Tag Archives: Tax

Jordan Income Tax Law Reform

Jordan’s new Income tax law number (34) of the year 2014 (published in the official gazette) is put in force as of January 1, 2015. Major changes included in the new tax law related to capital market gains are the following:

  • The new tax law included some changes regarding the withholding tax related to income from investment, and any other non-exempted income paid by a resident directly or indirectly to a non-resident person. Article (12/B) of the new income tax law, states the following: “Every person responsible for the payment of a non-exempted income, directly or indirectly to a non-resident person shall at the time of payment deduct tax at the rate of (10%), He shall also prepare and submit to the Income Tax Department, and the beneficiary a declaration of the amounts generated and the tax deducted.
  • The amounts deducted in accordance with Para (1) above can be considered as final taxes in accordance with the instructions issued thereto”.

It is worth mentioning that the amendment to this provision raised the withholding taxes from (5%) to (10%), taking in consideration the above article includes interest income generated from investments and any other non-exempted interest income paid by a resident directly or indirectly to a non-resident person including coupon interest payments of government and corporate bonds.

Para (H) of the same article states that the person responsible for deducting taxes related to article (12/B) above shall deduct and pay the withholding taxes within (30) days of payment date, The tax that has not been deducted and paid shall be recovered and collected as if it were tax due from such person.

Para (I) of this article also referred to instructions that will be issued to set procedures and provisions necessary to enforce this article. The said instruction has not been issued yet.

The new tax law kept the following activities exempted from tax, and added to those exemptions income derived from trading of Sukuk instruments:

  • Profits from stocks and dividends distributed by a resident to another resident, except profits of mutual investment funds of banks and financial companies, telecommunication companies, insurance, financial services companies. Exempted from taxes.
  • Capital gains incurred inside the Kingdom, other than profits from assets subject to depreciation.
  • Income derived from inside the kingdom from trading in dividends and stocks, bonds, equity loan, sukuk, treasury bonds, mutual investment funds, currencies, commodities in addition to futures and options contracts related to any of them, except that incurred by banks, financial companies, financial intermediation and insurance companies and legal persons who undertake out financial lease activities.
  • Personal exemption of 12,000 Jordanian dinar (JOD) – provided they stay in Jordan for more than 183 days during the calendar year (continuous or interrupted)
  • Family exemption of JOD 12,000 – provided the family stays in Jordan for more than 183 days during the calendar year (continuous or interrupted.)
  • Monthly retirement benefit exemption of JOD 3,500 – down from JOD 4,000 under the old Law
  • Additional personal and family exemption of JOD 4,000 on medical expenses, university education expenses and interests paid on housing loans, housing rent, technical services, engineering services, and legal services.
  • For the additional personal and family exemption, supporting documents and invoices must be available, and the exemption is granted case-by-case basis following the Income Tax Department’s review of the supporting documents.


Withholding tax for non-resident services providers is increased to 10 percent (up from 7 percent.

The 5 percent withholding tax on real estate rent has been abolished.

As of 1 January 2015, certain service providers are subject to a 5-percent retention, including doctors, lawyers, engineers, Certified Public Accountants, experts, consultants, insurance agents, custom clearing agents, arbitrators, speculators, agents and commission brokers, financial brokers, freight forwarders, and other persons specified by the Minister of Finance in related regulations.

The withholding tax on cash and in-kind prizes and Jordanian Lottery winnings in excess of JOD 1000 per each prize is increased to 15 percent (from 10%).

In-kind and in-cash dividends are not subject to withholding tax when paid by a resident to a non-resident party.


Corporate taxpayers that had annual total gross income over JOD 1 million (previously JOD 500,000) in the preceding tax year are required to pay interim corporate tax payments at a rate of 40 percent of the corporate income tax liability calculated based on the reported interim financial information related to the interim period (previously 37.5 percent), or 40 percent (previously 37.5 percent) of the income tax amount declared to the tax authority in the preceding tax year. These payments are due within 30 days from the end of the first half and second half of the fiscal year.


Under the new law, approved losses can be carried forward for up to 5 years (the period was unlimited in the previous law).


Monthly social security contributions increased to 20.25 percent (from 19.50 percent), as of 1 January 2015, implemented as follows:

The employees’ monthly contribution increased to 7 percent (from 6.75 percent).

The employer’s monthly contribution increased to 13.25 percent (from 12.75 percent).


An exemption has been granted from penalties and fines related income tax, sales tax, customs duty, stamp duty and property tax1. The exemption covers penalties related to the tax years 2014 and before, provided that taxes and duties claimed have been fully settled before 31 March 2015. Such exemption is reduced to 75 percent if the amounts are fully paid during the period from 1 April to 30 June. From 1 July 2015 to 30 September 2015, the penalties are phased out at 50 percent.


Jordan’s Renewable Energy Law2 is amended to include a full exemption from sales tax and customs duty on the renewable energy inputs, including spare parts and equipment.

Treaties for the Prevention of Double Taxation

Jordan has signed agreements for the prevention of double Taxation with Austria, Bahrain, Belgium, Canada, Cyprus, Denmark, Egypt, France, Iraq, Kuwait, Libya, Malaysia, Oman, Pakistan, Qatar, Romania, Saudi Arabia, Spain, Syria, Tunisia, Turkey, United Arab Emirates, United Kingdom, the United States and Yemen.

Snapshot of the New Tax Law:


  1. For individuals

– A tax free threshold of JD12, 000 for individuals, the same as the previous law.

– A further JD4, 000 exemptions is also added if supported by invoices of expenses related to medical services, and interest paid on housing loans.

– 7 percent tax for the first JD10, 000 above the exempted JD12, 000. In the previous law, the first JD12, 000, after the exempted amount, was subject to a 7 percent tax.

– Under the new law, a second bracket has been created with the second JD10, 000 subject to a 14 percent tax. There will further be a 20 percent tax for individuals who earn above this.

– This is compared to the previous tax law, which entailed a tax of 14 percent on any sum above the first taxed JD12, 000.

– The new law provides a tax free threshold of JD24, 000 for a household’s combined annual income, plus the JD4, 000 exemptions on expenses related to medical services and interest paid on housing loans.

  1. For businesses?

– Banks: 35 percent income tax (up from 30 percent)

– Industrial sector: 14 percent levy on every JD100, 000 generated, which rises to 20 percent on every JD1 above that amount. (The same as the previous law)

– Telecommunications, electricity distribution, mining, insurance, brokerage, finance and companies or persons who provide rental and leasing services: 24 percent tax on every JD1 earned

 Agriculture: Totally exempt from tax (Previously 14 percent tax after the first JD75, 000)

– Other businesses and partly owned government entities: 20 percent tax (up from 14 percent tax)

New tax exemptions for companies owned by employee ownership trusts

A strong economy requires, amongst other things, the use of a diverse range of business models. Once an under-used business model, the employee trust model of ownership has received a boost in recent years with support from the UK Government, including the introduction of new tax exemptions.

The growth of employee ownership

Employee benefit trusts or “EBTs” have commonly been used in the UK to act as a warehouse for shares in a company operating a share or share option plan and, in the case of private companies, for creating an internal market enabling employees to buy and sell shares in their employer company. EBTs were also used in tax avoidance structures during the 1990s and early 2000s – it is because of these structures that the UK tax authority, HM Revenue & Customs, can view employee trust arrangements with some suspicion. But another use is now proving popular, with support from the UK Government. This is where a business is owned collectively for the benefit of all those working in it through an employee ownership trust. In this article, “employee ownership” means:

a significant and meaningful stake in a business for all its employees. If this is achieved then a company has employee ownership: it has employee owners” (The Nuttall Review of Employee Ownership, Business of Innovation and Skills, 2012).

For decades, direct share ownership by employees has been promoted in the UK through a variety of tax-advantaged share and share option plans. Employee trust ownership is also a tried and tested method of running and sustaining a successful business. John Lewis Partnership, one of the UK’s biggest retailers, is a great example. It is wholly owned by an employee trust and all of its 93,800 permanent staff are beneficiaries of the trust. Notwithstanding such success stories there has been a distinct lack of awareness of the employee trust ownership model until recently. Hard work and perseverance by interested stakeholders has succeeded in raising awareness of employee trust ownership. In particular, in 2014, the UK Government confirmed its commitment to support employee ownership trusts in a tangible way with the introduction of new tax exemptions.

Capital gains tax exemption

As in many other jurisdictions, any capital gains made in respect of the sale of shares in a company by individuals are subject to tax (“CGT“). In the UK, the rate of CGT can be up to 28% depending on the facts.

The UK Finance Act 2014 introduced a complete exemption from CGT arising in connection with the sale of shares to a new type of trust, an “employee ownership trust” or “EOT”. An EOT is essentially a particular type of EBT which has less discretion as to, for example, how trust property can be applied in favour of the beneficiaries. There are a number of conditions that need to be satisfied in order for the exemption from CGT to apply. The exemption does not apply to disposals of shares by a company. The other main conditions are as follows:

  1. Trading company: the company whose shares are being disposed of (“C“) must be trading or the parent company of a trading group (i.e. the exemption does not apply to the sale of shares in investment companies). This requirement must be met at the time of the disposal and for the remainder of the tax year (from 6 April to 5 April the following year) in which the disposal falls;
  2. All-employee benefit requirement: the EOT must not permit:
    • any property in the trust (at any time) to be applied otherwise than for the benefit of all employees of C and any group companies (subject to some limited exceptions) on the same terms;
    • the trustees of the EOT to apply any trust property:
      • by creating a trust; or
      • by transferring property to the trustees of any settlement other than, broadly, another EOT;
    • the trustees to make loans to any beneficiaries; or
    • permit the terms of the EOT to be amended in such a way as to permit any of (a) to (c) above,

and this requirement must be met at the time of the disposal and for the remainder of the tax year in which the disposal falls; and

  1. Controlling interest requirement: as a result of the disposal (or an earlier disposal in the same tax year), the EOT gained a controlling interest in C. “Control” for this purpose means (broadly) the EOT owns more than 50% of the ordinary shares of C, has the majority in voting rights in C, has the right to more than 50% of profits of C available for distribution and is entitled to more than 50% of C’s assets available for distribution on a winding up.

