ITSAPT 2011 CONFERENCE OVERVIEW / NATIONAL GRID INDUS

The Second Annual ITSAPT Conference sponsored by Barclays Wealth was, in my view, a worthy culmination of our year-long efforts to raise the profile of corporate and personal migration as effective and novel international tax planning tools. Readers who wish to familiarise themselves with the subject can refer to IFS’ October 2010 and April 2011 newsletters  that respectively provide details of each concept. Those with access to ITPA materials can also download Roy Saunders’ March 2011 presentation “Corporate migration: planning opportunities” or request us to send them the same. 

The ITSAPT Conference focused on three major areas that the above materials and the new ITSAPT 2011/2012 book addressed.  Firstly, speakers described methods of corporate redomiciliation and their respective advantages and disadvantages. Next, the international experts explained what methods worked in their jurisdictions and what tax benefits a company could attain by moving there. The third area concerned individual tax planning through personal migration.

A substantial part of the Conference was devoted to discussing the benefits of redomiciliation to different EU jurisdictions. To name a few; Luxembourg, which does not tax foreign capital gains under certain conditions, may attract a UK listed company that cannot otherwise avoid paying tax on sale of its foreign subsidiaries if they do not qualify for the UK’s substantial shareholding exemption. Luxembourg, however, levies 15% tax on dividends payable to non-treaty States, and therefore Malta with its complete absence of withholding taxes may be a viable alternative. So if a company has migrated to Luxembourg, a further migration to Malta may be possible.

Also, Malta allows resident but not domiciled companies (ones not incorporated in Malta but managed and controlled there) to be taxed only on profits that are remitted to its territory — an approach akin to territorial taxation practiced in Hong Kong and Singapore — and fully exempts from tax profits of qualifying aircraft companies regardless of their source. Both Luxembourg and Malta also allow a step-up in value of the immigrating company’s assets bringing their book value to the market value on the day of redomiciliation. Ireland is another popular destination with its low rate of corporation tax and less stringent anti-avoidance provisions. Finally, Cyprus may attract many by its liberal tax laws and acceptance of all of the existing methods of redomiciliation.

Speakers from the UK and the Netherlands flagged up the problem of exit taxation levied on companies changing their residence within the EU. While most jurisdictions tax emigrating companies, it seems odd that exit taxes have not been struck down for violating EU Treaty freedoms and freedom of establishment in particular. There are a string of cases that address this issue, however, and the Court of Justice of the European Union addressed Dutch exit tax in a very recent case of National Grid Indus (C-371/10).  The Advocate General’s opinion provides an interesting background and serves as a perfect example of how and why a shareholder — an English parent company — may choose to redomicile its Netherlands subsidiary to the UK.

Both States follow the incorporation theory in determining residence of a company, and this allowed National Grid Indus BV to transfer its place of effective management and its entire business activity to London. It gave up its business offices in Rotterdam, three English directors replaced the Dutch directors, and the company closed its Netherlands bank accounts and opened new accounts with an English bank. As a result, the subsidiary continued to exist under both Netherlands company law and English tax law; the UK tax authorities regarded the company as resident in the UK, and under Netherlands tax law there was a permanent establishment in the UK which belonged to a Netherlands company.

There were rational commercial grounds for transferring the place of effective management. The main asset of National Grid Indus was a claim on an intra-group multi-million pound sterling loan, the interest on which was deducted by group debtor companies. Considering the UK’s decreasing rate of corporation tax, the interest would no longer be taxed at a rate higher than the rate at which UK debtors could deduct it. Also, the currency risk in relation to the Dutch guilder/Euro would no longer exist after the move because in the future the profits would be calculated only in pounds sterling. Finally, there was no longer a need to profit from the Netherlands–Pakistan double tax convention — one of the reasons for establishing the company in Rotterdam in the first place.

While resident in the Netherlands, because of rises in the exchange rate of the pound sterling against the Dutch guilder, the company earned substantial unrealised currency profits in respect of the loan.  Until the transfer, National Grid Indus was able to show the loan in its balance sheets at the historic rate, and until then the currency profits had not been taxed. Following the move the profits that constituted the gain would be liable to tax only in the UK under the applicable double tax treaty. Furthermore, seeing that the loan was denominated in UK currency, the gain would disappear altogether.

The Netherlands tax authorities did not object to the move.  At the same time, considering that under domestic law National Grid Indus would cease to derive profits from the business taxable in the Netherlands, they sought to impose an exit tax on the company — to crystallise the currency profits into a capital gain liable to immediate Netherlands corporation tax.

The Court considered whether levying such an exit tax was compatible with the principle of freedom of establishment — the issue previously considered in, amongst others, Daily Mail and Cartesio. The Court repeated its previous findings: companies are primarily creatures of national law, and Member States are free to decide on connecting factors that determine whether a legal person is incorporated and can maintain its status in the future; whether it remains subject to national laws and is thus capable of enjoying the right of establishment. The EU law should respect the choice of a Member State to grant a company the right to retain its legal personality under the law of that State subject to restrictions on transfer abroad of the company’s place of effective management (the “real seat” theory States) or without such restrictions (the “incorporation” theory States).

In other words, a company, which loses its legal personality following the transfer of its place of effective management abroad — an approach followed in e.g. France, Germany or Luxembourg — cannot rely on the EU freedom of establishment against the Member State that imposes exit tax on its departure.  Conversely, a company incorporated in a State that allows mobile place of effective management, such as the UK, Ireland and the Netherlands, continues to be regarded as a person under the laws of the State it departed from and should not be subjected to such tax.

