Issue 67 - 6 December 2006
Sentiment
I’m glad to report that we have now settled in very nicely at our new offices in the West End. A big thank you to all those friends (and family) who came along to our Champagne and Canapés evening a couple of weeks ago – it was a fun evening, although I did feel rather jaded the following morning as I boarded a flight to Dubai to attend SoccerEx (with the family in tow, I hasten to add). SoccerEx is the annual forum for the global soccer industry and I was there to promote the image right exploitation opportunities our Opus Group of companies in Switzerland and Cyprus can offer. If you would like to receive our presentation on this topic please contact our Business Development Director, Stuart Stobie (stuarts@interfis.com).
Prior to SoccerEx I was in the Highlands of Scotland chasing deer around “the hill” (being approximately 40,000 square acres, “the hill” is an understatement if ever there was one). I find this a time of great introspection, and a wake-up call to the hectic life we lead in London; moreover it makes you realise what a fabulous country we live in – the scenery is absolutely stunning and I returned to the “Smoke” refreshed despite having eaten like a king and drinking enough whisky see me through to next year! So back to work and the realisation that whilst the scenery in the West Highlands doesn’t change the tax landscape certainly does. In this edition of the ITN we report on a very important Special Commissioners’ decision and various other newsworthy items which we hope you find useful and moreover interesting.
Finally, we would all like to wish you a merry Christmas and a prosperous New Year. This year we have donated our Christmas card budget to SOS Children. http://www.soschildren.org/
Happy reading!
Tax tip of the day
Royalty Planning
It is evident that Hungary is a key player in the world of royalty planning, with its low corporate income tax rate of 16% and various investment incentives. In particular, the incentive whereby a resident company receiving royalties may deduct 50% of the royalty received, i.e. only 50% of the royalty income is taxable, giving an effective rate of 8%. However, a “solidarity tax” is also applicable at 4% increasing the effective rate to 12%, but this is still a very low tax rate. There are interesting planning opportunities through the extensive network of double tax treaties concluded by Hungary. The Hungary/US double tax treaty, for example, was concluded in 1974 and as a result does not include anti-treaty shopping provisions, and although it is currently under review, amendments are not expected until perhaps 2010. US source royalties may, therefore, be exploited successfully via Hungary.
Alternatively, our Opus Group is also an interesting and very efficient structure, particularly the Cyprus company within the group that may receive US source income. Such income could be royalties for intellectual property rights including image rights, but could also be copyright royalties earned by entertainers. In this respect, the US/Cyprus double tax treaty has a limitation of benefits clause but it is far more benign than most, so do contact Stuart for more information.
Belgium
Belgium abolishes dividend withholding tax on dividends paid to treaty countries
The Belgium Government has announced that it plans to abolish dividend withholding tax in respect of payments made to corporate shareholders resident in treaty countries from January 2007. The corporate shareholder must have a shareholding of at least 15% in the Belgian subsidiary and have held this for an uninterrupted period of 12 months (the same conditions as those of the EU Parent Subsidiary Directive). Currently, this withholding tax exemption is only available for dividend payments made to corporate shareholders resident in the EU. In addition, the domestic exemption is not subject to a limitation on benefits provision as is the case in the treaty arrangements, and the 15% participation requirement is more favourable than some of the new treaties Belgium has concluded.
The new legislation ought to make Belgium attractive to treaty partners as a holding company location for investments into Europe.
Bulgaria
Bulgaria reduces corporate tax to 10% as of 2007
The Bulgarian government has announced plans to reduce the corporate tax rate on profits made by Bulgarian and foreign companies operating within the Bulgarian state, from 15% to 10% When Bulgaria joins the EU on 1 January 2007 it will have one of the lowest rates of corporate income tax along with Cyprus. It may be some time, however, before Bulgaria is used as widely as Cyprus, but never say never!
Germany
Germany Introduces REIT legislation
The German government has issued draft legislation to introduce real estate investment trusts (REITs) from 2007. Typically, a REIT is a tax efficient investment vehicle often listed on a stock exchange allowing investors access to the real estate markets. Under the terms of the draft legislation a German REIT would have to meet the following criteria to be completely exempt from German trade tax and German corporate income tax (including the solidarity surcharge):
- The shares would have to be traded on a stock exchange in Germany or an EU member state;
- 90% of the REIT’s gains and profits must be distributed to its shareholders;
- At least 75% of a REIT's assets would have to consist of real estate, and at least 75% of it’s gross income must come from property investments;
- Direct participation in would need be limited to less than 10% for both domestic and foreign investors;
- Only residential property that has been built after 1 January 2007 (when REIT's are due to be introduced), or where more than 50% of the use is for commercial purposes, can be acquired by a REIT.
Although REIT’s will be tax exempt, dividends distributed by the REIT will be subject to withholding tax at 25%. The withholding tax can be credited against the income tax liability for a domestic investor, whilst in the case of foreign investors the withholding tax rate could possibly be reduced under an applicable double tax treaty.
