Category: International Law

BIS Removes Cuba as State Sponsor of Terrorism in Regulations

On July 22, 2015, the Bureau of Industry and Security (BIS), an agency of U.S. Department of Commerce, amended the Export Administration Regulations (EAR) to reflect Cuba’s removal from designation as a State Sponsor of Terrorism. The Secretary of State rescinded Cuba’s designation on May 29, 2015.

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As part of Cuba’s removal from designation as a State Sponsor of Terrorism, BIS amended the EAR to remove references in the text associating Cuba with terrorism. It also removes anti-terrorism (AT) license requirements from Cuba. Finally, BIS amended the EAR to remove Cuba from Country Group E:1, although Cuba remains on the Country Group E:2 list.

These amendments to the EAR affect certain license requirements and exceptions that apply to exports to Cuba. Specifically, the EAR apply to items that contain more than a de minimis amount of U.S.-origin content. For exports to most countries, that de minimis amount is 25 percent, but for exports to countries on the Country Group E:1 list, that de minimis amount is 10 percent. Exports of most items to Cuba are now also subject to the 25 percent de minimis rule. Yet, foreign-made items destined for Cuba that incorporate certain U.S.-origin 600 series content continue to be subject to the EAR regardless of level of U.S.-origin content.

Additionally, Cuba’s removal from the Country Group E:1 list makes exports to the country eligible for four new license exceptions including:

  • License Exception Servicing and Replacement of Parts and Equipment (RPL);
  • License Exception Governments, International Organizations, International Inspections Under the Chemical Weapons Convention and the International Space Station (GOV);
  • License Exception Baggage (BAG); and
  • License Exception Aircraft, Vessels and Spacecraft (AVS).

Despite these changes, it is important to remember that Cuba is still subject to a comprehensive embargo. Licenses are still required to export or reexport to Cuba any item subject to the EAR unless authorized by a license exception. Those who would like to export items authorized by license exceptions may only use license exceptions listed in 15 CFR 746.2(a).

ARTICLE BY Joan Koenig & Mollie D. Sitkowski of Drinker Biddle & Reath LLP

©2015 Drinker Biddle & Reath LLP. All Rights Reserved

The European Court of Justice Overturns, Unfreezes EU Iran Sanctions

Sheppard Mullin 2012

In a series of recent rulings, the European Court of Justice overturned economic sanctions issued by the Council of the European Union (EU) on several Iranian banks and shipping lines.  On September 6 and 16, 2013, the Court halted sanctions on Persia International Bank plc, Bank Refah Kargaran, Export Development Bank of Iran, Post Bank Iran, Iranian Offshore Engineering & Construction Co., Iran Insurance Company, Islamic Republic of Iran Shipping Lines (IRISL), Khazar Shipping Lines, and Good Luck Shipping.  The EU had sanctioned these entities for their support of nuclear proliferation activities in Iran, but the Court determined that the EU lacked sufficient evidence to introduce such sanctions.  The cases are notable for their effect on global sanctions against Iran, although it seems unlikely that U.S. sanctions against Iran would be lifted on similar grounds.

While a full review of the developments in each case would be beyond the scope of this blog article, a few representative matters bear closer scrutiny.  In the case against IRISL, the Court noted that the imposition of sanctions was only permitted where a party had allegedly supported nuclear proliferation.  The Court indicated that sanctions could not be imposed simply based on a risk that  IRISL might provide support for nuclear proliferation in the future.  In particular, the Court determined that, while the EU established that IRISL had been involved in exports of arms from Iran, that activity was not alone sufficient to support the imposition of nuclear sanctions.  As a result, the Court struck down the sanctions against IRISL.

Similarly, in considering sanctions against Iran Insurance Company, the Court noted that the EU had sanctioned the company for insuring the purchase of helicopter spare parts, electronics, and computers with applications in aircraft and missile navigation, which the EU alleged could be used in violation of nuclear proliferation sanctions.  The Court ruled that the EU had relied on “mere unsubstantiated allegations” regarding the provision of insurance services, and annulled the sanctions.

We think these two matters are noteworthy for the types of evidence used to link the activities of the entities to nuclear proliferation.  When viewed in the light of a formal court proceeding, it seems somewhat remarkable that the EU sought to tie the insuring of items including helicopter spare parts to nuclear proliferation at all.  But, as we have discussed previously in this blog, [see May 2013 sanctions article]  economic sanctions against Iran have been broadly construed and applied by the United States and the EU to target industries integral to the functioning of the Iranian economy.  Insofar as a functioning Iranian economy also supports the nuclear development efforts of its government, it may make political sense for the EU and the United States to impose leverage through sanctions.  As a legal matter, however, the European Court of Justice rulings suggest that Court will be loathe to tie restrictions on general economic activity to a statute focused on the specific activity of nuclear proliferation.

