Thursday 19 October 2017

Nexia Global Insight November

Planning for succession - where to start?


It’s hard to build a successful business, so the idea of leaving or handing over the reins is likely to lead to conflicting emotions. But nothing lasts forever, so whether you’re selling your business, passing it on to the next generation or simply retiring, you’ll need to plan for your succession.

The succession plan
Great businesses are generally run by leaders who spend the majority of their time working ‘on’ the business rather than ‘in’ it. Businesses run by these types of leaders are not owner-dependent and can survive, or even thrive, without them. Their valuable strategic input might be difficult to replace, but their management roles can be filled through normal recruitment channels. If this enviable status is achieved, succession is far easier.

Owner-dependency has many negative connotations, the most important of which are that the business cannot operate successfully without the owner’s involvement and it is unlikely to have any meaningful value. If this prognosis rings true, it’s important to start succession planning early. Leaving it too late is a common mistake.

A succession plan depends on whether the owner is selling, retiring or considering other ‘what if’ scenarios.

But unless the business is being sold and the owner is departing, succession is usually focused on two key aspects – the appointment and development of the right successor and the necessary change in roles.

Appointing and developing a successor
Barring wholesale management changes, perhaps as a result of a sale or a management buy-in, most businesses prefer appointing an internal rather than an external candidate to succeed their outgoing leader. At the end of the day, it depends on the firm’s culture. If there’s an obvious internal candidate in a small-sized business, it probably makes sense to go ahead with the appointment. In a larger business, more formality may be required. Recruitment methods will differ depending on whether there’s an obvious internal candidate, the potential for both internal and external candidates or just an external candidate.

Changing roles
Rather than making a complete exit, an outgoing leader may want to consider a role that can help both the business and its successor. Possible options include:

  • Moving from CEO (assuming he or she has that role) to executive chairman - this could initially be an executive role, with a view to becoming non-executive at a later stage.
  • From running the company to running the board - becoming the non-executive chairman immediately, running the board and being the guardian of the company’s strategic vision.
  • Becoming a mentor and coach - spending time with a chosen successor and letting osmosis take its course.

Planning for the future
There are a number of opportunities for business owners to consider once succession has been taken care of.

  • Stay put. The business is profitable, you have a great management team and you enjoy your job. All good reasons not to sell the best business you might ever own.
  • Keep it in the family. Improve financial security by engineering a family buy-out. A successful business should be able to raise external debt for this purpose, topped up with vendor loans that the business repays over time.
  • Part-sell the business. A part-sale of the business might offer the best of both worlds. A part-sale might typically be to a private equity house, which could take a meaningful stake in the business, providing cash out to the owner as well as cash into the business for expansion.
  • Float the business. Having a stock market quote can facilitate acquisitions, with sellers sometimes accepting shares in the business, instead of (or in addition to) cash. Visibility is increased, although this can be a double-edged sword as bad news travels fast in the public markets.
  • Sell the business. If the other options don’t appeal, there may only be one left!

This article is based on extracts from Guy Rigby’s book From Vision to Exit - The Entrepreneur’s Guide to Building and Selling a Business.

For more information, contact:

Guy Rigby
Smith & Williamson
Email: guy.rigby@smith.williamson.co.uk
Tel: +44 20 7131 8213
www.smith.williamson.co.uk

Succession in family businesses

An Eastern European perspective

As a generation of post-Communist era entrepreneurs in Poland near the end of their working lives, lack of knowledge and experience in effective succession planning present major challenges to business owners and the economy as a whole.

The concept of business succession effectively ceased to exist in Poland in 1939 as a result of the Second World War and subsequently the Soviet’s communist regime. In the early 1990s, with the end of the Soviet era, Poland’s economy was transformed, with flourishing entrepreneurs launching a new economy with a strong and diverse SME sector. Now, that generation of entrepreneurs is approaching retirement.

The same issue faces other former Eastern Bloc countries, but due to its economic success in the post-Communist era, Poland now has a huge wave of family businesses grappling with the issues and requiring advice on how to pass on their business to the next generation. There may be important lessons for other countries in the region to learn from the Polish experience.


Key characteristics
A number of factors make succession planning for business owners particularly challenging in Poland. In the absence of ‘old money’, the majority of successful family businesses have been built up by working people with little or no experience of how to bring non-family members into the business to help it grow. In turn, there are few advisory services available to family-owned businesses to support succession and manage family issues – the family office structure is not in place. There tends to be little trust between business owners and their professional advisers. Local advisers do not always have the relevant experience and understanding of succession planning, while experienced foreign advisers have little understanding of the local environment.

