blogger visitor

Sunday, May 05, 2019

Economic Substance Requirements and Tax Haven Jurisdictions

Not receiving much attention are new economic substance requirements that have recently been enacted in several tax haven jurisdictions, including the Cayman Islands, Bermuda, and the British Virgin Islands.

Tax planning structures often involve the use of corporations and other entities formed in tax haven jurisdictions. To give one example, tax haven companies are often used as blocker holding companies to insulate foreign persons from U.S. estate taxes on their U.S. assets. These new economic substance requirements threaten to complicate such planning structures.

The new requirements are an outgrowth of pressure from the EU and OECD to limit the use of tax haven companies for tax planning and base erosion purposes, especially where the companies have little or no activity, assets, or staff in the subject jurisdiction. When applicable, such companies will require adequate local premises, employees, activities, income, and expenses. Companies that do not comply are subject to civil penalties in the hundreds of thousands of dollars, criminal penalties if not properly reported, and being struck-off the register as a company in good standing. Thus, applicable companies will have to increase their local activities (and concomitant costs) to be compliant – many times this may not be practical or cost-effective.

Companies will be subject to these rules if they engage in “relevant activities.” These typically include banking, insurance, shipping, fund management, finance/leasing, holding company activities, IP holding activities, and service center or distribution center activities. The scope of what is required to comply may be reduced for pure equity holding companies, so this may allow continued use of pure holding companies, but it remains to be seen exactly how those reduced requirements will play out.

Companies already situated in these jurisdictions should review the application of these new rules to them – the use of companies in the future should include a review of the impact of these rules on their circumstances.

Sunday, April 28, 2019

Does a Disclaimer of Real Property Require a Legal Description in Florida?

In a recent case, a disclaimant signed a disclaimer that purported to include real property owned by a decedent, but did not provide a legal description for the real property. After entering into the disclaimer, the disclaimant apparently had a change of heart and desired to retain the disclaimed real property, claiming the disclaimer was invalid.

Here are the key statutory provisions (emphasis added):

Fla.Stats. §739.104(3): “To be effective, a disclaimer must be in writing, declare the writing as a disclaimer, describe the interest or power disclaimed, and be signed by the person making the disclaimer and witnessed and acknowledged in the manner provided for deeds of real estate to be recorded in this state. In addition, for a disclaimer to be effective, an original of the disclaimer must be delivered or filed in the manner provided in s. 739.301.”

Fla.Stats. §739.601:

     “(1) A disclaimer of an interest in or relating to real estate does not provide constructive notice to all persons unless the disclaimer contains a legal description of the real estate to which the disclaimer relates and unless the disclaimer is filed for recording in the office of the clerk of the court in the county or counties where the real estate is located.

      (2) An effective disclaimer meeting the requirements of subsection (1) constitutes constructive notice to all persons from the time of filing. Failure to record the disclaimer does not affect its validity as between the disclaimant and persons to whom the property interest or power passes by reason of the disclaimer.

As noted, Fla.Stats. §739.104(3) does not require a legal description. Fla.Stats. §739.601 does require it. The trial court held that the disclaimer was ineffective without a legal description.

Reversing the trial court, the 3rd DCA determined that a legal description is required for constructive notice purposes only via recording. As between the disclaimant and the persons who would receive the real property if there is a valid disclaimer, a legal description for real property is NOT required to enforce the disclaimer.

As an aside, the disclaimer was also rejected by the trial court as failing to meet the writing requirements of the statute of frauds. The appellate court noted that the disclaimer was in writing and signed by the disclaimant, and thus the statute of frauds was met.

Lee v. Lee, 44 Fla.L.Weekly D284 (3rd DCA 2019)