In other words, the European Court of Justice seems unlikely to defer to the EU, even where European security is at stake.  This stands in relatively stark contrast to U.S. courts, which have generally shown deference to government activity on issues of national security.[1]

For the time being, U.S. sanctions on Iran and key entities within the Iranian banking and shipping sectors remain in place, with far reaching consequences that will continue to deter Western business from even considering business in Iran.  And ultimately, any warming in diplomatic relations between the United States and Iran will likely be more momentous than judicially vacated sanctions.  But at a minimum, the European Court of Justice has signaled that EU sanctions are subject to standards of proof that cannot be broadly construed to incorporate all types of economic activity.

[1] At least one U.S. court has overturned criminal sanctions charges on individuals by reading regulatory provisions in the accused’s favor due to issues of vagueness in the sanctions regulations. [see Clarity Required: US V. Banki]

Politics and Consequences: An Update on U.S. Sanctions Against Iran

Sheppard Mullin 2012

Since Hassan Rouhani’s election to the Iranian presidency, some U.S. leaders have expressed interest in diplomatic talks with Iran.  It is currently unclear whether any such talks will ever occur, or on what terms.  In the face of ongoing uncertainty, the U.S. sanctions program against Iran has continued to develop in a piecemeal sometimes inconsistent fashion.

More Restrictive Sanctions: Executive Order 13645

On June 3, 2013, President Obama’s Executive Order 13645 authorized sanctions against foreign financial institutions that conduct or facilitate significant transactions in the Iranian Rial or that provide support to Iranian persons on the Specially Designated Nationals (SDN) list.  Under the Executive Order, the Secretary of Treasury may prohibit those financial institutions from opening or maintaining a correspondent or payable through account and may block the institutions’ property in the United States.

Less Restrictive Provisions

Notwithstanding the restrictions in EO 13645, there remains some room for engaging in business with Iran in some sectors.

The Executive Order itself is restricted to certain types of transactions.  A foreign financial institution engaged in transactions involving petroleum products from Iran may be subject to restrictions on its accounts in the United States only if the President of the United States determines there is a sufficient supply of such products from countries other than Iran.  The same sanctions apply to a natural gas transaction only if the transaction is solely for trade between Iran and the country with primary jurisdiction over the foreign financial institution, and any funds owed to Iran as a result of the trade are credited to an account located in the latter country.

The prohibition against significant foreign financial transactions for SDNs does not apply to transactions for the provision of agricultural commodities, food, medicine, or medical devices to Iran, or to transactions involving a natural gas project described in section 603(a) of the Iran Threat Reduction and Syria Human Rights Act of 2012.

On July 25, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) followed in the wake of the Executive Order, issuing a General License for the exportation or reexportation of medicine and basic medical supplies to Iran.  OFAC delineated the scope and limitations of the authorization via a list of frequently asked questions and new guidance, and updated section 560.530(a)(3)(i) of the Iranian Transactions and Sanctions Regulations to reflect the change.

Under the new regulations, the sale of food, medicine, and medical devices by U.S. persons or from the United States to Iran, and the sale of food, agricultural commodities, medicine, and medical devices to Iran by non-U.S. persons are not subject to U.S. sanctions.  The financing or facilitation of such sales by non-U.S. persons do not trigger sanctions either, so long as the transaction does not involve certain specifically proscribed conduct or designated persons (such as Iran’s Islamic Revolutionary Guard Corps or a designated Iranian bank).  Iranian oil revenues held in Central Bank of Iran or non-designated Iranian bank accounts at foreign banks, for example, may be used to finance exports of food, agricultural commodities, medicine, or medical devices to Iran from the country in which the account is held or from any other foreign country.

Separately, On September 10, OFAC issued two new general licenses. General License E authorizes nongovernmental organizations to export or reexport services to or related to Iran in support of specific not-for-profit activities designed to directly benefit the Iranian people.  The enumerated activities include those aimed at basic human needs, post-disaster reconstruction, environmental and wildlife conservation, human rights, and democracy.

General License F permits the importation into the United States, exportation from the United States, or other dealing in Iranian-origin services related to professional and amateur sporting activities and exchanges involving the United States and Iran.  The authorized activities include those related to matches and events, sponsorship of players, coaching, refereeing, and training.

Conclusion

The recent Executive Order and General Licenses highlight a fundamental fact about U.S. sanctions programs: because they are subject to unilateral executive control, changes can be sweeping and abrupt.  It remains to be seen whether the United States will engage in increased diplomacy with Iran.  But what is clear is that shifting geopolitical realities are sure to alter the future course of the Iran sanctions program and to carry real consequences for U.S. and foreign businesses.

US Taxpayers with Canadian Registered Retirement Savings Accounts (RRSPs)? File now to avoid penalties!

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This blog post focuses on the rules around US citizens or tax residents who have Canadian Registered Retirement Savings Accounts (RRSPs). RRSPs are a government sanctioned savings program in which contributions are deducted from taxable income, and any investment growth is deferred from taxation until the owner of the account makes withdrawals. This is a fantastic program for Canadian residents, as it provides significant tax savings in the short term, while allowing pre-tax retirement accounts to grow for use in a later year when income (and thus marginal tax rates) are expected to be lower.

