British Formula One star Lewis Hamilton got a new luxury jet, a $27-million candy-apple red Bombardier Challenger 605 with Armani curtains. He also got a refund on the value-added tax.
And the lawyers at Appleby, an elite law firm headquartered in Bermuda, were there to help.
They teamed with the London-based accounting giant Ernst & Young to craft an arcane plan to sidestep the Vat, a consumption tax charged in Europe on everything from socks to cars. One of the conditions: Hamilton’s inaugural flight would have to touch down on the Isle of Man, the British crown dependency in the Irish Sea known for its lenient tax treatment of the world’s super-rich.
“This will involve a short stay, normally less than 2 hours,” Appleby said in a written explanation of the tax-avoidance strategy.
The four-time Formula One car racing world champion was up to the challenge. He and his girlfriend, Pussycat Dolls pop star Nicole Scherzinger, planned to make a layover in the Isle of Man on their first time out of Europe on his new jet in January 2013, according to an itinerary sent to Appleby.
Whether Hamilton actually made the trip could not be learned. But in the end, he did pick up a $5.2 million Vat refund, according to secret documents reviewed by the International Consortium of Investigative Journalists, the BBC, The Guardian, and more than 90 other media partners, including The Irish Times.
The documents come from the internal files of offshore law firm Appleby and corporate services provider Estera, two businesses that operated together under the Appleby name until Estera became independent in 2016. The files were originally leaked to the German newspaper Süddeutsche Zeitung and the project to report them is called the Paradise Papers.
In a statement to The Guardian, Hamilton’s lawyers said the racecar driver has a set of professionals in place who run most aspects of his business operations on his behalf and that no subterfuge or improper levels of secrecy have been put in place.
Shielding offshore trillions
The episode opens a window onto a low-profile network of lawyers, bankers, accountants, financial advisors and other professionals who operate offshore, in the grey international area between tax jurisdictions. This global system exists largely to help shield assets from taxes, creditors, and competitors and has been instrumental in luring trillions of dollars offshore, forcing other taxpayers to make up the difference.
The offshore subspecialty handling private jets and mega-yachts has prospered even as concerns about the wealth and privileges of the global 1 per cent have grown.
The yacht-and-jet offshoring business extends far beyond secretive tax havens and discreet law firms. It has involved US banking giants such as Wells Fargo & Co, respected regional banks like the Bank of Utah, and US law powerhouses including Akin Gump Strauss Hauer & Feld. The banks have helped create trusts that have helped otherwise ineligible foreigners to register jets in the US, which can increase their resale value. Akin Gump helped an Arab monarchy qualify for a Vat refund on private jets it wanted to turn into spy planes. Ernst & Young worked with Appleby on a range of tax-related matters.
A spokeswoman for Wells Fargo said the bank is in the process of exiting the business of acting as trustee for foreign owners of non-commercial jets. “As a regular course of business, Wells Fargo evaluates its products and services to make sure we deliver the best experience for our customers while maintaining appropriate risk levels,” she said.
Alex Cobham, chief executive of Tax Justice Network, a UK-headquartered nonprofit that fights financial secrecy, said offshore ownership of luxury planes and boats “are a symptom of global inequalities.” These arrangements allow the rich to exploit the weakness of the international tax system through “hidden ownership and circular financing schemes,” he said.
Leaked documents from Appleby and other sources reveal a long list of rich and super-rich individuals who rely on offshore operatives to handle the tax issues and other challenges involved in owning luxury planes and boats. Among them: celebrities like Hamilton, the Crown Prince of Saudi Arabia and other royalty, and politicians or figures connected to them, such as Vladimir Putin’s friends, the billionaire brothers Arkady and Boris Rotenberg.
Even US President Donald Trump has taken advantage of offshore arrangements to organisse ownership of private aircraft.
A set of leaked documents from the Bermuda corporate registry, not related to Appleby, list Trump as the owner of a Bermuda shell company that in turn owned a Boeing 727 jet used by President Trump, who put it up for sale in 2009. President Trump disclosed the company, D.J. Aerospace (Bermuda) Limited, in his election disclosure filings. President Trump’s offshore ownership of the jet has been previously reported. The jet is now owned by Weststar Aviation, a Malaysian company.
