Issue 77 - 27th November 2007
Sentiment
I've never been one to celebrate anniversaries (as Bec my wife will testify, due to the fact I usually forget ours), or get hung up about birthdays, but of late I have to say I have been feeling my age. Zoe in the office has recommended I start to use eye cream as she thinks I have aged dramatically recently, and the middle aged spread has started in earnest.
I suppose this all started when we went to a Parent-Teacher evening at the boys’ school last week to discuss their progress. To my horror, I was almost 10 years older than most of the teachers, and then it dawned on me - I am 50 in 13.5 years! In thirteen and a half years time I will be half a century old. For the first time in my adult life I feel old(ish). It also made me look back and I realised that my first day at IFS was some 10 years ago, almost to the week. I remember pressing the buzzer at the old IFS offices on Hampstead High Street, petrified about my new career with the great Roy Saunders - I was significantly relieved to find out that Roy was away on business that week so I got off lightly.
In the past 10 years I have learnt a huge amount from Roy and I would like to thank him for taking a punt on me and having faith in my abilities - we have gone through a lot together, and long may that continue. We have changed as a company too. We are now 6 tax advisors and are busy recruiting two more (so if you know of anyone who might want to join us ask them to send in their CV); we have moved from the North to the West End of London and we now have an electronic library, not 1000's of dusty pages! Some things don't change, and I would like to think IFS is still the same company at heart with the same ethos; one which values its clients, one which tries to simplify and make tax less of a headache, and moreover one which puts commerciality at the core of its advice to clients.
Here's to the next 10 years.
Happy reading!
Tax Tip!
Tax tip of the day
The UK tax system is complex to say the least, but has many years been a safe haven for foreigners who are able to take advantage of the remittance basis. As reported in ITN 76 the 2007 Pre-Budget has, however, created a stir with it being very likely significant changes to the tax system will be introduced making the UK less popular for so called non-doms.
As a result of these developments an increasing number of clients are now considering their options. Possible 'tax friendly' jurisdictions to more to are, for example, Monaco, Gibraltar, the Channels Islands, Dubai and Switzerland. Because of its, arguably, high quality of life and central location within Europe, Switzerland has considerable appeal.
In Switzerland, subject to certain conditions, a foreign national who is not gainfully active in Switzerland can elect for a special tax regime whereby they are assessed to income and net wealth tax on a lump sum. This lump sum amount is related to the level of expenses and the lifestyle of the individual (e.g. housing, cars, boats, etc.) and in most Cantons this is based on the annual rental value of his or her home multiplied by five. The lump sum taxable amount can be negotiated in advance with the Cantonal tax authorities by way of a tax ruling.
In most Cantons the minimum required taxable income varies between GBP 100,000 and GBP 175,000. The total annual Swiss tax burden for a lump sum tax payer will vary between GBP 45,000 and GBP 85,000 depending on the Canton and the facts and circumstances of the particular case.
Under the lump sum taxation regime capital gains can in principle be realised without increasing the total Swiss tax due under the ruling. Income from Swiss sources and/or foreign income such as dividends, interest and royalties for which a reduction or exemption of foreign withholding tax is claimed may, however, increase the total Swiss tax due.
In Switzerland gift and estate duties are only levied at a cantonal and communal level and most cantons and communes abolished gift and estate duties between spouses and between parents and children. In canton where gift and estate duties are still levied, the applicable rates are generally quite low.
If you are considering moving aboard Switzerland may be a good alternative - our resident expert Ilonka van der Hoeven would be delighted to hear from you.
Isle of Man Taxation of partnerships
Practice note 145/07 was issued on 2 October 2007 which clarified the taxation of partnerships in the IOM. The main clarifications may be summarised as follows:
- Partnerships established in IOM, under IOM law are called "Manx Partnerships"; 'partnership' includes both general and limited partnerships;
- Manx income tax law treats a partnership as a ‘look through’ for tax purposes (note that in some non-tax related situations the partnership may be treated as a separate legal entity), as such:
- Manx resident partners are taxed on a worldwide share of their profits;
- Non-Manx residents are taxed on Manx source income.
- International limited partnerships and International limited liability partnerships were closed down from 6 April 2007; where these special entities are still in place, normal partnership tax rules within PN 145/07 will be applied (as laid out above).