However, there is a complication for US citizens resident in Canada, who are subject to both Canadian and US tax rules. Many assume that because the growth in an RRSP account is sheltered from tax in Canada, it need not be reported and taxed in a US tax return either. Unfortunately, this is not necessarily the case. In fact, the default treatment of RRSP accounts under US tax law is no different than a non-registered investment account – interest, dividends or gains on invested funds are reportable in the Form 1040 tax return, with no deduction for contributions in a given year.

However, there is relief available under Article XVIII(7) of the Canada-US Tax Treaty. Since 2002, US income tax residents have been able to make an election to defer US tax on the growth within an RRSP. The election is made by filing Form 8891 with a timely filed income tax return. Of course, the IRS will not permit a deduction for RRSP contributions; even so, Canada’s generally higher income tax rates usually mean that no US income tax is payable on the difference in taxable income, after foreign tax credits are applied. And, it is important to recall that RRSP accounts must be disclosed on FBAR returns annually.

This Treaty election is certainly helpful, but what should be done for those just hearing about their US tax obligations? The difficulty is that Form 8891 must be filed with a Form 1040 income tax return, so coming into compliance after the fact will not necessarily be effective. However, a trio of recent Private Letter Rulings (PLRs) from the IRS does provide some comfort regarding the IRS’ view on this issue.

As background, PLRs are written memoranda released by the IRS in response to specific enquiries by taxpayers regarding their tax situations (all personal information is redacted prior to public release on the IRS website). While these rulings are completely fact-specific, and cannot be used as legal precedents in any future cases, the IRS reasoning and interpretation of the rules can be instructive.

On September 12, 2013, three PLRs were released in which the IRS granted an extension to taxpayers in order to file appropriate Form 8891 Treaty Elections without penalty or interest accruing. In each case, the taxpayer was seeking discretionary relief from the IRS to permit late filings of Form 8891 in respect of their RRSP accounts in Canada. In each case, the extension was granted.

While each case was ostensibly decided on its own facts, a few common elements from all three cases are worth noting. First, in each case the taxpayer was otherwise tax compliant. This may be a relevant factor in terms of how the IRS would view late-filed Form 8891 – if the tax returns were timely filed at first instance, amended returns attaching the Treaty election form may be less likely to attract attention.

More significantly, however, in each case the IRS made a point of noting that the taxpayers promptly took action upon learning about the need to file Form 8891. The taxpayers did not wait until the IRS sent letters or notices of deficiency regarding the RRSP income.

The regulation that permits the IRS to grant extensions (i.e. Treasury Regulation § 301.9100-3(a)) requires that the taxpayer must satisfy the Commissioner that she acted reasonably and in good faith, and that the grant of relief will not prejudice the interests of the US government.

This factor should serve as fair warning to anyone in this position who is still trying to decide how to deal with their US tax compliance issues. While it may be the simplest and cheapest option, leaving your head in the sand is unlikely to earn any sympathy from the IRS if and when your delinquency does come to their attention. Instead, acknowledging an honest mistake and taking action to come into compliance will help to build a set of facts that will permit the IRS to grant some leniency toward your situation.

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It’s Time to Register for the 2015 Diversity Immigrant Visa Lottery!

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On October 1, 2013, the U.S. Department of State will begin accepting requests to register for the 2015 Diversity Immigrant Visa Program (DV-2015), also known as the Green Card Lottery. The Diversity Lottery Program provides a path for foreign nationals to become permanent residents of the United States regardless of whether they have a family member or an employer willing to sponsor them. This program is a success, facilitating the immigration of people from across the globe. If you meet the eligibility requirements and wish to secure permanent residence status in the United States, you should consider registration in the lottery.

Registration begins October 1, 2013

The State Department will open online registration for the DV 2015 Program on Tuesday, October 1, 2013 at 12:00 noon, Eastern Daylight Time (EDT) (GMT-4), and conclude on Saturday, November 2, 2013 at 12:00 noon, Eastern Daylight Time (EDT) (GMT-4). Individuals who meet the eligibility requirements and submit an application during the appointed time will be entered into a lottery from which 55‚000 green card entries will be selected. Applications must be submitted electronically by 12:00 noon EST on Saturday‚ November 2‚ 2013. Detailed instructions are athttp://travel.state.gov/pdf/DV_2015_Instructions.pdf. There is no fee to register for consideration in the lottery. Entries may not be submitted through the U.S. Postal Service.

Am I eligible for a green card if I am selected in the lottery?

Selection in the lottery does not guarantee the applicant a green card; applicants must still meet all standards for admissibility and be able to process their green cards within the allotted time. Immediate family members of successful lottery applicants are eligible for green cards as well, provided they meet the same admissibility standards. Individuals who are selected and eligible for one of the 55,000 visa numbers may either secure an immigrant visa at a U.S. Embassy or Consulate or, if they are in the United States and qualified to do so, adjust their status by filing an application and supporting documentation with United States Citizenship and Immigration Services (USCIS).