Income tax exemption

Bonus payments made in the UK from employers to their employees are generally subject to income tax (at rates of up to 45%) and national insurance (social security) contributions. The second tax exemption introduced by the Finance Act 2014 is an exemption from income tax (but not national insurance contributions) on qualifying bonus payments of up to £3,600 per employee per tax year. This business model provides a tax benefit to the business and its employees. As with the CGT exemption, certain conditions must be met in order for the income tax exemption to apply.

The main conditions for making a qualifying bonus payment by employer (“E“) are as follows:

  1. Discretionary bonus: it must not consist of regular salary or wages;
  2. Participation requirement: all individuals employed by E or another group company when a payment is made must be eligible to participate in the scheme pursuant to which the payment is made;
  3. Equality requirement: every employee must participate in the scheme on the same terms;
  4. Trading: E must be trading;
  5. Controlling interest requirement: an EOT must “control” E (see above); and
  6. All employee benefit requirement: such EOT must meet the all-employee benefit requirement described above.

The conditions in 5. and 6. above are together known as the “indirect employee-ownership requirement” which must be met throughout the period of 12 months prior to a qualifying bonus payment being made or, if less, the period of time since conditions 5. and 6. were first met in respect of E.

The future of employee ownership in the UK and around the world

Whilst the two new tax exemptions are welcome and go some way to putting employee trust ownership on a par with the tax advantages for direct employee share ownership, tax, of itself, should not drive business structuring. Employee ownership is a tried and tested business model in the UK. Businesses such as the John Lewis Partnership are proof of this. This is what should attract attention to this ownership model. Of course, the new tax exemptions certainly serve to raise the profile of this under-used business model.

Although these new tax exemptions are only relevant to UK tax payers, there is scope for promoting the employee trust model of ownership in other jurisdictions. One of the benefits of employee trust ownership is its flexibility. It can work at every stage of the business life cycle, not just as a business succession solution, and across companies of all sizes and in all sectors.

Tax Regulations in Panama: The Place to Invest In The Americas

Panama is a country located in the center of the Americas, with a republican, democratic and participatory political system, based on principles of rule of law and free enterprise. It has an extraordinary hotel and tourism infrastructure, as well as an international financial center, which together allow the satisfaction of anyone visiting our country.

Its tax system is based on the principle of territoriality. Only the income generated within the country will be subject to income tax, and the income of foreign source is exempt. Panama meets all international standards in taxation. It is the most favorable place to invest in the Americas. It is the hub to develop multiple business in the region. Here are some of its tax advantages:

Income Tax

It is determined by applying to the annual income declaration of taxpayers, the traditional method or the alternative income tax method (minimum tax). The method used is the one that results in the highest amount.

Under the traditional method, the net taxable income is taxed at a rate of 25%. This income will be the result of deducting from the gross income, exempt or non-taxable income and the costs, expenses and deductible expenses (traditional method).

The alternative income tax method will apply only to entities whose taxable income exceeds USD$1,500,000.00. Therefore, the 4.67% of the net taxable income will be paid according to the 25% tariff. The taxpayer may request not to apply this method in case it incurs in losses or the effective tax rate exceeds 25%.

Individuals will pay tax at a rate of 15% after the tax allowance of USD$11,000.00 to 50,000.00 and the surplus at a rate of 25%.

Dividends tax

When a corporation distributes profits generated in Panama to its shareholders, it must retain the tax at a 10% rate. Income generated from sources outside Panama are subject to a 5% withholding.

There will be no withholding when the entity distributes profits that are generated from profits, as long as the juridical person that distributed such profits made the withholding and paid the corresponding tax.

The withholding will not apply over the portion of income generated from profits, as long as the juridical persons that made the distribution is exempt of withholding or has paid the corresponding tax in other jurisdiction.

The taxation regime provided in treaties to avoid double taxation entered into by Panama with other countries will always prevail.

However, due to the inexistence of a legal obligation to distribute profits periodically, in the event profits are not distributed or less than the 40% is distributed, likewise a tax rate of 10% will be applied over the income of the taxpayer after the payment of the income tax (complementary tax).

Notice of operation tax

To do business in Panama companies require a Notice of Operation, except those exempt by law. Annually there is a 2% tax tariff of the net assets of the company, with a minimum of USD$100.00 and a maximum of USD$60,000.00 payable as notice of operation tax.

Companies located at free international commerce (such as the Colon Free Zone or any other free zone established or created in the future), will not be subject to the notice of operation tax, unless special law provides otherwise, but will pay 1% over their annual income, with a minimum of USD$100.00 and a maximum of USD$50,000.00.

Capital gains tax

The transfer of shares or real property, that do not constitute the ordinary business of the taxpayer, will be subject to a capital gains tax at a rate of 10%.

For a sale of shares, bonds or other securities issued by legal entities, the buyer will retain 5% of the transfer value as advanced payment of the tax and will pay such tax to the Tax Authorities. The seller may consider the advanced payment as a definitive tax or request a reimbursement of the surplus, if he considers that the amount retained exceeds the tax applied over the capital gain at a rate of 10% or the recognition of a tax credit to pay other taxes.

In the sale of the real property, the withholding by the buyer will be of 3% over the selling price and the seller also can claim back the reimbursement of the surplus or the recognition of a tax credit.

Remittances to foreign entities

Payments sent to a person domiciled abroad for services received in Panama or from abroad, will be subject to income tax at a 12.5% rate over the total amount remitted, as long as the services: (1) have an incidence in the generation or the conservation of Panamanian source of income; and (2) its value has been considered as deductible expense by the taxpayer that received such services.

Public entities of the Central Government, autonomous, local governments, state-owned enterprises or joint stock companies in which the State is owner of at least 51% of the shares, as well as non-taxpayer entities and taxpayers that present losses will be subject to the withholding.

Foreign source income

It will not be considered produced within the Panamanian territory, income originated from the following activities, among others:

  • Invoicing, from an office established in Panama, the sale of goods or products for a greater sum than the one invoiced for the same goods or products for the office in Panama, as long as the goods or products are transported exclusively abroad, as well as the invoicing of those in transit at national ports or airports.
  • Managing from an office established in Panama, transactions that are consummated, perfected or take effect abroad.
  • Wages and other labor related remunerations of the individuals that hold a permit as special temporary resident, that receive income directly from their headquarters located abroad, even if they reside in the country to perform those activities.

Tax Exempt Income

Several revenues are tax-exempt, for example: in regards to financing, interests paid over: (i) securities issued by the State and the profits derived from its sale: (ii) deposits in saving accounts, time deposits or of any other nature that are maintained at Panamanian banking institutions, whether local or foreign deposits; (iii) loans, acceptances and other funding instruments to obtain financial resources to banks or financial institutions abroad, through the Panamanian banking institutions, even though the product of such resources is used by the borrower bank in the making of productive assets.

For individuals, we must point out the sums that beneficiaries receive from retirement fund, pensions and other benefits are also tax-exempt.

Movable Assets and Services Transfer Tax (value added tax)

This tax (known as ITBMS in Spanish) is levied on the sale of movable assets and the rendering of services at a 7% rate, as long as the taxable events take place within the country. The law provides for a variety of products (food, medicine, school supplies) and some services that are exempt from this tax, such as the payments, including the interest rates, paid on banking and financial services, except for the fees charged for the services.

Double Taxation Agreements

Panama has endorsed the OECD recommendations to avoid international tax evasion and has subscribed 16 treaties to avoid double taxation with the following countries: Singapore, United Kingdom, Qatar, Portugal, Mexico, Luxembourg, Italy, Israel, Ireland, Netherlands, France, Spain, United Arab Emirates, Republic of Korea (south Korea), Czech Republic and Barbados.

Panama also has 9 agreements signed for the exchange of tax information with Canada, Denmark, United States, Finland, Greenland, Island, Faroe Islands, Norway and Switzerland.

Our domestic legislation has been modified to allow the application of the agreements, contemplating concepts such as the free market principle, related parties, comparison analysis, study and report of transfer pricing, permanent establishment and tax residency, among others.

Administrative Tax Court

This court was established under Law No.8 of 2010 as an autonomous agency, specialized and independent. It has competence to settle appeals against the decisions of the Tax Administration, representing a guaranty for the taxpayers. The World Bank has reviewed its creation as an important institutional advance.

Special Regimes

The Panamanian legislation includes special regimes created to promote foreign investment, to facilitate the flux of free trade and to promote the economic growth of the region.

– Multinational Headquarters Regime (Law 41 of 2007/Law 45 of 2012).

These are entities domiciled in Panama constituted to provide services to other entities located abroad, particularly to its headquarters, subsidiaries, affiliates and associated corporations.

They enjoy income tax exemption in respect of profits obtained on the services provided to any person domiciled abroad that does not generate taxable income in Panama. There is also an exemption on dividend and complementary tax.

The services provided by these entities are ITBMS exempt, as long as these are provided to persons that do not produce taxable income in Panama.

The wages and other type of labor remuneration that the workers with immigration permit for permanent staff in Multinational Headquarters receive from abroad will be considered foreign source income. This permit is granted for a period of 5 years renewable and with the right to opt out for a definitive residence.

Multinational Headquarter entities can carry out the following activities:

  • Conduct and/or administer geographic operations in an specific or global location (strategy planning, business development, staff management and training, operation control and/logistic);
  • logistics and/or component storage or product parts for manufacturing;
  • technical assistance to corporations of the corporate group and to clients for their products or services;
  • finance management, including treasury and accounting from the corporate group; and
  • advise, coordination and follow up for the market and publicity of goods or services produced by the corporate group, among others.

– The Panama Pacific Special Economic Area

The corporations located in this area may carry out any kind of activities that are not forbidden by Law. Since the moment of its incorporation corporations shall enjoy the benefits of Law 54 of 1998 on legal stability of investments, which provides that any amendments to the taxation regime will not be applicable for a 10 year term.

It is a tax-free area for the corporations located here, except some exceptions established by Law.

