Contents

1. The UK: Corporate Residence – Andrew Parkes
2. UK/US Treaty: Equivalent Beneficiary – Competent Authority Agreement – Miles Dean
3. The UK: Recent Developments – Anthony Lampard
4. The UK: Crypto Update – Zoe Wyatt

The UK

Corporate Residence 

In this article I consider a relaxation in the UK’s corporate residence rules for funds, something that may reassure UK based fund managers. I apologise in advance for all the Shakespeare references, my daughter has just started studying the Bard at school!

To UK or not UK

One of the benefits of the UK as a location is the flexibility offered by its rules on company residence, specifically the central management and control test. Whatever its other limitations (and boy there are quite a few), the test does allow non-UK incorporated companies to be tax resident in the UK.

This, plus HMRC’s and many other Tax Authorities’ sensible approach to Competent Authority Agreements (see Miles’ article below), means that it is possible to have your Dutch or Irish incorporated company tax resident in the UK, which can be very useful.

Et tu Brute

However, the flip side of the coin is that the central management and control test can make a company UK resident by accident, which I have seen on more than one occasion – no tax avoidance involved, just the rules bringing, often a personal company, to the UK.

For many businesses this is an inconvenience, but for the fund industry it would be disastrous. A definite tax knife in the back for the investors if the fund became subject to UK tax. Hence, overseas directors being appointed, advisers and fund managers being very careful in what they write in emails or racking up the air miles as they attend board meetings from outside the UK.

Much ado about nothing?

Then in 2020 the world shut down in response to Covid-19. Expecting it to be a short hiatus, HMRC confirmed that the odd board meeting/decision made in the UK would not affect company residence, but the restrictions dragged on and here we are 18 months down the line.

In a normal situation, if a company has been carrying on all of its board meetings etc in the UK for the past year and a half, it may have trouble persuading HMRC that it was not UK resident. However, with Covid (and if it is a “normal” commercial situation), HMRC are unlikely to be looking for windfalls (the arguments will be more trouble than they are worth) and the “facts and circumstances” that apply to central management and control gives them a wide latitude to ignore such cases.

You can’t rely upon HMRC turning a blind eye though, and many companies will have been busy arranging telephone calls or video conferences with the Chair being outside the UK, or at least the call originating outside the UK as they have been told that this means the meeting is deemed to have taken place outside the UK.

Sadly this is unlikely to provide protection from UK tax residence. Although it has not been tested in a tax situation, HMRC have seen non-tax cases where a person was held to be attending a meeting where they were physically located (i.e. you don’t magically move to the Channel Islands because you were called from Jersey) and I would expect HMRC to take this line if the situation arose (i.e. if your backside is on a chair in London, you are attending that meeting in London).

Midsummer Night’s Dream

For the fund industry at least there is a way out. In 2011 HMRC introduced a relaxation to the central management and control rule. Neither an Undertakings for the Collective Investment in Transferable Securities (UCITS) nor an Alternative Investment Fund (AIF) can be tax resident in the UK unless:

• it is incorporated here;
• it is a Real Estate Investment Trust (REIT), an investment trust or a unit trust with a UK trustee.

The definition of AIF is very wide as it is a collective investment undertaking that raises capital from investors and invests the money in line with a defined strategy (there are exceptions which need to be considered) and is likely to ensure that many funds simply cannot be tax resident in the UK.

So, if you are a UK fund manager and were frantically trying to leave the UK to hold a board meeting elsewhere you can almost certainly relax. However, this relaxation only applies to residence, it does not stop a trading fund from having a UK permanent establishment if the Investment Manager Exemption does not apply – so care still has to be taken in other areas.

We also have to wonder how many fund managers will use this simple residence exemption rather than the much more complicated UK Asset Holding Company regime.

If you have any queries regarding corporate residence in the UK, please contact:

Andrew Parkes,
National Technical Director
M: +44 (0)7522 229 589 or
E: andrew.parkes@uk.Andersen.com

UK/US Treaty

Equivalent Beneficiary – Competent Authority Agreement

Competent Authority Arrangements (CAA) have been agreed between the US and the UK, confirming that notwithstanding the UK is no longer a member state of the EU, it is so for the purposes of applying paragraph 7(d) of Article 23 of the UK/US DTA.

The CAA apparently “reflects the shared understanding of the competent authorities that residents of either contracting state should be eligible to qualify as equivalent beneficiaries for purposes of applying the derivative benefits test.”

In the absence of the CAA there was concern that post Brexit UK residents would no longer be “equivalent beneficiaries” under the “derivative benefits” test in the treaty, thus adversely impacting certain cross-border structures. However, the agreement only covers the UK/US DTA. We will have to await CAA’s between the US and the Competent Authorities of the other 13 countries where this is an issue.

As many readers will know, the UK/US treaty contains a now standard US-inspired Limitation on Benefits article, the aim of which is to, wait for it, limit those that can benefit from the treaty to only those persons with sufficient nexus with the UK (for example).  Very simplistically, a company incorporated in England might be resident in the UK for tax purposes by virtue of being incorporated here, but that does not entitle it to benefit from the UK/US treaty. The derivatives benefits test essentially “waters down” the LOB by allowing, for example, an English company to treaty benefits if the ultimate owners thereof would have been entitled to the same benefit had the income in question flowed directly to them. Under the UK/US treaty, a resident company must meet an ownership test (95% of the UBO’s must be EU residents) and a base erosion test (no more than 50% of gross income is paid or accrued to a person or persons who are not equivalent beneficiaries in the form of tax deductible payments).