What countries are eligible?

Lottery visas are apportioned to foreign nationals hailing from the following six geographic regions: Africa; Asia; Europe; North America; Oceania; and South America‚ Central America, and the Caribbean. To qualify‚ a foreign national must claim nativity or country of birth in an eligible country and meet certain education or work experience requirements. The purpose of the program is to diversify and encourage immigration from countries that send lower numbers of immigrants to the United States.

Not all countries in the six eligible regions fall within the Green Card Lottery program. Because each of the following countries has sent more than 50‚000 immigrants to the United States in the past five years, natives of these countries will not be eligible for the DV 2015 Lottery: Bangladesh, Brazil, Canada, China (mainland-born), Colombia, Dominican Republic, Ecuador, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories, and Vietnam.

For the coming year, Nigeria was added to this list of countries ineligible for the lottery.

How do I know if I was selected in the lottery?

Official notifications of selection will be made through Entrant Status Check, available starting May 1, 2014, through at least June 30, 2015, on the E-DV website: www.dvlottery.state.gov. Please note that the Department of State does not send selectee notifications or letters by regular postal mail or by e-mail. Any e-mail notification or mailed letter stating that you have been selected to receive a DV does not come from the Department of State and is not legitimate. Any e-mail communication you receive from the Department of State will direct you to review Entrant Status Check for new information about your application.

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The Financial Crises in Detroit and Spain and a New Round of Deaccessioning Debates

Sheppard Mullin 2012

When public institutions are suffering from financial deficits, one question is usually raised: can they sell art to survive? In the museum world it is generally understood that you are to deaccession art only if the work is duplicative of another work in the collection, or for similar collections-related reasons, and the sale proceeds are used exclusively for collections activities. Therefore, for example, you cannot seek to sell art to obtain sufficient liquidity to meet any financial obligation, or make debt service payments. There is little government regulation on deaccessioning (for example, the NY Board of Regents has the power to provide limitations on deaccessioning on New York museums chartered after 1890). However, private institutions such as the American Alliance of Museums (“AAM”) and the Association of Art Museum Directors (“AAMD”) have adopted for their members certain policy guidelines on deaccessioning. Their members are subject to sanctions such as censure, suspension and/or expulsion in the event they do not follow these guidelines.

This is the debate currently happening in the city of Detroit, which has recently filed for bankruptcy, and countries in Europe such as Spain, where steep cuts in its budget have affected state-sponsored museums such as the Prado museum.

As for Detroit’s bankruptcy, some have argued whether the Detroit Institute of Arts (“DIA”) should sell its artwork, yielding an estimate of $2 billion (the city of Detroit has a $20 billion debt). The DIA has 600,000 annual visitors and a collection of approximately 65,000 artworks. Michigan’s attorney general, Bill Schuette, has stated that DIA’s artworks were ‘held in trust for the public’ and could only be sold for the purpose of acquiring new art. Others have claimed that the collection should be sold to refrain Detroit’s retired employees from losing part of their pensions.

From a bankruptcy law perspective, municipalities, unlike businesses, cannot be forced to liquidate their municipal assets (the concept which provides that if a debtor wishes to reorganize it must provide creditors with at least as much as they would get in liquidation does not apply to municipalities). A municipal restructuring plan cannot be approved unless it complies with state law, and as mentioned above, Michigan’s attorney general issued a non-binding opinion stating that the artworks were held in trust for the citizens of Michigan, and thus cannot be sold.

As for Spain, the Spanish Official Gazette has published the annual statements of the Prado museum and one thing is clear: art is not immune to Spain’s recession. Patronage from the Spanish government had a 28% drop (from approximately €6.6 million to €4.8 million) in the last 2 years. However, rather than deaccessioning, this drop has been set off by increasing its international loans. Therefore, the museum authorities allocated these foreign loans receipts as deemed patronage, and this has allowed the museum to stabilize its balance sheet. The annual statements report that the main private sponsors for temporary exhibitions were Axa, Telefónica, BBVA and La Caixa, who contributed a total aggregate amount of €625,000. However, the statements do not specify how much the museums actually invested in setting up such temporary exhibitions. The Contemporary Art Institute (Instituto de Arte Contemporáneo) has been criticizing the lack of transparency in museums and art galleries that receive sponsorship or other type of financial assistance from the state. This Institute has created standards of best practices for contemporary art museums (the “Standards”), which attempt to follow the path of the AAM’s National Standards and Best Practices for U.S. Museums (see http://www.aam-us.org/resources/ethics-standards-and-best-practices/standards and http://www.iac.org.es/seguimiento-del-documento-de-buenas-practicas/documento-de-buenas-practicas-en-museos-y-centros-de-arte).

