Striking A Balance: Tax Compliance vs Wealth Management

In particular, it was said that the Federation of St Kitts and Nevis was denoted as giving preferential tax treatment to certain companies, that is to say, the Nevis international companies (IBCs & LLCs), and that our tax regime promotes or tended to promote a culture of ‘ring fencing’.

In Nevis, the Nevis International Business Ordinance, as amended as at 2009, and the Nevis Limited Liability Company Ordinance, as amended as at 2009, provide for entities incorporated thereunder and which are used primarily as investment or holding companies to be exempted from taxes. The legislation  also provided the option to companies incorporated thereunder to opt, if it so desired, to be a tax resident of the country of incorporation. These tax exemptions are noted as ‘grandfathered’ in until mid-year 2021.

Contrarily, local entities incorporated under all other [local] companies’ legislation are subject to 33 per cent corporate tax as a consequence of them being engaged in business conducted within the jurisdiction – the latter being the difference between  international as opposed to local companies.

The international financial services sector is vital to Nevis’ economic stability, which means that it’s dependent on a good reputation. Therefore, in response to the criticisms levied against it, in staunch defence of its reputation and in order to avoid being blacklisted, Nevis took immediate steps to rectify the situation. In so doing, the Nevis Island Administration had engagements with all service providers and other relevant stakeholders, the view being to  devise a plan of action that would ensure that Nevis remains tax- compliant while at the same time maintaining its stance as a jurisdiction of choice for high net worth individuals interested in wealth management.

In December 2018, following intense dialogue between the NIA and key players in the industry, a decision was taken to amend the current IBC/LLC legislation to remove the preferential tax provision granted to Nevis International companies as well as give certain commitments to be fulfilled in 2019. The move to swiftly amend its laws and make the commitments was wise, thus affording Nevis the status as being “largely compliant” and avoiding the non-cooperative jurisdictions list.

On the flip side, there have been concerns  regarding the impact of the removal of the tax-exempt status from the two pieces of legislation. While addressing the opening of an Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) meeting on Nevis, the Premier of Nevis, the Honourable Mark Brantley, warned that  Nevis, as a financial  centre, must resist what he described as the unfairness being meted out by the EU and the OECD and a tendency by such bodies to take advantage of our ‘smallness’. He stated as follows:

“Now, however, we are faced with such drastic rationing that even eating little seems to be a struggle. Yet struggle we must - against the unfairness of regimes that are imposed on us but not on the  ‘big players’; against initiatives that stack the decks against us; and against any suggestion that we fold our tents and simply fade away. The legitimate expectations of our clients, of our practitioners and of our people are that we will continue to provide opportunities for sophisticated succession planning and wealth management, and thereby continue to provide for the citizens and residents of Nevis a high standard of living, and a wealth of opportunities for personal and professional development in all sectors of our economy. That commitment means that, as a government, we must overcome all the hurdles that are thrown up before us as we seek to maintain and grow our financial services sector.”

As it stands, the high corporate tax rate of 33 per cent would be applicable across the board regardless of an entity being registered under the international companies laws or the local companies’ legislation.

However, in practice, the imposition of the corporate tax appears to be territorial in nature and so, only income of the company that was sourced in the Federation is taxable. Therefore, if the income of an LLC or an IBC were foreign-earned, then the corporate tax would not be applicable to IBCs & LLCs. The challenge now is that the EU and the OECD still frown upon this as the international entities are deemed to be lacking “economic substance”.  In this regard, a balance must be struck. Therefore,  in order to successfully cater to HNWIs & UHNWIs as well as to maintain a competitive edge, a number of proposed solutions are being considered:

1. Tax neutrality^[i] - Tax neutrality is sometimes used to describe a tax system that does not create a bias that could influence a taxpayer to choose one investment or course of action over another. A tax-neutral provision is one that permits the choice of investment or action to be made on the basis of market or personal considerations without influence from the tax laws. It is known that other international financial centres, such as Jersey,  have successfully implemented this as part of their tax system.
2. Family Office - The family office concept provides High Net Worth families with the opportunity to create a bespoke platform to govern the investment and administration of family wealth for current and successive generations. This would be a new product offering which has been securely and successfully established in other IFCs.
3. Economic Substance requirement for entitles that fall under the International Financial Services Sector - With the implementation of “economic substance”, an entity would have to fulfill certain requirements. For example, it  needs to be managed and directed in the jurisdiction; core income generating activities  should be undertaken in the jurisdiction in relation to the relevant activity; it is required to maintain adequate physical premises in the jurisdiction; there are adequate employees in the jurisdiction with suitable qualifications; there is adequate expenditure incurred in the jurisdiction in relation to the relevant activity; and it is obliged to file an annual confidential economic substance report  with the applicable authority in its jurisdiction which will assist the authority in assessing compliance.
4. Marrying the Citizenship by Investment Program (CIP) with an investment option specific to a Nevis project^[ii]. Such project could be linked to an essential service on the island such as health care (state- of- the- art medical care facility) or energy (alternate form of power such as wind or solar).
5. Allowing prospective investors the opportunity for a combined residency/citizenship and wealth management programme. Previously, under the Nevis International Exempt Trust Ordinance (NIETO), an individual who obtained citizenship under the CIP could not be a Protector under the NIETO. With the newly proposed Trust Ordinance, an individual would be able to invest and, at the same time, set up a trust as part of their wealth management programme.

Whilst challenges continue to loom, they will only continue to test the strength of the jurisdiction as a viable option to HNWIs. Nevis continues to keep up the momentum and is expected to roll out new pieces of legislation for IBCs, LLCs and Trusts. It is therefore hoped that due consideration is given to the strides which have been made thus far for Nevis, and that some balance could be founded by our Government to preserve our status as a premier international financial – centre; one that is seen to exercise good tax governance whilst at the same remaining attractive to wealth management seekers.

^[i] Neutrality according to the OECD is that: “Taxation should seek to be neutral and equitable between forms of business activities. A neutral tax will contribute to efficiency by ensuring that optimal allocation of the means of production is achieved. A distortion, and the corresponding deadweight loss, will occur when changes in price trigger different changes in supply and demand than would occur in the absence of tax. In this sense, neutrality also entails that the tax system raises revenue while minimising discrimination in favour of, or against, any particular economic choice. This implies that the same principles of taxation should apply to all forms of business, while addressing specific features that may otherwise undermine an equal and neutral application of those principle.”

^[ii] As opposed to the other established forms of investment options: 1. Real estate investment in an approved development; 2. Charitable donation in the (a) Sugar Investment Diversification Foundation or (b) Social Development Fund.

Maurisha A. Robinson
Maurisha A. Robinson is the co-founder and co-managing partner Morton Robinson, LP. She has won numerous awards including The Michael Bryan Clarke Memorial Prize and the Jamaica Public Service Ltd. Scholarship.