Jersey Funds Association UK taxation update

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Martha Morgan
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1 Jersey Funds Association UK taxation update 12

2 Contents Funds Real Estate Questions?

3 DIMF and changes to taxation of carried interest 3

4 The trilogy of tax changes The Disguised Investment Management Fees rules (From 6 April 2015 for sums arising directly or indirectly and from 22 October 2015 for amounts arising to connected persons/companies or other persons where power to enjoy ). Designed to prevent management fee income paid or benefitting individuals not being fully subject to UK income tax. Broadly all amounts in respect of the individual are in scope unless meet the definition of carried interest or co-invest. Carried Interest rules (From 8 July 2015 for sums arising directly or indirectly and from 22 October 2015 for amounts arising to connected persons/companies or other persons where a power to enjoy ). Designed to prevent base cost shift to ensure carried interest is fully subject to UK capital gains tax rates and also fundamentally changes the tax treatment of nondoms. Income Based Carried Interest rules (Draft legislation published 9 December 2015 and will apply to sums arising from 6 April 2016). Designed to ensure carried interest from funds that are trading by reference to the average holding period of the investments be proportionally subject to UK income tax based upon a strict criteria. 4

5 Timeline of recent UK tax changes for asset managers Introduction of the Disguised Investment Management Fees ( DIMF ) rules 6/4/2015 Revised (and backdated) DIMF and Carried Interest rules 22/10/2015 Introduction of rules on IBCI (and revised DIMF rules) 6/4/ /7/2015 9/12/2015 6/4/2017 Introduction of the Carried Interest rules (and revised DIMF rules) Consultation on Performance Linked Rewards ( PLR ) Draft FB 2016 including Income Base Carried Interest ( IBCI ) (formerly PLR) (and revised DIMF rules) Introduction of deemed UK domicile rules For discussion purposes only 5

6 DIMF rules Overview From 6 April 2015 the rules apply to all sums : Arising directly or indirectly from an investment scheme (being a collective investment scheme and an investment trust but under review). After 22 October 2015 the rules apply to amounts arising to individuals, connected persons (including trusts), connected companies and other persons where the individual has a power to enjoy. The individual performs (or performed at any time) investment management services in the UK (this includes, but not limited to: fund raising; research and due diligence; and acquiring, managing or disposing of investments). HMRC s view appears to be that this would include essentially all individuals working for an asset manager business and even includes an example whereby a 3rd party service provider could be caught. Prior to 6 April 2016 the arrangements need to involve at least one partnership. And the sum will be untaxed (i.e. not taxed as UK trading or UK employment income). If the DIMF rules apply Amounts arising to UK individuals are treated as profits of a deemed UK trade carried on by the individual (taxed at rates up to 47%) The rules apply to non-residents even if they come to the UK for 1 day (i.e. fly ins ). However, the individual s activities needs to constitute a permanent establishment. Certain carried interest and coinvestment returns are excluded. 6

7 Carried interest will be subject to a minimum tax rate of 28% Carried interest rules Four fundamental changes The elimination of Base Cost Shift Carried interest will be subject to a minimum tax rate of 28% Interest and dividends still taxed at income tax rates Remittance basis for nondoms determined by location of duties not just situs of asset Move from arising basis to power to enjoy Statutory definition of carried interest 7

8 Carried Interest rules Practical challenges and considerations Apportionment methods of calculating UK and non-uk proportions Reporting practicalities Need UK figures. US K1 will not be sufficient Remittance implications: Apportionment at time of payment Four bank accounts to minimise impact of the application of the mixed fund rules Calculation of average holding periods 8

9 Real Estate 9

Jersey UK DTA changes Measure come into effect from Report Stage of the Finance Bill 2016. New rules will not depend on the existence of a permanent establishment in the UK.

10 Jersey UK DTA changes Measure come into effect from Report Stage of the Finance Bill New rules will not depend on the existence of a permanent establishment in the UK. Jersey companies have for a number of years been used to legitimately take advantage of the benefits within the double tax arrangements with the UK to reduce the UK taxation on UK property development undertaken by non-uk resident persons. These proposals will therefore have an impact on the tax position of these companies although the intention is merely to place non-uk developers of UK property in the same position than UK developers. March 2016 Budget announced a change to the Jersey / UK DTA It ensures that non-uk resident developers of UK property will always be brought into UK tax on the profits from that development 10

11 Diverted Profits Tax and Real Estate 11

Timetable Companies must notify if Diverted Profits Tax applies within 6 months of year end (3 months in future years) Announced during Autumn Statement 10 December 2014 Public consultation held for

12 Timetable Companies must notify if Diverted Profits Tax applies within 6 months of year end (3 months in future years) Announced during Autumn Statement 10 December 2014 Public consultation held for stakeholders 4 February 2015 Updated draft legislation published in Finance Bill March 2015 Legislation enacted by Parliament and interim guidance released 30 March Diverted Profits Tax took effect in respect of diverted profits arising on or after 1 April

