Panama Papers | Mizzi trustees granted wide investment powers

Expensive UK properties are often acquired by offshore companies as a legal way of minimising the annual taxation on retaining these properties

Energy minister Konrad Mizzi: his offshore set-up could be used easily to avoid paying tax on his UK property
Energy minister Konrad Mizzi: his offshore set-up could be used easily to avoid paying tax on his UK property

The offshore trust that energy minister Konrad Mizzi set up in New Zealand granted his trustees an extensive array of options by which income was to flow into Rotorua trust.

Apart from enjoying a zero-tax rate on the assets in the NZ offshore trust, the trustees executing his orders were able to use the money to invest it in financial instruments, property, high-risk and speculative investments, as well as to loan any money without any security or interest.

The contents of the declaration of the Rotorua trust were among the documents published by the International Consortium of Investigative Journalists, but which Mizzi had also made available last month to journalists who interviewed him after he declared the existence of a New Zealand trust.

The declaration maps out the degree of control accorded to Orion Trust of New Zealand, the trustees of Rotorua, accountants from the offices of Bentleys Chartered Accountants in Auckland.

The trustees also owned the Panama firm he set up, which actually hid his ultimate beneficial ownership.

On instructions by Konrad Mizzi as settlor, Orion Trust are empowered to invest any money in the trust for the purchase of stocks, funds, shares, securities or other investment or property.

They also have the power to invest the trust fund “in any manner as the trustees in their absolute discretion think fit”, as well as invest in high-risk, speculative or hazardous investments, and invest in assets that do not produce an income.

Additionally, the trustees are empowered to lend any money in the trust with or without any security or interest, to any beneficiary of the trust, in this case being Konrad Mizzi’s wife and children; as well as borrow or raise money as they think fit.

The trustees can also incorporate companies or partnerships.

In what was the biggest leak of documents surrounding the tax secrets of the elite and powerful this week, Panama Papers – over 11.5 million documents from the Panamanian law firm Mossack Fonseca – confirmed the existence of Konrad Mizzi’s offshore company Hearnville Inc, which was acquired for him by a Mossack Fonseca firm, ATC Administrators.

A speculative diagram of how an offshore Panama company owned by the trustees running an offshore trust in New Zealand could work: the Panama companies hide their ultimate beneficial ownership, so that they can serve as business facades to issue invoices for property rentals or services rendered, but any payments can be made into a bank account controlled by the trustees as owners of the company, who deposit it in the New Zealand trust fund. This graphic illustrates just one of the legal, if questionable, ways of using an offshore trust and offshore company.
A speculative diagram of how an offshore Panama company owned by the trustees running an offshore trust in New Zealand could work: the Panama companies hide their ultimate beneficial ownership, so that they can serve as business facades to issue invoices for property rentals or services rendered, but any payments can be made into a bank account controlled by the trustees as owners of the company, who deposit it in the New Zealand trust fund. This graphic illustrates just one of the legal, if questionable, ways of using an offshore trust and offshore company.

 

Using offshore to hide ownerhsip

So far, little is known of why Mizzi and the Prime Minister’s chief of staff, Keith Schembri, who at the same time also opened his own offshore firm, Tillgate Inc in Panama, needed to hide their beneficial ownership of these companies.

Both Hearnville and Tillgate were transferred to the 100% ownership of Orion Trust, the trustees of the Rotorua trust, and in the case of Schembri, the Haast Trust.

In the meantime, Nexia BT in Malta, the agents for Mossack Fonseca, were trying to open a bank account in Dubai for the two offshore companies.

In one email, Mossack Fonseca asks for more information on what the companies would do, “as the reference to ‘management consultancy and brokerage’ does not explain this”. This reference alone has led Opposition leader Simon Busuttil to allege that corruption lies at the heart of the Mizzi-Schembri offshore set-up.

A financial expert who spoke to MaltaToday suggested that a bank account was essential for any money held in the trust fund to be able to be deposited or withdrawn.

Although no smoking gun exists of any wrongdoing, the trustees could use Hearnville as a business front to issue invoices for business services, while payments could be deposited in a bank account belonging to the NZ trust. It could be reasonable to suggest that a Panama company is used to invoice for management and brokerage services, but the money paid into the account only flows into the NZ trust: no connection would be made between the Panama company and the trustees, who are accountants running thousands of trusts on account of others.

Trust beneficiaries and or settlors could use the bank account to withdraw any funds, or else request loans from the trustees at zero interest.

Using offshore for UK property

By using an offshore company, the minister would have been able to anonymously hold ownership of the London property he said he wanted managed by his financial advisors.

All assets inside Hearnville Inc. are automatically owned by the trustees running his New Zealand trust.

Owning such property through offshore companies is perfectly legal.

The question is whether any income reaped from the rental or sale of the property would have been taxable or not.

In 2014, the UK started taxing foreign buyers who register their properties in the name of an offshore company, charging them anything from £15,000 to £140,000 – depending on property value – in an annual residential property tax (ARPT) and capital gains tax of 28% on resale.

Transferring property to an offshore company could still incur a handsome 40% inheritance tax, but corporate trustees are not subject to the annual taxes on the property. Transferring property already owned by an offshore company, such as Hearnville Inc in Panama, to an offshore trust like Rotorua in New Zealand, whose trustees own Hearnville, would have been a cost-effective way for Mizzi to avoid ‘unnecessary’ taxes on his UK property.

Trustees who hold UK assets are also subject to a 10-year anniversary charge for as much as 6% of the value of the property, but this charge is actually made on the equity of the property: the difference between the property value and any loans against the property.

So – as an example – as settlor of his New Zealand trust Konrad Mizzi could have injected cash in the trust as a loan, in that way reducing the equity of his UK property and therefore lowering the 10-year anniversary charge on the property’s value.

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