British political drama continues with the launch of campaigns towards general elections.

Regulatory changes  are being implemented in the popular international finance administration jurisdictions as knock on effects of economic substance requirements have yet to be realised. However economic substance consideerations remain at the forefront of corporate and private wealth structuring services news.
In this issue we look at some of the substance requirements set out in the BVI, and their impact on the industry. Many of the popular jurisdictions including the British Crown Dependencies and British Overseas Territories have introduced their versions of the requirement for establishing economic substance in their jurisdictions.  We also revisit capital gains tax in offshore jurisdictions and explore 2 contrasting jurisdictions - Switzerland and Barbados - in the wealth structuring arena.
As always, we welcome your comments and look forward to hearing from you on your thoughts around these developments.
Swiss Chocolate
Have you ever wondered why the Swiss have such a good reputation? 
Swiss watches, Swiss army knives, Swiss chocolate etc, the byword for quality and integrity some immediately think.
For many the name Switzerland might evoke associations of unspoilt, fundamentally safe  Alpine scenery on a summer’s day, and rural folk that seem as happy as the cows. Perhaps they are eating Swiss chocolate too.
But how is chocolate ever Swiss? The cocoa, the fundamental ingredient of Swiss chocolate, has likely been grown and harvested somewhere in West Africa thousands of miles away under often dubious economic and working conditions. 
Oh, and the same often applies to the sugar used in the chocolate. You could grow the cocoa indoors in Switzerland but that would be just over the top and not likely in line with environmental sustainability!
If there’s something which hurts Swiss interests even though the Swiss have recently agreed to the contrary (as in this new referendum) – no worries, we’ll just hold another referendum. People want to limit immigration – ok, this is contrary to the global zeitgeist, but we will hold a referendum ("anti-mass immigration law", now law, since 2014)! 
The country is divided into and managed in small, easily digestible pieces  - 26 of them – and if there’s an issue, well, everyone gets to vote! You can’t change the constitution without one (since 1874).
No need to wait for political party protocol - look at how this could play out in the UK. No need to wait up to 5 years at a time to vote and even then political parties’ menus offer limited fixes at best. 
What if I’d like nuclear disarmament, free hospital services for all to be better funded fused with avowedly capitalist, small scale governance? You can’t vote for three parties at once in most countries but in Switzerland you get to vote on anything that matters. Democracy stems from the Greek meaning ‘power to the people’. 
Surely Switzerland is the wiliest, soundest, most nimble player in the global market place – and it knows how to take care of its shareholders by listening and giving them the force to change if that’s what they really want. 
Why do I mention this? In February 2017 the Government was unable to push through a ban on sweetheart deals for multi-nationals. Why? The residents thought it would make their country less competitive as companies would move -leaving residents to pay more tax! Well the Swiss are voting again very soon, probably they will push through the reforms now, but with a less penalising net effect on its citizens. Isn’t this great?
What’s even more eye-opening is that the Swiss supreme court this year overturned a referendum (on taxation for married couples being unfairly levied). Why? The public wasn’t properly informed before the vote. Where is the UK’s such deus ex machina to save us from leaving the EU on such hideous terms. Would any reader like to wager that a new referendum on ‘Brexit or no Brexit’ would attract much more than 35% in favour? And yet the UK is stuck in the slowly moving proverbial mud, inching its way towards further ignominy. 
Switzerland is a diamond in the rough landscape of a stagnating Europe and I dearly hope the Swiss vote to give themselves the freedom to choose the taxation system it wants for itself. 
If you haven’t been before, it’s a beautiful country which ‘works’ on both levels, and expect that one day very soon we will have a base there to help clients structure their assets in a place which makes sense in the incongruous din of 2019 geopolitics.
Capital Gains Tax on Offshore Structures REVISITED
Following on from the article in our Autumn 2018 newsletter under the caption ‘How effective is it to invest in property in the UK through an off-shore structure?’ - on the topic of the UK Government’s proposal to introduce extensive changes to the Capital Gains Tax (CGT) regime - the Finance Act 2019 (the Act) is now in force implementing those changes.

Utilising international tax rules that grant the state the right to tax gains and income deriving from its immovable land and to be consistent with systems of taxation employed in major jurisdictions, the UK Government has introduced these extensive rules to apply to non UK residents, whilst also being commensurate with the system that applies to UK residents and introducing measures to counter anti-avoidance of CGT taxes.

It is anticipated that the new and old rules on CGT would be aligned for a more coherent system between the taxation of UK residents and non-residents, and for the purpose of coordination between the two systems, the Act brings into charge the taxation of both residential and commercial property disposals.

Since the commencement of the currently prevalent CGT regime introduced by the Taxation of Chargeable Gains Act 1992, the scope of applicability in relation to non-UK residents extended primarily to disposals of residential property, with limited applicability on disposals of commercial property by non-UK residents.