As a result, the main focus of family businesses seeking professional advice is usually on tax optimisation and avoiding legal problems. In addition, in the past, a general lack of confidence in the stability and fairness of government resulted in any long-term succession planning focusing on asset protection rather than business development. This attitude has been largely overcome in Poland more recently, but remains a facet of many other Eastern European countries.

Lack of trust in professional advisers, as well as a different legal environment, mean it is rare to see assets being managed using trust-like vehicles, as is common in Western European economies.

A new way of working
Professional advisers in Poland often have strong ‘technical’ know-how on legal, tax or management issues relating to succession planning. But few make the effort to get ‘under the skin’ of the family business to understand how it works and to identify some of the main areas of concern for families. Typical examples include decision-making, communication, setting priorities, generational conflict or a lack of education among the intended successors.

A key part of effective succession planning for family businesses should be to transfer the ideas and spirit of family governance into corporate governance. This is a way of balancing two different worlds: the family and the business. In this way, the family can draw up a set of formal rules, like a family constitution, detailing the decision-making process, how to resolve conflict, the dividend policy, inheritance rules, etc.

Businesses in Poland are starting to wake up to these challenges and to understand the potential to improve their performance over generations, but we still have a long way to go.

Tomasz Budziak is the author of the first Polish book to be published on succession in family businesses from a practitioner’s (rather than an academic) perspective.
It provides a detailed analysis of current themes, critical areas and practical tools for succession planning in the Polish context.

For more information, contact:

Tomasz Budziak
Korycka, Budziak & Audytorzy Sp.
Email: tomasz.budziak@kba.com.pl
Tel: +48 (22) 522 23 90
www.kba.com.pl

The changing face of internal audit

Globalisation, advances in technology and increasingly complex business operations have placed significant new demands on the internal audit professional. In the past, the chief audit executive (CAE) would simply meet with the audit committee once every three or six months to discuss internal audit activity on a formal basis. Yet today, this level of contact is rarely considered adequate.

To satisfy expectations around good governance and risk management, there needs to be a strong relationship between the CAE and the audit committee. The audit committee needs to be able to rely on the CAE to make the right decisions and take appropriate action where necessary.

There are three areas key to building a successful rapport – communication, a trusted relationship, and sponsorship and support.

Communication
The audit committee is only as effective as the information it is given. Formal reporting from the CAE should therefore be enhanced with informal, frequent dialogue around emerging risks, risk and control education, and assurances that internal audit activity is not being hindered. These unofficial communications help to build trust between parties, prevent negative surprises and ensure that key issues are properly investigated. They also reassure the audit committee that risks and concerns are mutually understood.

A trusted relationship
The CAE needs to be proactive and provide the audit committee with much more than just historical results. An effective CAE provides information and reassurances on best practice, trends in governance, emerging industry issues, technology implications and insights into the performance of the organisation against its aims and objectives. In return, the CAE will be assured that results and perspectives can be shared without fear of reprisals.

Sponsorship and support
The audit committee continues to emerge as a key stakeholder alongside executive management. So, functional reporting to the audit committee places the CAE at the highest level within the organisation, providing a level of credibility and authority that may not otherwise be achieved. Full sponsorship and support of the audit committee enables the CAE to execute appropriate internal activity around key risk priorities with the right level of impartiality.

For more information, contact:

Sue Ulrey
CliftonLarsonAllen LLP
Email: sue.ulrey@cliftonlarsonallen.com
Tel: +1 317 574 9100

Allen Still
CliftonLarsonAllen LLP
Email: allen.still@cliftonlarsonallen.com
Tel: +1 317 574 9100
www.cliftonlarsonallen.com

IFRS: where are we now?

The US stance on adoption of international financial reporting standards (IFRS) affects thousands of multinational companies and their subsidiaries.

Over the summer the US Securities and Exchange Commission (SEC) published its final report on whether, when and how IFRS should be incorporated into the current US financial reporting system.

Most of the world’s major economies have been moving gradually towards a common set of accounting standards to help users and preparers of financial statements better compare information. However, the SEC’s latest report casts doubt on whether a single common set of standards is achievable – even with full US adoption – because of the potential for governments to influence accounting rules.

