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PALLADIUM NEWSLETTER - AUTUMN 2018

We welcome you to the Autumn 2018 edition of our newsletter.

Sparks are flying between major powers on trade issues (this time, not between the EU and UK, but Washington and Beijing). Markets are intrinsically unsettled and yo-yoing hysterically. And another populist is elected, starkly dividing a  nation  (Brazil).  But  what’s really new?
Privacy, in spite of the much feared GDPR, is compromised more by the day in practice, and the big boys (think mega global tech companies - and with the CRS, Governments) are eking their way further into our souls.

We are bracing for what is in store for the UK and the industry in the year 2019, but we retain some hope in the global political scene and believe sense somewhere, somehow has to prevail in 2019! Whatever your need, we can still find a safe home and solution for it.

In this issue we discuss the eclectic topics of ICOs in the BVI, use of offshore structures to own UK property as well as the incredibly strict rule on filing BVI directorships by 2019.

We will continue to assess the environment and share our insights with you with the articles below and welcome your comments.
Setting up ICOs in the BVI
Perhaps the most hyped means of raising capital in the current digital economy is the setup of ICOs. An Initial Coin Offering (ICO) is an offer for investors in units of novel cryptocurrencies or crypto-tokens in exchange for the quasi-mainstream currencies such as Bitcoin or Ethereum. This can also take the form of cash equivalent, credit or tokens used for buying goods and services within the blockchain platform, which is then applied as investments into the ICO.

Unlike   an   Initial   Public Offering (IPO) of public companies, ICOs do not offer an ownership stake in the company but a potential capital gain may be attained provided the new currency catches on – hence it is considerably high risk. However, as the innovative market does not appear to be saturated the popularity remains to be untethered.

It was recently reported that during the first half of 2018 the trading volume in crypto assets in the BVI had been valued at $78.5bn and the BVI continues to be one of the most sought after jurisdictions for setting up ICOs.

Below, we look at some of the regulations in place in the BVI which potential ICOs should take into consideration:

Business Companies Act

The flexibilities and advantages associated with BVI business companies are available to the ICOs with the BVI being one of the top jurisdictions in terms of its efficiencies towards financial capital. Some of the key advantages are:
•  tax neutrality and double-tax treaties with a number of jurisdictions;
•  corporate flexibility and efficiency provided in the Business Companies Act and other BVI corporate statutes;
•  no capital control or maintenance regulations (free flow of funds in and out of the BVI);
•  low incorporation and annual renewal costs;
•  comparatively less stringent continuing obligations for the officers and owners;
•  most ICOs do not fall into securities or IPO regulations under BVI law; and
• the political commitment and governance focus to remain as a leading financial services economy.


Securities and Investment Business Act

Although investment businesses in the BVI require a license from the BVI Financial Service Commission (FSC), it has been successfully argued that cryptocurrencies or tokens cannot be classed as investments under the SIBA. This is on the basis a digital token itself does not form a security or a derivative. As such there have been ICOs setup in the BVI legitimately carrying out business without an investment business license.

Similarly, whilst making a public offer needs to be placed upon a registered prospectus, if the digital token can be determined to be outside the scope of securities, they may be exempted from the requirement to have a registered prospectus.

Determining whether a digital token issued by an ICO can be considered a security or whether it is actually a derivative contract caught by the act requires professional legal advice on a case by case basis.


AMLTF, FATCA and the CRS

These regimes provide for cross-border tax compliance and preventing the circulation of criminally acquired funds between the participating and reportable jurisdictions. The Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) place onus on financial institutes to provide information about the ultimate beneficial ownership of structures. Generally FATCA and CRS come into play when a BVI business company issuing ICO starts its trading activities where the investors start realising potential gains in the value of the tokens.

The Anti-Money Laundering and Terrorist Financing (AMLTF) regulations on the other hand places onus on the issuers to verify and maintain customer identity information from an anti-money laundering perspective. It is noteworthy that the changes to BVI AML Code in 2018 facilitating the digital technologies provide a useful guidance which ICOs will certainly benefit from.

With the UK Parliament pushing towards public registers of beneficial owners, the leaders of the British Overseas Territories continue to resist the introduction of the public registers. The BVI delegation led by Dr Kedrick Pickering, have recently hired Stephen’s former employers, Withers, to prepare a legal challenge on the basis that the UK Parliament’s imposition of a public register of the beneficial ownership of companies goes against the sovereignty of the overseas territories.


Electronic Transactions Act 

The Electronic Transactions Act 2001 backs the recognition of electronic records providing it with legal validity in par with systems that are maintained in paper format. As an ICO is essentially a system that relies on electronic records and algorithms, the provisions of the Act on electronic signatures and record-keeping requirements is key to existing or planned ICOs.

Conclusion

Although no specific ICO or blockchain-specific rules or guidelines have been issued by the BVI FSC as yet, the growth in the number of ICOs in the BVI is impressive. The legislations facilitating ICOs and the provisions for digital exchanges make the BVI a sought after jurisdiction for potential new-age entrepreneurs.
How effective is investing in UK property through an offshore structure?