Later introductions of concepts relevant to non-UK resident persons, such as the ATED  and NRCGT regimes, also only extended to disposals of residential property, albeit bringing within its purview significant changes effective since April of this year include the charge to Capital Gains Tax (CGT) of non-UK residents on their disposal of ‘interests in UK land’ , the inclusion of non-residential property and the disposal of interests in UK property-rich entities, thereby widening the scope of immovable property disposals.

It has also abolished the charge to tax on ATED-related gains, bringing non-UK resident companies into charge to corporation tax on their chargeable gains instead.

Apart from this, other changes include that UK residents will be charged CGT on chargeable gains made on disposal of assets wherever situate, and UK resident companies are to be chargeable to corporation tax - instead of to CGT – on chargeable gains made on the disposal of assets.
Within its purview non-UK companies, partnerships and collective investment schemes in respect of the ATED regime, and excluding certain investment companies and unit trusts that were not open-ended. The NRCGT scheme also excluded diversely-held companies, widely-marketed offshore funds, open-ended investment companies or authorised unit trusts from within its ambit. 
Historical background on applicability of CGT on non-resident persons and companies

Non-resident persons
The significant basis for liability to pay CGT on the disposal of an asset was a person’s residence in the UK, which included residency during any part of the tax year when the chargeable gain accrued to the person. All forms of property, whether situated in the UK or worldwide, were deemed to be assets for the purpose of applicability of CGT on their disposal.

Liability to CGT arose on a disposal if the person carried on a trade in the UK through a branch or agency, and the asset disposed was used in or for the purposes of that trade .

Non-resident companies
Profits of a property business were chargeable to income tax . The property business could be both a UK property business carried on by a non-UK resident generating income from land in the UK, or an overseas property business carried on by a UK resident generating income from land outside the United Kingdom.

Similarly, a non-UK resident company that carried on a trade in the United Kingdom through a permanent establishment in the United Kingdom, which derived income from property, was chargeable to Corporation Tax .

In relation to a chargeable gain accruing to a non-UK resident close company , its UK-resident shareholders holding more than one twentieth of its shares were chargeable as if part of the gain accrued to them, the holdings being equal to the proportion of the assets of the company to which that person would be entitled on a liquidation of the company. However, where any amount of such gain was distributed to its shareholders, by way of a dividend or capital or on the dissolution of the company, within two years of it accruing, CGT was not applicable. 

The concept of annual tax on enveloped dwellings known by its acronym ATED was introduced in 2013. Charged on companies, partnerships and collective investment schemes, whether they were based in the UK or off-shore, ownership of an interest in a single-dwelling interest  with a taxable value of more than £2 million made such entities liable under the ATED rules. Due to the subject-matter of the ATED regime being a residential property valued at £2 million, the disposal of such a property was categorised as a high value disposal and certain rules on computation were applied. Thus, the definitive distinction was made for charging CGT on gains accruing from disposals of residential property.

ATED related gains by companies on high value disposals were chargeable to CGT, and not corporation tax, as was the case with other chargeable gains accruing to companies. 
Individuals, trustees of a settlement or the personal representatives of deceased persons were excluded from capital gains tax in respect of an ATED-related chargeable gain if the gain related to the disposal of a partnership asset of which the relevant person was a partner, or it was a disposal of an asset held for the purpose of a collective investment scheme and the person was a participant in  the scheme. 
Provision was made for the statutory residence and ordinary residence test to determine residency for CGT and other tax purposes.

The Finance Act of 2015 reiterated the charge to CGT of gains made by companies which are ATED related  and created the concept of Non-Resident Capital Gains Tax (NRCGT). It refers to the disposal of a UK residential property interest. Interest being defined more widely to include an interest under a contract for an off-plan purchase, by an individual not resident in the United Kingdom. Where previously, a person not resident in UK was charged to CGT in respect of a chargeable gain accruing during any part of which he was resident in the UK, the concept of NRCGT differed in that it applied where the individual (or Trustee or PR of a deceased person) disposing the interest was not resident in the UK in a tax year in question but the gain would be deemed to accrue in the overseas part of the tax year, which is a split year as respects the individual. UK situate assets used in or for the purposes of a trade or held for the purposes of a branch or agency by a non-resident were excluded to differentiate such disposals from the NRCGT regime.

Persons stipulated as being ‘eligible’ were able to make a claim to be exempted from CGT on their NRCGT gains. Those persons were diversely held companies, schemes  and life assurance businesses.

It was the position until the budget of 2018 that no CGT was applied to disposals of commercial property by non-UK residents, disposal of interests in land by widely-held non-resident companies nor the taxing of disposal of entities that derived their value mainly from UK property.

