Dear Readers,
We are ending the year on a more positive and buoyant note than we started the year, with unemployment generally falling, inflation being controlled, interest rates still low and the prospect of an end to quantitative easing in the US heralding economic growth, not only in the US but globally. The pessimism surrounding the euro currency has abated (although without any good underlying reason), and there is a resurgence of consumer sales around the world.
And yes, the debt burden of an individual family to a bank may be too high; this may create banking vulnerability which ultimately may need to be rescued by the country where its shareholders are resident; and that country may have to issue bonds to support its burdened economy with the bonds taken up by its global counterparties. But the globe isn’t in debt to intergalactic planetary monetary providers, so perhaps we should all take a breath and thank the massive growth of global trade in the recent years. Due to this growth, country debt burdens can be managed by increased trade (perhaps following devaluation of its currency, something which Eurozone countries cannot accomplish), and in turn banks will be less volatile and consumers will be able to sleep at night more easily.
Structuring this growth of global trade is the focus of our work at IFS, and we have now created the organisation currently known as (ITSAPT). (but more about that in our next newsletter) which is the community for international business advisors and their clients. Tax is an element which will affect the returns from global trade, and there is a clear dichotomy emerging from many governments with their criticism of multinational companies mitigating their tax liabilities in a perfectly legitimate way, and their hidden acquiescence to such mitigation through legislative measures reducing the tax burden for such companies! It I time for greater honesty – if a government wishes to attract international trade with low corporate taxes and specific incentives (such as the patent box regime in several countries), then it should encourage international companies to take advantage of these incentives without vilifying them.
Before passing you over to Dmitry, may I wish all of you a very happy Christmas and a happy, healthy and successful 2014.
With my best regards
Roy Saunders
Dear Readers
You might be familiar with a certain Stephen Holmes and Maurice Brightman — the two protagonists of the case studies, first introduced in Roy’s “Red Book” and fleshed out in our newsletters and annual ITSAPT conferences. The former is a keen entrepreneur, full of energy and ideas, yet a complete tax layman eager to acquire knowledge. The latter is an experienced advisor whose passion for international tax and business planning is unrivalled.
I have worked with Roy in various capacities for over four years. Although a tax LL.M and ADIT gave me a slight advantage over Mr Holmes, when Mr Brightman decided to turn me into Mr Brightman Junior, I faced a very steep learning curve. There is still a lot of room for improvement; however, I hope that at least some of Roy’s knowledge and hands-on experience has been reflected in my work, for which I am extremely grateful. Now, having appeared before many clients, met an incredible variety of professionals, spoken at various IFS and independent events, and published numerous articles, I have the honour to talk to you through our monthly newsletter.
The end of the year is traditionally the time for recapping all the things that have happened to us in the last 12 months and the following should give you a flavour of what we did. As you know from our past newsletters, corporate redomiciliation, whereby a company changes its jurisdiction and tax residence without dissolution, is one of the hottest topics in international tax planning. We first talked about it in our October 2010 newsletter (click here). and considered in detail during our ITSAPT conference in November 2011. (click here).
This year we used our experience to successfully advise an international media group on how to migrate its business from Cyprus to a more welcoming jurisdiction on very short notice. Another client agreed to follow our recommendations to relocate a real estate business from a tax haven closer to the UK shores. Continuing with the tradition of writing about redomiciliation, I am revisiting the topic in my article below that puts some of our clients’ affairs into practical examples of various tax and business planning benefits that corporate migration can achieve.
Despite Roy’s attempt to teach me Received Pronunciation, you can still tell my origins as soon as I open my mouth. Some of Roy’s clients felt uncomfortable opening their heart and soul in presence of someone whose uncle might be a KGB henchman (he is not). However, in most cases my previous work experience and language skills gave us a clear advantage over tax and business advisors working with the clientele coming from the former USSR. We have been gaining a strong foothold amongst high-net-worth individuals coming to the UK as Tier 1 investors and also buying UK real estate. Some of the key planning points are explained in my article Tax Planning Considerations for Tier 1 (Investor) Migrants which you can read in our August 2013 newsletter (click here). Another article, which might be worth revisiting, is Holding Company Structures for Investment into Russia in the Light of Current Developments, found in the May 2013 newsletter (click here)
In November we had a great opportunity to demonstrate our experience by hosting a seminar at the Mandarin Oriental Hyde Park hotel for Russian and other Eastern European individuals who intend to live in the UK and their advisors. We invited Forsters LLP, Farrer & Co, Blokh Solicitors and Memery Crystal LLP to join us and examine the problems and opportunities of migration, immigrations issues, tax benefits for those who are UK resident non-domiciled individuals, and recent changes to the taxation of high value property. The evening seminar was attended by over 100 individuals many of whom after a long day at work continued socialising and networking over drinks and canapés until we drew carriages at 10.15 pm. You can download the seminar programme and the case study by (clicking here)
The seminar was followed by our fourth annual ITSAPT Conference whose topic was International Business Structuring in a Rapidly Changing Environment attended by well in excess of 100 delegates. You can find out more about the Conference at ITSAPT’s website by (clicking here).
