Private Client Briefing

Transcription

1 Private Client Briefing March 2013 Contents Note from the Editor 01 Tax Updates: UK: Personal taxes 02 France: Personal taxes 04 Germany: Real estate 07 Spain: Real estate 08 Greece & Italy: Yachts 09 Case studies: UK Immigration 12 UK Real Estate 13 Special Report: Hotels 14 Contacts 16 Note from the Editor Itʹs a pleasure to welcome you to another edition of our Private Client Briefing unfolds against a background of continuing global economic fragility, with many governments of developed countries resolved to tame bloated public sector debt. As one response the crisis has seen tax administrations in these countries re double their efforts to collect unpaid tax and our Briefing kicks off with a look at two life lines thrown to non compliant taxpayers in the United Kingdom to regularise their affairs: the UK/Switzerland Tax Co operation Agreement and the Liechtenstein Disclosure Facility (though options should be considered swiftly on the former). In France, the combination of the economic situation and a new socialist government has seen moves to increase a number of personal taxes; the report from our Paris office highlights the main changes to these contained in the first new finance laws under M. Hollande. It s not all doom and gloom though: adversity brings opportunity and many high net worth individuals will be on the look out for new investments. Once something is found they will want to ensure optimum tax efficiency for holding the new asset. With this in mind, we have a report from Germany summarising some of the tax issues when contemplating an investment in real estate there and another from Spain highlighting a softening in Transfer Tax in relation to businesses employing real estate assets. For those clients who take to the sea, WFW has a long experience of advising in relation to yachts and superyachts. In this Briefing we turn our attention to VAT on chartering yachts, with an outline on new VAT regulations recently brought in in Greece and Italy. wfw.com

2 02 PRIVATE CLIENT BRIEFING Aside from tax, we have some interesting articles from contributing WFW specialists on: UK Immigration and Real Estate our London office is regularly instructed by foreign clients wishing to come and live in the UK for help in securing appropriate immigration status and buying a residence; two case studies illustrate the wisdom of obtaining proper advice in these areas Hotels these are long established as an attractive asset class to certain private clients; here we provide an introduction to some ins and outs of approaching investment in this sector I hope you will find some interesting features in our Briefing. Please contact the relevant WFW contributor or any of our team on the final page if you would like any more information. David Harvey Editor Head of Swiss Desk Tax update: UK Regularising non compliant offshore affairs Sarah Gatley Associate, Tax, London The UK/Swiss tax co operation agreement and the Liechtenstein disclosure facility As part of the UK Governmentʹs continuing drive to increase its information gathering powers and to combat tax evasion by UK taxpayers using offshore centres, the UK Government has entered into agreements with the Governments of Switzerland and Liechtenstein. The agreement with the Swiss Government impacts UK residents with bankable assets in Switzerland, whilst the agreement with the Liechtenstein Government may be applicable to those persons who have unassessed UK tax liabilities. The aim of the [UK/Swiss] Agreement is to tackle tax evasion by UK residents who have Swiss bank accounts. The UK/Swiss tax co operation agreement On 6 October 2011, the UK/Swiss tax co operation agreement (the ʺAgreementʺ) was signed. The Agreement has now been ratified by both the UK and Switzerland and came into force on 1 January The aim of the Agreement is to tackle tax evasion by UK residents who have Swiss bank accounts. Notwithstanding this, even those individuals who have paid all tax due on their assets in Switzerland will be affected by the Agreement, so they should not ignore it. The Agreement applies to UK resident individuals (including those who are non UK domiciled) who had bankable assets in Switzerland on 31 December 2010 and who still hold these on 31 May Affected individuals should ensure that they consider the implications of the Agreement and seek the appropriate professional advice, as they have a number of rights and duties under the Agreement. UK resident but non UK domiciled individuals claiming the remittance basis will have additional rights under the Agreement. The Agreement, which deals with both past tax liabilities and future tax liabilities, offers UK resident taxpayers various options. They can make anonymous one off payments to