Spain’s Ministry of Culture was actively involved in drafting these Standards, which were revised and signed in 2007 by the Ministry of Culture, the Contemporary Art Institute, and other prestigious institutions, such as ADACE (Association of Directors of Contemporary Art in Spain), CG (the Consortium of Contemporary Art Galleries), UAAV (the Association of Visual Artists), CCAV (the Board of Critics of Visual Arts), and UAGAE (the Association of Art Galleries of Spain). As in the United States, the Standards are voluntary. The pressure by funders, regulators, the press and the public may be considerable, but museums still choose to follow, or not, the Standards. As of this date, of all 50 museums ranked by the Contemporary Art Institute, only two museums comply with the Standards’ minimum requirements: the Museo Nacional Centro de Arte Reina Sofía and the Artium.

Spain is also trying to overcome the steep cuts in state subsidies and public grants for art institutions by enacting a bill that will heavily increase tax benefits for museum’s private donors (mirroring the French system) through the Patronage Act (Ley de Mecenazgo). If this bill is passed, tax deductions will increase from 25% to 70% for natural persons, and from 35% to 65% for legal persons. Moreover, small donations of less than €150 will be fully deductible. The aim is to achieve France’s success, where revenues increased from €150 million to € 683 million in a seven-year period (2004 to 2011).

In conclusion, the vast majority of museums are nonprofit and ask for public support in return for providing some kind of public good. Thus, it is essential that museums are broadly accountable for their conduct, in particular in times of recession.

Should they sell part of their collection, or should they choose Spain’s path? i.e. advocate for a subset of artworks in the collection to be sent on a 10-year tour (or less) to museums around the world, receiving a revenue stream while having part of its collection available for the public as a representative and emissary of the city of Detroit? Or is there another path?

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International Group Structures Are Subject to An Ongoing Review for Optimizing Their Tax Position

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The recent trends show that offshore jurisdictions are off the corporate agenda in view of the increased scrutiny and decreased levels of acceptance from both fiscal and corporate social responsibility perspectives. Client feedback confirms the following rationale for moving corporate tax planning solutions onshore:

  • Increased scrutiny on tax havens and statutory requirements regarding tax substance, potential issues concerning withholding tax and taxation of foreign profits; and
  • Avoiding overtly complicated tax systems with strict CFC (controlled foreign company) regulations, thin capitalization rules and prohibitive transfer tax applicability.

It is a well-known fact that the Netherlands is not a tax haven but a safe haven and a logical choice as an alternative with an extensive double taxation treaty network. In addition, the Netherlands has an extensive bilateral investment protection treaty network that is regarded to provide premium coverage in view of the broad definition of “investor” and “investment” and providing access to dispute resolution through arbitration against independent states and awards that are enforceable against states, often referred to as “the Dutch Gold Standard.” Dutch structures are increasingly a recurring feature in international corporate structures for the purpose of protecting key corporate and personal assets. In this GT Alert, we briefly set out the options for migrating a corporate structure to the Netherlands to benefit from the all of the features that the Netherlands has to offer.

How to Achieve a Corporate Migration

Migrating a corporate entity within the EU into the Netherlands is a straightforward process from a Dutch law perspective. The following options are available:

Registration of an EU member state entity with the Dutch Trade Registry

The tax residence of an existing holding company can often be changed by moving its place of effective management and control outside of its existing jurisdiction for tax purposes. This may trigger a tax charge on exit.

Cross border merger

EU parent companies can migrate to the Netherlands by effecting a statutory merger with a Dutch entity under the cross-border merger regulations. It is also possible for non-EU parent companies to merge with a Dutch company by initially entering into the EU through a conduit EU jurisdiction that permits cross-border mergers with non-EU entities.

Share swap

It is possible to incorporate a holding company in the Netherlands whereby the existing shareholders exchange their existing shares for shares in the newly created Dutch holding company.

Re-registration as Societas Europaea 

An EU parent company can re-register as a European Company (Societas Europaea) and transfer its statutory seat to the Netherlands followed by a re-registration in the Netherlands as a Dutch parent company.

Why migrate to the Netherlands?

Key drivers for migrating the top holding company of an international group structure to the Netherlands are:

  • Low corporate income tax rate of 25% on trading profits (20% up to EUR 200K first band);
  • The Netherlands has an extensive double taxation treaty network with well over 90 jurisdictions;
  • The Netherlands has entered into a vast number of bilateral investment protection treaties (BITS) that offer comprehensive protection against unfair treatment of investments by sovereign states through access to world class dispute arbitration;
  • International and well-recognized jurisdiction with one-tier corporate governance system similar to that of common law countries;
  • Straightforward, cost-efficient and fast incorporation process for Dutch entities;
  • Public company N.V. entities are widely recognized as listing vehicles;
  • The Netherlands is the premier port of entry to mainland Europe with excellent facilities in terms of corporate and financial services;
  • English language optional for proceedings before the Amsterdam courts; and
  • Limited and straightforward corporate reporting requirements.