It is hoped that introducing REIT's in Germany will increase long-term foreign and domestic investment and stimulate growth.
Germany
Corporate tax reform
An amendment to the planned corporate tax reform has been put before the German government, as follows:
- Corporate income tax is to be reduced from 25% to 15%
- Municipal trade tax is to be reduced from 5% to 3.5%
- Partners in tax transparent partnerships may defer paying tax at the top marginal rate of 42% until distribution, paying tax at a special rate of 30%
- The current thin capitalisation rules are to be reformed by introducing an ‘interest barrier’, whereby up to 30% of interest payments in excess of one million euro on investor loans would not qualify as a tax deductible expense
Netherlands/United Kingdom
Clarification of conditions of Dutch withholding tax credit
Background
In the UK a tax credit is granted to residents of the UK to avoid double taxation on dividends. Article 10(3) of the Netherlands/UK tax treaty allows this credit to be attributed to shareholders resident in Netherlands subject to the following conditions:
- Companies which own either directly or indirectly 10% or more of the voting rights of the dividend paying company are entitled to a half credit, and dividend income is taxed at 5% in the UK
- Shareholders with less than 10%, whether companies or individuals, are granted a full credit and are taxed at 15% in the UK.
Clarification
- UK tax on dividends is treated as a ‘paid tax’ therefore shareholders in the UK are entitled to a credit for this tax.
- An investment company can claim the credit in respect of their investors who receive a dividend from them, as long as the relevant treaty provisions are satisfied.
- A company resident in the Netherlands may credit 3% of foreign withholding tax on dividends received against Dutch tax withheld when dividends are redistributed.
Norway
New amendments from 1 January 2007 to CFC rules
On October 3, the Director of Taxes amended the CFC rules (see Regulation No.1158 of 19 November 1999), which will be effective from 1 January 2007. At present either distributed or undistributed profits of a foreign owned or controlled company (at least 50% owned by Norwegian taxpayers) are attributed proportionately to the Norwegian resident shareholders provided the controlled company is in a ‘low-tax country’. Two lists state which countries are low-tax or not. The black list includes countries which are assumed to be low-tax countries. The definition of a low-tax country applies when the general income tax rate on corporate profits is less then two-thirds of the Norwegian corporate tax rate, which would apply if the company would have been resident in Norway. CFC Legislation will only apply to a company resident in a tax treaty country to the extent that the company has passive income.
From January 2007 the white list will be extended to include Denmark, Sweden and Finland, these being the countries which are not low-tax. Morocco will no longer be on the white list from this date. If a company from India is not taxed at a reduced rate or is not exempt from tax under Indian Tax incentive rules, then India will also held to be on the white list.
United Kingdom
Robert Gaines-Cooper v The Special Commissioners of HM Revenue & Customs SPC00568
This case is very interesting for a number of reasons, not least the fact that HMRC have succeeded in challenging a widely abused concession, namely the rule that days of arrival and departure are ignored when calculating the number of days an individual spends in the UK. A detailed Memorandum prepared by the IFS team is available upon request from Hema – hemap@interfis.com.
The UK has two tests for determining whether an individual is resident here:
- If a person is physically present in the UK for 183 days or more in any fiscal year which needs not be consecutive days (says of arrival and departure, for this purpose are normally ignored); or
- If a person makes regular visits to the UK, so that these visits become habitual and substantial. Visits to the UK are regarded as becoming habitual after four successive years (unless any intent to make them habitual is evidenced earlier, and an average visit of 91days per year is regarded as substantial.
HMRC raised assessments for the years 1992/93 to 2003/04 under the transfer of asset rules in ss.739 to 746 ICTA 1988 and the provisions charging settlors with income tax on trust income in ss.660A to 660G ICTA 1988. These assessments were appealed by Mr Gaines-Cooper, the tax-payer.
Mr Gaines-Cooper claimed he was not UK resident and had abandoned his domicile of origin in England from the early 1970s. He claimed he had acquired a domicile of choice in the Seychelles prior to the tax years in question and argued that he had retained the domicile of choice due to his personal and business connections there.
HMRC’s guidance on the 90 day rule is detailed in the publication “IR 20 Residents and Non-Residents – Liability to tax in the United Kingdom” where it states, “The normal rule is that days of arrival and departure from the UK are ignored in counting the days spent in the UK.” Days of arrival and departure have not been challenged previously, despite HMRC being aware that many non-residents flaunt the above rule by coming to the UK on a Monday morning and leaving on a Friday evening (thus spending an entire working week in the UK) but only counting 3 days for the purposes of their residency calculation. This case demonstrates that HMRC guidance is just that, guidance: it cannot be relied upon in all circumstances.
Our advice is (and always has been) for all non-residents to include their days of departure and arrival in their calculation and even to go as far as including every hour spent in the UK. There is no time like the present to consider a detailed review of your affairs to ensure they meet HMRC’s increasingly strict requirements.
