Press Room

7 Nov 2019

Tax Update (Nov 2019)


November 2019

Andersen – Tax News

After an untoward amount of political manoeuvring, much of which verged on the ridiculous, the UK is finally heading to the polls on 12 December. Whichever side of the line you sit, whether it’s left or right, Leave or remain, having a government that is, for all intents and purposes powerless, is far from ideal. Trust in politics and parliament is at an all-time low in the UK, due in large part to the Brexit inertia. The Budget that was scheduled for 6 November has now been cancelled following the announcement that a General Election will be held in December.

The next Budget, which will most likely follow very shortly after the General Election, could be the most dramatic in many years, if Labour and Mr Corbyn get swept into No 10. The most obvious risk a Corbyn government poses is an increase in income tax rates to more than 50%. It is conceivable that income and capital gains will be aligned and an axe will be taken to Entrepreneurs’ Relief. Inheritance tax and corporation tax will also likely be overhauled which could lead to many people considering whether they should stay in the UK – a return to the 1970s all over!

If you are considering whether your time is up in the UK, our first item in this month’s newsletter looks at the UK’s Statutory Residence Test. The Netherlands is next up with a brief summary of the new withholding tax rules that come into effect next year. We’re then back to the UK for a more detailed look at the Investment Manager Exemption, and then finally a note of caution on the exchange of clearances under DAC3.


1. The UK: Statutory Residency Test
2. The Netherlands: Dutch Withholding Tax Rules
3. The UK – The Investment Manager Exemption: Trading v Investment
4. Europe – DAC3: Exchange of Clearances

Happy Reading!

The UK: Statutory Residency Test

Like most countries, the UK seeks to tax its residents on their worldwide income and non-residents on their UK source income. This makes the question of whether you are resident in the UK, or not, one of vital importance.

Until the recent past, the UK still based their decision of whether an individual was tax resident on common and case law, with the principles dating back to the days of sailing ships. Why worry about the day of departure and arrival, when anyone leaving the UK was likely to be gone for months as they sailed slowly to their destination?

This caused a considerable amount of uncertainty, not helped by the HMRC “guidance” on the subject (ask Mr Gaines-Cooper what he thinks about guidance that cannot be relied upon!). To provide certainty, and definitely in a case of be careful what you wish for, the Statutory Residence Test was introduced from 6 April 2013.

The test does provide certainty, but at the cost of being hideously complex. It can require levels of record keeping not usually seen outside of a medical trial and take years off your life, as you try to follow it all through. In the test, a friend’s couch could count as a permanent home, but a house you own and use regularly (say, as a holiday home) may not.

A day is only a day in the UK if you are still here at midnight, unless it is a deemed day, when any time in the UK will count. Also, what is a day? A work day is different to a day in the UK!

If you are leaving the UK (or for that matter thinking of relocating here – and many seem to be doing so), a detailed analysis of the rules is absolutely necessary.

Paul Lloyds

If you would like further information please contact Paul Lloyds on +44 20 7242 5000 or

Julian Nelberg

or Julian Nelberg on +44 20 7242 5000 or

The Netherlands: All Change to the Holding Company Regime

The Netherlands implemented ATAD I in December 2018 thereby introducing CFC rules, an exit tax, interest deductibility restriction and a GAAR. It introduces ATAD II from 1 January 2020 to include hybrid and other mismatches, a step that broadly harmonises the Dutch and UK holding company regimes. However, further changes to the tax regime (discussed below) will, in our view, see the Netherlands playing second fiddle to the UK when it comes to choice of holding company location.

The Dutch Government have been concerned with the application of their withholding tax (WHT) regime for a couple of years now. They originally proposed to abolish WHT on cross border dividends where the dividend was paid to a company resident in a country within the EU, or where the country had a double taxation agreement with the Netherlands and if the dividend was part of a chain, the intermediate holding company also had sufficient substance. However, following the “Danish cases” where the ECJ considered the question of beneficial ownership and WHT, the Netherlands has amended the “safe harbour” provided by the economic substance rules. It will now be possible for the Dutch authorities to argue (where they have the appropriate evidence of course), that a dividend is “abusive” and subject to WHT, even if the recipient has the relevant economic substance.

The changes to the WHT rules detailed above will enter into force from 2020, whilst the Dutch propose to bring in WHT on certain intragroup interest and royalty payments from 1 January 2021. Under this proposal, WHT will be deducted from intragroup interest or royalty payments where the recipient is resident in a country with a tax rate of less than 9%, or is on the EU blacklist of tax havens. If an intermediate holding company in a “high tax” jurisdiction is interposed, then there is a similar rule to the dividend WHT rules. Where the interposed holding company has sufficient economic substance WHT will not be due, unless the Dutch authorities can show that the structure is abusive.

In addition to WHT, non-Dutch resident individual and corporate shareholders with a substantial shareholding in a Dutch entity (i.e. 5% or more) are subject to 25% income or corporate tax, respectively.

This can be mitigated where the conditions of a relevant double tax agreement (DTA) are met, but from 1 January 2020, when most Dutch tax treaties will include a Principle Purpose Test (PPT), corporate shareholders could be exposed to 15% withholding tax plus 25% corporate tax on dividends.

It is also proposed that, from 1 January 2022, Dutch law will be amended to tax a shareholder (even if non-Dutch resident) on a loan from a Dutch company at up to 51.75% income tax rates.

With a participation exemption for dividends and gains from substantial shareholdings that is arguably more complex than the UK’s substantial shareholding exemption, has the Dutch holding company had its day?