New rules introduced on applicability of CGT on non-resident persons and companies

Non-resident persons
Whilst the previous status of a non-UK person’s charge to CGT on disposals of assets with a relevant connection to the person’s UK branch or agency is restated in the new Finance Act, additionally, new facets of asset disposals were introduced. They are the disposal of assets that are ‘interests in UK land’ , and worldwide assets that derive at least 75% of their value from UK land where the person has a substantial indirect interest in that land; the latter being “property rich entities”.
An asset is defined as deriving at least 75% of its value from UK land if the asset consists of a right or an interest in a company, and at the time of the disposal, at least 75% of the total market value of the company’s qualifying assets  derives (directly or indirectly) from interests in UK land. 

Non-resident companies
Previous provisions in relation to the disposal of assets that have a relevant connection to the company’s UK permanent establishment being chargeable to CGT were restated once again by the new Act. As a means of aligning the rules on applicability of CGT to disposals by companies with those applicable to individuals, the same rules on the disposal of ‘interests in UK land’ and the rules on deriving 75% of value from UK land are also extended to companies.
It is to be noted that in the case of non-UK resident close companies, the intention is to impose the charge on gains that accrue where the gains are connected to avoidance, but to exempt companies that meet a genuine diversity of ownership test, and widely marketed investment companies.

CGT regime applicable to Collective Investment Schemes
A framework is outlined for the specific application of the CGT rules to disposal of assets connected to collective investment vehicles (CIV’s).

Described as indirect disposals due to the disposals not being from a person’s or company’s own ownership of assets, the rules are applied to disposal of assets (wherever situated) that derive at least 75% of their value from UK land and where the person or company has a substantial indirect interest in that land. These are disposals of assets pertaining to “property rich” vehicles used in real estate investment activities and broadly, they cover such investment activities carried out by specially constituted funds and companies.

A CIV includes a collective investment scheme, or a company which is resident outside the United Kingdom and meets the property income condition.

A company meets the property income condition if -
  • it is a widely-held company i.e. having more than 5 participators,
  • is deemed to be a close company i.e. having less than 5 participators due to there being a “qualifying investor” as a direct or indirect participator; a qualifying investor includes a foreign incorporated open-ended investment company, 
  • at least half of its income is property income from long-term investments, 
  • it distributes all, or substantially all, of its property income from long-term investments and does so on an annual basis, and
  • it is not liable to tax on that income under the law of any territory in which it is resident.

Specifically, an “offshore collective investment vehicle” can be a CIV constituted as a body corporate – other than a limited liability partnership – which is resident outside the UK, a CIV under which property is held on trust for the participants where the trustees of the property are not resident in the UK, or a CIV constituted by other arrangements that create rights in the nature of co-ownership under the law of a territory outside the UK.
Where a person disposes of an asset deriving 75% of its value from UK land and such disposal has an ‘appropriate connection’ to a CIV, the person is chargeable to CGT. 

Under an operative clause, where the components enumerated above are present, the person is treated as having a substantial indirect interest in the land, thereby excluding from within its remit minority interests of persons holding less than 25% of investment in the company.
An ‘appropriate connection’ to a CIV can take the form of –
•  entities will be considered as carrying relevant activity during the financial period during which it receives income from that activity (Rule 3).
•   a right or interest in a CIV,
•  a company at least half of whose market value derives from its being a direct or indirect participant in one or more CIV’s,
•   the vehicle takes the form of a partnership business and the disposal is made by a person as a participant of the vehicle,
•   the vehicle is a company and the company makes the disposal,
•   the disposal is made by a company, not being the vehicle itself, and the vehicle and other CIV’s that are UK property rich, have a 50% investment in the company.

Where however, the relevant disposals by CIV’s or companies meet the following conditions, they will not be deemed as having an appropriate connection to a CIV or company under the framework:
•   where the relevant disposal is by a vehicle then, by virtue of its prospectus, if 40% of the expected market value of the vehicle’s investments is intended to derive from investments consisting of interests in UK land, or rights or interests in companies which are UK property rich, there will not be an appropriate connection to a CIV;
•   in the case of a company, if it is widely held i.e. with more than 5 participators, or is a close company (with less than 5 participators) but only because it has a “qualifying investor” – qualifying investor includes a foreign incorporated open-ended investment company - as a direct or indirect participator;
•   in the case of a fund, it is a widely-marketed fund. 

Offshore CIV’s and companies can elect to be exempt from corporation tax on chargeable gains if they are able to satisfy the criteria laid down for enabling the exemption. This exemption has effect subject to providing information or documents to an officer of Revenue and Customs in relation to the disposals, with the information being provided within 12 months from the end of the period of account for the entity.

Transparent offshore funds will default to being opaque for tax from the perspective of non-UK resident investors. This will include commonly used entities such as Jersey Property Unit Trusts, which were a particular focus in the consultation stage prior to the Act being passed in parliament. They will, however, be able to elect to be treated as transparent. The treatment from the perspective of UK resident investors will not change.

