Holding assets through legal entities has in the past, and to a certain extent remains to be, an efficient way to control, administer, and safeguard the HNWI’s investment portfolio. This holds true whether the purpose of the investment company is to hold real estate, bankable assets, or facilitating for the venture capitalist looking for the next “Magnificent 7” company to invest in. What however has changed over recent years is what one should hold, how ít should be held and, what it oftentimes ultimately boils down to: how it should be taxed. The latter part specifically holds true for investors and their family offices setting up companies in jurisdictions where they themselves are not domiciled. Such companies are oftentimes collectively referred to as a “Foreign Company”.

The Foreign Company investor has been continously hit by waves of new regulations since the implementation of FATCA. The latest EU anti-tax avoidance initiative, ATAD 3, whilst still under consultation, sends a perfectly clear message to everyone investing through a Foreign Company: we dont know by when, but if there is little to no substance to your Foreign Company, it will be handled differently in the new world (read our article “Past their shell-by date” on ATAD 3).

Whilst the Foreign Company will continue to serve as a useful asset protection tool in the future it should be on everyones top agenda to overlook their set-up and re-evaluate substance over form in terms of ownership, control, income streams, residence and other specific anti-avoidance provisions that your home country may have, or is planning to, apply. Understanding its limitations, and implementing necessary precautions, is crucial before, this time, it might actually be too late. In this article we explore how a Private Placement Life Insurane can be used as a complement or alternative solution to the Foreign Company.

Going back to the basics - What's the issue?

Foreign Companies are required to have substance and rationale for being established in another jurisdiction other than where the investor resides. Controlled Foreign Corporation, or simply CFC rules, should be anyones starting-point in evaluating future challenges ahead. CFC rules was intitally designed to prevent tax evasion using Foreign Company structures defining it as a legal entity that is registered and operates in a foreign country but is controlled by shareholders who are residents of a different country. The key critica for classifying a company as a CFC typically include:

  1. Ownership: CFC rules typically define a threshold level of ownership or control by residents of the home country. This threshold can vary but is often set at 50% or more of the voting power or value of the foreign company
  2. Control: The shareholders or group of related shareholders from the home country have significant influence or control over the foreign corporations decision-making process, such as financial management, operational policies, or investment decisions
  3. Income: Often focuses on passive income such as dividends, interest, royalties, or capital gains generated by the foreign corporation. If a significant portion of the CFC’s income falls into these categories, it may trigger taxation or reporting requirements in the shareholders’ home country
  4. Residence: Further consideration of residency rules of the shareholders and the foreign corporation for tax purposes may apply. If the shareholders are tax residents of a particular country and the foreign corporation is registered in another, often-times qualified “tax-haven” country, such indicia may be sufficient.
  5. Anti-avoidance provisions: Some jurisdictions have anti-avoidance provisions in their CFC rules to prevent tax evasion or abuse of tax treaties. These provisions may target specific arrangements or structures designed to circumvent the CFC rules.

So where does the Private Placement Life Insurance help?

Private Placement Life Insurance, or simply PPLI, is a type of a life insurance policy tailored for high net worth individuals, and their investment companies, is often used as a tax-efficient investment vehicle, recognised as a robust and compliant wealth planning tool in most European countries, especially used for individuals with significant assets and complex financial situations. Whether CFC rules apply within a PPLI insurance arrangement would depend on various factors such as the ownership structure of the underlying investments, the jurisdictions involved, and the specific tax laws of the countries where the policyholder and the investments are located. However, in general PPLI policies are typically out of scope of CFC rules given the following reasons:

  1. Ownership: As the shareholder of the investments is the insurance company and the policyholder (UBO) holds an insurance contract (a claim from the insurance company) equivalent to the underlying investment portfolio, CFC rules should not be based on the policyholder but the insurance company. The bigger insurance companies should be sufficiently diversified to which ownership should rarely serve as an indicia to deem the solution to be subject to CFC rules.
  2. Control: PPLI policies are life insurance contracts to which the insurance company invests widely through a variety of assets, often including foreign investments, within the insurance wrapper. The policyholder doesn’t have direct control over the investments and are therefore not typically considered to meet the criteria for classification as a CFC.
  3. Income: As CFC rules are designed to address the taxation of income generated by foreign corporations that are controlled by shareholders who are tax residents of a different jurisdiction a PPLI insurance should equally fall out of scope as long as investments are not withdrawn or surrendered from the policy but remains to be invested within the policy.

Why don't I just move my money home?

The increased scrutiny on Foreign Companies have consequently lead to an unfair and misleading bias towards simply qualify all jurisdictions outside your home market as « foreign» and foolishly believe that this is a cause for concern. As a minium one should distinguish between « tax havens », with aggressive tax rates and oftentimes weak governance rules, with « international hubs », like Luxembourg and Ireland for the European investor. International hubs play an increasingly important role in our private wealth eco-system today bringing a much needed competence on cross-border planning with focus on:

  1. Protecting your wealth in an increasingly unstable geopolitical environment
  2. Avoiding unnessesary tax spills by taking into consideration tax-treaties and local tax-laws in multiple jurisidictions
  3. Administer your international investment portfolio under one roof

Re-viewing your Foreign Company with your financial advisor or lawyer is of the utmost importance. Perhaps this might, for a one last time, be the very last time to act.