Traditionally, it had been the practice for foreign investors to hold investments in UK property through off-shore structures due to the tax-efficient nature of such a mode of investment. The tax regime applicable to the holding of property in the UK is the charge to Inheritance Tax (IHT) and Capital Gains Tax (CGT) and historically, these taxes applied to residents of the UK.
In this context, the tax-efficiency was derived from the fact that off-shore structures lay outside the scope of Inheritance Tax  (IHT) and Capital Gains Tax (CGT). Apart from the tax efficiency, this mode of holding investments also provided transparency required by those foreign investors. 
Capital Gains Tax

Imposed by the provisions of the Taxation of Chargeable Gains Act 1992 (TCGA92), it is a tax payable on the disposal of assets and is chargeable to persons resident or ordinarily resident in the UK on any chargeable gain accruing during the year of assessment (s. 2 of TCGA92). A non-resident company and which would be classified as a close company - a company which is under the control of 5 or fewer participators (per the definition in Schedule C1 Part 1 s.2 of the aforesaid act) - that had an individual shareholder/s resident and domiciled in the UK, would be treated as if part of the chargeable gain accrued to its shareholder (s.13 TCGA 92).

Inheritance Tax

Is a tax on the value of an asset transferred by a chargeable transfer, a chargeable transfer being a transfer of value which is not exempt by the provisions of the Inheritance Tax Act 1984 (IHTA84 sections 1 and 2). For the purposes of the applicability of this Act too the domicile, as stipulated in s.267 of the act was applicable.

Crucially, where property was settled in to a trust, the disposition of an interest in such property also gave rise to IHT.

However, it is becoming increasingly necessary to rethink this strategy, as over the last five years or so, structuring the holding of investments in this supposedly tax efficient manner is being gradually threatened by the various legislation that are being and continue to be enacted by the government seeking to align the taxation system that applies to UK residents with that applicable to foreign-resident investors.

It is therefore pertinent to analyse the tax regimes as they currently prevail and the future enactments that the government plans to introduce.


Changes introduced to the system of taxation over the last 5 years

The Annual Tax on Enveloped Dwellings (ATED) was introduced in 2013 (s.94 of the Finance Act of 2013), whereby a tax on dwellings with a taxable value of more than £2 million held by a company, partnership or collective investment scheme was imposed. In effect, any company, be it an off-shore structure as envisaged  above, or UK resident company that held an interest in a residential property as aforesaid was within the scope of the ATED system.
UK resident company that held an interest in a residential property as aforesaid was within the scope of the ATED system.

Thereafter, in 2015 (s.37 of the Finance Act 2015) the government extended the scope of tax on chargeable gains to disposals of residential property by non-residents and certain non-resident companies. Sometimes referred to by the acronym “NRCGT”, it sought to bring changes to the following: 
  • impose a charge on the gains of non-residents from disposal of interests in residential property,
  • in the case of non-resident corporate entities disposing of such property, to impose the charge on closely-held companies, but to exempt companies that meet a genuine diversity of ownership test, and widely marketed investment companies.
Both of the above forms of taxation fall under the regime of Capital Gains Tax (CGT), and as stated, applies only to residential property.

Therefore, in summary the current regime of CGT is chargeable only on residential property and is applicable to corporate entities that are controlled by 5 or fewer persons.

In order to closely align the CGT tax regime of UK residents with that applicable to Non-UK residents in relation to the holding of immovable property situated in the UK, the government seeks to introduce changes which it hopes would also reduce the incentive to use offshore structures, to be effective from 2019/20. This legislation will encompass the holding of interests in commercial property held by foreign individuals and companies, the disposal of interests in widely-held companies and the disposal of interests in property holding companies.

 
Changes to be introduced in the near future:

With regard to direct disposal of UK property there are two key changes to be introduced. The first change is that non-residents will become chargeable to CGT on disposals of commercial property. The second change will be the extension of the applicability of CGT to non-resident widely held companies, a widely held company being defined loosely as being under the control of more than 5 participators.

Where the non-resident person is a body corporate, then the gain on the disposal of the asset is chargeable to corporation tax at the rate of corporation tax prevailing at that date. For other persons such as individuals, trusts and personal representatives of deceased persons, the charge to CGT is in accordance with the normal rules at the rates prevailing. The current rate of corporation tax is 19% pa and is proposed to be reduced to 17% by 2019 and losses and gains will be applied in terms of available relief. The rate of CGT currently prevailing is 20% with personal allowances also applied. 