For foreign personal hiring, there are several immigration alternatives that facilitates the permanency in Panama. Under this regime, the income tax exemption to foreign staff is not granted, regardless of the place of remuneration.

– Colon Free Zone (Decree Law No. 8 of 1948)

Among the operations that can be developed in this tax free area, we have introduction of goods and assets abroad; general handling (transformation, assembling, packaging and repackaging) any other goods stored in the zone; selling abroad goods stored or handled in the zone (import taxes will only be paid when the goods are sold within the national fiscal territory); and making transfers within the corporations located in the Zone. In respect of foreign workers, there are also several immigration options. The special temporary worker permit would involve the exemption of the income tax if the wages come directly from the headquarters located abroad.


Panama´s tax system has been consolidated under the principle of territoriality, although in the present times it has been overshadowed by the foreign income taxation, without compromising the advantages that represent investing in Panama due to its geographical location and the connectivity that offers to the Americas.

Beyond the criteria that we are a capital importer country, with a territorial taxation system we have adhered to the subscription of treaties to avoid double international taxation and the exchange of tax information, cooperating with the policies aimed to prevent the tax evasion.

The Spanish Reits: A Valuable Instrument for Spanish and International Investors to Take Advantage of the Recovery of the Spanish Real Estate Market

1. The Socimi Regime

SOCIMIs (Sociedad Anónima Cotizada de Inversión en el Mercado Inmobiliario) are Spanish collective real estate investment vehicles that enjoy a privileged tax regime, provided that certain legislative requirements are met. The law governing SOCIMIs (the “SOCIMI Law”) was passed in 2009 but created a more restrictive and unattractive legal and tax regime that failed to satisfy investors’ expectations.

The Spanish regime departed too far from the standard European model when implemented in 2009 (19% Corporate Income Tax rate and the requirement of a minimum of €15m in share capital) and combined with the significant economic downturn’s impact on real estate transaction activity, no SOCIMIs were actually incorporated before 2014.

From 2008 to 2013, the Spanish commercial real estate market contracted in terms of volume to the point that deal activity consisted of a limited number of relatively small-scale transactions each year and there was no longer a fully functioning investment market.

This negative trend has reverted since 2014, with that year marking the inflection point for the Spanish real estate market’s turnaround. Since the end of 2013, the improvement in macroeconomic indicators has boosted confidence in Spain, resulting in greater interest and investment flows from international investors, which judged it a good moment to enter the Spanish market by taking advantage of the bottom of the cycle.

The SOCIMI Law was amended in December 2012 to make the regime more attractive. The reforms successfully converted the SOCIMI into a flexible and attractive instrument to invest in Spanish real estate assets.

The new SOCIMI regime provides for a 0% Corporate Income Tax rate and removes the asset diversification and leverage limitations, allowing SOCIMIs to trade on Spain’s alternative investment market (Mercado Alternativo Bursátil). Combined with the recovery and improvement of the real estate sector, investment through SOCIMIs has been boosted significantly. Listed SOCIMIs have accounted for almost 33% of the total investment volume in Spain and close to 75% of domestic investment (Source: Savills Market Report – Spain Investment, February 2015). SOCIMIs also accounted for over 20% of the total investment volume in the first quarter of 2015, maintaining the high levels of investment seen in 2014.

The SOCIMI structure has become one of the preferred routes for international investors seeking to benefit from the Spanish real estate market’s recovery. Foreign investors have their eyes on “blind pool listings” and others look for tailored structures, including the conversion of former standard real estate companies into SOCIMIs. For foreign REITs interested in Spanish real estate, the use non-listed SOCIMIs may also be an option, benefiting from 0% taxation under certain circumstances.

Naturally, local investors such as Spanish family offices or certain family-run business can also benefit from this advantageous regime solving specific issues (limitations on the deductibility of interest expenses, benefiting from a more favorable divestment regime, etc), including a reduction of its tax invoice. It is therefore worth revisiting their structures.

2. Requirements of the Socimi Regime

A) Corporate form and listing

The SOCIMI must take the form of a joint stock corporation (Sociedad Anónima) with a single class of registered share capital (minimum of EUR 5 million fully subscribed). The SOCIMI’s shares must be in registered form and nominative, being this requirement met if the shares are represented in nominative book entry form. This trading requirement must be met within 24 months of the election to become a SOCIMI.

In addition, the SOCIMI must be listed on a regulated market (for example, one of the four Spanish Stock Exchanges) or multi-lateral trading systems (such as the Spanish Mercado Alternativo Bursátil or MAB) either in Spain, in the European Union, in the European Economic Area or in any jurisdiction with which there is an effective exchange of tax information agreement with Spain.

As a general rule, the minimum free float for listing on the Spanish Stock Exchanges is 25%. In the case of MAB listing, shares representing either (i) 25% of the total share capital of the SOCIMI, or (ii) an aggregate estimated market value of €2 million, are distributed among investors holding individually less than 5% of the total share capital of the SOCIMI. Such calculation will include the shares made available to the liquidity provider to carry out its liquidity duties. No minimum number of shareholders is required by the MAB regulations and, in practice, their shares are not widely distributed among shareholders. However, as a listed entity, an actual free float requirement must be appropriately met.

B) Purpose and activities

The SOCIMI must have the following as its main corporate purposes:

  1. Acquisition, development and refurbishment of urban properties to be leased;
  2. The holding of shares of other SOCIMIs, collective real estate investment funds or foreign listed REITs that meet similar requirements to those applicable to SOCIMIs;
  3. The holding of shares in non-listed Spanish or foreign companies whose corporate purpose is the acquisition, development and refurbishment of urban properties to be leased, provided that they have the same compulsory dividend distribution obligation as that which applies to SOCIMIs and the same investment requirements and wholly owned by SOCIMIs or foreign REITs (“Sub-Socimi“).

The SOCIMI can only invest in one tier Sub-Socimis (i.e. only one level of Sub-Socimis is available); Sub-Socimis cannot hold shares in other companies. Any foreign subsidiaries must be tax resident in a jurisdiction which effectively exchanges tax information with Spain.

SOCIMIs are allowed to carry out other ancillary activities that do not fall under the scope of their main corporate purpose. However, such ancillary activities must not exceed 20% of the assets or 20% of the revenues of the SOCIMI in each tax year.

C) Investment and income requirements: 80%-20% rules

At least 80% of the SOCIMI’s assets must be invested in:

  1. Urban properties for lease;
  2. Land for development into urban properties for lease (if the development activities start within the 3 years following the acquisition);
  3. Shares in SOCIMIs, foreign REITs, Sub-Socimis or real estate collective investment funds.

There are no asset diversification requirements: the SOCIMI is entitled to hold one single asset. These qualifying assets must be held for a minimum three year-period from its acquisition date (or from the first day of the financial year when the company became a SOCIMI if the asset was held by the company before becoming a SOCIMI).

This 80% threshold should be calculated on a consolidated basis, taking into account the SOCIMI and its qualifying subsidiaries and the gross value of the assets (without taking into account depreciation or impairments).

At least 80% of the SOCIMI’s net income, excluding income arising from the sale of qualifying assets after the minimum three-year holding period has expired, must derive from:

  1. Leasing of qualifying real estate to non-related parties; or
  2. dividends from SOCIMIs, Sub-Socimis, foreign REITs, or real estate collective investment funds.

The Spanish tax authorities consider that the annual income should be measured on a net basis, taking into consideration direct income expenses and a pro rata portion of general expenses. These concepts should be calculated in accordance with Spanish GAAP.

All income obtained by the SOCIMI (including 20% income deriving from other non-qualified assets) is taxed a 0% Corporate Income Tax Rate provided the 80%-20% rules on assets and income are met.

Capital gains derived from the sale of qualifying assets are in principle excluded from the 80%/20% net income test. Conversely, the sale of qualifying assets before the end of the three year period implies that (i) such capital gain would compute as non-qualifying revenue; and (ii) such gain (and the rental income generated by the asset, if any) would be taxed at the standard Corporate Income Tax rate (28% for 2015 and 25% for 2016 onwards).

D) Dividend distribution

The SOCIMI is required to adopt resolutions for the distribution of dividends within the six months following the closing of the fiscal year of: (i) at least 50% of the profits derived from the transfer of real estate properties and shares in qualifying subsidiaries and real estate collective investment funds ( provided that the remaining profits must be reinvested in other real estate properties or participations within a maximum period of three years from the date of the transfer or, if not, 100% of the profits must be distributed as dividends once such period has elapsed); (ii) 100% of the profits derived from dividends paid by Sub-Socimis, foreign REITs and real estate collective investment funds; and (iii) at least 80% of all other profits obtained (e.g., profits derived from ancillary activities). If the relevant dividend distribution resolution was not adopted in a timely manner, a SOCIMI would lose its SOCIMI status in respect of the year to which the dividends relate.

In our view, the investment model for the SOCIMI should ensure that the dividend distribution requirement is met. However, in circumstances where SOCIMI’s leasing business does not generate enough cash to service debt and pay compulsory dividends in cash, the Spanish tax authorities have previously accepted that this requirement is met if the dividends are declared, but the resulting credit against the SOCIMI, net of withholding taxes, is immediately capitalised by the shareholders.

3. SOCIMI Tax Regime

A) Opting into the SOCIMI regime

The decision to apply the SOCIMI regime has to be agreed by the shareholders in a general meeting and communicated to the Spanish tax authorities before the last three months of the fiscal year (i.e. before 1 October if the fiscal year coincides with the calendar year). The tax regime is applicable from the beginning of the fiscal year in which the communication is duly filed with the Spanish tax authorities.

It is possible to opt for the SOCIMI regime even if its requirements are not met, subject to the SOCIMI meeting the requirements in the two years after the date on which the option was made. However, certain requirements of the SOCIMI regime are essential and must be met on the date on which the option is elected: (a) the dividend distribution policy; (b) main corporate purpose; and
(c) the registered nature of the shares.

The SOCIMI will lose the benefits of the tax regime if certain circumstances take place or if certain failures are not cured the following year. In such a case, certain taxation may be triggered and the entity will not be eligible for the SOCIMI regime for three years.