The above, however, is not the final conclusion reached by the Court. It accepted views of some Member States that levying of exit tax can be justified by overriding reasons in the public interest. In this situation the purpose behind the exit tax is to preserve the allocation of taxation powers between the Member States. In other words, under the circumstances the Netherlands is entitled to tax the gain, which arose before National Grid Indus became resident in the UK, despite the fact that but for the company leaving the Netherlands the gain has not yet crystallised.

The Court reached two important conclusions regarding determination of the company’s tax liability. The first finding concerns the amount of the gain liable to the tax. The Netherlands is entitled to definitely ascertain the gain amount without taking account of potential subsequent decreases or increases in its value at the time when the company ceases to be resident in the Netherlands through the transfer of the company’s place of effective management to the UK. The second finding concerns the moment when the Netherlands is entitled to levy the tax. The Court found that the Member State must give the Company a choice between paying the tax immediately at the time of the transfer of residence and deferring the payment until the gain is subsequently realised.

In other words, a company that owns assets pregnant with gains may be requested by the Member State, which it departs, to ascertain the amount of gains at the moment of becoming not resident in that State.  This amount will be final and not subject to further increases or decreases.  It will be used as the tax base for levying exit tax.  The company, however, should be given a choice of whether to pay the tax immediately and suffer adverse cash-flow consequences or to postpone the tax charge and face administrative burdens of tracing the assets together with paying interest on unpaid tax.

Failing expectations of many tax practitioners, the decision of the Court does not prohibit Member States from levying exit taxes, although admittedly it provides a useful summary of the case law to date and adds important clarifications to the existing practices.

The Conference also addressed the possibility of avoiding exit tax liability despite findings of the Court (at that time the outcome of National Grid Indus was unknown and the discussion considered the existing case law).  One method, devised specifically to migrate a UK company to Italy, involved merging the existing UK corporation into an Italian SPV. The merger would not cause adverse tax consequences in the home state due to the effect of the EU Merger Directive.  Benefits under the Directive, however, could be denied if the UK tax administration believed that the transaction was concluded purely for tax avoidance. To rebut such presumption it was necessary to demonstrate the genuine commercial purpose behind the merger and in particular that the Italian company was an active company with substance.

Recently, the Court expressed its views on the importance of genuine business arrangements in Foggia (C-126/10) . The case concerned a Portuguese holding company that acquired another holding company belonging to the same group in order to benefit from its losses. The Portuguese Ministry of Finance refused the transfer of tax losses on the ground that there was no commercial reason to acquire the target, which did not conduct any commercial activity, but to benefit from its liabilities.  The Court found that a merger based on several objectives, which may also include tax considerations, can constitute a valid commercial transaction, provided that it is not purely tax driven.  Each case, however, must be examined on its own merits taking all relevant factors into account. The Court concluded that under the particular circumstances, the fact that the target company does not carry out any activity, nor has any financial holdings and only transfers substantial losses of obscure origin, it was possible to presume that the transaction was carried out for purely tax reasons.

The post December 2011 (116) – ITSAPT 2011 Conference Overview and National Grid Indus appeared first on IFS Consultants Ltd.

Have you or your clients thought about moving your personal tax residence out of the UK – or the US? And into Switzerland – or Spain – or perhaps Israel or even further afield in Singapore or Hong Kong? Or providing advice to non-residents on pre-immigration planning before arriving in the UK, US or Canada? 

Or on the corporate residence issue, would you like to find out the possibilities of transferring a company’s tax residence from one jurisdiction to another without tax penalties? What are the UK, EU and OECD issues governing this area of corporate tax planning which has been largely unexplored to date. 

We will be discussing the above at the second ITSAPT conference presented by IFS and sponsored by Barclays Wealth – on corporate and personal migration as per the attached programme for booking details. The date is November 3^rd at the Landmark Hotel, London and the conference will host speakers from 20 different countries ending in a cocktail party where delegates and speakers can discuss the issues of the day. 

Amongst these issues will be the UK’s new statutory residence test, the US’ tax issues around migration, the requirements for beneficial tax residence status in Switzerland, Spain, Malta, Israel and may other countries, pre-immigration trust planning, the EU merger directive and how it can facilitate corporate migration from one country to another, the latest ECJ cases relating to corporate and personal migration … and many many more. 

We now have limited places available so please submit your booking form application as soon as possible. 

I look forward to welcoming you at the conference. 

Kind regards 

Roy Saunders

The post October 2011 (115) – Invitation to ITSAPT Conference 2011 appeared first on IFS Consultants Ltd.

I always think that September marks the start of a new round of client activity, conferences, etc. – perhaps because having four children, it has always marked the start of the new academic year.  This year, I have particular reason for being excited about the coming year, due to several specific opportunities which IFS is developing with highly reputed firms. 

The first is that IFS has recently entered into a strategic relationship with UK law firm Memery Crystal, who have been my lawyers since 1975 and with whom we have a number of key mutual clients.  Memery Crystal is a full service firm with market leading lawyers in each of its core practice areas and a client base particularly focused on individual entrepreneurs and growth companies.  The firm was recently ranked by Hemscott as the top legal adviser to companies listed on the AIM Market of the London Stock Exchange (based on number of AIM clients) and has also received a “Tier 1” ranking for its AIM work by the Chambers Guide to the UK’s best lawyers.  Memery Crystal has a strong international focus, with considerable cross-border transactional and litigation experience and strong relationships with other leading law firms around the world. This development between IFS and Memery Crystal will facilitate cooperation and enable us to offer our respective clients a fuller and more integrated range of services and significant added value.