US reach
The US approach to international financial reporting will have major implications for US businesses with an international outlook or any business worldwide with US interests.

There are well over 2,000 US multinational parent companies with majority interests in foreign entities. These companies have over 20,000 foreign affiliates, each of which may have to report in their home country using local Generally Accepted Accounting Principles (GAAP) or IFRS. Similarly, the 9,000 or so entities around the world that own interests in close to 12,000 US entities have to use GAAP or IFRS in their home country, which can have a huge impact on the US entity.

Sticking points
Among the SEC’s main concerns have been the principles-based nature of IFRS, which makes it difficult to enforce compared to the rules-based US GAAP.

The insistence of European governments that they maintain legal oversight of IFRS means that standards can change in individual countries as a result of political influence. (US GAAP is immune to such direct political pressure). In fact the SEC believes that most foreign governments view IFRS as recommendations only and will amend them as and when they feel it necessary to provide a ‘local flavour’.

Financial support for US GAAP is given through required contributions from publicly held companies. But because IFRS is supported by voluntary contributions, 25% of which comes from seven of the largest accounting firms, it is seen, at least in the US, as being susceptible to political influence.

Other significant concerns include a lack of consistency in the global enforcement of IFRS; the length of time it takes to publish interpretations to clarify IFRS rules; the need for greater involvement of major national standard setters, like the SEC; and the lack of a US mechanism for the governance of an IFRS standards body.

Where next?
A full-scale transition to IFRS in the US appears increasingly unlikely, in part because of the anticipated cost. But the SEC has agreed that convergence of IFRS and US GAAP should continue.

The SEC says that the US Financial Accounting Standards Board should endorse IFRS as written for the “vast majority” of current IFRS rules and with specific exceptions for the remainder. Three major standards convergence projects are currently in progress – leases, revenue recognition and financial instruments – all of which are due by mid-2013.

No further developments are expected until after the US presidential election, since the leadership of the SEC ties in with changes at the White House. A new chief accountant might be appointed after the elections.

Long road ahead?
There are still many areas where the SEC believes IFRS principles are not as extensively developed as US standards and will require more work. This is partly why the US has been reluctant to incorporate IFRS – because it sees its rules-based accounting system as being more intricate and developed to begin with. Still, it appears that IFRS and US GAAP will continue to converge, although US-style differences are expected to remain.

For further information, contact:

John Malone
Malone Bailey, LLP
Email: jmalone@malonebailey.com
Tel: +713 343 4211
www.malonebailey.com

Singapore: success of the 'little red dot' in Asia

Singapore – known to many as the ‘little red dot’ – was ranked the fourth most competitive nation among 59 economies surveyed for the 2012 World Competitiveness Yearbook. This is a remarkable achievement for a small nation with a population of just five million packed into 704 square kilometres.

Singapore remains one of the top ten richest countries in the world with a GDP per capita of approximately S$59, 000. It is ranked second for business and government efficiency and in the top ten for overall economic performance, alongside economic powerhouses such as the US, China and Switzerland, according to the Competitiveness Yearbook.

Almost 90% of the country’s households live in their own homes, with nearly three-quarters housed in four bedroom or larger public flats and private homes. Its two sovereign wealth funds are ranked 7th and 11th in the world. Even during the recent financial crisis Singapore proved resilient and recovered quickly, with an average growth rate of 12% in 2009 and 2010.

From fishing village to major global financial centre
A new book entitled “Some Small Countries Do it Better”, published by The World Bank, pointed to Singapore, Finland and Ireland as examples of small, resource-poor countries with high growth rates over a decade and serving as useful economic models for other low and middle-income countries striving to accelerate growth.

Singapore’s significant achievements can be traced back to robust planning, strategic foresight, and a sound and efficient government. Less than 50 years after independence, the country has gone from a port hub in the Straits of Malacca to an international business and financial centre, as well as a cutting-edge manufacturing destination. It is developing into a global research hub in IT, biotechnology, education and healthcare, and can take pride in its world-class infrastructure. Changi International Airport is linked to some 200 cities in 60 countries and is still one of the top international airports in the world.