Apart from the above “direct” disposals, another form of disposal, known as “indirect” disposals are also introduced. Essentially, this is in relation to property holding companies set up to hold commercial property and are thus deemed to derive their value from property. In this context, the disposal of an interest in such an entity is to be brought into the scope of CGT. In this regard, to determine whether a disposal is in scope, it must be ascertained firstly, if the entity being disposed is “property rich” and secondly, if the non-resident person holds or has held in the past 5 years an interest of 25% or more in such entity. The determining factor as regards the property richness test is whether at the time of the direct or indirect disposal 75% or more of the value of the asset disposed of derived from land situate in the UK. Non-UK land is specifically excluded from this test.

 
Changes introduced by the 2018 budget
 
The government is to publish a consultation in January 2019 on a Stamp Duty Land Tax surcharge of 1% for non-residents buying residential property in England and Northern Ireland.

From 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to Corporation Tax, rather than being charged to Income Tax as at present.

All non-UK resident persons, whether liable to Capital Gains Tax or Corporation Tax, will be taxable on gains on disposals of interests in any type of UK land, for disposals made on or after 6 April 2019.

All non-UK resident persons will also be taxable on indirect disposals of UK land made on or after 6 April 2019.

The provisions relating to ATED-related Capital Gains Tax will be abolished.

 
How we can help?
 
Clearly, it is becoming increasingly difficult for tax-efficient structuring of investment holding in the UK. However, there still prevail other reliefs and measures available to corporate entities in the form of allowable gains/losses and deductions to corporation tax. We at Palladium are able to procure coordinated tax advice and planning through reputed third-party tax advisors on how best to plan and structure UK property holdings and also identify other tax-efficiencies still available. In any event, use of overseas entities may not reduce local taxes in the UK, however they can help with succession planning, peace of mind, tax neutrality (say, as between family members resident in a mix of taxed and untaxed jurisdictions) and, of course, some confidentiality.
BVI - Companies not filing the register of directors getting struck-off
The BVI Financial Services Commission (“BVIFSC”) has reiterated that companies who do not complete the register of directors (“RODs”) by 31st December 2018 will be struck off the register. the Financial Services Commission of the BVI introduced an amendment to the BVI Business Companies Act requiring the mandatory filing of a register of directors (ROD) with the registrar of Companies. This law came into effect in December 2015 and granted a “grace period” up to 31st March 2017 for existing companies to comply and file their RODs.
 
In addition, the penalties levied on companies that have not completed the RODs filing have been amended to US$1,000 for each month or part thereof that the failure to complete the register continues, up to a maximum of US$5,000 per company. 
 
The RODs filed with the Registrar are not available to the public, and will only be available to competent authorities. 
The amendments to this regulation include, where the existing company failed to comply by 31st March 2017, the penalties applicable for each month of default thereafter was liable to a maximum penalty of up to $5,000. Companies incorporated after December 2015 are mandatorily required to file their RODs within 14 days of the appointment of their first directors, and any changes that occur thereafter must be notified to the Registrar within 21 days.
Failure to file a copy of the ROD and failure to file changes to the particulars both carry a penalty of $100 each.
 
Further, if there is failure in compliance by 31st December 2018, a company risks being struck off the register. In such an event, the company’s directors, members and any liquidators or administrators will be forbidden to act for the company in any way.
 
As of  the 1st of October 2018, a company that has failed to comply as aforesaid will no longer be able obtain a certificate of good standing from the registrar. Please contact us urgently if you think this may affect a company which concerns you.
Below are some article links for updates on these and other subjects.

Wishing you a wonderful end to 2018 ahead,
 
Stephen

We strive to deliver excellence at reasonable cost.

While the offshore world faces challenges and is subjected to more scrutiny than ever before, Palladium’s commercial ethos is centred on due compliance as well as efficiency and robustness in the delivery of its services.
 
We hope that you find our website a helpful and informative introduction to our services. Please contact us if you have any questions.
More articles:

New benchmark set by Danske Bank money laundering debacle?:
https://www.dw.com/en/danske-bank-money-laundering-is-europes-biggest-scandal/a-45584105

Is the EU Becoming More Unilateralist?:

Mauritius central bank cautious on moves into Africa:
https://www.ft.com/content/e9726432-8436-11e7-94e2-c5b903247afd

Overview of BVI trusts which can have unique VISTA characteristics:
http://palladiumadvisors.net/images/documents/BVITrusts2018.pdf

Guideline on the ever popular New Zealand trusts:
http://palladiumadvisors.net/images/documents/NZTrustsIWS.pdf

Jersey is first to post on implementing economic substance rules:
https://www.gov.je/News/2017/Pages/JerseySignsOECDConvention.aspx

Passport shopping alleged to be the latest ill in international tax schemes:
https://www.theguardian.com/business/2018/oct/16/tax-evasion-oecd-blacklist-of-21-countries-with-golden-passport-schemes-published

Only six relative unknown jurisdictions have failed the mark set by the EU. Time to look inward rather than at the small players in the international financial fight against crime:
https://pacificnewscenter.com/guam-still-on-eu-tax-haven-bblack-list/

 
Read More
 
with the offshore fiduciary market, and our onshore commercial background in the City, have convinced us that we provide a unique and valuable service.
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