The second exciting development is a co-operation that we have developed over the past six months with Finimmo Wealth Management, a Luxembourg based independent Professional Service Company. The cooperation with Finimmo offers IFS a unique opportunity to deliver Luxembourg Services & Solutions “B2B” to the Legal, Private Banking, Private Equity, Real Estate & Wealth Management professionals.  A first opportunity to meet with Finimmo is offered by IFS & Finimmo to you at the occasion of a Luxembourg Services & Solutions Seminar hosted at the Luxembourg House in the Embassy of the Grand Duché du Luxembourg on October 4 at 8 AM, organised by the B-Luxembourg CC in GB. You may register by sending a mail direct to Simon P. Saverys at sps@finimmo.com

The topic of Luxembourg will also be an integral part of the Luxembourg meeting of the ITPA to be held on 16-18 October at the Hilton Hotel in Luxembourg (see details at www.itpa.org). The role of Luxembourg in the international financial community has been understated, as this month’s newsletter article on Luxembourg explains.

As regards conferences, I will be speaking at two conferences over the next month, the first being a conference presented by Patrick Soares of Grays Inn Tax Chambers entitled ‘101 Corporate Tax Planning Ideas’ (see details at www.ibc-events.com) to be held on 25 October at the Millennium Hotel, Knightsbridge, London.  I will be speaking on corporate re-domiciliation, which is a very relevant topic at present for many Australian mining companies. In July 2012 these will become subject to a 30% Australian Minerals Resource Rent Tax (MRRT), formerly known as Resource Super Profits Tax, chargeable on profits from mining iron ore and coal. MRRT will be only levied on above-normal “mega” profits, however it will be payable in addition to income tax, which may result in a combined effective tax rate exceeding 45%. 

The second conference is our own second annual ITSAPT conference to be presented by IFS at the Landmark hotel in London on 3 November 2011.  The topic this year will be personal and corporate migration and, as for last year, we have the same respected speakers from the US, Singapore, Israel, Hong Kong, Switzerland and many EU countries with Philip Baker QC, also of Grays Inn Tax Chambers, in the chair.  All of the speakers will be looking at the issues of personal and corporate migration from the point of view of their jurisdiction, with Philip and I giving an overview of the OECD, EU and other international views on this very interesting topic.  As for last year, we will hold a cocktail party in the Gazebo at The Landmark hotel after the conference, so that delegates and speakers can discuss matters of mutual interest.  The programme and booking form is on our website (click here).  Readers of our Newsletter will be entitled to a discounted rate of £750 for bookings made prior to 30 September 2011.

I hope that the start of the new academic year is an exciting one for you, our valued IFS newsletter readers, and I look forward to seeing you at an early opportunity.

With kind regards

Roy Saunders

 LUXEMBOURG’S INTERNATIONAL ROLE

 According to the IMF, the volume of securities portfolio investments in Luxembourg far exceeds the amounts in the Caribbean, Switzerland, Hong Kong and Singapore, with a healthy ratio of bank deposits compared to these countries.  So clearly Luxembourg is doing something right, albeit with a lower profile than its competitor countries, and indeed in the international tax arena, Luxembourg has always maintained a lower profile than, for example, the Netherlands and Switzerland. Yet it clearly offers some excellent opportunities with specific entities introduced under Luxembourg law.  This article will examine some of these beneficial entities which, as fully taxable Luxembourg companies, will be able to benefit from the excellent double tax treaty network that Luxembourg has with the rest of the world.

Holding companies

Prior to the introduction of the SOPARFI legislation of 24 December 1990, Luxembourg’s main attraction was the 1929 exempt holding company (now extinct) as well as being the centre for insurance companies offering insurance ‘wrappers’ so that income could be accumulated and only taxable when the insurance bonds were redeemed.  The SOPARFI legislation attempted to put Luxembourg on a par with the Netherlands as regards a participation exemption in respect of dividends and capital gains, yet the requirements relating to minimum tax rates of subsidiary companies meant that Dutch holding companies were far preferable for holdings of low taxed subsidiaries.  Indeed, this may still be partially true since subsidiary companies should be taxed at a rate corresponding to the Luxembourg corporate income tax rate (generally a rate of 10.5% would be sufficient).  However, The SOPARFI legislation has been amended so that the participation exemption is relevant for all subsidiaries resident in an EU member state and covered by the EU Parent Subsidiary Directive, so that for example Cyprus companies taxed at 10% or even Maltese companies taxed at an effective 5% tax rate may be owned by a Luxembourg holding company within the participation exemption regime.

A major concern to investors in Luxembourg holding companies has always been the Luxembourg withholding tax on dividends payable which is at a standard rate of 15%.  However, withholding tax will not be payable where distributions are made to any EU resident company under the EU Parent Subsidiary Directive, or a company that is resident in a State with which Luxembourg has a double tax treaty; subject to the requirements of a 10% participation for at least a 12 month period or an acquisition price of at least €1.2mn.  Having relatively recently entered into a double tax treaty with Hong Kong, a territorial based jurisdiction, it is not difficult to structure a low taxed European business activity through a Luxembourg holding company under the SOPARFI regime which is itself owned by a Hong Kong company, so that dividends are neither taxable in Luxembourg, nor subject to withholding tax in Luxembourg, and also not taxed in Hong Kong under the territorial system since the income did not arise in Hong Kong.