The growth of trade in the early 1960s to 1970s was boosted when a number of European countries, the US and Japan moved their manufacturing operations offshore to industrialised economies where wages, rental facilities and other costs were lower. Singapore recognised the importance of multinational corporations (MNCs) in creating jobs, providing access to global markets and transferring technology and skills to the local community. It actively wooed them, offering foreign investors a range of financial incentives, including competitive tax rates, and investing in the country’s training, infrastructure, urban services and amenities to attract a substantial flow of foreign capital.

Competitive advantage
Singapore has differentiated itself from its neighbours, many of which have more natural resources, human resources and space, with its rule of law, world-class infrastructure and world-class communications system.

The country does not rely on sheer volume of capital spending or an abundance of natural resources, but on harnessing the potential of human capital and technologies. By moving quickly to build its human and knowledge assets, it has been able to diversify much faster into high-tech manufacturing and value-added services than other East Asian economies. This has enabled Singapore to maintain higher growth rates over a longer period.

There is no doubt that the country’s competitiveness has been boosted by a strong focus on education, providing Singapore with a major talent pool. The quality of education, particularly in science and mathematics, is considered to be among the best in the world. The government also works with educational establishments and industry partners to develop a range of training and scholarship programmes focused on producing a high-quality workforce. This stimulating intellectual climate must be cultivated on an ongoing basis if Singapore is to continue attracting foreign talent and MNCs.

At the heart of a world-class learning and innovation system, Singapore’s research capabilities give rise to entrepreneurial ideas and innovation to boost productivity and profitability. As a preferred location for innovation, Singapore has nurtured a rich research and development (R&D) ecosystem and robust intellectual property (IP) regime. It is currently rated number one in Asia and ninth in the world for IP rights protection in the IMD World Competitiveness Report 2011. Similarly, the World Economic Forum’s Global Competitiveness Report 2011-2012 ranks the island as having the best IP protection in Asia and the second best in the world.

Challenges ahead
Singapore has relied heavily on western superpowers and multinational corporations to generate demand for its goods and services. In fact, reliance on external demand for its exports has risen to 76% in the last ten years, with more than half of the country’s exports still going to the US and Europe. While MNCs are crucial in job creation and driving economic growth, they are also quick to downsize operations or move to more cost-efficient destinations in a recession. Therefore, Singapore faces the very real risk of production pullbacks and job losses.

It seems that reliance on MNCs was born out of necessity in the early days of independence. But could Singapore have tried to change its course, perhaps attempting to grow its own local manufacturing elite?

The government has taken some steps towards developing a strong and sizeable SME base as part of Singapore’s economy. The Economic Strategies Committee recommended nurturing 1,000 SMEs, with an annual turnover of more than S$100m, over the next decade. While some of these businesses may eventually be able to compete worldwide as a Singapore MNC, it is highly unlikely that 1,000 SMEs will become 1,000 MNCs. The reality is that Singapore lacks the critical mass to produce global manufacturing champions in the same way that South Korea, Taiwan or Hong Kong have. Singapore’s manufacturing sector will always be dominated by foreign MNCs, so the focus should instead be on providing a superior environment and services to retain the best MNCs in Singapore for as long as possible.

There is also a concern that the pursuit of high growth inevitably leads to a widening income disparity. Higher earners enjoy double-digit growth while lower-income wages remain largely stagnant. The government’s view is that as long as it continues to deliver economic growth, people will tolerate the accompanying social problems and trust them to redistribute some of the wealth, for example, through public housing.

Pooling talent further afield
Another price that Singapore is paying for fast growth is the need to import foreign talent, with all the associated social costs. Low-cost foreign labour is essential to the growth of sectors like manufacturing and construction, as Singaporeans are often unwilling to do these unskilled jobs. And yet they continue to look unfavourably upon the competition from foreign workers for jobs, housing and school places – despite the contribution these individuals make to society.

To counter the labour shortage the challenge is to retrain and upgrade workers, especially those over 40 who have missed out on tertiary or vocational education in their early years. However, there is no immediate solution to this problem, so Singaporeans will either have to settle for slower growth or learn to live with the new social dynamics.

Looking ahead
The reasons and success factors behind Singapore’s growth from a fishing village to a major international financial centre are expected to remain in place for the next decade or so. This ‘little red dot’ will continue to be used by both the East and West as a hub for doing business with each other – helped by the country’s vast talent pool. It is not unusual to see Indian IT experts working alongside Chinese IT brains, European and American expatriates, and Malaysians and Singaporeans. As long as Singapore retains its status as a place where it is easy to do business, and is safe and comfortable for the families of foreign workers, it will continue to prosper.