The Wall Street Journal reported in December that another Trump aircraft - a Boeing 757-200 he used during his presidential campaign - is controlled via a complex ownership and leasing setup involving limited liability companies, an arrangement that could have allowed Trump to avoid paying the $3.1 million New York sales tax upfront and instead pay it in installments spread over many years.
Trump and Rotenberg did not respond to requests for comment from ICIJ and partners.
Isle of riches
A craggy, rainswept island otherwise known for its tailless Manx cats, the Isle of Man has long been a key outpost in the offshore industry, thanks in large part to its close but ambiguous relationship with the United Kingdom.
It has a “partnership” with the UK, but it controls its own domestic policy - and has turned itself into an attractive hub in the global financial system by offering low tax rates and tolerating high levels of corporate secrecy. It didn’t even have an aircraft registry until 2007 but now maintains the largest offshore plane registry in the world, with roughly 1,000 private airplanes registered there, each generating fees to the island’s financial services industry, the Isle of Man’s biggest employer.
The registry’s growth is in part due to the Isle of Man’s lenient Vat policy and tolerance for arrangements, like those Appleby helped create, that exploit it. Indeed, Appleby alone has been responsible for creating companies that owned at least 48 private jets with an average price of $33.9 million, according to an analysis of the law firm’s internal documents by the BBC and ICIJ.
The Isle of Man isn’t the only offshore jurisdiction Appleby uses. The firm also has a big business in registering yachts, particularly in the Cayman Islands, where it has registered offshore companies that claim ownership of dozens yachts and ships. These include boats owned by the royal families of the United Arab Emirates and Saudi Arabia, Russian fertiliser billionaire Andrey Guryev, and Microsoft co-founder Paul Allen. Mr Guryev did not respond to request for comment. An Allen representative declined to comment.
On the Isle of Man, Appleby has managed to draw big-name customers by creating offshore arrangements that push the boundaries of EU tax rules, according to international tax experts contacted by ICIJ and its partners the BBC and The Guardian.
For instance, the Isle of Man grants, on a case-by-case basis, pre-approved exemptions that are not subject to public scrutiny. EU member states could choose to offer similar exemptions to the super-rich but, political pressures constrain them from doing so.
In 2011, under pressure from the European Union, the United Kingdom tightened a rule that had allowed owners to avoid Vat if their aircraft weighed more than 8,000 kilograms.
That created an opening for firms on the the Isle of Man, which enjoys access to the giant EU market via its relationship with the UK, to attract even more offshore firms.
Some of the complex Isle of Man arrangements don’t appear to meet the criteria set out in the EU’s Vat exemption language, tax experts say. EU language, for instance, requires companies to be real operating businesses and not so-called “letterbox” companies. “It doesn’t pass the smell test,” said Maria Martinez, a former international tax attorney now with the antipoverty nonprofit Oxfam America, referring to the Isle of Man’s treatment of many of its arrangements.
After the ICIJ partners sent questions about the arrangements to the Isle of Man’s government, its chief minister, Howard Quayle, called an October 23rd press conference and declared: “We have found no evidence of wrongdoing or reason to believe that our customs and excise division has been involved in a mistaken refunding of Vat.” He added “The Isle of Man is not a place that welcomes those seeking to evade or abusively avoid taxes.”
At the same time, however, Mr Quayle announced that he had invited the UK Treasury to conduct an assessment of the Isle’s jet registration business.
And in response to The Guardian and ICIJ questions, the government disclosed that VAT refunds for 231 jets registered on the Isle totaled more than $1 billion. Without the Isle of Man structures, much of that revenue would have gone to EU countries where the planes would have been registered.
How Hamilton’s jet deal flew
The exemption that Appleby helped secure for Formula One champ Hamilton’s jet, for instance, shows how expansively the Isle of Man interprets EU aircraft rules.
Appleby began with a pitch to Hamilton and his representatives: “By working with Ernst & Young LLC as a VAT specialist and through the use of their dedicated Vat Deferment Account together with appropriate structuring, the need to fund the Vat would not be required.”
Officials from Ernst & Young, Appleby and other advisers exchanged a slew of emails and held conference calls to puzzle over how to deal with EU rules, which allow VAT refunds to private planes only when they’re used for business purposes by real companies that operate in the EU.