Securitisation vehicles

An exciting new entity was introduced in 2004 under the Law on Securitisation which aims to develop Luxembourg as a securitisation hub.  The securitisation vehicle (SV) can be set up either as a corporate entity or as a fund managed by a management company and governed by management regulations.  My preference is as a corporate entity since then the SV can then benefit from the wide range of double tax treaties entered into by Luxembourg.  Although the SV is fully liable to corporate income tax and municipal business tax, any ‘commitments’ that the SV has to investors and creditors are fully tax deductible.  Thus, the SV could issue preference shares to investors, the dividends on which would be deductible against corporate profits; could issue bonds to investors, the interest on which would be fully deductible against corporate profits.  Or indeed any other form of security including hybrid ones which would provide the maximum tax efficiency for the relevant jurisdiction in which the investors are resident.  Even undistributed income which is nevertheless committed for the benefit for investors or creditors may be fully deductible against corporate profits.

SV’s are useful for many types of investments, since the income and gains from specific investments are ‘stapled’ to the specific security issued by the SV to the investor, ie there is a ring-fence vis a vis other investors and their investments which is provided under the relevant securitisation law.  Thus, an SV could invest, for example, in French real estate by issuing a preference share or other security to the relevant investor who may be offshore and would otherwise have to pay the 3% special tax in France on a direct real estate investment.  Provided the SV is owned by Luxembourg residents (or residents of another country which has a relevant double tax treaty with France), then the relevant form for exemption from the 3% tax can be complied with.  The extension of such investments to real estate located in other countries is quite clearly an interesting planning concept. 

I have suggested the use of an SV for ownership of intellectual property rights where individual rights are acquired by a different group of investors to those investing in other intellectual property rights, yet there is only one commercial entity that has legal ownership and effective management of all these IPR’s.  Unlike the protected cell company, which I believe is vulnerable to attack as a nominee for the owner of the specific cell, the Luxembourg SV will be able to participate in income derived from underlying assets, even if to a minimal extent, whilst at the same time it has an effective management role in respect of these assets and cannot therefore be considered a pure nominee.  It is for reasons of this place of effective management (POEM) that the Luxembourg SV can benefit from the double tax treaty network entered into by Luxembourg.

Investment Funds

There are various investment regulated vehicles under Luxembourg law which may also be formed as Luxembourg companies in order to benefit from the relevant double tax treaty network.  The SICAV or variable capital investment company (Société d’Investissement à Capital Variable) is an open ended retail fund which may be formed as a limited liability company, qualifying as UCITS as an umbrella fund with compartments.  This is fully tax exempt except for the subscription tax which is less than 0.05% of the capital.  The SICAF is an investment company with fixed capital (Société d’Investissement à Capital Fixe) and is similar to the SICAV, except that its fixed capital means a finite investment activity. 

The SICAR (Société d’Investissement en Capital a Risque) was introduced in 2004 for specific forms of risk capital such as private equity and venture capital transactions.  It is used by ‘sophisticated investors’ and although fully taxable, all dividends, interest and gains are exempt from tax and there is no net worth tax applicable to SICARs.  Moreover, there are no withholding taxes on dividends payable to shareholders irrespective of where they are located and the extent of their investment (as opposed to the general Luxembourg legislation as explained above under the SOPARFI section).  The SICAR offers a light degree of regulation as it is adapted to meet the needs of the sophisticated investor.

The Specialised Investment Fund (SIF) was introduced in 2007 to deal with the demand from sophisticated investors for a lightly regulated onshore investment fund vehicle.  It can be used for any type of investment including real estate and is one of the fastest growing investment fund vehicles in Luxembourg.  Again, only ‘sophisticated’ investors may invest in the SIF which is exempt from Luxembourg corporate income tax, municipal business tax and net wealth tax.  And again, profit distributions made by a SIF to its investors are not subject to any withholding tax.  The SIF is subject to an annual subscription tax of just 0.01% on its net assets, with certain assets being exempt from this tax.  The SIF qualifies for relief under approximately half of Luxembourg’s double tax treaties.

To a great extent, Luxembourg has been hiding its light under a bushel, a biblical idiom relating to often shy individuals who avoid letting people know that they are good at something.  This Luxembourg awareness process is now handled by Luxembourg for Finance www.LFF.lu, a government sponsored organisation which is mandated to promote the benefits offered by Luxembourg within the international community. Our Luxembourg strategic co-operation with Finnimo has therefore been put in place to assist LFF in developing this awareness.  For this reason, we are looking forward to welcome you without charge – as a valued IFS newsletter reader – at the Seminar at the Luxembourg House on October 4 AM: please confirm your interest to attend directly to sps@finimmo.com.

The post September 2011 (114) – Luxembourg’s International Role appeared first on IFS Consultants Ltd.

Firstly, IFS is moving to 44 Southampton Buildings, London, WC2A 1AP, with new telephone number +44 (0)203 368 6968 as from 30 August.

I decided that the time was right to sell my beautiful office in St John’s Wood and move closer to the heart of London, and I look forward to welcoming you to our new office in the near future.