For more information, contact:

Henry Tan
Nexia TS Public Accounting Corporation
Email: henrytan@nexiats.com.sg
Tel: + 65 6534 5700
www.nexiats.com.sg

Happy landings

The flight went well, customs wasn’t a problem and you’ve arrived at your hotel a little hungry but otherwise none the worse for wear. Your trip is off to a good start, but how safe is your computer data?



In your room, you kick off your shoes and power up the laptop. Whether or not you know it, your trip takes a turn for the worse: perhaps the hotel wi-fi isn’t secure or it’s a hotspot set up by hackers to virtually look over your shoulder as you surf the web. They certainly have motivation – identity theft in the US alone reportedly cost an estimated $54bn (Javelin Strategy & Research, 2009) and £73bn in the UK (National Fraud Authority, 2012). Spyware, malware, phishing and other technology-derived methods combine to reap big rewards from unsuspecting computer users every year.

Plan ahead
Travelling can increase the risks computer users face, as it often involves accessing public wi-fi at airports, hotels and coffee shops or leaving a laptop unattended in a hotel room. It’s also easy to let your guard down since you’re likely have a lot on your mind during a business trip. That’s why it’s vital to fortify your IT defences before you even get on a plane. Here are a few tips that can keep you, and your information, more secure while travelling abroad.
  • Leave your computer at home. Go ahead and take a computer with you, but it’s a good idea to leave your regular computer on which you do your business, banking, web surfing and everything else at home and use a computer borrowed from your IT department. Depending on the purpose of the trip, it’s unlikely that you’ll need all your normal bells and whistles anyway – including the sensitive data that hackers find so appealing.
  • Lock down your data. While you’re getting that computer from the IT department, make sure its hard drive has full disc encryption enabled and that the operating system firewall has been properly configured. A business traveller returned to his hotel room in a foreign country only to discover that his laptop had been physically opened up and the hard drive copied. Had the hard drive been encrypted, his data would have been protected. If you have a favourite USB flash drive, make sure it is also fully encrypted, otherwise leave it at home.
  • Lock down those cool gadgets. Turn on your smartphone’s passcode access. Not taking this quick and easy step leaves all of your data – contact information, photos, links and any notes (including handy little password reminders) – vulnerable to anyone who can get to your phone. But requiring, say, a four-digit passcode is the bare minimum you can do to protect your information.
    On an iPhone or iPad, set a longer passcode via General > Passcode Lock > slide “Simple Passcode” off > “Turn Passcode Lock On” > enter a passcode with letters, numbers and special characters.
    The process may be different across various Android devices, but on the Galaxy s3 it can be done via Settings > Security > Security Lock > Password.

A survey by Javelin Strategy & Research found 7% of smartphone owners were victims of identity theft, a third higher incidence rate compared to the general public. Part of this increase may be attributable to consumer behaviour: 62% of smartphone owners do not use a password on their home screen, while 32% save login information on their device.

Establish a VPN ‘tunnel’ Going directly online using your hotel’s wi-fi is never a good idea. Think of it as the web surfing equivalent of leaving your hotel room door unlocked, since anyone who wants a peek at what you’re doing won’t have to work too hard to do this. Instead, surf under the protective cover of a virtual private network (VPN). There are a number of ways to develop a VPN solution if your company doesn’t already offer one, but perhaps the most convenient is to create a GoToMyPC or LogMeIn account and remotely access a home or work computer and its web browser (be sure your company policies allow use of these tools). You’ll be able to leverage the hotel’s wi-fi, but surf privately through the protective/encrypted tunnel.
 
Stay safe
Keeping your data secure during a business trip begins before you even get on the plane. You’ll have a lot on your mind preparing for a trip, but taking just a handful of precautions before you depart can make the whole experience far safer and enable you to protect your confidential data and intellectual property.

For more information, contact:

Scott Bailey
Rehmann Corporate Investigative Services
Email: scott.bailey@rehmann.com
Tel: +1 248 458 7871
www.rehmann.com

Navigating transfer pricing - business benefits beyond risk mitigation

One of the more challenging issues facing modern businesses is the fact that a company of virtually any size can find itself operating as a multinational business, in multiple tax jurisdictions. Transfer pricing is usually the number one global tax issue facing such businesses.