3 PRIVATE CLIENT BRIEFING 03 settle past tax liabilities and pay tax using a lifetime withholding mechanism going forward. This enables an individual to preserve his or her anonymity. As an alternative, they can authorise the Swiss bank to disclose details of their accounts to HM Revenue & Customs ( HMRC ), the UK tax authority. The one off payment will apply to all individuals who were UK resident on 31 December 2010 and who have bank accounts in Switzerland that were open on 31 December 2010 and are still open on 31 May The rate of the payment will be determined according to a complex formula resulting in effective rates of between 21% and 41% of the individual s bankable assets. The Agreement will impose a lifetime withholding tax on income arising and gains realised on Swiss accounts going forward. For UK domiciled individuals, the withholding tax rate will be 48% on interest, 40% on dividend income, 48% on other income and 27% on capital gains. Certain taxes may be credited against the withholding tax. The alternative to the one off payment and/or the withholding tax involves an individual authorising disclosure of his or her accounts to HMRC. The Swiss bank would, if the disclosure option is pursued, report an individual s income and capital gains to HMRC via the Swiss tax authorities. If the individual does not authorise disclosure, the withholding tax will be applied automatically. A UK taxpayer who has already paid the appropriate amount of tax on his or her Swiss accounts will need to allow the Swiss bank to disclose details of his or her accounts to HMRC, to avoid double taxation. The Agreement, which deals with both past tax liabilities and future tax liabilities, offers UK resident taxpayers various options. Non UK domiciled individuals are subject to different rules under the Agreement. Whilst not the subject of this article, the issue of domicile is a complex one and individuals who may fall within the special rules for non UK domiciliaries need to be sure that they are genuinely non UK domiciled for tax purposes. Non UK domiciled individuals can opt out of the one off payment mechanism. In order to opt out, non UK domiciled individuals must provide a written certificate from their professional advisor to the relevant Swiss financial institution. This certificate must confirm that the individual s tax return for the year in question contains a claim that the individual is not UK domiciled, that the individual has claimed the remittance basis of taxation, and that his or her domicile status is not formally disputed by HMRC. In addition, the Agreement also provides for an enhanced exchange of information between the tax authorities of the UK and Switzerland. The consequences of the Agreement are wide ranging. Affected individuals, particularly those who have undisclosed income in Switzerland, will need to obtain specialist tax advice and consider the best course of action to take. If an affected individual does not take any action before 31 May 2013, a withholding will be applied. The Liechtenstein Disclosure Facility ( LDF ) In August 2009, the Governments of the UK and Liechtenstein signed a Tax Information Exchange Agreement. A second agreement was entered into on 11 November 2010 which amended the original agreement. These agreements will allow UK residents who have unassessed UK tax liabilities to settle these tax liabilities under a special agreement, known as the LDF. The LDF will apply to those persons (this includes individuals and companies) with a beneficial interest in relevant property, in respect of whom a Liechtenstein financial Watson, Farley & Williams March 2013

4 04 PRIVATE CLIENT BRIEFING intermediary provides relevant services. Relevant property includes bank accounts in Liechtenstein, and companies, trusts, partnerships or foundations which are incorporated, founded or settled in Liechtenstein. The LDF will run from 1 September 2009 until 5 April 2016 for those with relevant property on 1 September 2009, and from 1 December 2009 to 5 April 2016 for those persons acquiring relevant property after 1 September Those persons who are not currently eligible to use the LDF can, by creating a beneficial interest in relevant property, use the facility. The LDF can therefore be used by those with no prior links with Liechtenstein. The LDF involves a voluntary disclosure of all unassessed UK tax liabilities for those tax years covered by the facility. Tax will be payable at the usual UK tax rates (although special rules apply whereby it is possible to elect for a single composite rate of 40%). Usual interest rates apply, penalties are fixed at 10% (reduced to nil in respect of innocent errors) for tax years ended up to 5 April This is subject to certain exclusions. The UK/Swiss Agreement and the LDF offer those taxpayers with undeclared income and/or capital gains a mechanism to regularise their tax affairs... Where a person enters into an agreement under the LDF, all liabilities to UK tax are covered for those years to which the LDF applies. Certain people, such as those subject to investigation by HMRC, may not take advantage of the LDF. Those participating in the LDF will not be subject to a criminal investigation. Liability is limited to tax years beginning on or after 6 April 1999 for individuals and 1 April 1999 for companies, and may be reduced to six or four years before the tax year of disclosure for careless or innocent errors. It should be noted that the LDF does not allow the taxpayer to retain his or her anonymity (unlike the UK/Swiss Agreement), so if this is a consideration, the LDF may not present an attractive option. A careful analysis needs to be undertaken before deciding if the LDF is an appropriate route to pursue, particularly where a person does not already have a beneficial interest in relevant property. Conclusion The UK/Swiss Agreement and the LDF offer those taxpayers with undeclared income and/or capital gains a mechanism to regularise their tax affairs. However, affected persons should seek appropriate professional advice to ensure that they take the most appropriate action applicable to their particular circumstances. Tax update: France The new regime on personal taxes Romain Girtanner Partner, Tax, Paris Following the enactment of the Finance Law for 2013 and the third Amending Finance Law for 2012 on 29 December 2012, this article provides an overview of the main tax measures relating to individuals. Back to high wealth tax rates The 0.25% rate applicable to the portion of net wealth between 1.3m and 3m and the 0.5% rate applicable to that exceeding 3m have been abolished. From 1 January 2013, the