B) Corporate Income Tax

Generally, all income received by a SOCIMI or a Sub-Socimi (including capital gains) is taxed under CIT at a 0% rate. Nevertheless, rental income and capital gains stemming from qualifying assets being sold prior to the end of the minimum holding period (three years) would be subject to the standard CIT rate (28% in 2015 and 25% for 2016 onwards).

The SOCIMI will not be entitled to tax losses carried forward and tax credits, although if the company had any of such tax assets in its balance sheet before its application for the SOCIMI tax regime, those assets could be used if the SOCIMI obtains income or gains subject to the general CIT rate.

Nevertheless, the SOCIMI will be subject to a special 19% levy on the amount of the gross dividend paid to shareholders which do not qualify for the SOCIMI regime and which own 5% or more in the capital of the SOCIMI and are exempt from any tax on the dividends or not subject to tax at, at least, a 10% rate on dividends received from the SOCIMI. The Spanish Tax Authorities have issued certain rulings stating that the 10% test to be carried out in order to identify substantial shareholders shall be focused on the tax liability arising from the dividend income considered individually, taking into account (a) exemptions and tax credits affecting the dividends received by the shareholder, and (b) those expenses incurred by the shareholder which are directly linked to the dividend income (e.g., fees paid in relation to the management of the shareholding in the relevant SOCIMI distributing the dividends, or financial expenses (interest) deriving from the financing obtained to fund the acquisition of the shares of the relevant SOCIMI). In addition, the Spanish Tax Authorities have confirmed that the withholding tax levied on a dividend payment (including any Non-Resident tax liability) should also be taken into consideration by the shareholder for assessing this 10% threshold. Hence, if these dividends are subject to withholding tax in Spain at a rate equal to, or higher than, 10%, said 19% levy should not be triggered. Otherwise, a careful review will need to be carried out of the substantial taxation of the shareholders’ dividend.

C) Taxation of non- resident Shareholders

Dividends distributed to non-resident Shareholders not acting through a permanent establishment in Spain are subject to Non-Resident Income Tax (“NRIT”), at the standard withholding tax rate at 20% (19% for 2016 onwards). No exemptions are allowed on dividends distributed by a SOCIMI.

This standard rate can be reduced upon the application of a convention for the avoidance of double taxation (“DTC”), or eliminated as per the application of the EU Parent-Subsidiary Directive as the SOCIMI may qualify for its application according to the Spanish Tax Authorities criterion (the application of the EU Parent-Subsidiary withholding tax exemption requires the fulfillment of certain requirements and includes an anti-abuse provision when the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities who are not resident in a EU Member State or in a European Economic Area).

Capital gains derived from the transfer or sale of the shares are deemed income arising in Spain, and, therefore, are taxable in Spain at a general tax rate of 20% in 2015 (19% in 2016 onwards), unless the relevant DTC prohibits Spain from taxing such capital gains.

Nevertheless, capital gains obtained by non-Spanish Shareholders holding a percentage lower than 5% in a listed SOCIMI will be exempt from taxation in Spain provides the shareholder is tax resident in a country which has entered into a DTC with Spain which provides for exchange clause information (most of the DTC entered into by Spain). This exemption is not applicable to capital gains obtained by a non-Spanish shareholder acting through a country or territory that is defined as a tax haven by Spanish regulations

The “Netflix” Tax

One of the most technically interesting tax changes announced in the Federal Budget in May 2015 was the proposed imposition of goods and services (GST) at 10% on offshore intangible supplies to Australian consumers, termed the “Netflix tax”, so called after the announcement by Netflix in November 2014 that it proposed to enter the Australian market with its online movie streaming service by March 2015.

The Government announced the implementation of “integrity measures” (which included the Netflix tax) in April 2015. The integrity measures proposed by the Government were in relation to what was emerging as an OECD (Organisation for Economic Co-Ordination and Development) consensus, that GST should be charged at the source of the revenue, so a supplier providing intangible services into Australia, wherever the supplier is located should be subject to Australian GST on those services.

The Tax Laws Amendment (Tax Integrity: GST and Digital Products) Exposure Draft Bill 2015 (Exposure Draft Bill) proposes to extend the scope of GST to supplies of things other than goods or real property (ie intangibles) from offshore which are made to Australian consumers. It is intended that the legislation will take effect from 1 July 2017.

The amendments are consistent with the reforms in a number of other countries (including Norway, Japan and the member states of the European Union) to extend the scope of their value added taxes to the growing area of offshore intangible supplies to consumers in those countries.

Summary of current law

Under the current GST law, GST is payable on taxable supplies and taxable importations.

A taxable importation is an importation of goods that are entered to Australia for consumption within Australia, provided the importation is not specified to be a non-taxable importation.

Generally, for a supply to be a taxable supply it must, among other things, be connected with the Australian “indirect tax zone” (ie, supplies made or done in Australia or good delivered within Australia).

The current GST law also ensures that entities that are registered or required to be registered for GST are in the same net GST position in respect of intangibles acquired for their Australian activities from overseas as they are for things acquired locally. This is known as the “reverse charge” rule. However, this rule does not extend to entities that are not registered or required to be registered for GST (ie consumers).

The issue that was identified by the Australian Government with the operation of these rules was that the importation of services or intangible property by consumers would never be a taxable importation (as importations must be of goods) and will often also not be a taxable supply under the current “connected” rules and would not be subject to the “reverse charge” rule.

The implementation of a “Netflix tax” is intended to ensure the GST revenue base does not steadily erode over time through the increasing use of foreign digital supplies by Australian consumers and that local suppliers are not at a tax disadvantage relative to overseas suppliers

The Netflix tax

The effect of the Exposure Draft Bill is that all supplies of “inbound intangible consumer supplies” made to “Australian consumers” will be considered to be “connected” with Australia, and subject to GST, regardless of whether the supplier is an Australian resident or non-resident. This change will result in supplies of digital products , such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and advisory services (such as brokering), receiving equivalent GST treatment whether they are supplied by a local supplier or a foreign supplier.

A supply is an “inbound intangible consumer supply” if it is a supply of anything other than goods or real property that is not done wholly in the Australian indirect tax zone or made through an enterprise the supplier carries on in the Australian indirect tax zone.

An “Australian consumer” is an Australian resident (other than an entity that is an Australian resident solely because the definition of Australia in the Income Tax Assessment Act 1997 includes the external Territories) that:

  • is not registered or required to be registered; or
  • if the entity is registered or required to be registered – the entity does not acquire the thing supplied solely or partly for the purpose of an enterprise that the entity carries on.

Importantly, no GST liability arises under the amendments if the recipient acquires the supply as a business rather than as a final consumer.

The amendments also make changes to the rules for determining an enterprise’s GST turnover, which determines whether registration for GST is required. Usually, an entity’s GST turnover includes, among other things, the value of the GST-free supplies the entity makes that are connected with the Australian indirect tax zone. However, this would mean that the making of a significant number of supplies by overseas suppliers to Australian residents which would now be connected with the indirect tax zone, used and enjoyed outside the indirect tax zone and therefore GST-free, would require GST registration of the suppliers. The Explanatory Memorandum uses the example of hairdressing services that an Australian resident might obtain while travelling overseas. The suppliers may have no involvement with the Australian GST system, and in some, if not most instances, will be unaware they are making a supply to an Australian resident. Therefore, requiring these entities to register for GST purely on the basis that the supply falls within the new law would create significant compliance costs for no benefit. As a result, the amendments exclude GST-free supplies from GST turnover if they are connected with the Australian indirect tax zone only as a result of these amendments.

Electronic distribution service

In some circumstances, the GST liability is shifted from the supplier to the operator of an “electronic distribution service” through which the supplies of inbound intangible consumer supplies are made. This will occur if the operator of the electronic distribution service controls any of the key elements of the supply.

A service is an “electronic distribution service” if the service allows entities to make supplies available to end-users and the service is delivered by means of electronic communication and the supplies are to be made by means of electronic communication.

The responsibility for the GST liability shifts from a supplier to the operator of an electronic distribution service for supplies that are inbound intangible consumer supplies made through the electronic distribution service they operate unless all of the following are met:

  • an invoice issued in relation to the supply identifies the supply and identifies the supplier as the supplier of the supply;
  • the supplier is identified as the supplier of the supply, and as the entity responsible for paying GST, in contractual arrangements for making the supply and the provision of access to the electronic distribution service;
  • the operator of the electronic distribution service does not authorise the charge to the recipient for the supply and does not authorise delivery of the supply and does not set terms and conditions under which the supply is made.

The shift in GST liability to the operator of an electronic distribution service is proposed given that, generally, the operator of an electronic distribution service will be a much larger and better resourced entity than most of the entities making the supplies. The operator of the electronic distribution service will also have significant influence over the terms of sale made using the electronic distribution service and either manage or closely regulate the payment process. Further, often the operator of the electronic distribution service will have more information about the recipient of the supply, compared with the suppliers.

Modification of regulations

The Exposure Draft Bill also proposes the making of regulations to modify particular GST rules (for example, registration turnover, tax periods and GST returns) in order to accommodate the new rules for intangibles and to minimise compliance costs of non-resident suppliers. The Explanatory Memorandum to the Exposure Draft Bill states that the form of regulations will need to be determined in consultation with members of the industry.

WORDS: 1,352

Austrian goodwill amortization: AG Kokott issues her opinion on a landmark case for the relation between state aid and treaty freedoms

On 16 April 2015, Advocate General Kokott („AG“) advised the CJEU to rule that the exclusion of foreign EU group members of an Austrian tax group from the goodwill amortization scheme is not in line with the freedom of establishment. The AG, furthermore, argued that the scheme does not constitute illegal State aid due to the lack of selectivity.

Treaty Freedoms vs. State Aid Rules

The case Finanzamt Linz vs. Bundesfinanzgericht, Außenstelle Linz (C-66/14) is expected to result in a landmark decision of the CJEU. The importance of the case is that it deals with an Austrian tax regulation which may simultaneously infringe the freedoms of the treaty (freedom of establishment) and the state aid rules of the EU.