- A partnership tax return must be filed by all participants, whether Manx resident or not, although for non-residents, an agent of the IOM may file the return on their behalf.
We have seen quite extensive use of Manx Partnerships over the past 5 years, predominantly in relation to UK land development structures. The planning involves two Manx life interest trusts which form a partnership which then undertakes the UK land development. The structure allows land development profits to be taxed only in the Isle of Man (or so the planning goes), and flow through the structure back to the UK without UK tax. Hey presto – the alchemy of UK tax planning. Too good to be true????
France Proposed increase in CGT on sale of shares in French real estate companies
In ITN 76 we reported that the French 3% special tax which is applied to non-French resident companies holding French real estate was incompatible with EC freedoms, namely the free movement of capital. The French Finance Bill 2008 includes a provision amending the rate of tax applicable to gains realised by a company on the sale of shares in a French real estate company, most likely in response to the ECJ ruling.
Under the current rules, capital gains realised on the sale of real property are subject to an effective corporate income tax rate of 34.43%. A reduction in this rate to 15% is available where the shares have been held for at least 2 years at the time of the disposal and the shareholding is more than 5%. Under the proposed rules this special rate will be abolished and the corporate income tax rate will be applied to all such disposals.
Italy Budget 2008
The most noteworthy proposals made in the 2008 Budget on 3 October 2007 may be summarised as follows:
- A reduction in the corporate tax (IRES) from 33% to 27.5%
- The 84% exemption available for capital gains realised on the disposal of qualifying investments held by an Italian company is to be increased to 95%.
- Italy has a "black list" whereby countries on this list automatically trigger certain anti-abuse restrictions. This black list is to be replaced by a "white list"; consequently structures involving countries not on the white list will trigger the same anti-abuse provisions.
- It is proposed that the thin capitalisation rules are to be abolished.
- The new rules provide that interest expense may be deducted at a maximum of 30% of gross earnings; any excess can be carried forward for up to 5 years.
Switzerland Major changes to Swiss taxation considered
On 1 October 2007 the National Council of the Swiss Parliament approved two measures which, if enacted, will shake up the Swiss tax system; the measures include:
- A reduction of the corporate tax rate;
- A reduction of the federal income tax rate;
- The introduction of a new lower rate of tax for specific types of income.
Switzerland currently applies a beneficial tax regime based on whether the income of foreign or Swiss source. The introduction of the new regime tax will look to tax persons on the type of income received (i.e. dividends, interest, royalty). This is questionably a submission by the Swiss Parliament to the pressure it has received from the EU Commission which has repeatedly suggested to Switzerland that the difference in treatment of foreign and Swiss source income infringes the 1972 Free Trade Agreement with Switzerland. The Swiss Federal Department of Finance have rejected this argument as irrelevant as Switzerland is not part of the single European Market and therefore no contractual regulation would exist between Switzerland and the EU. Notwithstanding this it does appear that the Swiss have bowed to such pressure.
Of course there is the impending election and the process for implementing and drafting of the legislation, which means these changes may not be seen for a couple of years. In the meantime the Swiss Cantons continue to reduce their tax rates. The Canton Appenzell Ausserrhoden (try saying that after a few Jägermeisters), has recently amended its tax legislation reducing its tax rate to approximately 12.5%, including federal tax, which makes it currently the lowest corporate income tax rate available in Switzerland.
Luxembourg
A Bill was presented before Parliament on 6 November 2007 introducing an 80% tax exemption on net income derived from the licensing of intellectual property, including patents, TM, designs, models and software copyrights.
In addition, net capital gains realised on the sale of such IP rights by the Luxembourg owner will be eligible for the exemption. However, any losses deducted in the year of sale will be recaptured. The exemption is not available in respect of capital gains rolled over from previous years.
The exemption, however, is not available to IP’s acquired from a related company (a related company is one which holds 10% directly or indirectly of the Luxembourg owner). Where the Luxembourg taxpayer has developed its own IP, a deduction is available equal to 80% of the net income which would have been realised if the IP had been licensed to a third party. This is similar to the new rules introduced in the Netherlands and which were discussed in ITN 69.
The new provisions, once enacted, will apply to IP acquired or registered after 31 December 2007.