Secondly, HMRC issued a technical note on 1 August 2011 entitled ‘Tax Treaties Anti-Avoidance’. It is without doubt one of the most wide ranging Consultative Documents I have read, designed to stop ‘treaty shopping’ not as we generally understand the term, but in the widest possible understanding of the term. This Newsletter briefly summarises some of the aspects of the Consultative Document and our concerns should it become adopted in its current form.

Thirdly, Barclays Wealth have agreed to sponsor this year’s ITSAPT conference on 3 November at The Landmark Hotel, London. Please view our conference programme and booking form on our website – click here – and note that there is an early bird discount from 31 July to 31 August, albeit a slightly reduced discount, for those who have not yet booked a place.

Finally, the stock markets may be showing an even more than usual August volatility, but the state of the Euro is of far more long lasting concern. Previous newsletters have expressed my doubts of the sustainability of the Euro without political union, and I believe it has only lasted in its current form for a decade because the first seven years or so were boom years. During this period of good economic growth, there may have been no need for the fiscal tools of adjustment to monetary crises, ie interest rates, taxes and devaluations. When the growth spurt stopped, countries (and individuals) continued to borrow beyond their means until the chickens came home to roost! Tax increases and public spending cuts are extremely difficult to achieve during periods of stagnation, which leaves no fiscal mechanisms available with just a single currency i.e. EU countries in need of these mechanisms cannot adjust their interest rates or currency value. The Euro demise (in its current form) is almost as certain as the ERM (exchange rate mechanism) demise, yet there is too much political pride resting on its maintenance that some form of compromise will undoubtedly be reached. So far the solution seems to be commonly guaranteed Eurobonds, but even German growth has stagnated, so is this just another short term palliative measure?

I wish you bon continuation of your summer break. With kind regards.

Roy Saunders

TREATY SHOPPING

I have been advising clients, students and colleagues for several years that one needs to go beyond the specific provisions of any double tax treaty and look at its purpose, often contained in the title of the convention, which is ‘the avoidance of double taxation and the prevention of fiscal evasion’. The artificial use of treaties to actually create fiscal evasion, or avoid just a single level of taxation, was never the intention of the authorities who have entered into relevant treaties and multilateral conventions. Indeed, there have been some Court cases where tax authorities have argued that the relevant convention should be entirely ignored because it has simply created the fiscal evasion which it was intended to prevent.

It is therefore understandable that the UK wishes to introduce specific legislation to prevent what it considers to be an abusive use of conventions, as indeed the Commentary to Article 1 of the OECD Model Taxation on Income and Capital accepts in paragraph 9.4. However, the Consultative Document suggests provisions relating to UK residents and non -UK residents which seem to go far beyond the concept of abuse. For UK residents, the proposed legislation states that double tax treaties will not prevent income, profits or gains being charged to UK tax, or at a rate higher than that proposed in double tax treaties, if a ‘scheme’ has been put in place whose purpose is to prevent or reduce the extent of UK taxation chargeable. Thus an individual may remain UK resident for the purposes of these proposals even if he has become resident in another country under the tie breaker provisions of the relevant treaty.

So taken together with the new Statutory Residence Test (SRT – see our July newsletter), an individual, say a writer who has just written a book to rival Harry Potter, could have decided to move to say Switzerland, relying on advice to sell his permanent home in the UK and acquire a new permanent home in Switzerland. In this way he could presumably rely on the provisions of the treaty to ensure that any future royalty income would be subject to tax only in Switzerland, and not the UK.

However, he still has family connections in the UK and may fall foul of the number of days he is allowed to spend in the UK taking into account ‘connecting factors’ involved. Until the announcement of this Consultative Document, the effect of the SRT would have been overridden by the relevant double tax treaty provisions, which should have preference. However, if HMRC consider the individual’s move to Switzerland to be a ‘scheme’ to obtain the benefit of the double tax treaty provisions, then the individual will remain subject to UK tax on all future royalty income if he breaches the conditions of Part C of the SRT.

For non-residents, a similar concept applies if a treaty has been used to reduce or exempt UK tax. Thus, the traditional use of Luxembourg or Dutch finance companies to lend money to businesses in the UK without a UK tax charge may no longer be viable if the financier is offshore based without an appropriate direct tax treaty with the UK (private equity funds beware!).

There are so many ramifications of the legislation that it may take some time for the extent of concerns to be realised. For example, a UK company with a foreign treaty based subsidiary could acquire an asset through that subsidiary in the belief that the absence of capital gains tax in the subsidiary would be preserved. This would be in accordance with the relevant Article 13 of the double tax treaty between the UK and the country of residence of that subsidiary. This proposed legislation removes the protection of the treaty and exposes the UK company to a Section 13 capital gains tax assessment.

There has been considerable speculation that the double tax treaties between the UK, Jersey, Guernsey and the Isle of Man may be terminated in view of the fact that these countries no longer create the problem of double taxation in the light of their own unilateral absence of taxation for the majority of corporate income earned. The consultative document may avoid the necessity for terminating treaties, merely rendering them impotent to prevent UK taxation being levied. It should be noted that the proposed legislation only applies to dividends, interest or income from debt claims, royalties or income falling within the ‘other income’ article of the double tax treaty. 

So treaties will still take precedence as regards the taxation of business profits and the clarification of what comprises a permanent establishment or otherwise, as well as for dependent and independent personal service income and other income under Article 14 et seq of the OECD Model Treaty.