By way of example, assume an English holding company had been set up by UK, Luxembourg, Spanish and Irish investors (as to 25% each) to make a US acquisition. Two years have passed and the US subsidiary now wants to pay a dividend to its UK holding company. This means it has to work out what rate of US withholding tax is due on the dividend. The UK/US DTA gives a rate of 5% or 0% if the UK company qualifies for the benefits of the DTA because it is owned by equivalent beneficiaries.

Under the terms of the UK/US DTA before the CAA agreement, the Lux, Spanish and Irish investors were all potential equivalent beneficiaries as they were residents of a country within the EU, whereas, if the UK investor was a company it was not an equivalent beneficiary as it is not resident in an EU country and the UK holding company may not qualify for the UK/US DTA and US WHT would be due at 30%. A mad result.

However, now we have the CAA, the UK investor can qualify as an equivalent beneficiary as, for these purposes, it is as if Brexit never happened and the US subsidiary may be able to pay the dividend with a reduced rate of WHT.

You’ll note that the example above is all if’s and maybe’s. This is because whether a person is an equivalent beneficiary relies on more than simple residence in the EU, but that is what we wanted to cover today.  Also, the dividend may qualify for treaty relief another way, but to cover all of the possibilities would require one if not more newsletters all of their own.

For more information, please contact:

Miles Dean,
Head of International Tax
M: +44 (0)7785 770 431 or
E: miles.dean@uk.Andersen.com

The UK 

Recent Developments 

There are four issues that I’ve recently come across that are of interest to advisers and clients alike.

Family Investment Companies

Firstly, HMRC have announced that they have completed their review of Family Investment Companies (FIC) and have not come across anything that they feel indicates that such structures have been used to gain a tax advantage.  That is a positive outcome as FICs are popular as an alternative to setting up trusts.

Basis Periods – Consultation Documents

Secondly, following on from a consultation document that the Government issued in March 2021, called the Tax Administration Framework: Supporting a 21st Century Tax System, the Government has issued a new consultation paper relating to basis periods.

One of the areas covered in the March document was the need to simplify the tax rules so that it is easier for taxpayers to be compliant. One of the areas that was highlighted was taxing the self-employed on the profit arising in the current tax year, rather than having basis periods. Depending upon the year end chosen by a business, there can be a significant time lag between when profits are earned and the tax is paid. This problem is exacerbated for new partners and the horrors of overlap profits.

The current consultation document recommends simplifying the process, acknowledging there will need to be some transitional process. There is also a benefit for the Government that they will advance when tax is received and this will help in a small way to reduce the current budget deficit.

Tech Platforms – Exchange of Information

There has been a recent announcement that HMRC are going to be looking to capture information from tech companies such as Amazon, Uber, eBay, Deliveroo and Airbnb so that they ensure that people who are using these platforms are paying tax on the income generated from their sales etc., but also so that, where relevant, information can be shared with other tax authorities. It is currently intended that the need for the platforms to share information with both HMRC and individuals/companies will apply from 31 January 2023.

Change to Calendar Year Basis

Finally, the FT recently reported that the possibility of changing the UK tax year from 6 April to a calendar basis was being considered. It was felt that as many other countries already adopt this basis, it may help both with preparing accounts for major corporate entities, but also make it simpler for individuals who have complex tax affairs and the need to factor in double tax relief.

All of these potential changes would fit into the desire from the Government to make the tax system relevant for the world we live in, whilst at the same time both simplifying tax compliance and advancing when tax is paid.

The UK has used this anachronistic date since 1800 (prior to which it was 4 April since 1752, just in case you wondered), and whilst the Office for Tax Simplification’s report considers aligning the tax year with the financial year (31 March) this is unlikely to happen in the very near future.

For more information, please contact:

Anthony Lampard
Director
M: +44 (0)7983 927 096 or
E: anthony.lampard@uk.Andersen.com

The UK 

Crypto Update 

The pace of change in the tech sector never ceases to amaze, particularly in the crypto world. In this brief article I want to summarise the work I am currently doing in this space.

I mostly advise clients that are offshoring for regulatory purposes (e.g. ICOs, crypto exchanges, derivative exchanges, DeFi etc.). I advise on all the UK and cross-border aspects of the offshoring process, including:

• use of orphan structures such as Cayman foundations and Singapore guarantee companies to achieve decentralised legal ownership which is a key objective for the crypto community);
• use of interim offshore structures (e.g. an offshore subsidiary of a UK company) in order to issue SAFTs to raise initial funds and how to unwind the interim steps;
• structuring arrangements between offshore and UK including all relevant international tax considerations;
• how to leave a pool of tokens in the UK company (for incentivising future employees or for staking) without triggering a disposal or a deemed revenue stream;
• managing any timing mismatch on tokens coming into the UK company and out to employees / contractors;
• VAT considerations on electronically supplied services (this is a seriously non-compliant and misunderstood area);
• how to structure founder / shareholder / employee / contractor tokens tax efficiently;
• valuation of tokens / right to tokens (via the Andersen US valuations team);
• maintaining the efficacy of offshore structures (i.e. managing corporate residence and PE risk);
• impact of a DAO and community voting on corporate residence (I expand on this in an article that will be published shortly); and
• providing strategic and offshore structuring advice to founders in other high tax and highly regulated jurisdictions, giving directions and ideas to their local advisers to help navigate local anti-avoidance issues.

I am also delighted to be leading the tax working group for CryptoUK along with its chairman and will be an adviser to the new all party parliamentary group on crypto once it is properly established.

If you would like to discuss any aspect of Zoe’s crypto practice please contact her on:

Zoe Wyatt
Partner
M: +44 7909 786 144 or
E: zoe.wyatt@uk.Andersen.com