The mentioned combination of conflicts brings up fundamental questions, i.e. the interaction between treaty freedoms and state aid rules. The issues gives rise to a potential conundrum because in the context of alleged “aid” in relation to domestic transactions, the respective remedies for unlawful state aid and the breach of freedoms are, in effect, opposites. Unlawful state aid has to be repaid which – in the given situation – results in a non-application of the goodwill amortization scheme. However, the scope of a discriminatory rule has to be extended which would require the amortization scheme to be applied to all investments (domestic and foreign targets). The solution for this conflict cannot be derived from the already existing case law of the CJEU. Tax experts were therefore looking forward to the opinion of AG Kokott which is laid down in the following.

Facts and Circumstances

Group taxation system

The Austrian Corporate Income Tax Act (KStG) offers legally independent companies belonging to a group of companies the opportunity to form a tax group, with the result that the income of all tax group members is taxed in an added up way at the level of the group parent. This has the effect that the income of all group members is taxed in the hands of the parent company of the tax group. The main requirement for two or more companies to establish a tax group is that the group parent company holds an investment in the subsidiaries of more than 50%. Also foreign companies can take part in the tax group, if they are directly owned by a domestic group member. Therefore only first-tier foreign subsidiaries may become members of a tax group. The tax group scheme provides for the attribution of 100% of profits/losses of a domestic group member to the group parent even though the actual participation might be lower. In the case of foreign group members only losses are attributable to the parent company according to the percentage of the participation. There is a recapture of taxes when the foreign losses are set off against profits abroad in subsequent years or if the foreign group member ceases to be a group member.

Goodwill amortization

Fore share acquisitions prior to March 2014, tax groups could amortize the goodwill resulting from the purchase of Austrian group members with an active business.[1] Following this scheme the goodwill inherent in the acquisition cost was amortized on a straight-line basis over a period of 15 years. In order to avoid constitutional concerns goodwill that resulted from acquisitions prior to March 2014 and which has not fully been amortized upon March 2014, can be further amortized if the possibility of the goodwill amortization had an impact on the purchase price of the participation. As the goodwill amortization was limited to domestic participations, foreign EU group members were excluded from the scheme.

Litigation procedure

An Austrian taxpayer (a tax group which acquired a non-privileged Slovak subsidiary) concerned by the goodwill amortization started a litigation process, because under its opinion it infringed the freedom of establishment. The court of first instance (=Federal Tax Court Linz) in its decision on 16 April 2013 followed the taxpayer’s argumentation, classified the Austrian goodwill amortization as being not in line with the freedom of establishment and extended the goodwill amortization also to foreign group members.[2] After the Austrian tax office involved has appealed against this decision, the Austrian Administrative High Court (VwGH) referred two questions with regard to the goodwill amortization scheme for preliminary ruling to the CJEU.[3] The Court raised the question whether (a) the scheme constitutes illegal State aid for the beneficiaries of the scheme as defined under Article 107 TFEU and (b) the exclusion of foreign EU group members from the scheme was in line with the freedom of establishment.

Opinion of the AG

Freedom of establishment

According to AG Kokott the exclusion of foreign EU group members from the amortization scheme restricts the freedom of establishment. Since the AG found the domestic and the cross-border scenario comparable, she examined whether there was any justification for limiting the amortization scheme to just domestic targets. The representatives of the Austrian Government argued that the exclusion of foreign participations is required in order to maintain the coherence of the Austrian tax system. They based the coherence argument on the fact that under Austrian corporate income tax law capital gains from domestic participations are taxable and therefore the goodwill amortization provides a temporary liquidity advantage only, while capital gains from foreign participations are, in most cases, tax exempt with the requested goodwill amortization resulting in a permanent tax advantage which was not the intention of the Austrian lawmaker. The AG rejected this justification on the grounds of the coherence of the Austrian tax system because the goodwill amortization scheme was even not open to taxpayers who opted for tax liability of their participations in foreign EU group members according to § 10 Par 3 Nr. 1 KStG.[4] Since there were no other justification grounds the AG came to the conclusion that the goodwill amortization scheme infringes the freedom of establishment.[5]

State aid assessment

  1. The concept of selectivity

With regard to the State aid assessment the AG argued that the goodwill amortization confers a tax advantage for its recipients pursuant to Art 107 para 1 TFEU. The advantage was also granted through state resources. For the selectivity test of the measure the AG modified the traditional selectivity examination scheme, where one has to first identify the “normal” taxation approach (“derogation approach”). As the referring Court suspects that the different treatment of (a) companies and individuals, of (b) companies within a tax group and outside a tax group and of (c) companies which acquire domestic participations and companies which acquire foreign participations might be selective, one “normal” tax regime cannot be identified.[6] Therefore it is solely important whether comparable legal and factual situations are treated differently and whether this different treatment leads to a selective advantage for certain industries or undertakings (“comparability approach”). The argumentation of the AG is in line with the present case law of the CJEU, which considers the selectivity examination also as an examination of comparability. For example in the Gibraltar judgement the CJEU classified a tax-exemption to offshore companies as selective, even though less than 1% of companies were actually taxed.[7]

  1. Assessment of the goodwill amortization scheme

According to the AG the refusal to grant the goodwill amortization to individuals and to companies which are not part of a tax group cannot be considered to be state aid, since these persons are not in a comparable factual and legal situation with companies, which are members of a tax group. The AG suggests a less stringent comparability test for pure domestic situations as compared to cross-border situations. This is due to that fact that only unfavorable treatment of cross-border cases compared to domestic cases are covered by the EU Treaties.[8]

AG Kokott then states that the goodwill amortization scheme, by excluding foreign EU group members, treats taxpayers in comparable legal and factual situations differently. Consequently the goodwill amortization constitutes an advantage to companies, which acquire domestic participations, compared to companies which acquire foreign participations. This unequal treatment is not justified by the basic or guiding principles of the Austrian tax system. Therefore the goodwill amortization scheme can be regarded as a subsidy in the narrow sense (which cannot be justified by the basic or guiding principles of the Austrian tax system).[9]

However, as the scheme covers all sorts of domestic companies, it does not favor certain industries or undertakings and therefore it is not qualified as being selective. The advantage is rather that all companies within a tax group irrespective of the economic sector they perform, receive a subsidy for acquiring domestic participations.[10] With this reasoning the AG follows the view taken by the European Court of First Instance in two cases regarding the Spanish goodwill amortization (Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10).[11] There the Court concluded that the granting of a goodwill amortization only in relation with the acquisition of foreign participations was not selective since the scheme was in principle open to all companies and did not exclude a specific group of undertakings. In order to confer a selective advantage, a tax rule would have to characterize the recipient undertakings, by virtue of the properties which are specific to them, as a privileged category.[12] The mere fact that the tax rule/benefit is subject to conditions could not, alone, render it selective in favor of undertakings satisfying this conditions. Otherwise, any tax relief subject to conditions would be state aid. The AG furthermore argues that a too broad understanding of the terms ‘certain undertakings’ and ‘production of certain goods’ and ultimately ‘selectivity’ entails the risk to affect the distribution of competence between Member States and the EU as foreseen in Art 2 to 6 TFEU as well as between the European Parliament/Council of the European Union (Art 14 TEU) and the European Commission (Art 17 TEU). Consequently, the AG came to the conclusion that the goodwill amortization scheme does not constitute illegal State aid.[13]

Way Forward

The opinion of the AG provides an important indication on how the CJEU could qualify the Austrian goodwill amortization scheme. It is expected that the CJEU will render its decision still in 2015.

Until then, Austrian tax groups with foreign EU group members, which were purchased before 1 March 2014 and where the holding company exercised the option for tax liability according to § 10 Par 3 Nr. 1 KStG should, if not already done, examine their tax positions and assess whether they could benefit from the goodwill amortization scheme or not. The prerequisite that the goodwill amortization had to have an impact on the purchase price of the participation is also likely to infringe the freedom of establishment and should therefore not prevent tax groups from obtaining the goodwill amortization for their foreign EU group members.

[1] In 2014 the goodwill amortization concept was abolished for new acquisitions due to the possible infringement of EU-law.

[2] Federal Tax Court (former „UFS“, now “Bundesfinanzgericht”) Linz, 16 April 2013 (RV/0073-L/11).

[3] Austrian Administrative High Court, 30 January 2014 (Zl. 2013/15/0186).

[4] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 61.

[5] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 69.

[6] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 88.

[7] Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.

[8] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 91.

[9] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 104.

[10] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 111.

[11] Banco Santander and Santusa/Commission, T-399/11 and Autogrill España/Commission, T-219/10.

[12] Commission/Government of Gibraltar and United Kingdom, C-106/09 P and C-107/09 P.

[13] Opinion of AG Kokott, 16 April 2015, C-66/14, Finanzamt Linz, para. 117.

Lump-sum taxation and residence permit in Switzerland

Foreigners who take up residence in Switzerland for the first time or after an absence of more than ten years may opt for a special tax regime provided that they will not carry out any gainful activity in the country. In doing so, they will benefit from the application of a special method for the assessment of their income and wealth, which is an expenditure–based taxation. This special regime is more generally known as “lump-sum taxation”. It is applied at Federal level and in some cantons, more particularly in the West part (French speaking part) of Switzerland. Opting for lump-sum taxation regime will generally be a decisive criterion for the grant of a residence permit to applicants from non EU countries who are under the age of 55 and have no specific personal relation to Switzerland.

Lump-sum taxation has raised a rather intensive controversy in Switzerland during the year 2014 and even earlier. Until very recently the system was under the attack of certain political parties and organizations that launched popular initiatives (typical democratic rights provided by Swiss constitution), in several cantons and at Federal level, calling for lump-sum taxation to be abolished. The canton of Zürich, for instance, had to abolish lump-sum taxation in 2009 as a result of a cantonal popular initiative that collected a majority of votes against this tax regime. The reasoning of the opponents to lump-sum taxation is that the system would not be consistent with the constitutional guarantee of equal treatment. In other words, tax payers benefitting from lump-sum taxation – who cannot be Swiss citizens – are considered to be taxed on a more favourable way than other tax payers – mainly Swiss citizens – who are taxed under the ordinary regime.