Appleby set up an Isle of Man company called Stealth (IOM) Limited to lease the jet from Hamilton’s British Virgin Islands holding company, Stealth Aviation Limited, and import the plane onto the Isle of Man and thus, thanks to the island’s relationship with the UK, into the EU. The letterbox company then subleased it to TAG Aviation Limited, a third-party jet operator in England.
But EU rules require that the company that imports the plane be a real - not a shell - company that actually operates in the EU. Only “fixed establishments” that have a “sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the services which it supplies” are eligible, according to EU rules.
Stealth (IOM) Limited has no employees. Knock on the door of 33-37 Athol Street in Douglas, the capital, and you’ll find an Appleby office that also serves as headquarters for more than 1,100 companies and trusts. Stealth (IOM) Limited has no staff, no building of its own. It has a “brass-plate” address and a single director, General Controllers Limited - another Appleby shell company used as a nominee director, a stand-in for the controlling parties.
Despite the fact that the importing firm clearly exists only on paper, Isle of Man officials pre-approved Hamilton’s arrangement. After that, all that was required was a layover on the Isle of Man for customs to sign the jet’s paperwork allowing the VAT refund. Neither Hamilton nor his plane ever had to visit the island again, even though the firm that imported it is incorporated there.
Appleby sold its Isle of Man jet operation and the rest of its fiduciary business to the unit’s managers in early 2016; the new company took the name Estera.
In their statement, Hamilton’s lawyers said Stealth (IOM) Limited is not a shell company and was formed to run a leasing business and hire the aircraft on a long-term basis at a commercial rate. They added that the company made all necessary disclosures to Isle of Man officials, who approved the approach.
The lawyers said that reducing taxes was not the motive, but even if it had been, it is lawful to lease rather than buy in order to reduce VAT.
They added that it was not correct that Hamilton had paid no VAT on any of the arrangements.
In a separate statement, Ernst & Young said, commercial leasing arrangements such as those used by Hamilton constitute entirely legitimate commercial practice. The accounting firm said that as a commercial business, the import company is entitled to reclaim the VAT incurred on its business asset against the VAT which it is due to pay on the import of the aircraft into the European Union if the aircraft is being used wholly or predominantly for business purposes by the end user.
“All our advice, whether in planning or compliance, is based on our knowledge of tax law and providing transparency to tax authorities…,” Ernst & Young said in a statement. “Our services are underpinned by a firm-wide global code of conduct.”
It could not be learned if any Hamilton entities paid Vat on trips within the EU.
EU rules forbid Vat refunds for personal jet purchases and imports. Hamilton, however, received a refund even though he had planned to use the plane for non-business purposes one-third of the time, according to draft leases in the Appleby files. And his social media feeds and website often flaunt his private use of the plane. One video, uploaded to Hamilton’s YouTube account, shows him, his dog Coco, and some friends aboard the plane, followed by scenes of him cavorting on four-wheeled dirt bikes in Colorado and dancing and drinking at a 2015 festival in Barbados.
The jet was used primarily for business purposes, Hamilton’s lawyers said, adding that on the few occasions that it was used for private purposes, a proper hire charge was invoiced and paid.
An unsigned statement on behalf of the Isle of Man Government to The Guardian said the government is committed to enforcing tax rules. “Whilst it is clear that no jurisdiction in the world could ever guarantee that instances of evasion, abusive tax avoidance and error do not occur on an individual basis, the Isle of Man is committed to ensuring that it is not used by those seeking to evade taxes or to abusively avoid taxes,” the statement said. It adds that in October 2016 it began “to review the accuracy and efficacy of the declarations being made to it” by the roughly 270 aircraft ownership arrangement there.
The arrangements aren’t so unusual among the very rich.
Even the United Arab Emirates - one of the world’s wealthiest countries - sought to avoid the VAT with help from Appleby. In 2012, the Persian Gulf monarchy bought two Bombardier Global 6000s for $120 million and committed to pay $98 million more to convert them into high-tech spy planes.
Because it’s a state, the UAE wasn’t eligible to register an aircraft in the Isle of Man. Appleby and Washington-based Akin Gump lent a hand. Appleby created a shell company called Advanced Integrated Systems (IOM) Limited that could register the aircraft on behalf of the authoritarian monarchy.
