger comes from the other side.

Consider legislation of your home country, or where you conduct business. Common law countries, with their judicial precedents system, are especially “not nice” in this regard. High secrecy tricks are not working here. If it is not possible to determine, who is the owner of an offshore corporation being a party to legal proceedings, the judge tends to presume that the defendant is the owner. Now, you are to find the owner or prove that you are not the one.

Property in Abeyance

Authorities of countries less particular about their international reputation may simply take advantage of mistiness around identification of the real owner and forfeit your property as the ownerless one. Property seized by the government with such formulation is very hard to get back. Well, of course, in certain countries this can happen with any company, in particular of offshore origin, but bearer shares are of real help.

Bearer Shares and Taxation

Tax law of developed countries is never simple. Non-presence of your name on the share certificate does not release you from obligations to report your offshore activities and incomes, and paying the according taxes, if any. Even if the reporting requirements are not that wide-reaching and you can avoid them, you may get caught by a commonplace stock transfer tax or gift tax. Some countries treat transfer of bearer shares as a gift. You may not know it, but you are supposed to report it and pay the according tax, as well as the whole chain of previous owners. If you didn’t do it, you are all in trouble, if one day it is discovered.

Many providers strive to discourage their clients from involving difficulties related to bearer shares. They impose extra fees for setting up corporations with bearer shares, while offering free nominee shareholder service instead.

We do not oppose using anonymous structures, not at all, but it is important to analyze every aspect of it. The above are only few from so many factors to consider.

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Tax Residency in Germany

German taxation system is based on residence, rather than on citizenship principles. Individuals, German nationals and aliens, having their domicile or place of abode in Germany, are considered residents for tax purposes. If you are a German tax resident, you have an unlimited German tax liability, including your worldwide income, even if you are resident abroad.

Non-resident aliens have a limited tax liability covering only income from German sources.

A company with the central management and control functions being executed from Germany is a resident for tax purposes. A foreign company is considered a German tax resident, if its management functions are shifted to Germany.

Change of Domicile

If you leave Germany and change your domicile, you become a non-resident national keeping a limited tax liability (with income from German sources). However, additionally you may get an extended limited tax liability, if the following conditions are met:

• you used to live in Germany for 5 years during the 10 year period preceding the change of domicile;
• you have retained essential economic ties with Germany;
• you changed your domicile from Germany to a low-tax jurisdiction, or you cannot prove any tax residence at all;

In short, the extended tax liability, with certain exceptions and conditions, involves 10 more years of tax liability with all income, that would not be otherwise taxed after you left Germany, as if you would be staying its resident.

For the purposes of individual income tax estimation, a foreign jurisdiction is considered to be a low-tax one, if the overall tax burden on the individual in that jurisdiction constitutes less than two-thirds comparing to what it would be in Germany for a single person with an annual income of EUR 77,000.

If you leave Germany after you have been subject to unlimited German income tax liability for at least 10 years prior to emigration to another country, you are subject to tax on emigration. The tax is being charged on unrealized gains from the increase in the value of your share in a domestic company in which you, directly or indirectly, have owned at least 1% of the share capital at any time within the preceding 5 years.

Anti-Avoidance Regulations

German tax law provides for the following substantive instruments to prevent German taxpayers from using low-tax jurisdictions to avoid German tax liability:

• add-back taxation, or Controlled Foreign Company (CFC) Regulations,  or intermediate companies regulations – sections 7-14 of the Foreign Tax Act;
• case law in respect of the “foreign-base companies”;
• general misuse provision – section 42 of the Tax Code.

Add-Back Taxation

Following the general rule, a foreign company qualifies as an intermediary company for the purposes of German tax liability, if all of the below conditions are met:

• a German taxpayer, individual or corporate body, has a participation in a foreign company, directly or indirectly;
• German shareholders control more than 50% share in that foreign company, directly or indirectly;
• this foreign company is from a low-tax jurisdiction, and
• this company has income stemmed from passive sources.

The passive income of an intermediate company in the amount attributable to the German shareholder’s share is treated as deemed dividend or imputed income. It is to be included in the personal income report as income from capital investments or business income, depending on the case, subject to full taxation in Germany. This rule applies even if that income was not yet distributed to the shareholder (add-back taxation principle).

Herewith, no regular domestic tax incentives apply. Although the income of intermediate company is generally treated as dividends, domestic German exemption rules do not apply. The add-back amount is fully taxable at the regular flat rates. Also, in case the company’s activity brings losses, they are not allowed for reduction of the German tax basis of the shareholder.

Any dividends, being paid to the shareholder from the respected income during the year of liability or the next seven years, are tax-exempt as they have already been taxed in full under the add-back principle.

Ownership and control aspects are being checked in the end of the reported year. Cross ownership doesn’t save the shareholder from tax transparency. Even the shares legally owned by the trustee are being attributed to the beneficial owner.