I am very excited about the new year 2014. Besides client work, I am very keen to work alongside Roy and our colleagues developing ITSAPT, to which he is referring previously. Secondly, I am looking forward to helping Roy teach his annual MA course on International Tax Law at the University of London. What is even more exciting is that I might be teaching the same course in Moscow and Saint-Petersburg, but more on this in our future newsletters! I am a strong believer in fais ce que tu dois, advienne que pourra and can only do my best.
Merry Christmas everyone and a happy New Year!
With kind regards
DMITRY ZAPOL
Restructuring concept of corporate re-domiciliation
Successful international structures in most cases begins with choosing the right jurisdiction to host a company that will form part of an international business. Depending on the company’s activities, the choice will depend on the range of double taxation treaties and the availability of tax reliefs followed by a host of other tax and non-tax related factors. However, circumstances might arise that make the original hosting country no longer acceptable. This could be due to changes in tax laws, practices or rulings, or perhaps a requirement to create securities which cannot be accommodated within the original country’s legal system, or indeed a myriad of other reasons. In this situation the shareholder may of course liquidate the existing company and transfer its assets to a new entity in a different country. However, receiving liquidation proceeds may be an expensive option for such a restructuring. Alternatively, the shareholder may exchange the company’s shares for shares in a company located at a different jurisdiction, which will receive the assets of the former as dividends in specie or its liquidation proceeds.
What is not commonly understood, however, is that just like individuals are able to shift their tax residence to a different country, the relevant company might be able to migrate to another jurisdiction without the need to liquidate it. If the laws of its country of residence and the host country permit, the company can transfer its legal domicile without losing its corporate personality. As a result it will cease to exist in one State without dissolution and continue in a different country as the same entity. Although this method is not universally accepted around the world, where this is possible, significant benefits can be obtained for the shareholder without creating expensive personal or corporate tax liabilities.
A company may also move its place of effective management and become tax resident in a different country. However, this will only work between the States that follow the so-called “incorporation theory”. Broadly, the company always remains a legal entity subject to the tax jurisdiction of the country of incorporation but its “mobile” place of effective management can be situated abroad, thereby creating a tax presence there. If there is a double taxation treaty between the two States with a tie-breaker clause, the company will only be resident where it is effectively managed. In the absence of the treaty the company may be liable to tax in both jurisdictions, but if the country of incorporation is a tax haven that does not tax corporate profits, then double taxation will be avoided in any event. The incorporation theory is followed in most of the common law States and also Malta, Switzerland and the Netherlands.
The rest of the countries apply the “real seat” theory, also known as siège social or siège reel. These include mostly civil law jurisdictions, such as Belgium, Germany, Spain, Luxembourg, Russia and France. Their laws require the company’s centre of administration to remain in the country of incorporation, failing which the company will be considered dissolved with all the attendant tax costs of liquidation. There are also alternative re-domiciliation methods envisaged under the EU legislative framework. Firstly, a company can apply the EU Merger Directive and merge into another company that already exists in the host EU Member State thus avoiding adverse tax consequences. Secondly, the company can be transformed into a Societas Europaea (European Company) that can move freely across the EU and then be converted back into a regular corporation.
There is no single best method of corporate migration and the final choice depends on a multitude of factors. These include exit taxes that might be levied when a company leaves a jurisdiction, existence of tax treaties, the time scale and financing available for re-domiciliation. The following examples illustrate the situations in which it is no longer desirable for businesses to continue operating in particular jurisdictions. The proposed solutions demonstrate how corporate re-domiciliation can be used as an alternative to more traditional methods.
Mr Yew — the property magnate
Mr Yew is a Singaporean businessman who wants to invest in UK real estate. He acquires a BVI company (BVICo) that owns rental properties situated in London. Mr Yew is not interested in running the business himself nor does he trust independent directors so he appoints his Singaporean right-hand man Mr Siong as director of BVICo. The business starts generating steady rental income and Mr Siong decides to move to the UK to promote BVICo’s business and find new customers.
Because of his dealings on behalf of BVICo Mr Siong might be considered its dependent agent therefore creating BVICo’s permanent establishment in the UK. Moreover, if Mr Siong continues effectively managing the company while in the UK, BVICo will be deemed to be resident in this country, thus losing all the benefits awarded by its purported offshore status.
