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Family Office for Global Business

25.12.2014 Author: Valentyn Gvozdiy
Source: PrivatBank VIP
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Political and geographical instability in Ukraine, of course, contributes little to the increase of assets. From your practice, how the events in Ukraine and on the world arena may affect the businesses of wealthy Ukrainians?

The events on the world arena prove that we live today in a very dynamic world where there is no place for standard schemes of asset structuring which the investors and businessmen used to usually apply.

Many successful Ukrainian businessmen, owners of transnational companies and simply wealthy people are now facing the consequences of ill-conceived schemes of business building. Both international companies and capitals of some wealthy families are now in the risk envelope.

What does really mean such ill conception and what risks may it entail?

Difficulties for Ukrainian business, first of all, appeared as a result of a wrong structuring of asset owning and the use of old schemes of tax planning. Such structures had been established without compliance with the world standards and as a result they had been considered by tax authorities as tools of evasion from ta payment and funnelling of the capital out to offshore companies.

How to avoid such problems?

The world trends suggest that “the Golden Age of the principle “we pay taxes nowhere” is over. That is the quotation of the General Secretary of the Organization for Economic Cooperation and Development (OECD), one of the most affluent interstate organizations.

OECD has designed a global document (BEPS project) which is the most radical reform of tax system for the last hundred years according to the estimations of the experts. The purpose of this project is to prevent evasion from tax payment using the offshore companies and abusing of double taxation treaties.

In other words, this project means that the offshore age is over?

That’s one way of putting it. The project provides for the actions aimed at prevention of any illegal use of tax conventions, i.e. there is a possibility to pay taxes where the rates are less important will be cancelled.

How soon will Ukrainian owners feel the BEPS project working?

The project is going to be implemented within the shortest terms. For instance, the necessity to confirm the substance of companies has already entered into force from September 2014. Now it is insufficient to have only one office to confirm the real activity of the company. For Ukrainian business it shall mean one thing, it will be more difficult, more expensive and, may be, impossible to work in a usual tax shadow.

Should they expect any supplementary inspections and fines?

It’s rather probable. The implementation of the above mentioned initiatives may entail quite serious consequences for business and wealthy people.

The activity of Ukrainian holding structures which were built with the assistance of foreign companies will undergo a supplementary analysis from the part of controlling agencies. The controllers will also pay a careful attention to the transactions under the commission agreements and to the operations with the intellectual property.

Moreover, tax authorities will analyse the economic substance of a deal following the principle of the substance prevailing over the form.

It helps to remember that the evasion from tax payment in Ukraine entails a criminal liability. An investment abroad, including purchase of shares and corporate rights of foreign legal entities without an individual license granted by the NBU may become the grounds for recovery of penalty in the amount which is equivalent to the amount of such investment.

How can Ukrainian tax authorities know about the businessmen’s revenues abroad?

One of the initiatives of the BEPS project is more transparent tax management. It means that they will contribute to exchange of tax information between the departments of different countries. Ukraine is also willing to follow the global trend of transparency and shows its readiness to exchange the information with foreign tax authorities. Such readiness has been already documented. In October 2014 Ukraine signed the Memorandum of Understanding with OECD which provides for reforming of tax system of Ukraine and exchange of tax information with other countries.

Which data the tax authorities of other countries will have access to?

They will have access to information on incomes of physical persons, companies, trusts and funds which are so popular to minimize taxation. The Ukrainian Parliament has already adopted the Law binding to enter into the Unified State Register of Legal Entities and Physical Persons – Businessmen the information on final beneficiaries of a company. The incompliance with this law entails an administrative liability.

The first exchange of tax information will take place in September 2014. This initiative has been signed by the British Virgin Islands, Cayman Islands, Cyprus, Malta, Guernsey, Jersey, Luxembourg and others. At that, it is safe to say that the cooperation in exchange of tax information will grow year after year.

What should the offshore owners do in this case?

Such actions of regulatory agencies are an immediate warning for offshore business owners to revise their views on a proprietary privacy and a necessity to upgrade the structures.

There is no need to stop business to secure yourself. A quicker and a cheaper way is to analyse your business structures and assets to take all required measures to assure their transparency.

For today, there are many legal tools allowing to provide for the reliability of business and the integrity of property. Moreover, the experience proves that the right asset structuring allows to increase their profitability.

This recommendation is mostly referred to business owners. And what should wealthy people involved in business do?

This is the most frequent question asked by wealthy people who faced the problem of management of a great amount of different assets. From my practice I can affirm that in Ukraine this problem exists not even at the level of several people, but at the level of families and dynasties.

The optimal solution for such wealthy people is the asset management according to the concept “family office”. Protection and growth of business, management of commercial and residential real estate, hereditary transmission of estates and full-time consulting support on all the issues related to the security and wellbeing of a respectable family, that is only a part of the issues a family office can help with. And the most important advantage is that all those services are provided by the best professionals who may be fully involved in a family office team as well as invited by such office manager to provide specific services to a family. The competences of a family office frequently include the deals related to purchase and management of luxury assets (yachts, aircrafts, real estate abroad).

Do such professionals work with the heirs of great capitals?

Of course, the issue of inheritance is very important. Practically, for a person from a wealthy family one of the greatest emotional stresses is not only a successful hereditary transmission, but also the heirs’ informing on the existence of such capital.

Depending on the situation in the family and the relations between the relatives the right moment may come at different time. There were the cases when children were learning about huge estates after their parents’ death.

It may appear that children do not have required capabilities and it becomes difficult to transmit a company to an heir. Then the task of a family and its consultants is to discover even one potential leader and help him to obtain the relevant knowledge, to develop his business talent.

All the issues related to the growth and inheritance of wealthy people capitals need an individual approach and the practice of a family office functioning applies it in the best possible way. In the countries having the great history of family money inheritance such format of consulting is always in demand and very popular. In Ukraine we will face the necessity to establish the trust to this managerial tool, but our positive experience with wealthy dynasties suggests that we are on the right track.

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