The legislation is applicable once enacted and overrides the provisions of a double tax treaty even if the activity, eg becoming non-resident, occurred prior to the date of enactment. It is hoped that representations will be made to HMRC that remove the scope for uncertainty that the Consultative Document raises. On the one hand, HMRC are introducing the SRT to remove the uncertainty regarding the previous absence of a statutory definition of residence, yet they are now introducing what could result in far greater uncertainties regarding how properly negotiated double tax treaties are applied through unilateral measures. At the very least, the definition of the term ‘scheme’ must be clarified so that genuine commercial activities carried out for bona fide reasons can fall outside of the scope of the proposed legislation, even if tax mitigation may result therefrom.

The post August 2011 (113) – Treaty Shopping appeared first on IFS Consultants Ltd.

UK Real Estate I wrote a book entitled ‘Structuring International Real Estate Transactions’ in 1991, published by Sweet & Maxwell, the preface of which introduced the fictional Maurice Brightman and his exploits in advising on real estate transactions around the world. Maurice appears again in this month’s article. Such is the interest I found amongst clients and colleagues in the different ways of structuring real estate investments and developments in countries such as the UK, US and southern European countries that I intend to devote next year’s IFS conference to this topic. As a reminder to those who may have overlooked the May newsletter announcement, the Second Annual IFS ITSAPT Conference to be held again at The Landmark Hotel, London on 3 November 2011 is on the subject of personal and corporate migration. And this is going to be very relevant for the new Statutory Residence Test in the UK just announced by HMRC last Friday.

Statutory Residence Test This consultative document introduces the long awaited statutory definition of residence aimed to replace the current set of rules primarily based on court precedents. The importance of this development cannot be overstated – even HMRC have admitted that the current residence rules are “vague, complicated and perceived to be subjective”. They have acknowledged that presently in certain circumstances it is not possible for a person to be sure whether they are tax resident in the UK or to know what activities or circumstances would make them tax resident; factors that remove certainty and predictability, which are much sought after by foreign individuals. The new rules seek to introduce clear and objective tests to determine a person’s affiliation with the UK. They will become law in April 2012. HMRC will also publish an online residence self assessment tool on its website.

Currently it is possible to acquire residence even by spending a seemingly insignificant number of days on UK soil. The proposals stipulates a de minimis rule, i.e. the minimum number of days that a person must stay in the country during a tax year before he/she becomes sufficiently connected with the UK. For those who have not been resident in the UK during the previous 3 tax years, this is 45 days; for others who have been resident in the previous 3 years it is 10 days unless they leave the UK to carry out full-time work abroad.

They also state who will conclusively be considered resident in the UK, namely those present in the UK for 183 days or more in a tax year, or who have only one home and that is in the UK, or those who carry out full-time work in the UK. And then there are the in-between ‘connecting factors’ which fall under Part C, which include (a) where the family is resident, (b) the use of available accommodation in the UK, (c) substantive work in the UK, (d) presence in the UK exceeding 90 days per annum in either of the previous two tax years, or (e) more time in the UK than in other countries. The proposals identify those who are arriving in the UK and those leaving the UK; for arrivers who have not been resident in the UK in all of the previous 3 tax years but exceed the de minimis limit of 45 days and are in the UK for less than 183 days, two of the connecting factors (a) to (d) need to exist if their number of days is between 120 and 182, 3 factors need to exist if their number of days is between 90 and 119, and all four if their number of days is between 45 and 89. For leavers who exceed the de minimis limit of 10 days but who are in the UK for less than 183 days, all 5 connecting factors (a) to (e) are relevant and an individual only needs one of these to be present for the number of days between 120 and 182, two for the number of days between 90 and 119, 3 for between 45 and 89 and all four between 10 and 44 days in a tax year.  Simple huh? Well at least this is a mechanical presence test as opposed to a subjective test, although the connecting factors may in themselves have some subjectivity which will presumably be ironed out during the consultative process. And there are anti-avoidance provisions in the consultative document which parallel to some extent the capital gains tax rules whereby those leaving the UK to achieve tax free income (e.g. from accumulated UK corporate dividends) and returning within a certain period may nevertheless be taxed on such income even if considered non-resident when the income was received. At the same time as issuing this consultative document, HMRC have clarified the announcement in this year’s Budget that non-domiciles who have been in the UK for 12 of the previous 14 years will have to pay £50,000 rather than £30,000 each year if they want to retain the remittance basis of taxation in respect of overseas income and gains. However, HMRC states that it is recognised that non-domiciled individuals contribute significantly to the UK economy and will therefore allow remittances for certain types of investment without subjecting these to UK tax. Let us hope that this finally puts an end to the conjecture as to whether the Government is likely to put an end to the nondom rules for income and gains, or to introduce a similar 7 out of 10 years provision (or 12 out of 14) after which non-doms will be treated for income tax and capital gains tax in the same way as domiciled and resident individuals.

All of the above issues will have become clearer nearer our November conference and we will be examining these in detail during the UK sessions in the programme – for the programme and booking form, please click here. What is clear is that having your only home in the UK will make an individual UK taxresident under this test, and that trying to restrict days of residence in the UK to under 90 days per annum over a four year period will not avoid UK residence if factors (a) to (d) above are relevant. Nevertheless, it has to be realised that even if an individual is UK resident under the Statutory Residence Test, he may be resident in another jurisdiction as well under the laws of that country, in which case the relevant double tax treaty provisions will still apply to determine which country has the taxing rights for the relevant income and gains under that treaty. I will also be speaking at the occasion of a private conference organised by the Belgian-Luxembourg Chamber of Commerce in Great Britain on 12 July 2011 at the Luxembourg House in London. My presentation will be on the subject of Luxembourg Services & Solutions for UK residents, focusing on investing in commercial, hotel & residential real estate in/outside the UK.