Summary of legislation A new 25% tax on a company s taxable diverted profits in two scenarios Entities or transactions lacking economic substance: Where groups create a tax benefit by using

13 Summary of legislation A new 25% tax on a company s taxable diverted profits in two scenarios Entities or transactions lacking economic substance: Where groups create a tax benefit by using transactions or entities that lack economic substance as defined in the legislation (including UK-UK transactions). A comparison of the value of the tax reduction and the financial benefit of the transactions or the economic contribution of the entities' staff ; and 1 Scenario Focus on situations where absent the tax benefit the UK expenditure would not have been incurred or the income would have been in the charge to UK tax. 2 Avoidance of a UK taxable presence: Where foreign companies have arranged their UK activities to avoid creating a permanent establishment. Scenario The legislation has a secondary objective of requiring companies to notify HMRC early if DPT might arise. 13

14 Recent developments 300 companies in HMRC s sights. Still no formal clearance procedure for DPT fear of setting precedent. Companies reassessing their Transfer Pricing policies and business models. Companies addressing their DPT accounting position for 31 December 2015 year ends to assess notification requirements. Technical queries have been submitted to HMRC. TP adjustments to reduce DPT charge. Credit for foreign taxes paid against DPT liability. Foreign tax groupings. ROBUST view! 14

15 DPT and Non-Resident Landlord S.80 Tenants On-lease to tenants UK Property Co 1 UK Property Co 2 Transfer of undeveloped property Lease back Company in low tax territory Development managed by UK Property Co First guidance suggested possible S.80 exposure: Transactions would not have occurred absent tax. Offshore Co has capital but unable to manage it itself. Relevant alternative provision: no deduction rental payments to Offshore Co. Latest guidance (Nov 2015): No loss of tax as NRL tax applies. First guidance prompted by case where agreed treaty trumped NRL. 15

16 DPT and Non-Resident Property Developer S.86 Nonresident owners HMRC argue UK contractors activity can constitute avoided PE for S.86. Appoints contractors UK contractors Undertaken works Offshore PropCo UK property development and sale Tax payers resists attribution of profits arguing significant people functions not in UK. HMRC counters presence of property in UK gives significant weight to profit allocation. 16

17 Practical Considerations Notification (6 months after year end) Advanced pricing Agreements Tax Due Diligence (M&A) Business Operating Model Reviews 17

18 Take home messages Notification deadline is looming Have you reached a decision? Do you have an in-depth and robust level of technical and evidential analysis? Do you have a Transfer Pricing policy, does this need reevaluating? 18

19 Profits from trading in and developing UK land 19

20 Profits from trading in and developing UK land Finance Bill 2016 Background UK tax on land Territorial scope Capital Gains Tax exemption for non-residents except: Residential property. Assets used by the UK PE of a non-resident company, for the purposes of trading. Trading profits taxable if: Company UK resident, worldwide profits and gains. Company non-resident, trading in UK through a PE. Company non-resident, no UK PE, residual income tax liability subject to treaties. Subject to DPT. Some property developers were using offshore structures to avoid UK tax on their profits from trading in property in the UK. 20

21 Real Estate trading profits Example 1 UK developer carrying on development activity wholly in the UK Nonresident owners Appoints contractors UK PropCo Development profits fully charged to UK tax Contractors Undertake works UK property JIBS 21

22 Real Estate trading profits Example 2 offshore developer with no UK resident company Nonresident owners Appoints contractors Offshore PropCo Claimed that minimal part of development profit charged to UK tax Contractors Undertake works UK property Some offshore PropCos use DTA with PE definition that does not include building site. Even if DPT catches contractors argued that limited profits to tax. JIBS 22

23 Anti-Avoidance rule To ensure that an offshore developer of UK land is taxed in the same way as a UK developer and cannot benefit from more favourable treatment. Non-resident companies can be taxed on trading profits from UK property regardless of whether there is a UK PE. Avoidance Risk: Fragmentation Disguised trading through selling envelopes Effective date: 16 March 2016 JIBS 23

24 Implications for Jersey Double Taxation Agreement with the UK has been amended (protocol took effect on 16 March 2016). Impact on UK property developers based in Jersey. Protocol took effect on 16 March 2016 JIBS 24

25 Questions? 25

26 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers CI LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers CI LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers CI LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Diverted Profits Tax 2015 briefing 21 April 2015

Diverted Profits Tax 2015 briefing 21 April 2015 www.pwc.com/jg 2015 briefing Agenda 1 Diverted 2 How will Profits Tax background 5 6 What does this mean for you? Who will Diverted Profits Tax impact? Questions 3 4 Diverted Profits Tax work? Examples