Appleby also got assurance from the island’s customs officials that the planes wouldn’t be taxed. Akin Gump helped arrange Appleby’s registration of the plane, according to emails sent from its lawyers to Appleby. Neither Akin Gump nor the UAE returned requests for comment.
Not all maneouvers involve the Isle of Man, of course, and not all of them are particularly complicated.
When Mohammed bin Salman, now crown prince of Saudi Arabia, bought the mega-yacht Serene from Russian vodka billionaire Yuri Shefler for $456 million, it was docked in port in La Ciotat, in the south of France. Its 30,000 square feet of living space includes an underwater viewing room, a climbing wall, a cinema and an indoor seawater pool, as well as space for 52 crew members. The yacht also features a helicopter hangar, at least five onboard boats, and a submarine garage.
Advisors proposed motoring the 439-foot yacht to international waters in the western Mediterranean and closing the sale there, according to documents sent from the American law firm Baker McKenzie to Appleby in 2015.
It couldn’t be learned if the plan was ever carried out. It’s unclear if any VAT was ultimately paid. A spokeswoman for the Saudi government declined to comment, as did Baker McKenzie.
Martinez, of Oxfam, said moving yachts is a common tax avoidance strategy. “If you’re in international waters, no country can claim it,” she said. “It’s stateless income.” Whether the sale closed in international waters and whether the location was part of a tax-avoidance strategy could not be learned.
The lucrative business of working around ownership problems for jets and yachts has also attracted US financial institutions. Appleby worked at least nine times combined with Wells Fargo and Bank of Utah to create trust structures allowing noncitizens to register jets in the US.
The Bank of Utah served as a trustee on a deal involving natural-gas oligarch Leonid Mikhelson, the richest man in Russia, with a fortune estimated at $16 billion. Appleby set up a complicated arrangement for Mikhelson that included creating an Isle of Man branch of his Panama company, Golden Star Aviation Limited, which leased the plane from a Cayman Islands company to avoid Vat on a $60 million Gulfstream G650. (Golden Star Aviation’s president is listed as James Ackroyd-Cooper, a personal trainer in Suffolk, England. ) The arrangement saved Mikhelson $12 million, according to Isle of Man documents approving the exemption from the 20 per cent tax. Using the Bank of Utah as trustee also allowed Mikhelson access to the US jet registry, which would likely increase the plane’s resale value.
“Mr Mikhelson acts strictly within the boundaries of the law and in compliance with applicable legislation at all times,” a spokesperson said. “He does not deem it necessary to provide any comments on his personal property activities.”
Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley, and the author of The Hidden Wealth of Nations, said tougher information-sharing requirements for the offshore industry are required to stop the wealthy from going offshore. “This confirms that the offshore system benefits a tiny elite who uses it to avoid and sometimes evade billions of dollars in taxes,” he said. “Unless we are willing to accept ever rising inequality, this situation is unsustainable.”
After US authorities retaliated against Russia’s 2014 invasion of Crimea by blacklisting Mikhelson’s natural-gas company Novatek along with other businesses and people tied to Putin, Appleby cut its ties to him.
An Appleby official wrote that, “with regret,” he was required to advise Mikhelson’s representatives of the law firm’s decision to end relationships that were directly or indirectly connected to entities or people named on the US economic blacklist. Appleby helped transfer Mikhelson’s arrangements to another Isle of Man firm.
The Bank of Utah applied to renew Mikhelson’s plane’s registration with the Federal Aviation Administration in 2016, two years after his company was sanctioned, according to FAA records.
In an interview with an ICIJ partner, the New York Times, Bank of Utah trust officer Joe Croasmun said the bank took seriously its obligations to know its customers and to be on guard against suspicious activities. When asked about the bank’s relationship with Mikhelson, Croasmun went to look in the bank’s files. When he returned, he said that the bank was indeed trustee for Golden Star Aviation but that he couldn’t find any mention of the Russian businessman.
“His name is not in there,” he said.
In a later statement, Mr Croasmun said, “We view our risk management processes to be a living and breathing methodology, always growing to implement best practices and enhancing our country risk assessment as the world changes. We are currently doing a review of all countries we have designated as ‘higher risk’ - including transactions involving Russia.”
Contributors to this story: Cécile Schilis-Gallego, Mike McIntire