Readers of this Newsletter are invited to attend – again, for more details please contact Linda at the office.

Finally, as for last summer, I am closing down the Newsletters until September so I wish you all a very enjoyable summer.

With my best regards

Roy Saunders

FOUR UK REAL ESTATE CASES

Maurice Brightman was walking through Regent’s Park withCharlie, his border collie, reflecting on four different UK property cases that he had been involved in during the past week. The first involved his old client Albert Stonemiller, an Australian national who had come to the UK 20 years ago and had acquired a very substantial private home through a trust and company structure. The second was a very recent client, Sven Johanssen, a Norwegian national who was coming to live in the UK for approximately ten years whilst his children were being educated at a well known private school. The third was the Russian oligarch Alexander Nabokov, who had been resident in the UK for several years and had recently acquired a rare plot of land in central London for which he hoped to get planning permission for a large hotel, and then sell the undeveloped land to a hotel group with relevant permission. The fourth individual was a dear friend, Jonathan Powell who is UK domiciled and resident and has a similar opportunity to Alexander, but this involves a plot of land in Worcester for which he hopes to obtain planning permission for an office development. There were so many possible structures that came into mind, andMaurice thought, not for the first time, how complex structuring real estate transactions was. Not only did one have to consider the income tax and capital gains tax consequences on current and future profits, but also whether loan interest could be deducted against these profits and whether there were any withholding tax issues on payment of interest to third parties; inheritance tax at 40% on estates situated in the UK above £325,000 is a huge potential bombshell waiting to explode at any time; and of course stamp duty land tax and value added tax needed to be considered. He sat down on a park bench with Charlie and started thinking about the various possibilities.

Albert Stonemiller and existing property

Owning a private home through an offshore company owned by a trust was the standard way of avoiding potential inheritance tax consequences for non domiciled individuals, but nowadays this is not a structure that Maurice would advocate. Not only is Albert now deemed domiciled in the UK for inheritance tax purposes, but he is living in a private home now worth £10mn owned by a company whose directors meet all the expenditure required in the house, including the salaries of servants working in the house under the direction of the ever vigilant and rather irascible Albert. HMRC have won far easier cases where a UK resident individual has been deemed to be a shadow director of an offshore company, in effect making the individual in employment with the offshore company and therefore liable to the benefits in kind provisions relevant to all employees. In Albert’s case, this would mean a benefit in kind equivalent to 4% of the value of the property over £75,000, involving a 50% tax charge on a £397,000 benefit in kind. Albert wouldn’t be happy with this and Maurice was thinking how to remove the deemed employment arrangement. One way could be for Albert to pay rent to the offshore company at market value, thereby avoiding any benefit in kind. However, UK tax would have to be payable on the rental income, and with a rental value of £500,000 per annum, this would also be a costly solution.

There is no point at this stage to create an interest bearing loan to reduce the rental income, since the loan has not been incurred for the acquisition of the property but on effectively refinancing it, and therefore the interest would not be tax deductible.

Another way of avoiding the employment relationship is for the offshore company to licence the property to the trustees who are the shareholders of the company. Albert could then sub-licence the property from the trustees, and although, in the absence of any licence fee being paid by Albert, this could be an effective distribution from the trust, this would not be a problem if the trust were what Maurice describes as a ‘dry’ trust i.e one without any income or capital gains In this case, any deemed ‘distribution’ could not be assessed to UK tax in the absence of any income or gains arising in the trust. Maurice made a note to ask Albert to let him have accounts of the trust for the past few years.

Sven Johanssen and a new property acquisition Maurice then considered his new client, Sven Johanssen, a likeable Norwegian who wanted to buy an expensive property in central London whilst his children were being educated.

Happily, the property has not yet been acquired and no trust or company structure has actually been put in place. Maurice contemplated the idea he had been developing of allowing Sven to buy the property in his own name so that he could enjoy the principal private residence exemption in the UK if he sells the property whilst still UK tax resident. Sure, there would be a potential inheritance tax liability since the property is UK situs, and it may be difficult to reduce his estate by internally generated loans since Section 103 (1) FA 1986 did not allow a deduction for inheritance tax purposes of a debt derived from his own property.

An interesting idea would be for Sven to put money into an offshore life assurance single premium bond which would represent clean capital prior to his becoming resident in the UK. He would have the status of resident, ordinarily resident but non domiciled, and could withdraw up to 5% of his original investment in the bond over a period of 20 years without any tax issues, the income and gains within the bond effectively being deferred for tax purposes until the bond is finally cashed in part or in whole. Since Sven is unlikely to be resident in the UK at that time (planning to be resident only for 10 years), he could therefore avoid tax on accumulated income and gains throughout his period of UK residence.

Maurice had discussed with the UK branch of an offshore bank whether an interest only loan from the bank to Sven could be arranged upon the security of both the property and the offshore bond, thereby ratcheting up the loan to value ratio in respect of the property. The interest could be serviced by the 5% capital withdrawals without UK tax consequences i.e. no constructive remittances to the UK. Sven could then sell the property whilst still UK tax resident, before moving back to Norway, enjoying the principal private residence exemption in the UK. Otherwise he would have to pay Norwegian tax on the sale of the property once he had resumed Norwegian residence. As regards whatever remaining inheritance tax liability there would be with the higher loan to value advance from the bank taken into account, it would be relatively inexpensive to insure Sven’s life for the limited ten year period. This whole arrangement would be a lot less expensivethen the trust and company structure, as well as being much more tax effective.