In case of mixed income, if passive income of the intermediate company does not constitute more than 10% of its gross receipts and it’s not more than EUR 60,000, it is disregarded for tax purposes under CFC regulations (petty provision).

If the intermediate company has its place of management in Germany, the CFC regulations are not applicable. All income of such company would be in any way fully taxable at source under the regular German taxation rules.

Low-Tax Jurisdictions

For the purposes of corporate tax estimation, a foreign company is deemed to be low-taxed if its corporate tax burden at the place of its management (or business residence) is less than 25%, be it a consequence of a regular taxation system in the whole country or in a separate free economic zone, or due to a special regime for certain types of activities (like tax exemption of holding companies’ income or income from offshore activities) etc.

A list of low-tax jurisdictions issued by tax authorities exists for indicative purposes. It is not definitive and other jurisdictions not appearing on the list might be recognized low-tax. Even in case of the existing double tax treaty add-back amount is not treaty protected.

Passive Income

Passive income is everything apart from the active income defined by the Section 8 of the Foreign Tax Act.

Active income sources include among others the following:

• agriculture and forestry, manufacturing and assembly, exploration of mineral resources;
• banking and insurance (where physical presence is proved and except for transactions with the related parties);
• trading (except for transactions with the related parties when the company cannot pass the test of carrying on independent business activities);
• services (except for transactions with the related parties);
• renting and leasing, except for:
  • intellectual property, unless it is a result of the company’s own research with no assistance of the related German taxpayer or persons related to the latter;
  • real-estate, unless German residents can prove that their income proceeding from such business would be exempt by a tax treaty;
  • movables, unless the company can prove carrying on its own independent business without cooperation with the related German taxpayer or persons related to the latter;
• inter-company financing activity (as income from borrowing and granting the capital), but only in case the company can prove that the funds originate from foreign capital markets and not from the related German taxpayer or persons related to the latter;
• dividends and dividend-like distributions from other corporations;
• gains from sale of shares in or liquidation of or decrease of share capital in other companies, providing these gains are not being allocated to the assets serving investment activities.

Anything else is passive income. However, only a low-taxed passive income qualifies under the CFC regulations.

General Misuse Provision and Foreign-base Companies

Even if the company escapes the CFC regulations, it should take into account the general misuse provision and court law.

The general misuse provision, Section 42 of the Tax Code, applies to the structures whose first aim is to bypass the German tax. The fact of lowering foreign tax burden does not trigger application of this provision.

It restricts using of foreign-base companies in low-tax jurisdictions. Foreign-base company is generally a company that was created to avoid German tax liability. Foreign entity can be recognized a foreign-base company if it cannot provide economic justification or other reasons for its interposition, and has no own business.

The burden of proof is imposed on the tax liable shareholder.

Federal Tax Court ignores foreign-base companies for tax purposes and attributes their activities and income directly to shareholders liable to German tax.

Foreign companies trading actively should not be concerned, even if based in low-tax jurisdictions.

Foreign Personal Holding Companies

Foreign personal holding companies generally escape the add-back taxation due to the reason dividends and dividend-like distributions of profits are recognized as active income. However, they will not be useful if the company’s central management and control is located in Germany – it will be taxed in full at source. Same as it cannot be used for employment purposes, if the employee is working in Germany – any work performed in Germany results in taxation in Germany.

Additional Regulations

More instruments aimed to prevent relocation of income and property to offshore territories include:

• transfer pricing regulations (Section 1 of the Foreign Tax Act);
• taxation of founders, beneficiaries and other members of offshore family foundations (Section 15 of the Foreign Tax Act);
• thin capitalization rules (Section 8 of the Corporation Income Tax Act);
• deemed profit distributions (Section 8 of the Corporation Income Tax Act);
• relocation of the corporation’s seat outside Germany (Section 12 of the Corporation Income Tax Act).

The above is a brief and non-technical summary of the German anti-avoidance regulations and should not be used as guidance without professional advice.

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Anti-avoidance regulations refer to situations where a UK individual undertakes a transfer of assets in favor of a non-resident person (company, trust) under the following conditions:

• as a result of that transfer, the income becomes payable to an offshore person/entity;
• the transferring individual (the transferor) has power to enjoy that income in some way;
• the transferor is ordinarily resident in the UK in the year of liability.

If all of the above conditions are met, the income payable to that offshore person (offshore company or trust), whether received from UK or foreign sources, is deemed to be the income of the transferor, to the extent he has power to enjoy that income.

These rules can apply if you settle an offshore trust, or subscribe to shares in a foreign company, or simply transfer assets or property to an already existing foreign trust, or a company, or a person abroad.

If you fall under the above regulations, all deductions and allowances are applicable to the reported income of the foreign entity, same as to your personal income. Further dividends and distributions from the same income of the offshore entity are free of tax, given they are already included in and taxed as your personal income. In case more than one UK person are likely to be charged on the same income, the HM Revenue and Customs (HMRC) will seek to agree with the taxpayer a “just and reasonable” division of liability.