Mr Siong can suggest to Mr Yew that he re-domiciles BVICo to one of the Crown Dependencies that has a double tax treaty with the UK and which is geographically close to its shores, for example, Jersey. Provided that BVICo is in good standing and its constituent documents allow for the re-domiciliation, the company will be removed from BVI’s corporate register after following few formalities, including filing a Notice of Continuation Out of the Virgin Islands (s184, The BVI Business Companies Act 2004). Equally in Jersey the company, provided it is solvent and has fulfilled certain administrative steps, can apply to the Commission for continuance as a company incorporated under domestic law (Part 18C, Companies (Jersey) Law 1991).
BVICo-turned-JerseyCo will continue with its ownership of property and rights. This obviates the need to renew any contracts besides changing the address of the company, and avoids stamp duty land tax liability on transferring the properties. Under the UK–Jersey tax treaty Mr Siong will benefit from a much more restrictive definition of the “dependent agent” compared to that provided under UK law. He will still need to curb substantially the scope of his activities; however, for as long as he does not “habitually exercise a general authority to negotiate and conclude contracts on behalf of JerseyCo” the permanent establishment problem may be avoided.
Besides changing the company’s domicile, Mr Yew needs to ensure that JerseyCo has the necessary level of corporate substance in Jersey commensurate with its business functions. At the very least, it should have an office in Jersey staffed with the employees whose skills are appropriate for the tasks they are performing. Mr Yew might decide to appoint another director who will exercise day-to-day management of JerseyCo, leaving the more strategic decisions to the former. Because of Jersey’s proximity to the UK, perhaps Mr Siong will be more inclined to fly there (as opposed to the BVI) to exercise his director’s duties to ensure JerseyCo’s tax residence.
Mr Afanasiev — the intellectual property magnate
Mr Afanasiev is a Russian businessman who has acquired a Belize company with a portfolio of various intellectual property rights (BelizeCo). The IPRs are licensed to an intermediary Cyprus company (CyprusCo) that further sublicenses them to members of Mr Afanasiev’s corporate group in Russia. The group is taking advantage of the Russia–Cyprus double taxation treaty, which allows the Cyprus company to extract the royalties tax free and accumulate them in Belize.
In light of the international anti-avoidance doctrine rapidly developing by the Russian courts the CyprusCo may not be considered to be the beneficial owner of the royalties for much longer, thus denying it the treaty benefits. Also with the pending introduction of the Russian CFC rules, Mr Afanasiev might find himself liable to include BelizeCo’s undistributed profits in his personal tax base.
Mr Afanasiev can re-domicile BelizeCo to one of the countries that has beneficial tax treaties with Russia, and which Russia should not consider to be within the jurisdictions with “preferential tax regimes” that trigger the application of the CFC rules. The three EU Member States that allow immigration of foreign companies are Cyprus, Malta and Luxembourg. Just like Mr Siong described previously, Mr Afanasiev will also need to transfer BelizeCo’s tax residence to the destination State by exercising effective management and control there, and also to create a substantial level of corporate substance to ensure that the company is indeed considered to be the beneficial owner of the Russian royalties.
Provided BelizeCo’s constituent documents permit re-domiciliation, it will be struck off the Belize Register upon submission of the affidavit to the Registrar evidencing that the company has continued its incorporation abroad (s96, Belize International Business Companies Act 2000). In Cyprus, for example, the Company can apply to the Registrar to continue as a company registered in the country and provided that the company is in good standing, it will be issued the certificate of continuation (s354ff, Cyprus Companies Law Cap 113). A similar procedure exists in Malta (Continuation Of Companies Regulations of 26th November, 2002).
Under Luxembourg law the domicile of a company is located at the seat of its central administration (head office). Any company whose head office is in Luxembourg shall be subject to Luxembourg law, even though it may have been incorporated in a foreign jurisdiction. If the company’s domicile is located in Luxembourg, it is of Luxembourg nationality and subject to its laws (arts.2, 159, Law of 10th August, 1915). Therefore, Mr Afanasiev could re-domicile BelizeCo by transferring its place of effective management to Luxembourg followed by the fulfilment of the domestic corporate registration formalities. Overall the process is more time-consuming and costly than that envisaged in Cyprus or Malta although the end result remains similar.
In addition to having treaties that limit Russian withholding tax (although strictly speaking the treaty with Malta is not in force yet), all three jurisdictions have special royalties’ taxation regimes. Very broadly, Cyprus taxes foreign royalties and gains from disposals of the IPRs at only 20 per cent of the standard income tax rate, resulting in an effective rate of 2.5 per cent. In Malta the company can apply to be exempted from the taxation of foreign patent royalties’ income. The rest of the royalties will be taxed at an effective rate of 5 per cent. Luxembourg also has a special regime whereby royalties from the exploitation and disposal of certain IPRs are only taxed at the effective rate of 5.84 per cent.