This is not the place to enter into the controversy even though there are many reasons to consider that foreigners taxed on a lump-sum basis in Switzerland are not actually in the same situation as Swiss nationals and other foreigners who are taxed under the ordinary regime. Therefore different situations allow different treatments, in particular when it relates to taxation. Furthermore, economic considerations surrounding lump-sum taxation show that this system brings a lot of benefits to the local economy which recovers most of the expenses, quite actual and significant, incurred by lump-sum taxpayers for their living at their place of residence. This explains why the business community strongly opposed the abolition of lump-sum taxation.

Finally, on November 30th, 2014, the initiatives to abolish lump-sum taxation at Federal level and in the canton of Geneva were strongly rejected by the population at both levels. So far there are no other cantonal initiatives against lump-sum taxation pending in other cantons.

It is now very clear that lump-sum taxation will remain in force in Switzerland, at Federal level and in some cantons, more particularly in the French speaking part of the country (for instance in the cantons of Geneva, Vaud and Valais). However, following the abolition of this special regime in some cantons of the German speaking part of Switzerland, Confederation had already taken the lead in tightening the conditions for the application of lump-sum taxation at Federal and Cantonal levels. In this respect amendments, effective as at January 1, 2016, have been made to the Federal Direct Taxation Act (DFTA) and to the Federal Act on the Harmonization of Direct Taxation at Cantonal and Communal levels (DTHA).

For the sake of clarification, it is worthwhile noting that Swiss tax system provides for tax jurisdiction at three levels, Federal, Cantonal and Communal. Taxation is however made by Cantonal authorities who act for themselves and, by delegation, for the Confederation and the home municipality of the tax payer. Confederation levies tax on income only, while cantons and municipalities levy tax on income and wealth.


Principles applicable to lump-sum taxation at Federal level (art. 14 DFTA) and at Cantonal and Communal levels (art. 6 DTHA)

  • Expenditure-based taxation (lump-sum taxation) replaces ordinary taxes on income and wealth.
  • The system is available only for foreigners who set up domicile in Switzerland for the first time or after an absence of ten years. Swiss nationals cannot benefit from this tax regime.
  • Spouses living in the same household must both meet the requirement for lump-sum taxation.
  • The portion of expenditure–based taxation replacing the ordinary income tax is calculated on the basis of the annual expenditure / living costs of the tax payer, in Switzerland or abroad, for himself and for his family members or other people dependant from him and living with him. Taxes are levied on the highest of the following amounts:
  • The minimum amount set by the law, which may not be less than CHF 400’000.- for Federal direct taxation. (Cantons have to set in their legislation, at their discretion, the amount of the minimum assessment basis);
  • Seven times the annual rent or annual deemed rental value of the home of the main tax payer;
  • For other tax payers living for example in a hotel or in a pension: three times the price of the annual pension for food and housing at the place of residence of the tax payer.
  • Tax is levied at ordinary tax rate.
  • Cantons are free to determine how cantonal wealth tax is covered by lump-sum taxation.
  • The amount of taxes due on the basis of the lump-sum assessment must be at least equal to the total of income and wealth taxes that would be charged to the tax payer if he would be taxed on following items, under the ordinary regime:
  • Real estates in Switzerland and the income generated by such assets;
  • Movable assets located in Switzerland and the income generated by such assets;
  • Financial assets invested in Switzerland, including debts secured by real estate and the income generated by such assets;
  • Copyright, patents and similar rights exploited in Switzerland and the income generated by such rights;
  • Retirement pensions, annuities and other pensions from Swiss sources;
  • Foreign income for which the tax payer requires partial or full exemption of foreign taxes based on any double taxation treaty entered into by Switzerland with the country where taxes are levied.
  • If the income from a foreign state is exempted provided that Switzerland levies taxes on such income, applying the rate for global income, Swiss taxes are calculated not only on the basis of the income mentioned above but on the basis of all items of income from the state at source or attributed to Switzerland based on the relevant double taxation treaty.


Specific conditions at Cantonal level (limited to the Cantons of Geneva, Vaud and Valais):

Minimum annual assessment basis, i.e. lump-sum amount, set forth by law:

  • Geneva: CHF 300’000.-
  • Vaud: CHF 300’000.-
  • Valais: CHF 220’00.-

However, in practice lump-sum taxation is granted based on higher minimal amounts, as follows, by approximation:

  • Geneva: CHF 350’000.-
  • Vaud: CHF 350’000.-
  • Valais: CHF 280’00.-

So far, the above cantons have not set forth any specific condition in order to assess wealth separately, in addition to tax assessment based on expenditures.


As explained above, renouncing to any gainful activity is a key condition in order to benefit from lump-sum taxation. Therefore, foreigners who become new Swiss taxpayers under this special regime are not allowed to take up any employment in Switzerland, should it be with a third person/entity or with a legal entity under their control, for instance as shareholder or beneficial owner of such entity. The same applies to any independent gainful activity. For the time being carrying out gainful activity outside Switzerland is still allowed. The conditions in this respect might become more tightened in the future, at least at Cantonal level. According to existing practice, lump-sum tax payers are still authorised to be a member of a Board of directors of a company in which they have interests (equity and/or loan), in the capacity as “observer” for the purpose of monitoring their investment. However they may neither participate to corporate decisions nor receive any remuneration for their position within the company. In any way one must remain careful in this respect. The practice, more particularly at Cantonal level, could develop new and stricter requirements.


Lump-sum taxation and residence permit

Any foreigner who decides to take up domicile in Switzerland with or without any gainful activity must obtain a residence permit.

Residence permit for gainful activity must be obtained from the first day of activity. Residence permit without any gainful activity is necessary after a continuous stay of 90 days in the country.

For European citizens, obtaining a residence permit with or without gainful activity is a simple and swift process based on the agreement between Switzerland and the European community supporting the free movement of persons.

For citizens from non EU countries, the process is less straightforward. Residence permit with gainful activity requires a labour market survey to verify that there is no one available on local market and in the EU countries to take up the position. Authorizations are reserved for people at executive level for positions that will help develop the local labour market. For residence permit without gainful activity, the applicant must be over 55 and justify good ties with Switzerland. If none of these two prerequisites are met, the applicant may still show that he will be of a significant interest to his home canton in terms of taxation.

In this context, lump-sum taxation is frequently combined with the application for residence permit without gainful activity. Indeed, for non EU applicants who are not 55 of age or older and who have no ties to Switzerland, opting for lump-sum taxation is generally the only route to the grant of a residence permit without gainful activity. One must however be aware that the lump-sum amount must be of some significance in order to create a tax interest for the canton. Currently, the minimum amount of the lump-sum taxation basis is in the order of CHF 800’000.- to CHF 1’000’000.- depending on the Canton of residence. One can note therefore that the minimum assessment amounts (CHF 400’000.- at federal level) or seven times the housing expenses as lump-sum amount might not be sufficient when applying for a residence permit.

For practical reasons, it is advised therefore to obtain first a lump-sum taxation agreement with relevant Cantonal tax administration in order to be able to apply then for a residence permit in front of the population office of the Canton of residence.


The recent confirmation of the lump-sum taxation system in Switzerland will quite certainly result in a renewed interest for foreigners who see the country as a possible place for immigration. In addition the political and economic stability in the country combined with a high quality of life will continue to make Switzerland a first choice for immigration.

Tax planning considerations for Tier 1 (Investor) migrants

The UK encourages foreign direct investments by granting high net worth individual investors and their families the right to reside temporarily in its territory, with the associated tax benefits of the resident ‘non-dom’ regime. And after a qualifying period, whose length depends on the amount invested in the British economy, the individual and their kin can obtain indefinite leave to remain (ILR) in the UK. Later, they can even apply for British citizenship.

The Immigration Rules that regulate the process are extremely complex and subject to frequent and unexpected changes. The most significant amendments became effective on 6th November 2014 following an extended period of scaremongering and rumours, which mostly turned out to be true. The new rules doubled the investment threshold and only gave panicked HNW migrants 20 days to apply under the old rules or face an expensive revision of their investment plans.

The Home Office’s explanatory notes are comprehensive; however, clients rarely submit visa applications themselves. Usually they engage a triad of advisors who are experts in the fields of UK immigration law, financial and tax planning. It is not a coincidence that the tax consultants are right at the end of the list — experience has shown that despite moving to a high-tax country, seeking comprehensive tax advice often comes as an after-thought, when the investments are made and the arrival dates are set. This article highlights the primary tax planning considerations relevant to non-domiciled investors at different stages of the UK immigration process for high-value migrants.


There are two pathways that such high-value migrants can take — Tier 1 (Investor) and Tier 1 (Entrepreneur), although this article focuses on the planning opportunities for the former. These differ in the size of the investments and the commitments on behalf of the migrant. The Home Office’s website (http://tinyurl.com/ldtl8cw) explains the regimes in detail and contains policy guidance documents (http://bit.ly/1yIoFKt), extracts from which the author used in writing this article.

The Tier 1 (Investor) category is for high-net-worth individuals who can afford to invest at least £2 million in the UK. The investor does not need a job offer in the UK nor is he required to prove a good command of the English language although the latter will be required when applications for ILR and settlement are made. Broadly, the funds must be his own savings or belong to his spouse or a partner — the Rules no longer permit borrowing the funds. According to Home Office’s statistics (http://bit.ly/1GvfGTu) in 2013, the Chinese received the largest number of investor visas, followed by the Russians; the rest of the nationalities trailing behind. Anecdotal evidence suggests a significant number of the investors being wives of wealthy foreigners; the latter, together with the couple’s children being her dependants, who are free to visit the UK as they please without any commitments as to the duration of visits or making the investments.