Taxation

The Netherlands is a gateway to Europe and the rest of the world. For many years, the Netherlands has been a preferred location for foreign companies to establish a business. The location, the political stability and, especially, the beneficial tax regime have turned the Netherlands into one of the go-to countries in this respect. The following tax points are of particular relevance:

  • The general Dutch corporate income tax rate is 25% (20% up to EUR 200K first band). This rate is more than competitive in the region, as all countries surrounding the Netherlands have higher corporate income tax rates.
  • Traditionally, the Dutch participation exemption has been a major attractor of companies to the Netherlands. This facility allows the receipt of dividends and capital gains from subsidiaries free of tax in the Netherlands. The Dutch facility is still one of the most flexible and easy accessible compared to other jurisdictions, especially, with regard to the following conditions: no holding period is required, an interest of 5% is already sufficient to apply, interest in subsidiaries located in tax havens are allowed to benefit from the facility and certain other specific benefits are available.
  • No withholding tax on royalties and no withholding tax on interest.
  • Dividends are taxed at a statutory rate of 15%. However, this rate may be reduced by virtue of tax treaties to 0-10%. In principle, no dividend withholding tax applies to distributions made by a Dutch cooperative pursuant to the domestic rules.
  • No controlled foreign company/Subpart F rules
  • No thin capitalization rules.
  • There is no stamp duty or capital tax.
  • One of the most extensive international tax treaty networks (the Netherlands has concluded over 90 tax treaties, more than most other countries) and the membership of the EU (and corresponding access to EU treaties) ascertain minimal taxation on payments to any group company.
  • Another traditional benefit of the Netherlands is the open attitude of the Dutch tax authorities. The Netherlands offers the possibility to discuss and reach agreement on tax positions in advance with the Dutch tax authorities that can be formalized in agreements (or advance tax rulings) to offer optimum certainty in advance.
  • Currently, the Dutch government´s main focus is on innovation. In 2007, the government was one of the first countries to introduce a special tax regime aimed at innovation (Innovation box). Based on the Innovation box, income earned out of R&D activities can benefit from an 80% exemption, resulting in an effective tax rate of 5%;
  • The Netherlands has extensive experience in the use of hybrid structures (i.e. hybrid entities and hybrid loans). These structures can be used to further optimize the group tax rate.
  • The Netherlands has traditionally not only been very welcoming to foreign companies, but also to expatriates. In the Dutch Personal Income Tax Act, expatriates (with certain skills) can receive 30% of their income as a tax free allowance under the so-called “30%-ruling.” A benefit that also benefits the employer in negotiating (net) salaries.
  • Customs authorities in the Netherlands have a reputation for being cooperative, innovative and exceptionally efficient; all to facilitate the free flow of goods. Customs duties or import charges are charged at a later date, if the goods are stored in accordance with customs procedures in the Netherlands. This leads to considerable cash-flow advantages to foreign shippers.
  • The Netherlands’ position on Value Added Tax (VAT) is also advantageous. In contrast to other EU member states, the Netherlands has instituted a system that provides for the deferment of VAT at the time of import. Instead of paying VAT when the goods are imported into free circulations within the EU, the payment can be deferred to a periodic VAT return. The Dutch VAT system offers companies significant cash-flow and interest benefits.
  • Even though the Netherlands provides several unparalleled tax facilities, it is not blacklisted as a tax haven, but can be considered as a safe haven.
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Is a Limited Liability Company (LLC) good for Canadians buying in the U.S.?

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If you are Canadian, the answer to that question is: it depends.

People purchasing real estate in the U.S. are faced with different challenges depending on whether they plan on using the property personally or renting it. In this article, we will address the latter issue and its different implications.

A Tax Efficient Structure

There are two main issues to be considered when renting property in the U.S.; income tax and liability. Because rental properties generate income, it is necessary to determine the most tax efficient structure in which to hold the property. On the other hand, because a third party (most likely a tenant) will be using the property, it is essential to create a structure that also offers creditor protection to protect against potential civil liability claims from such third party. A limited liability company (LLC) provides both those elements.

In the U.S., an LLC allows a purchaser to benefit from the low individual tax rates and therefore avoid the higher corporate tax rates inherent to owning property in a corporation. A corporation is an independent taxpayer and is taxed at a higher rate. However, an LLC is not an independent taxpayer but rather a “flow through” entity, which means that its revenue is taxed in the hands of its owner. Therefore, if the owner is an individual, the LLC’s revenue is taxed at the low individual rate.

Creditor Protection

Although one of the main goals of tax planning is to minimize tax, the main advantage of the LLC is creditor protection. When owning property in your personal name, you are exposed to liability claims from creditors such as a tenant who may have suffered injuries on your property while renting it. Should a judgement be rendered against you finding you liable for the injuries, the creditor could seek execution of this judgment not only against your U.S. property but also against the rest of your assets. However, when owning property in an LLC, only the assets in your LLC (i.e. your U.S. property) are within reach of the creditor.