As in the previous scenario, after the company is re-domiciled, it continues as the legal entity under the laws of the host jurisdiction with its assets and rights at their book value. Mr Afanasiev might find that between the day on which the former BelizeCo had acquired the IPRs and the day of re-domiciliation, their values have appreciated significantly. Consequently a subsequent disposal of these rights might trigger a sizeable chargeable gain. Two of the jurisdictions will allow Mr Afanasiev to step-up the base value of the IPRs. Maltese law allows a company that changes its domicile to Malta to elect that all of its assets which are situated outside Malta and which were acquired by the company prior to the change in domicile are valued at their current market value on the day of the re-domiciliation (art.4A, Maltese Income Tax Act 1949, Chapter 123). A similar rule is envisaged under Luxembourg law (art.35(4), Luxembourg Law on Profits Tax of 4th December 1967). As a result, the gain liable to tax on a future disposal will be substantially reduced.
Mr Visser — the TV magnate
Mr Visser owns an entertainment TV channel in South Africa. The rights to the films the channel shows belong to a Cyprus entity (CyprusCo). The March 2013 Cypriot crisis left Mr Visser shaken but unharmed — all of the CyprusCo’s post-tax profits were distributed as dividends to an offshore trust. However, unwilling to take further chances Mr Visser decides to leave Cyprus once and for all. Because of the broad availability of tax treaties with South Africa he chooses to relocate CyprusCo with all of its assets to another of the EU jurisdictions. The UK because of its relative economic stability and nil withholding tax on South African royalties under the tax treaty appears to be the most appropriate.
The UK does not allow foreign companies to ‘continue’ on its soil. Instead Mr Visser can merge CyprusCo into a company based in the UK (UKCo) whereby UKCo will absorb CyprusCo’s assets and the latter will be dissolved in Cyprus. It is important that the UKCo should not be a newly-founded SPV created solely for the purposes of the merger. The company should preferably have legal history to demonstrate that the merger is done for bona fide commercial reasons and it does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is the avoidance of tax liability.
The EU Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC) governs the cross-border merger. The Directive has been transposed into UK and Cyprus laws and the description of the process can be found respectively in the Companies (Cross-Border Mergers) Regulations 2007 (SI 2007/2974) and Articles 201I–201X of Cyprus Companies Law Cap 113.
The merger broadly starts with the preparation of the detailed terms of the merger by the CyprusCo’s directors, which are filed with the Cyprus Registrar of Companies and published for public viewing. After reviewing the Directors’ and Expert Report on the merger, Mr Visser approves the terms of the merger at a general meeting. Next the terms of the merger need to be scrutinised and approved by a Cyprus District Court, which issues a certificate that evidences the approval of the same. Meanwhile a similar procedure is pursued in the UK, including the approval of the merger by a UK Court. In the end, UKCo absorbs CyprusCo and all of its assets and the latter is struck off the companies’ register in Cyprus.
Most on-shore countries impose exit taxation on companies that leave their jurisdictions. In essence, their assets are deemed to be disposed of and reacquired on the day of the departure and the resulting gains liable to tax. Council Directive 2009/133/EC of 19 October 2009 (Tax Mergers Directive) permits cross-border reorganisations, including mergers, of the EU companies in a tax-neutral manner. Luckily for Mr Visser, Cyprus does not impose exit tax in any event; however, the Directive might prove useful in the UK should he ever decide subsequently to exit the UK and merge the UKCo with a company in another EU Member State.
Overall, merger migration allows a company to achieve a clean break with an EU jurisdiction where true corporate re-domiciliation is unavailable. However, its main disadvantage lies in the length of time it takes to perform it, and also the costs arising because of the voluminous documentation and the need to hire counsels to approve the mergers in courts (or notaries who are charged with the same task in a few States). Also, the Tax Mergers Directive contains a two-tier anti-avoidance mechanism. First, the merger should not be performed for the tax avoidance purposes. Second, if say a UK company merges into an Italian company, the former should leave a permanent establishment in the UK, which remains the owner of the company’s assets. However, the question of whether a permanent establishment remains is one of act, and may not be relevant even though the merger arrangements are effected. This area of corporate tax restructuring is exceptionally complex, but nevertheless is likely to become standard procedure in years to come – the corporate equivalent of the individual brain drain of prior years.
This article will be published in December 26th, 2013 edition of Wolters Kluwer/CCH Global Tax Weekly.