The challenge
With a smartphone in every pocket and access to the internet from virtually anywhere, 21st century companies can be in constant contact with customers, suppliers and business partners in almost any country in the world. Products fabricated or purchased in one jurisdiction may be stored in another jurisdiction and sold to customers in a third jurisdiction. Any business may enter into a partnership, joint venture or cost-sharing arrangement with allies in other countries. Support functions like accounting, marketing or research and development, may be located in one place and provide services throughout the organisation.

The challenge for such global businesses is how to determine the amount of profit earned in any given jurisdiction – and how to protect the company from aggressive tax authorities that may challenge the prices set for the sale of goods or services between businesses.

Benefits of a transfer pricing study
A transfer pricing study is a thorough review, usually conducted by an outside party, of the company’s pricing policies and related documentation. Such a study can produce a number of benefits. These include:

  • reducing taxes and penalties by ensuring that the company’s transfer pricing policies comply with all requirements in the local jurisdiction, including meeting local documentation rules
  • providing support for transfer pricing related deferred tax assets and deferred tax liabilities recorded in the company’s financial statements
  • identifying opportunities to reduce the company’s global effective tax rate by restructuring multinational operations
  • identifying ways to increase global supply chain efficiency by relocating operations or reorganising legal entities.

Enforcing transfer pricing rules
The goal of most transfer pricing regimes is to ensure that the income taxed in a particular jurisdiction is determined using sound economic and business principles. No government wants to allow businesses to evade taxes by inappropriately sourcing profits to low-tax jurisdictions, or so-called tax havens, as its tax base then suffers as a result of businesses using questionable transfer pricing policies.

Almost all advanced economies around the world have transfer pricing rules that allow tax authorities to adjust items of income, expense, credit or allowance in connection with related party transactions. Most jurisdictions with transfer pricing regimes require businesses with related party transactions to develop and retain documentation supporting the arm’s length nature of these transactions. Such documentation must be prepared in a prescribed format that may vary by jurisdiction. Often it must be completed by the time the tax return is filed to reflect the related party transaction. If an adjustment is made and the required documentation is not available, the company could face significant penalties.

Be clear on your obligations
All governments worldwide are looking for ways to expand the tax base without raising nominal tax rates. Businesses operating in multiple jurisdictions should expect pressure from tax authorities to justify the allocation of revenue and expenses among jurisdictions. It is uncertainty about transfer pricing positions that creates a high proportion of financial reporting and tax disclosure issues for businesses operating cross-border.

Transfer pricing is an issue that no business can ignore. There are strict reporting and compliance obligations, significant exposure to additional taxes and penalties, and a very real possibility that the same profits will be subject to tax in two or more jurisdictions.

A transfer pricing study is a tool that can minimise these risks. By using such a tool, combined with sound international tax planning, a company may be able to lower its overall tax obligation, reduce the effective tax rate reported in its financial statements, fully comply with reporting obligations and manage the profitability of its business operations in every location throughout the world.

For more information, contact:

James Wall, JD, LLM
Email: james.wall@cohnreznick.com
Tel: 646-254-7460

David Slemmer
Email: david.slemmer@cohnreznick.com
Tel: 646-625-5732
www.cohnreznick.com

Dutch holding companies: your springboard to Europe

The Netherlands has been one of the centres of global finance and trade activities for many years. The Dutch holding company provides one of the most popular international structures – largely because it offers a tax-efficient exit route for the profits of subsidiaries.

The benefits
The main benefits of the Dutch holding company are:

  • full tax exemption of dividends and capital gains on shares in qualifying subsidiaries (participation exemption)
  • tax deduction of qualifying expenses and losses
  • tax treaty benefits, specifically the reduction of the withholding taxes on dividends (in many cases to nil) based on the tax treaties concluded by the Netherlands with more than 80 countries worldwide
  • the absence of withholding taxes on interest and royalties
  • EU tax benefits, specifically the 0% withholding tax rate on dividends and interest and royalties received from qualifying subsidiaries located in other EU member states and the European Entrepreneurial Region
  • relatively low incorporation and annual running costs.

The participation exemption generally applies where a subsidiary has capital divided into shares and the Dutch shareholder owns at least 5% of these shares. The expenses of qualifying subsidiaries are usually tax deductible, including interest expenses on funding loans and local running costs, but other provisions may limit the tax deduction on interest expenses.