For the sake of completeness, Tier 1 (Entrepreneur) is for non-European migrants who want to invest in the UK by setting up or taking over, and being actively involved in the running of, a UK business or businesses. Broadly, the applicant needs to invest £200,000 in a UK company and comply with a host of other requirements, including speaking English to a certain standard and having enough money to support himself in the UK. This route is attractive to younger entrepreneurs who might have sufficient savings and are prepared to actively manage the business and create jobs in the UK. In fact, certain graduate entrepreneurs are allowed to apply with only £50,000. With the recent tightening of the rules allowing foreign students to seek work in the UK after finishing their studies, the Entrepreneur visa has become especially popular with parents willing to help their children to stay in the UK.

Both routes allow the migrant to apply for the ILR after a continuous residence period in the UK of five years. This can be reduced to three years for the investor who invests £5 million or the entrepreneur who makes extraordinary progress with developing his business. A further reduction to two years is available to the investor who invests £10 million. Interestingly, the Rules only allow the main applicant to reduce the length of time before he applies for the ILR and exclude his dependants, who need to wait the whole five year period before submitting the application. There are also strict requirements regarding the number of days that the migrant can spend outside the UK in any 12-month period (http://bit.ly/1ndkzW5). Failing to meet them will result in the inability to apply for the ILR and settlement.

Statutory Residence Test

Taxation in the UK primarily depends on a person’s residence status. Since April 2013, residence has been determined under the statutory residence test (SRT). The SRT is explained in brochure RDR3 (http://tinyurl.com/SRTRDR3), which also contains useful practical examples, which are worth reviewing by anyone attempting to ascertain their residence situation. The SRT establishes residence status according to the number of days that an individual spends in the UK during the tax year that runs between 6 April and 5 April of the following calendar year. Residents generally pay tax on their worldwide income and gains, whilst non-residents are generally only taxed on income from sources in the UK. However, individuals resident but not domiciled in the UK can elect to be taxed on the remittance basis where non-UK income and gains are only liable to tax when directly or indirectly remitted (brought) into the UK.

On its own, an individual’s immigration status or current nationality has no bearing on his UK tax liability whatsoever. The investor should be treated as a regular typically non-domiciled taxpayer who requires the usual pre- and post-arrival tax planning measures. Nevertheless, tax advice should take into account two considerations that pertain to the granting of the Tier 1 (Investor) status.

Firstly, assume that the end goal of most investors and their families is to settle in the UK. To achieve this they must spend at least 185 days in every 12-month period in the UK starting from the day of arrival in the UK under the newly issued leave to enter. This immediately denies the benefit of the UK-residence planning techniques based on the extended periods of absences from the UK. As a result, most tax planning measures should be undertaken before the investor’s arrival in the UK during Stage one as explained below.

Secondly, the Rules require the investors to physically bring the investment funds into the UK. Unless these are derived from clean capital, accumulated during the period of non-UK residence, the investor will suffer the consequences of making a remittance of foreign income or gains, which will be taxed at the appropriate rates. Further remittances might occur where the investor pays for the services rendered to him in the UK, such as immigration advisors’ and solicitors’ fees. Taxation of remittances can be avoided under the business investment relief as described below; however, the expense of planning for the minimisation of the tax burden might nullify the tax benefits it aims to achieve.

The Tier 1 (Investor) process

It is possible to split the Tier 1 (Investor) immigration process in three stages. Stage one is preparatory during which the migrant collects documents and submits the visa application. As Stage two, the investor arrives in the UK after receiving leave to enter the country. Stage three involves the migrant making the investment, which will permit him to remain in the UK and to apply for the extension of his stay until he can apply for the ILR and later for citizenship. There might be a period of several months between Stages one and two during which the investor stays in his home country waiting for the outcome of the application. The migrant typically has up to three months from the day of his arrival in the UK to fulfil the requirements of Stage three. The investor should plan to remain non-UK resident at Stage one and even partly through Stage two; and during this period of non-residence he should aim to perform the larger share of his tax planning strategy.

During Stage one the applicant prepares and submits documentary evidence of his ability to invest at least £2 million in the British economy. This amount must be in cash and kept in a regulated financial institution (typically a bank) in the UK or overseas. Sometimes instead of clear funds the future migrant has an asset portfolio that includes capital assets and undistributed income, but the Home Office will not take these into consideration. Funds held by companies or trusts are equally excluded. The investor should convert these assets into cash: any gains accumulated in securities and properties should be crystallised by selling them; where there is a right to receive income — dividends, interest, salary, royalties, business profits — this right should be exercised and the proceeds received into a bank account.

It might seem reasonable only to create sufficient cash to fund the £2 million investment. In fact, when converting assets into cash or receiving income, the investor might be subject to a double tax liability, determined by his current tax residence and the source of funds, although this might be reduced under double tax agreements or domestic tax exemptions. However, any non-UK gain that is crystallised and non-UK income that the investor receives after he becomes UK resident will be liable to UK’s fairly high taxes unless the taxpayer claims the remittance basis of taxation and does not bring the funds to the UK. As a result, the migrant might face the situation where he cannot pay for his life in the UK without incurring a significant tax cost.

‘Clean capital’

Conversely, income and gains received before becoming resident form so-called “clean capital”. If the investor loans clean capital to someone, the loan principal will always remain clean capital when repaid to the investor (but note the position with regard to loan interest below). Gifts received from related and third parties are also clean capital provided they are not considered to be a form of hidden income or gains distribution. In practice, some UK-resident investors live off the gifts made to them from their non-UK resident spouses, who earn income and gains not liable to UK tax. Clean capital will not be taxed in the UK, whether brought in its territory or not. However, in the case of an investor’s death, clean capital kept in a UK bank account will form his UK-situs asset liable to 40% inheritance tax. Therefore, it might be prudent to bring to the UK only the amounts necessary to fund current expenses.

Clean capital should be credited to a separate bank account and never mixed with non-UK income and gains that might be derived after assuming UK residence. In fact, considering that income and gains are taxed differently in the UK, they should also be kept in separate bank accounts. Moreover, if clean capital generates income — say it has been loaned and the investor receives interest — this should be paid to the income bank account and not into the clean capital account to avoid tainting it. Counterintuitively, the same cannot be done with gains generated with the use of clean capital. For example, if clean capital is used to buy shares, any gain realised on their future disposal will always form part of the proceeds and it cannot be segregated from clean capital by being paid to a separate bank account. There are methods that allow for such separation of gains involving the use of several connected trading entities or loaning clean capital to a bank to secure a bank loan, which will later be used to acquire capital assets.

If the investor runs out of clean capital he might have no choice but to bring foreign income and gains to the UK and face the prospect of the maximum 45% taxation. He can borrow from an overseas lender provided that the loan is made on commercial terms and the interest is serviced from UK-source income or gains. It had been possible to borrow under security of non-UK income and gains; however, in August 2014 this possibility was revoked.

There is no requirement or in fact possibility to declare clean capital to the UK tax authorities (HMRC) upon becoming UK resident. Equally, there is no requirement to report the use of clean capital on UK’s tax returns. However, the taxpayer should keep documents that reflect dates and methods of creation of non-UK income and gains to prove that they were received while he was non-UK resident and thus form his clean capital. Such documents include bank statements, sale and purchase agreements, loan agreements. They might be necessary in case of a future dispute with HMRC.

The Rules also allow the investor to rely on money that is owned either jointly with or solely by his close relative (spouse or partner). If the close relative is a lower rate taxpayer then, subject to the rules of their residence jurisdiction, the investor can gift the assets to the relative, which she can dispose of subject to the payment of a smaller amount of tax.

Provided the requirements of stage one are satisfied, the investor will receive the leave to enter the UK as a Tier 1 (Investor). The arrival to the UK should be timed with regards to the residence planning considerations as discussed next. At the same time the investor should not delay his arrival in order to satisfy the continuous residence requirement required to apply for the ILR at the end of his stay.

‘Connecting factors’ of tax residence

Under the SRT UK residence may be acquired automatically if the individual spends over 182 days in the UK, has a home in the UK or works in the UK on a full-time basis. If the investor is not UK-resident automatically, he might be resident under the sufficient ties test, which looks at the connection ties that the individual has with the UK. The relevant factors include having a family resident in the UK, presence of UK accommodation, working in the UK and length of visits to the UK in the preceding tax years. The more UK ties the investor has — the less number of days he can spend in the UK during the tax year without becoming a UK tax resident. It is also possible to be automatically non-UK resident under a separate set of circumstances. Residence is determined for the entire tax year starting from 6th April regardless of the taxpayer’s relocation date. However, there is a possibility to split the tax year and only begin UK tax residence from the day of arrival in the UK.

Experience shows that in the tax year of arrival in the UK, most investors have two connection ties: they acquire a home in the UK and their families become UK resident. The SRT allows them to stay in the UK for up to 120 days without becoming resident here provided they are not UK resident automatically. However, there are plenty of pitfalls and before determining his residence situation, the investor should avoid buying accommodation in the UK or entering into long-term leases, moving family and sending children to school and spending over 90 days in the UK in any tax period. Additional planning opportunities might be offered by the tie-breaker clause in the residence article of the double taxation treaty that the UK might have with investor’s residence State, although complications might arise stemming from the mismatch between the tax years’ periods. HMRC provides an interesting explanation of this rule in part INTM154040 of its International Manual (http://tinyurl.com/INTM154040).

Under Stage three the investor must invest £2 million by way of UK Government gilt-edged securities, share capital or loan capital in active and trading companies that are registered in the UK. The minimum investment threshold must be met only when the investments are made and there is no need for a top-up if their value falls during the continuous ownership period. It is also possible to rely on the existing investments, however, the Home Office will only count those that have been made in the UK in the 12 months immediately before the date of the application. Otherwise, the investor will have to make “fresh” investments, which might trigger tax consequences in the UK or in his residence State if to do so he would have to realise assets pregnant with gains.

Remittance rules and Business Investment relief

Provided that the investment comprises clean capital accumulated during Stage one, there will be no UK tax consequences on bringing the funds in the UK. In the opposite scenario, where the investments consist of foreign untaxed income and gains made after the date of first becoming UK tax resident, these will constitute remittances, on which the investor will be taxed at his applicable income tax rate. HMRC explain the meaning of remittance in part RDRM33140 of its Residence, Domicile and Remittance Basis Manual (http://tinyurl.com/RDRM33140).