Transparency would mean that investors in these funds would be treated in the same way as partners in a partnership under the new rules: they would be making a direct disposal of the underlying UK property. The indirect disposal rules would therefore not apply.

From the perspective of a non-UK resident investor, the acquisition and disposal values would be based on the value of the UK land, not the value of the interest (such as units) in the fund. In many cases these values will be the same, but where units are bought or sold on the secondary market the values may differ. Respondents to the consultation noted that funds will regularly value their property assets, so these amounts should be known. Transparent offshore funds will also be eligible for inclusion in the special tax treatment that exempts gains by the fund and structure, and taxes the investors on disposals of their interest in the fund, using the value of the interest rather than the underlying asset.

Outlined within the measures are anti-forestalling rules that would be brought into force to prevent taxpayers moving their investments to take advantage of Double Taxation Treaties where the UK does not have taxing rights over non-UK residents’ gains.

The measures introduced by the Government are collectively geared towards discouraging the indirect holding of investments in UK property and abolition of what it perceives as an unfair advantage to non-UK based individuals and entities over resident individuals and companies. Nevertheless, the need for structuring and setting up of off-shore entities, whilst mostly based on tax-efficiency, could also be due to other factors and considerations. It is to be said that within the new CGT rules there are reliefs available and benefits to be gained by entities, which with appropriate tax planning and accountancy advise, will ensure a just system that provides uniformity, certainty and fairness.

At Palladium, with our pool of third-party professionals and intermediaries in different fields, we can assist with structuring, tax planning and accountancy advice.
BVI Economic Substance Guidelines Published
We have been receiving a number of queries from clients about the impact of the economic substance legislations introduced by the BVI in December 2018 on their wealth structuring considerations – here’s our take based on the draft code issued by the BVI International Tax Authority (ITA) in April 2019 and the subsequent guidelines issued in August 2019.

The most important revelation perhaps is that BVI investment funds are outside the scope of the economic substance dragnet unless they carry out other relevant activities.

Other notable points from the draft Code include:
•    entities will be considered as carrying out relevant activity during the financial period during which it receives income from that activity (Rule 3).
•    the initial financial periods for new entities (formed since 1 Jan 2019) is deemed to be 12 months from the date of formation; and for existing entities (formed before 1 Jan 2019), the initial financial period is deemed to be 12 months from 30 Jun 2019 (Rules 14 to 18).
•    whilst entities conducting financing and leasing business are considered to be carrying out relevant activities, businesses may provide credit as an incidental part of another type of business without being ruled as a financing and leasing business (Para 47).
•    entities which hold debt or debt instruments for the purposes of investment are not considered as engaged in the business of providing credit facilities and hence are outside the scope of financing and leasing business (Para 48).
•    Ownership by an entity of any investment other than equity participations will mean that it is not a pure equity holding entity. (Para 60)

A list of relevant activities are stated in the legislation. These include:
  • Banking business
  • Insurance business
  • Fund management business
  • Finance and leasing business
  • Headquarters business
  • Shipping business
  • Intellectual property business and
  • Distribution and service centre business
Whilst pure equity holding companies are also required to demonstrate economic substance, there a lowered threshold of substantiation is expected from pure equity holding companies.

As you may be aware, the rationale for jurisdictions such as the BVI, Bahamas, Cayman and Mauritius introducing the economic substance requirements were among other things, pressure from the EU Code of Conduct Group (Business Taxation) (CCG) and the Organization for Economic Co-operation and Development (OECD) against “harmful tax practices” and base erosion profit shifting practices (BEPS). BEPS refers to tax avoidance strategies targeted at exploiting mismatches in tax regulations within different jurisdictions, by means of artificial shift of profits from higher tax jurisdictions to low/no tax jurisdictions without actually operating any material business within the low tax jurisdiction.
Earlier in 2019, six international financial centres (IFCs) were branded by the CCG at risk of harmful tax jurisdictions – Barbados, Belize, Curaçao, Mauritius, Saint Lucia and Seychelles – advising them to make a high-level commitment to counter the preferential regimes, without introducing provisions to reduce the impact on non-resident businesses. Barbados has since been removed from the list.
The twelve jurisdictions placed on the EU blacklist are American Samoa, Belize, Dominica, Fiji, Guam, the Marshall Islands, Oman, Samoa, Trinidad and Tobago, UAE and the US Virgin Islands.
Below are some article links for updates on these and other subjects.

Wishing you a joyful Christmas!

Palladium team
More articles:

Bahamas follows Barbados’ suit with domestic reform to please the OECD:

CRS is a net income negative exercise in reality:

Law Society guidance to solicitors on helping clients evade tax:

New Zealand Limited Partnerships as Vehicles for Private Equity:

OECD measures effective, but what about the big boys?: 

Palladium Guide to BVI Mutual Funds: 


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