United Kingdom
Indofood: HMRC publishes draft guidance
We reported the Indofood case in ITN 63 and have been waiting for guidance notes from HMRC since then. On 9 October 2006 HMRC published their guidance in draft form on the impact of the Court of Appeal decision, which as ITN readers will know looked at the meaning of ‘beneficial owner’ in the context of Double Taxation Agreements and the reduction in withholding tax rates thereunder.
As a basic rule, payments of interest by a UK company to persons outside the UK (other than interest paid on quoted Eurobonds) are subject to 20% withholding tax. However, a number of double tax treaties to which the UK is party reduce the applicable withholding tax rate to below 20%, and in some cases to nil. Many financing structures seek to benefit from these reduced treaty rates by interposing intermediaries resident in treaty jurisdictions. One of the conditions for a payee of interest to benefit from a reduced or nil rate of withholding tax in a double tax treaty is that they are the beneficial owner of such interest.
Historically, it has been thought that the UK domestic law meaning of beneficial ownership applied in relation to payments of interest from the UK. This is a narrow test that looks at the parties’ strict rights and obligations. While this test would prevent an agent, nominee, fiduciary or mere administrator being the beneficial owner, it would generally not apply beyond that. It was, therefore, generally thought that the beneficial ownership requirement was of limited impact.
However, the recent case of Indofood International Finance Ltd v JP Morgan Chase Bank NA [2006] EWCA 158 has cast doubt on this view. The background to the case is detailed in ITN 63. The Court of Appeal applied the ‘international fiscal meaning’ of beneficial ownership in that the term means the actual owner of the interest income who truly has the full right to enjoy directly the benefits of that interest income. Accordingly the Dutch SPV in the case would not be the ‘beneficial owner’ of the interest and thereby subject to full withholding taxes.
The draft guidance indicates that HMRC will be adopting the ‘International fiscal meaning’ of the term beneficial ownership in the context of interest, royalties and if appropriate dividends. The draft guidance details that a different interpretation of the term ‘beneficial ownership’ will be applied depending on whether or not treaty abuse is in point. HMRC set out a number of examples of how they consider the guidance will work in practical situations and seem to demonstrate that they will only take the international fiscal meaning where an intermediate lender is imposed to reduce withholding tax on interest paid by a UK borrower compared to that which would have been payable had the borrowing been made directly from the lender.
We would add that, in our view, it is by no means clear that there is an accepted international fiscal meaning of beneficial ownership for purposes of interpretation and application of OECD Model based tax treaties.
United Kingdom
Investment Manager Exemption
HMRC has recently released draft guidelines on the application of the rules in Finance Act 1995 (“FA 1995”) and Finance Act 2003 (“FA 2003”) regarding UK investment managers who act on behalf of their overseas clients. In principle non-UK residents are chargeable to UK tax in respect of income from a trade conducted through a branch or agent in the UK. The purpose of the Investment Manager Exemption is to ensure that non-UK residents are not liable to UK tax just because they use UK investment managers or brokers.
The draft guidance provides tests that investment managers need to satisfy to qualify for the Investment Manager Exemption. Based on the draft guidelines the exemption applies to certain investment transactions carried out by the investment manager on behalf of the non-resident provided the investment manager meets certain conditions. The key changes in the draft guidance mainly affect the “customary” remuneration and the “independent capacity” test.
The customary remuneration test
Under the current test an investment manager of a non-UK resident fund needs to demonstrate that the remuneration received for his management service is not less than “customary” for these services. Under the current legislation what is “customary” is not defined. In the draft guidelines HMRC confirm that it will determine whether remuneration is “customary” by applying the arm’s length principles of the OECD transfer pricing guidelines. Whilst this will give more certainty it also implies that investment managers need to ensure that they can show that all the amounts paid to related parties are at arm’s length rates.
The independence capacity test
Another test that needs to be met to apply the Investment Manager Exemption is that the investment manager needs to act for the non-UK resident in an independent capacity. Under the current test a list of circumstances is set out under which the HMRC will regard the independence test to be satisfied. In deciding whether the manager acts in an independent capacity, HMRC considered that the test was passed where any one of a number of circumstances were present.
Under the draft guidance the HMRC considers that guidance under the OECD Commentary as to what constitutes an independent agent is key and needs to be taken into account. In determining whether an agent is independent the guidelines HMRC will give regard to all the facts pertaining to the UK investment manager, the non-UK resident entity and the arrangements between them, rather than on the nature and constitution of the non-UK resident. HMRC will look at all the facts in each case and, contrary to the current situation, no one circumstance will be treated as decisive.
The guidance is still in draft form and comments can be made until 12 January 2007. If guidance notes become final it would give more certainty with regard to some elements, such as the customary remuneration test and the definition of investment transactions. However, other elements of the guidance lead to more uncertainty. Assuming the guidance notes come into effect investment managers need to review their arrangements in order to ensure that the non-UK resident funds for which they act maintain their tax-exempt status.