Positive developments
The Dutch BV is the most commonly used legal entity in the Netherlands, with recent changes to the Dutch civil law making it easier to incorporate a BV. For example, the minimum capital requirement of €18,000 has been abolished, while the bank statement and auditor’s statement for contributions in kind are no longer necessary. It is also possible to transfer the shares of a BV without limitations.

Another advantage of the Dutch holding company is that from a Dutch perspective, there are virtually no substance requirements. The holding does not need to have employees and, in most cases, the foreign-owned holding company is serviced by a trust company providing management and domiciliation.

For more information, contact:

Hans Eppink
KroeseWevers
Email: hans.eppink@kroesewevers.nl
Tel: +31 53 850 49 00
www.kroesewevers.nl


Economic outlook

US

If recovery from the financial and housing meltdowns and the concomitant recession were an Olympic sport, it would be a marathon course littered with hurdles. This sport demands endurance (to address debt burdens, asset devaluations, and fiscal and trade imbalances) and nimbleness (to circumvent political impediments and respond to natural disasters).

The US economy is performing like a true marathon-hurdler: its goal may be some distant finish line, but its immediate focus is on clearing innumerable hurdles without taking a tumble.

Since mid-2009 when the marathon-hurdle event began, the US has achieved mixed results. Real GDP, i.e. inflation-adjusted output and real after-tax incomes, are now higher than before the recession. But there are four million fewer jobs and inflation-adjusted earnings, i.e. the wages/salaries of those with jobs, are now smaller.

These are critical shortfalls in an economy where households consume 70% of total output. Put bluntly, despite repeated doses of fiscal and monetary steroids, the marathon hurdler’s pace is inadequate.

Data for the third quarter indicate a general deceleration in the US economy. This is not a new contraction but a slowdown of slow growth as domestic and external concerns impinge on household spending and business investment.

Caution is likely to prevail, as households modulate spending in line with after-tax incomes, which are growing slowly and unevenly. Businesses will continue to hire and invest, although they are expected to defer whenever they can. So, look out for the continued crawling – rather than running – of the US marathon hurdler in 2013.

For more information, contact:

Patrick O’Keefe
CohnReznick
Email: pokeefe@cohnreznick.com
Tel: +1 973 364 7724
www.cohnreznick.com

Europe

 European equity markets have been buoyed by the European Central Bank’s (ECB) announcement to make potentially unlimited purchases of short-term bonds, in an effort to bring down borrowing costs in peripheral countries, mainly Spain and Italy.

The announcement brought an immediate reduction in Spanish and Italian bond yields, although before bond purchases can begin, countries will have to apply to the European Stability Mechanism (ESM), the eurozone’s new bailout vehicle, and agree to a strict set of conditions and economic reforms, making further austerity measures likely.

This will be a contentious issue for countries such as Spain, where further austerity will prove politically dangerous for Prime Minister Mariano Rajoy and could lead to further social unrest. Nevertheless, it’s a step in the right direction for the eurozone and could lead to lower bond yields in other affected countries, including Portugal and Ireland.

While recent announcements have helped stem the fear of an immediate eurozone break up, the core structural and competitiveness issues remain unaddressed. Growth in the region continues to be non-existent and third-quarter GDP figures are more than likely to show the region is moving into a technical recession. 

For more information, contact:

Christopher Bates
Smith & Williamson Investment Management
Email: christopher.bates@smith.williamson.co.uk
Tel: +44 20 7131 8131
www.smith.williamson.co.uk


Asia  

Trade and industrial production figures continue to point to a slowdown in China and increased expectation that the country’s policymakers will introduce further stimulus.

China’s official manufacturing Purchasing Managers’ Index slipped below the 50 expansion/contraction level for the first time since November last year, signalling a further decline in GDP growth in the third quarter. There is still low demand for China’s exports in the eurozone.

More worrying is the rapid decline in trade between China and its main trading partner Japan. Tensions between the two nations, after Japan announced plans to buy the disputed, potentially oil-rich islands in the East and South China Seas, are threatening their trade relationship further.

With output falling and inflation now looking to be under control, further monetary easing and stimulus in the coming months is likely. However, investors and the rest of the global economy may have to begin adjusting expectations of China, as growth of 6-7% may become the new normal in the region.

Japan is facing a slowdown in export growth and weak domestic demand. The continued slowdown in Europe means exports are likely to decline further while confidence remains at low levels. As a result, further stimulus from the Bank of Japan is anticipated before the end of the year.