The Issue for Canadian Buyers

After reading this, you may be thinking an LLC is the best solution for your U.S. real estate purchase. Unfortunately this structure can be disastrous for Canadian residents due to double taxation. Under the Canada-U.S. Tax Treaty, a Canadian resident is granted foreign tax credits for any tax paid to the Internal Revenue Service (“IRS”). Those credits can be used to offset the tax owed to the Canada Revenue Agency (“CRA”) on the same revenue or capital gain. Although the IRS considers the LLC as a flow through entity and taxes only the owner personally, the CRA does not recognize the flow through nature of the LLC but rather considers it a separate taxpayer, therefore creating a mismatch on said foreign tax credits. In this type of situation, the CRA will tax the owner of the property on the full amount of the revenue or capital gain and will not allow the use of any foreign tax credits for what was paid to the IRS. This is the known and dreaded double taxation. The owner of the property will pay taxes twice on the same revenue or capital gain, once in the U.S. and once in Canada. Depending on the values and amounts involved, Canadian residents can be required to pay in excess of 70% of taxes on their property income or capital gain due to double taxation. In extreme circumstances, this rate can even climb up to 80%.

That being said, even though LLCs should be avoided in the above-described situation, LLCs can be a valuable tool in a carefully planned structure. As general partner of a Limited Partnership for example. When used in such a structure, an LLC can help provide an extra layer of creditor protection to a Canadian resident while creating very limited tax consequences.

As you probably realised by now, the way you own property in the U.S. is crucial and putting your asset(s) in the wrong structure can lead to very unpleasant surprises. Always talk to a cross-border legal advisor before making any decisions in order to make sure you are aware of all the tax implications.

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Argentina Legal Highlights (Volume II, 2013)

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Latin American Region Enviromental Report, Second Quarter, 2013

Packaging Waste Management Bill Introduced in Chamber of Deputies

On April 11, 2013, a bill (No. 1859-D-2013; the “Bill”) was introduced in the Chamber of Deputies that would create a national, comprehensive packaging-waste management system. The Bill would apply to most packaging and packaging waste, and would regulate most entities that are involved with the packaging of products, the marketing of packaged goods, or the recycling or recovery of packaging waste. (Arts. 2, 7) A covered entity could comply with its responsibilities through one of two methods. (Art. 9) One option would allow it to pay a fee and participate in a provincially or municipally administered Packaging-Waste Management Program (Programa de Gestión de Residuos de Envases), which would set requirements for collection, transportation, temporary storage, processing, and recovery of packaging waste. (Arts. 10-23) Alternatively, a covered entity could administer its own government-approved Deposit and Return System (Sistema de Depósito, Devolución y Retorno). (Arts. 24-26) The Bill was referred to the committees on Industry, Natural Resources and Conservation of the Human Environment, and Budget and Finance.

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Battery Waste Bill Introduced in Chamber of Deputies

On April 25, 2013, a battery waste management bill (No. 1859-D-2013; the “Bill”) was introduced in the Chamber of Deputies. The Bill would cover nearly all batteries, with the exception of industrial and car batteries. (Art. 2) Most of the obligations established by the Bill would fall on battery producers: i.e., manufacturers, importers, brand owners, and resellers. These companies would be responsible for collection and management of battery waste and required to implement one of the following waste-management options: (a) establishing their own Individual Battery Waste Management System (Sistema de Gestión Individual de Residuos de Pilas y Acumuladores ); (b) participate in an Integrated Battery Waste Management System (Sistema Integrado de Gestión de Residuos de Pilas y Acumuladores); or (c) establish a deposit-and-return system. (Art. 5) Regardless of the option chosen, approval of the Secretariat of Environment and Sustainable Development (Secretaría de Ambiente y Desarrollo Sustentable) would be required. (Arts. 6-8) The Bill would also set standards for battery collection, treatment, recycling, and disposal (Arts. 9-10), impose labeling requirements (Art. 15), and require equipment manufacturers to make battery removal easy (Art. 16). Under the Bill, as under current Argentine law, used batteries would be deemed hazardous by definition, and thereby subject to Argentina’s extensive restrictions on transport, storage and handling of hazardous wastes. (Art. 3)

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Mexico Legal Highlights (Volume II, 2013)

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Latin American Region Enviromental Report, Second Quarter, 2013