Miles Dean

If you wish to discuss any of the above, please contact Miles Dean on +44 20 7242 5000 or

or Zoe Wyatt on +44 79 0978 6144 or

The UK – The Investment Manager Exemption: Trading v Investment

The UK has a long and proud history of being a centre for the fund management industry. The regulations and the tax system are designed to attract non-UK investment funds to use UK-based fund managers. The UK even goes so far as to guarantee that regulated foreign investment funds will not be considered to be UK tax resident (Andrew was part of the team that introduced the amendments to s.363A Taxation (International and Other Provisions) Act 2010 in 2014), even if their central management and control abides in the UK (you can tell that he also had responsibility for company residence as he insists we use the word “abides”!).

Section.363A took care of one route by which foreign investment funds could be within the UK tax net, but there is still UK tax due if a non-resident has a taxable presence in the UK; usually in this context, having a UK agent who carries on the fund’s trade in the UK – AKA a fund manager. If it were possible for a fund to be subject to UK tax because of the actions of its UK-based fund managers, all non-UK funds would quickly move to firms outside of the UK, destroying the fund management industry nearly overnight.

To stop this happening the UK has the “Investment Manager Exemption” (IME), which ensures that the UK taxation of any income of a non-UK fund from investment transactions carried out by independent fund managers in the UK, is limited to any withholding tax (so nil for any foreign income or UK dividends). We’ve highlighted “independent”, as that can be overlooked.

The aim of the IME is to reduce the UK’s tax take on these investment transactions, so people use UK fund managers and, if you read HMRC’s guidance, it is clear that the policy is to enable as many funds and their managers to get within the exemption as possible.

Et tu brute?

However, HMRC also has a long and proud tradition of taxing fund managers until their pips squeak. From initiating many inspectors into the dark arts of transfer pricing around the turn of the century, asking them to look at the fees paid to the UK-based managers (and to be fair to HMRC, a number were booking only 0.5% in the UK out of the 2% and 20% the fund was paying), to the recent disguised investment managers fees rules, the managers themselves have been scrutinised very closely.

To tax or not to tax

A recent case required us to look at the IME in detail. The investment fund in question started off well within the safe confines of the benign HMRC treatment, non-resident funds with the IME for the UK-based investment managers. Several years down the line they are now potentially at risk (out of this protective bubble), of seeing the other face of the Revenue.

The client was a “normal” investment fund, based outside the UK (in tax neutral jurisdictions), with many external investors and UK-based fund managers who had “skin in the game” by investing alongside their clients. Indeed, if they hadn’t made these investments, no-one would have put their money into the funds. This is all catered for by the IME and it allows fund managers 18 months to find enough investors to get within the exemption.

The potential problem arises as a result of the funds being wound down, or to be more precise the funds are closed to external investors and, indeed, the external investors have now redeemed their investments, leaving behind one fund made up, mainly of the fund manager’s own investments. This means that the relationship between the fund and the manager is now outside of the IME. Instead of a UK-based fund manager making investment decisions on behalf of an independent fund, the UK-based fund manager is making investment decisions, effectively for their own money.

All’s well that ends well

However, for the IME to be in point, the fund has to be trading and this is the usual get out of gaol free card.

Whether a fund is trading is a question of fact, one that the legislation gives next to no help with, and that the courts and a Royal Commission have spent many hours deliberating, leaving behind those nine “badges of trade”. Helpfully, the UK courts have acknowledged that the badges are of little help in deciding if someone is investing or carrying on a financial trade.

The Courts have, though, also said that the active management of investments is not a trading activity. So, where does an investment become a trade? We believe that there are three occasions, the first is when the person holds themselves out as a market maker, offering to both buy and sell a class of investments from all comers. The second is high-frequency traders, as it is a bit difficult to argue that you are holding shares as an investment if your holding period is a nanosecond. The final occasion is where the “investment” strategy is to “play the market”, looking for shares that are about to rise or fall in value and buying or selling appropriately.

In this third scenario, the investor is looking to make a profit out of the turnover of the relevant class of investment. Whereas, if an investor buys shares to hold, aiming to make a long term gain, and receive the dividend or interest income, then even if they “actively manage” the investments by selling poorly performing shares, buying more of well performing ones etc. will not lead to a trade. To use an analogy, it is the difference between someone surfing eBay to buy items they believe they can sell at a profit, and someone who surfs to buy items they like the look of but have a habit of selling items they get bored of, or with the intention of making room for their new purchases!

Some funds will be trading with a few hints of investing, but many more will be investing with a few hints of trading, and this is the category our client is in.


Although a fund taken “in-house” is likely to be outside of the IME, other anti-avoidance rules have to be considered, such as transfer of assets abroad or the new profit fragmentation rules – but that is a tale for another day.

For more information please contact Andrew Parkes on +44 20 7242 5000 or

Europe – DAC3: Exchange of Clearances

Since 1 January 2015 tax authorities within the EU (under DAC3) and from 1 January 2016, tax authorities signed up to the OECD’s Inclusive Framework (under BEPS Action 5), have been exchanging clearances (or rulings to use the terminology of the EU and OECD) that relate to cross-border transactions.

In other words, if you ask HMRC to agree that the restructuring of your Irish and U.S. sub-groups is tax neutral in the UK, then HMRC will share that request and their answer with the U.S. under BEPS Action 5 and all EU Member States under DAC3.

You therefore have to be very careful what you say in the clearance. Andrew led on the implementation of these for HMRC and it was common to see requests for clearances saying that there was a tax avoidance motive, but it was not aimed at the UK. For instance, in the example above, the clearance would often say that the purpose of the transaction was to avoid U.S. tax, but clearance could be given in the UK as there was no UK tax avoidance motive.

DAC3 and BEPS Action 5 now ensure that these sorts of comments are brought to the attention of the targeted tax authorities.

For more information please contact Andrew Parkes on +44 20 7242 5000 or