Individuals who choose security over higher returns might prefer UK Government gilts, which can also be tax advantageous — there is no UK capital gains tax on their disposal and the coupon can be structured in a way that does not attract interest taxation when paid to non-UK tax residents. Also some gilts are exempt assets for UK inheritance tax purposes. Others invest through international banks that form a balanced portfolio of low risk quoted securities. UK-resident taxpayers are taxed on dividends they receive and gains derived from disposals. These methods are preferable for individuals with large amounts of clean capital that they can bring and invest in the UK without any tax consequences.

Investors with non-UK income and gains that will be taxed on remittance to the UK and who are not averse to risk might instead buy shares of UK trading unquoted companies or provide the funds to such companies as loans. The only limitation is that the companies cannot be mainly engaged in property investment, property management or property development, although it does not prevent investment in, for example, construction firms, manufacturers or retailers who own their own premises.

If they satisfy terms of the business investment relief (http://bit.ly/1wq9Wj6) the invested amounts shall not be treated as remittances and shall not be liable to UK tax. There are additional income tax and capital gains tax reliefs such as EIS, SEIS and VCT intended to encourage investment in the shares of unquoted trading companies. Finally, if the investor is appointed director or taken on as an employee of the company in which he has invested, he might be able to receive a substantial reduction on futuredisposal of its shares under the terms of the ‘Entrepreneurs’ Relief’ where the personal tax rate may be 10% on gains made.

Thus pre-arrival tax planning for a Tier 1 investor is a complex matter that should be done prior to finalising immigration plans. Future migrants should consider their medium to long-term planning strategy, which includes residence planning, creation of clean capital and acquisition of assets in the UK.

Real Estate Tax Exemption Issue Muddied Again

On December 23, 2014, the Commonwealth Court of Pennsylvania logged another frustrating mile down the confused and confusing road of property tax exemption for purely public charities.  In Fayette Resources, Inc. v. Fayette County Board of Assessment Appeals, the Court overturned a lower court finding that an operator of group homes for intellectually disabled adults satisfied the requirements for tax exemption as a “purely public charity.”  The Commonwealth Court held that Fayette Resources failed to show that it satisfied the second requirement of the so-called HUP test (declared in Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985)) that it donate or render gratuitously a substantial portion of its services.

While this opinion may be viewed simply as Fayette Resources failing to make an adequate record below, the case also illustrates the confusion created by the Pennsylvania Supreme Court’s decision in the 2012 Mesivtah case, Mesivtah Eitz Chaim of Bobov, Inc. v. Pike County Board of Assessment Appeals, 44 A.3d 3 (Pa. 2012), which held that non-profit entities must satisfy both the statutory requirements of the Purely Public Charity Act (“Charity Act”), codified at 10 P.S. 371-385, and the court-established HUP test.

When the HUP test was developed by the Supreme Court in 1985, there was no statute implementing the charitable exemption for “purely public charities” under Article VIII, Section 2(a)(v) of the Pennsylvania Constitution.  When the Charity Act was passed in 1997, however, the legislature filled that void, and created what should be the standard against which such questions are evaluated, unless the statute itself is declared unconstitutional either on its face or as applied.  Instead, in Mesivtah, the Supreme Court required that entities meet both tests, which can lead to inconsistent results, as occurred here.

The Commonwealth Court recognized that Fayette Resources “satisfies all of the statutory requirements imposed by the Charity Act”; nevertheless, it overturned the exemption because it found that an element of the HUP test was not met.

Even apart from the dual standard itself, it is  troubling that Fayette Resources, which provides staffed homes for the intellectually disabled (who are legitimate subjects of charity), is exempt from federal taxation, relieves the government of the duty and burden to care for the intellectually disabled and has no private profit motive, was found not to have established its entitlement to a real estate tax exemption because it did not show that its costs exceeded its revenues.  This rationale appears to conflict with the evidence that Fayette Resources is compensated by Medicaid payments, that any surplus revenues are directed back into acquisition or fixing up of group homes and that distribution of any funds for a private purpose is prohibited by the organization’s by-laws.

Is the Court saying that an entity must lose money on a consistent basis to be entitled to a real estate tax exemption?  Must it solicit charitable contributions to establish its claim?  These are the types of questions the legislature answered in the Public Charity Act.  The Supreme Court’s, and here the Commonwealth Court’s, insistence on applying the less detailed, court-established standard of the HUP test in addition to the Public Charity Act standards only creates confusion and additional costs to charities who must repeatedly litigate the vagaries of the HUP test — the very result the legislature attempted to avoid.

Moving to the UK from France

Some statistics rank London as the fourth largest ‘French’ city by population, and the number of French individuals moving to the UK is growing. This is not surprising – the UK offers a highly favourable tax regime for ‘non-domiciled’ individuals moving to the UK, while entrepreneurs, professionals and high net worth individuals in France are subject to tax rises.

However, crossing the Channel is not always plain sailing. Without careful planning, individuals moving to the UK may continue to have French liabilities and may not be able to take full advantage of the UK’s favourable regime.

In this briefing note we set out ten key tips and traps which should be considered as part of any plan to move to the UK. Charles Russell Speechlys’ Private Client tax specialists in London and Paris are ideally placed to advise individuals considering such a move.

Make sure you cease to be resident in France

This requires more than boarding the Eurostar at the Gare du Nord. Breaking French residency also does not simply mean spending less than six months of the year in France. You also need to take steps to demonstrate that your home has moved from France to the UK, and that your centre of personal and economic interests has moved. Factors that will be taken into account for these tests include where you have property available for your use, where your spouse and children are living, from where you manage your assets, where is your wealth mainly located, where you hold bank accounts and where your statements are received, for example.

Make sure you become resident in the UK

Similarly, you cannot assume that stepping off the Eurostar at St Pancras will cause you to be UK tax resident. The UK has a complex residence test, which is broadly based on the interaction between the number of nights spent in the UK and other connections with the UK. The UK tax year runs from 6 April to 5 April and if you arrive towards the end of a tax year, you may find that you will not meet the conditions to be regarded as UK resident during that year. Conversely, in other circumstances you may arrive part of the way through the year and find that you are treated as having become resident from 6 April. Detailed advice is essential.

Structure your accounts to take advantage of the UK remittance basis of taxation

UK residents are generally liable to tax on their income and gains on a worldwide basis. However, non-domiciled individuals (those who come from outside the UK

and do not intend to make the UK their permanent home) can choose to pay tax on the remittance basis. This means that they are only liable to UK tax in respect of their non-UK income and gains to the extent that they “remit” (ie bring) such funds to the UK.

Complex rules determine the tax treatment of remittances to the UK from “mixed” funds, ie non-UK accounts containing a mixture of capital, income and capital gain. By setting up a series of non-UK bank accounts in the correct manner, UK resident non-domiciliaries can ensure that their foreign income and gains remain outside the UK, while “clean” capital which is not subject to tax can be used for UK expenditure. If implemented correctly, this can enable UK resident non-domiciliaries to live in the UK at a very low tax cost.

Review investments and investment wrappers

Many French residents hold investments through an assurance vie, ie life insurance “wrapper”. The UK has a special regime for the taxation of life insurance products. Unless the policy has been designed with UK tax rules in mind, it is likely to be taxed as a “personal portfolio bond” meaning that policyholder will be subject to highly punitive tax charges in respect of gains which are deemed to arise on an annual basis. Individuals holding such policies should consider encashing them on arrival in the UK, or altering the terms to make them UK compliant.

More generally, certain directly held investments may receive unfavourable UK tax treatment. For example, gains realised on the disposal of “non-reporting” funds (including hedge funds and most non-UK collective investments) are subject to income tax rather than lower capital gains tax rates. It is advisable to review investment mandates in light of UK tax considerations.

Consider the French exit tax

Individuals holding shares giving a right to 50% of a company’s net profit or with a global value exceeding € 800,000 are subject to an exit tax in respect of unrealised gains, on ceasing French residence. The tax is automatically deferred if you move to another EC country such as the UK, but will be crystallised if certain triggering events occur within 15 year such as leaving the EC or, sale of the shares.

It may be possible to restructure a shareholding in a family business through a non-French holding company in order to mitigate the consequences of the exit tax for a future sale of the business. This might involve establishing a Luxembourg holding company having sufficient substance, which we can implement through our Luxembourg office.

Check company directorships

If you are a director of a non-UK company, then there may be a risk that following your move to the UK, the company could be regarded as “managed and controlled” in the UK and thereby subject to UK corporation tax. Even if you retire as a director, you could still be treated as a “shadow director” if the board

acts in accordance with your instructions. It is essential that corporate structures are reviewed carefully to protect against this risk.

Protect UK real estate from inheritance tax

London property is expensive, and the purchase of a property is often easily the single largest item of expenditure by individuals moving to the UK. UK property is subject to 40% inheritance tax on death and so the tax bill can prove costly. There are, however, opportunities to structure the purchase of a property in such a way that its value is protected from inheritance tax. It is essential to take advice before the purchase because the opportunities for tax mitigation are severely limited once a property has been bought.

Review marriage contracts

A French marriage contract will not generally be respected in English divorce proceedings. In certain circumstances, the starting point for the division of assets between a couple in the English divorce courts will be a 50/50 split. Our Family team can advise on putting in place a “mid-nuptial” agreement to protect your assets.

Put in place a Will

If you acquire property in the UK, you should put in place a suitable Will to ensure that it will pass to your chosen heirs smoothly and in a tax efficient manner.

Your move to the UK may also have implications for your estate outside the UK. From August 2015, an EU regulation will alter succession laws in France. The operation of this regulation is not straightforward but, broadly, it could result in English law governing the disposition of your French assets, if you are resident in the UK at the time of your death. It is therefore important to review your estate planning, following moving to the UK.

Don’t forget France when estate planning

Much tax and estate planning in the UK involves trusts. However, trusts can have very disadvantageous consequences where assets or beneficiaries in France are involved. A typical UK estate plan might result in punitive tax charges for French heirs or in relation to French assets. Estate planning needs to have regard to both the French and UK systems.