Mexico Enacts Landmark Environmental Liability Law

On June 7, 2013, Mexico published its long-awaited Federal Environmental Liability Law (Ley Federal de Responsabilidad Ambiental; the “Law”), establishing the types of harms that incur liability and specifying which parties have standing to sue for environmental restoration.  The scope of occurrences that create liability under the Law is broad: “Any person or entity who by act or omission directly or indirectly occasions a harm to the environment, will be liable and will be obligated for the reparation of the harm or, when reparation is not possible, to environmental compensation.”  (Art. 10)  The Law provides important exceptions, stating that “environmental harm” is not deemed to have occurred if: (1) the activity that caused it was previously authorized through an environmental impact assessment process; or (2) the limits (i.e., of emissions, etc.) established by the relevant laws or regulations were not exceeded.  (Art. 6)  Where there is a qualifying activity and harm, the Law grants standing to the following: (1) the inhabitant of the community adjacent to the environmental harm; (2) Mexican environmental non-profit organizations; (3) the federal government through its environmental prosecution office (Procuraduría Federal de Protección al Ambiente; commonly known as “PROFEPA”); and (4) the state governments through their prosecutorial offices or institutions that exercise environmental protection functions.  (Art. 28)

The Law enumerates the factors that judges must observe in the issuance of judgments, both in determining the appropriate measure of liability (Art. 39) and in the elements that a judicial decision must contain (Art. 37).  Rather than money damages, the principal restoration due under the Law is either remediation of the harm or “compensatory” investment in other environmental improvements.  For cases of intentional causation of environmental harm, in addition to requiring restoration, courts may assess “economic sanctions” (apparently a counterpart to punitive damages) ranging from 300 to 50,000 (for individuals) or 1,000 to 600,000 (for companies) times the daily minimum wage in Mexico City.  (Art. 19)  The Law provides for two forums in addition to the existing court system: first, the Law envisions the creation of District courts specialized in environmental issues to be established within two years (Art. 30; Third Transitory Art.); second, the Law encourages the use of alternative dispute resolution in parallel with formal judicial proceedings (Arts. 47-51).   The statute of limitations for bringing actions under the Law is twelve years from the date on which the environmental harm and its effects were caused.  (Art. 29)

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Mexico Regulates Vehicle Greenhouse Gas Emissions

A new Official Mexican Standard (Norma Oficial Mexicana; “NOM”), NOM-163-SEMARNAT-ENER-SCFI-2013, limits the emissions of greenhouse gases allowed from passenger vehicles and light trucks sold in Mexico.  The emission limits are mandatory for new vehicles up to 3, 857 kilograms, and apply to the fleets of vehicles sold by a given company in model-years 2014-2016; however, companies that sell less than 500 vehicles per model-year are exempt.  (Art. 2)  The bulk of NOM-163 sets forth the parameters and methodology used to calculate corporate targets and actual averages of carbon dioxide emissions (reported in grams of carbon dioxide per kilometer) and its equivalent in terms of fuel efficiency (reported in kilometers per liter).  Companies that registered sales of between 501 and 2,500 vehicles in 2012 may opt for an alternative, potentially less stringent program that requires emissions reductions of approximately 25% from 2012 levels.  (Art. 6)  A credit system will be established in order to incentivize the use and development of high-efficiency vehicles.  (Art. 5.5.2)

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Mexico Issues Product Stewardship Requirements for Plastics

Through a May 21, 2013, decree (the “Decree”) amending the General Law for the Prevention and Integral Management of Wastes (Ley General para la Prevención y Gestión Integral de los Residuos; the “Waste Law”), Mexico has enacted product stewardship requirements for plastics at both the beginning and end of their life.  The Decree provides for the issuance of Official Mexican Standards (Normas Oficiales Mexicanas; “NOMs”) that establish environmental and technical criteria for the plastic and expanded polystyrene materials used in products and packaging and which becomes wastes.  (Art. 7(VI))  The NOMs must consider the principles of reduction, recycling and reuse.  Unlike the technical standards of most countries, most NOMs stand as binding law (i.e., without being incorporated by legal provisions), so criteria developed in Mexico can potentially have a direct impact on materials used internationally.  At the end of life, the Decree subjects plastics and expanded polystyrene to the producer take-back requirements that apply to special management wastes.  (Art. 28)  For certain circumstances, plastics and expanded polystyrene had already been included in the regulation on special management waste take-back plans, NOM-161-SEMARNAT-2011, issued in February 2013.  Their inclusion in the Waste Law may be intended to backfill a legal gap, and could also be used as authority to expand take-back requirements for these materials.

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Mexico Will Establish Voluntary Sustainability Certification for Goods and Services

On May 24, 2013, Mexico amended its General Law of Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección del Ambiente; “LGEEPA”) to provide for the establishment of a certification and labeling program for environmentally sustainable goods and services.  Specifically, LGEEPA now directs the Secretariat of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales; “SEMARNAT”) “to promote the identification of those products, goods, inputs and services with lesser environmental impact.”  (Art. 37 bis)  Such identification would be through a voluntary marking or certificate, and would have to be based on environmental criteria taking into account the life cycle of the product or service to be certified.  The new LGEEPA text also includes a broadly worded directive for SEMARNAT to issue regulations on the “requirements, specifications, conditions, procedures, goals, parameters and permissible limits that must be observed . . . in the use of natural resources, in the development of economic activities, in the production, use and disposition of goods, in inputs and in processes.”  (Art. 36)

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