Power to Enjoy Income

It doesn’t matter if you didn’t enjoy any income yet from such transfer, the key factor is to have the power to enjoy income in some way and/or be entitled to the capital sum. So far, even if no factual distributions are made by the foreign entity in your favor, you are still liable with its income in the amount attributable to you.

Same regulations refer to the transfer of assets where another UK resident receives the right to enjoy the income. With the only difference, that now it’s that other person, beneficiary, becomes liable for tax instead of the transferor.

Transfer of Assets

From the point of view of the HM Revenue and Customs, the transfer of assets can be done directly or indirectly, including by means of a sale or purchase, or a gift.
These regulations also involve situations when the UK individual is not only transferring but also is associated with the transfer. If you consider arranging a transfer through a chain of companies, or any other series of transactions contemplated as one scheme and developed to masquerade the transfer, this will not save you.

Exemption from the Rule – Motive Test

The exemption, which in practice can be difficult to get, is being granted by the Section 741, if you persuade the HMRC:

• that the transfer transactions had a non-fiscal purpose and did not have a tax avoidance purpose, or
• that the transfer was a genuine commercial transaction and, again, was not constructed to avoid UK tax.

The latter option, being called “bona fide commercial”, is meant to apply only to the furtherance of trade or business, and not to the making or managing of investments.

Non-UK Domiciliaries

One more exemption to the rule is non-UK domiciled individuals. Individuals who are ordinarily resident but not domiciled in the United Kingdom may be assessable under Section 739 or 740. However, the legislation restricts the liability of a non-domiciled individual, broadly applying a “remittance basis” to income and benefits received outside the UK. In fact, that means that the rule does not apply to non-domiciliaries until they remit their offshore profits to the UK.

The above is a very brief and non-technical summary of the regulations and should not be used as guidance without professional advice.

Sources:

Transfer of Assets Abroad – HM Revenue & Customs

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Israel Facts and Benefits

• The State of Israel, located at the east coast of the Mediterranean Sea, is a respectable jurisdiction, enjoying the confidence and support of the international community.
  Israeli law is a civil law based system.
• Official languages are Hebrew and Arabic, with English being the primary language for international relations. Among those non-official languages, Russian is one of the most widely spoken. Generally, you can hardly have any language barrier when doing business with Israel.
• Israeli banking system is known as highly developed.
• The country is not part to EU Savings Tax Directive or other EU regulations.
• Israeli companies enjoy protection of a wide network of double-tax treaties.

Israel Foreign Trust

Israel foreign trust, or Israel offshore trust, is a trust, where the settlor (or grantor) and the beneficiaries are non-residents of Israel during the tax year. The structure obviously requires a local Israeli trustee. All parties to the trust deed, settlor, trustee and beneficiary, can be individuals or corporate bodies.

You can incorporate a local company to serve as the trustee. As soon as the Trust Deed is signed, the settlor can transfer its assets to the corporate trustee, and the Israeli company becomes then a front company for all business transactions. From a third person’s point of view, the company is acting in its own capacity. Trust agreement and real beneficiary is behind the curtain.

Offshore income of such trust, that is any income from sources outside of Israel, is free of tax in Israel.

Israeli Trustee company is a regular limited company entitled to formal remuneration for its trustee services and subject to Israeli tax and reporting with this income. There are no statutory requirements in this regard, but the company’s remuneration should be economically reasonable. As a matter of example, you may count on the figures of 5% of income in case of passive investments and 10% in case of active trading operations.

Israeli company may have its bank accounts in Israel, as well as in any other country of the world without extra permissions from Israeli authorities.

There is no requirement for such a company to have local directors/managers. Unless a local stuff is hired, the company is only to report to tax authorities once, in the end of the year. Annual audit is also required.

You can use Israeli trust structure as the owner of your international business, for asset protection purposes, and as an active business instrument, for tax savings.

List of Double-Tax Treaty Countries

Availability of protection by a double tax treaty provisions makes this legal structure even more attractive. The list of DTT countries covers:

Austria, Belarus, Belgium, Brazil, Bulgaria, Canada, China (People’s Rep.), Croatia, Czech Republic, Denmark, Ethiopia, Finland, France, Germany, Greece, Hungary, India, Ireland, Italy, Jamaica, Japan, Korea (Rep.), Latvia, Lithuania, Luxembourg, Mexico, Moldova, Netherlands, Norway, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Kingdom, United States, Uzbekistan.

Each treaty requires individual consideration by professionals.

Israel Agency Company

The jurisdiction of Israel provides for one more tax efficient option for active international trade operations. You can use an Israeli company as an intermediary under an agency agreement with the principal located in a tax-advantageous zone. Here again Israel contributes to attractive international image of your business and allows you to save on taxes.

It is worth to mention that Israeli trust or an agency company is a cost-effective solution, keeping in mind its benefits and comparing to similar options from other jurisdictions.

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