Appetite for Japanese equities remains low, mainly due to the persistent strength of the yen against most major currencies. This is likely to hold back Japanese growth this year, although the estimated growth forecast of around 2.3% is still strong compared to other developed countries.

For more information, contact:

Christopher Bates
Smith & Williamson Investment Management
Email: christopher.bates@smith.williamson.co.uk
Tel: +44 20 7131 8131
www.smith.williamson.co.uk

Changes to India's FDI policy, finally

After a long spell of no activity on the foreign direct investment (FDI) policy front, there has been a flurry of recent activity by India’s Union Government. Significant changes have been announced to the FDI regime across the retail, domestic aviation, broadcasting and power industries.

Red letter day for the retail industry
The government has announced that foreign companies can now invest up to 51% in the ‘multi-brand product retail’ format, although it has been left to the various states to decide whether they will actually allow this. The government had tried to usher in FDI in multi-brand retail previously but faced stiff resistance from both opposition party members and allies. Nevertheless, Indian and foreign companies including Bharti Enterprises, Future Group, Carrefour, Tesco and Walmart, have welcomed the recent news.

The rules on brand ownership and the requirement to source 30% of products locally from micro, small and medium-sized enterprises have been relaxed for companies seeking FDI in single-brand product retailing. Swedish furniture giant IKEA was among those foreign companies that had wanted the government to ease the rules relating to sourcing.

Emotions soar
The Indian airline industry has also been given a welcome boost with the government allowing FDI of up to 49% in existing domestic carriers by foreign airline companies. A high tax structure on Aviation Turbine Fuel (ATF) and a steep rise in airport charges had left most of the industry’s players feeling bleak after a cumulative loss of approximately US$2.4bn last year. The industry clearly needed a helping hand on the policy front.

This announcement will be a morale booster for Kingfisher airlines in particular, which saw losses in excess of US$460m in the last financial year. Companies such as British Airways, Gulf Air and Middle Eastern Airlines have been eagerly waiting for the government to allow them to be part of the Indian airline story. Investment will require government approval, with foreign companies requiring clearance from the Foreign Investment Promotion Board and Home Ministry.

Know-how and technology
The cabinet also approved a decision to increase the FDI limit in the direct-to-home segment from 49% to 74%. Any investment beyond 49% will require government approval. The industry has welcomed the move saying that the increased investment limit will go a long way towards achieving the government’s target of 100% digitalisation by 2014.

The final major decision was to allow FDI of 49% in power trading companies. This is again a welcome step that will allow the power trading markets to mature by permitting foreign companies to bring in capital, as well as know-how and technology.

For more information, contact:

Manoj Gidwani
SKP Crossborder Consulting Pvt Ltd
Email: manoj.gidwani@skpgroup.com
Tel: +91 22 66178000
www.skpgroup.com

Building foundations: Guernsey's new law

Guernsey will soon be introducing legislation allowing for the formation of a new financial structure – the foundation. This new law has been driven by the fiduciary industry’s desire to offer an alternative solution for clients in those cases where traditional trusts or companies may not be the ideal answer.

What is a foundation?
Like trusts, foundations have historically been used for estate planning and philanthropic purposes (although trusts have tended to be the favoured vehicle by common-law countries such as the UK). So, a founder will donate assets that will be held by an independent third party (the foundation) for others (beneficiaries) or for a specific purpose. Unlike a trust, however, the foundation is a legal entity in its own right and similar to a company in this respect.

Foundations are often referred to as having a more ‘corporate feel’. However, it is important to acknowledge that the foundation is not a corporate vehicle. Guernsey law has been drafted to ensure that the foundation is not a ‘corporate trust’ but a structure that is familiar to the civil law practitioner.

Why might a foundation be used?
With families spread out across the world, fiduciaries may need to be able to offer both structures in order to meet the specific needs of their international clients.

Guernsey has been administering foundations formed in other jurisdictions for many years, but with the introduction of the foundation law, practitioners will be able to form such vehicles locally, safe in the knowledge that disputes will be regulated by the Guernsey courts rather than elsewhere.

With one of the most sophisticated and experienced infrastructures of any international financial centre, Guernsey is well placed to build on its many years of experience in working with trusts through the introduction of this new law.

For more information, contact:

Helen Green
Saffery Champness Guernsey
Email: helen.green@saffery.gg
Tel: +44 1481 721374
www.saffery.gg

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