Alexander Nabakov and the hotel site

Maurice knew the Cypriot lawyers who were looking after Alex’s affairs for many years, and they had enquired whether a Cyprus company could own the potential hotel site in London, and what would be the UK tax consequences of ‘turning’ the site once planning permission had been granted. Maurice had already explained to them the provisions of Chapter 3 Part 13 ITA 2007 which is an anti avoidance section aimed at offshore companies owning UK real estate. The UK is rare amongst high tax jurisdictions in allowing offshore companies and individuals to own UK investment properties and realise tax-free capital gains from their disposal. Part 13 attempts to convert what would otherwise be a capital gain into a capital profit in the nature of a trade. As such, UK trading profits would be subject to UK tax, but if the owning entity is a company located in a jurisdiction with a double tax treaty with the UK, such trading profits would only be subject to tax if a permanent establishment were deemed to exist in the UK.

Maurice is aware that HMRC has tried to attribute permanent establishment status to any development site owned by an offshore company, but clearly this is inconsistent with the definition of a permanent establishment if the business of the offshore company is being conducted offshore; the site is only the place at which the business profits could be derived, but not through which the business is carried on.

Thus if a Cyprus company were to be created to acquire the site and it is clear that the Cyprus company has done so as a trading opportunity, then if the Cyprus company deals only with third party town planners and architects, there should be no permanent establishment created under the provisions of the UK-Cyprus double tax treaty. Thus the trading profits should only be taxable in Cyprus, but Maurice was aware that the sale of non Cyprus situated real estate by a Cyprus company would not be taxable itself in Cyprus under domestic law. He would suggest to the Cypriot lawyers that they obtain a tax ruling from the Cyprus authorities to this effect since Alexander didn’t like surprises, and another issue that he would have to consider is UK anti-avoidance legislation in the form of Section 720 ITA 2007.

This anti-avoidance section allows HMRC to tax an individual on (trading) profits enjoyed by an offshore company as a result of a transfer of assets to that company. Clearly Alexander has negotiated the purchase of the site and is transferring it into the name of the Cyprus company, and even though Alexander is non-domiciled in the UK, recent changes to UK tax law allow the UK authorities to penetrate the trust owning the Cyprus company if the source of the profits is UK (otherwise the remittance basis of taxation would still apply to foreign source income and gains). However, Section 720 ITA 2007 seems to be incompatible with EU law and indeed the European Commission had written to the UK overnment stating this in their notice of February 2011. After all, Section 720 would not apply had the property been acquired in the name of a UK company, and therefore should not apply if the property were acquired in the name of another European Union registered company. So Maurice made a note to write to the Cypriot lawyers advising them that they could go ahead with their proposals.

Jonathan Powell and the Worcester Office Development

Jonathan is a very cautious client who does not want to get into complex tax structures for what is a similar issue to that of Alexander Nabakov. However, Maurice has advised him that it may always be helpful to acquire the site in an EU resident but non UK company just for ease of flexibility for prospective buyers; they may themselves be non resident of the UK and may prefer to acquire a property in the UK through a foreign company. Moreover, there may be stamp duty land tax savings that could be achieved. Maurice was thinking of having a Maltese company owning the UK site and then eventually disposing of the shares of the Maltese company once planning permission has been granted so that Jonathan could enjoy Entrepreneur’s Relief on the capital gain at the rate of 10%. Jonathan had seemed very interested in this very much lower rate of tax than he was used to, and wanted to be sure that this was totally above board as regards HMRC.

Maurice had brought with him a note of the key elements of Entrepreneur’s Relief which are that the Maltese company must be a trading company in the 12 months at the date of its disposal, and Maurice wondered whether Jonathan would be able to comply with this from the moment of first acquisition through the planning process to the eventual sale. There was no problem with Jonathan owning at least 5% of the ordinary share capital of the Maltese company, and he could also be one of the directors of the Maltese company provided that the majority of the board were resident in Malta and all board meetings relating to the property were held in Malta; this would require Jonathan to travel a few times to Malta during the coming year but this was hardly an unpalatable prospect.

In the same way that Article 5 of the Cyprus-UK double tax treaty relates to permanent establishments, so Article 2 of the Maltese- UK treaty has a similar provision. A prospective purchaser may then like to create a UK subsidiary of the Maltese company for the purposes of the development itself, but perhaps the Maltese company could reserve for itself parts of the completed development which would remain in the Maltese company for investment purposes, so that the eventual capital gain would not be taxable in the UK and would suffer a maximum 5% tax in Malta.

Maurice then turned his thoughts to the forthcoming presentation on Luxembourg SPs for real estate investments in France, something which he had advised on many times because of the favourable LuxembourgFrance double tax treaty provisions. He contemplated thinking that in fact the Luxembourg securitisation vehicle he had recently advised on for a group specialising in intellectual property rights licensing, could also be useful for UK private home acquisitions, and whether this could be an alternative for Sven Johannson to consider. Well, that was for another occasion on a park bench.

And as the sun set over Regent’s Park, Maurice realised that he had been sitting down for a long time and was feeling a little stiff in his joints, and that Charlie hadn’t budged for hours. He hoped that neither of them were getting any older . . .

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