5 PRIVATE CLIENT BRIEFING 05 following progressive wealth tax rate applies: Net Value of Asset (N) Rate 0 800,000 0% 800,000 1,300, % 1,300,000 2,570, % 2,570,000 5,000,000 1% 5,000,000 10,000, % over 10,000, % Wealth tax is payable on net assets exceeding 1,300,000. The taxable basis is determined according to the fair market value of the assets on 1 January each year. The scope of the French wealth tax is unchanged. It continues to apply to worldwide assets for French tax residents or to the French assets only of those who are tax resident elsewhere. Deductions from gross assets for wealth tax purposes are only possible for liabilities that relate to assets subject to the tax; where assets are wholly or partly exempt from wealth tax or are not subject to it at all, related liabilities are no longer deductible. The total of a French taxpayerʹs liability to wealth and income tax is capped at 75% of the tax payerʹs ʺannual taxable incomeʺ. The French Constitutional Court struck down certain provisions in the draft Finance Bill that would have broadened the parameters of ʺannual taxable incomeʺ. For individuals with a low annual taxable income, the 75% cap can significantly reduce the impact of wealth tax. Increase of dividends taxation Under the previous regime, dividend income was, at the election of the taxpayer, taxed either at the progressive rate of individual income tax (margin of 41%) after application of a 40% tax allowance, or subject to withholding tax at a rate of 21%. The Finance Law provides that, as from 2013, dividends will be taxable at the standard progressive income tax rate applicable to salaries after application of a 40% tax allowance, the year following their perception. Upon perception, dividends are subject to a prepayment withholding tax of 21%, which is offset against income tax in the following year. Dividends remain subject to French social contributions of 15.5%. The last financial bills increased individual taxation in France but the tax treatment of holding companies is still efficient for investments in France. Non French tax residents remain subject to a withholding tax of 21% for residents of EU or EEA member states and 30% for residents of other states (apart from specific exclusions), without social contributions. Increase of interest taxation Previously, interest received by individuals was taxed at their option, either at the progressive rate of individual income tax (margin of 41%), or subject to a 24% withholding tax. The new Finance Law provides that interest received by French residents will now be subject to the progressive rate of individual income tax in the year following its perception (margin of 45% plus a surtax up to 5%). Upon perception, interest is subject to a pre payment withholding tax of 24% which will be offset against income tax due the Watson, Farley & Williams March 2013

6 06 PRIVATE CLIENT BRIEFING following year. Interest remains subject to French social contributions (15.5%). Non French residents are not subject to a withholding tax, unless interest is paid through ʺNon Cooperative States and Territoriesʺ. Increase of capital gains taxation Capital gains on share sales were previously subject to a 19% flat rate tax plus French social contributions of 15.5%. The Finance Law provides that, as from 1 January 2013, capital gains on the transfer of shares in French or foreign companies will be subject to the standard progressive income tax rate (margin of 45% plus a surtax of up to 5%). A rebate is applied to the amount of capital gain before taxation, as follows: 20% of the gain if the shares sold have been owned between two and four years; 30% of the gain, if the shares sold have been owned between four and six years; 40% of the gain, if the shares sold have been owned for more than six years Depending on the tax residency of the investor and on the acquisition structure, it may be possible to avoid or mitigate the above capital gains tax costs. Capital gains will also continue to be subject to French social contributions (15.5%). Exceptionally, French tax residents who are shareholders and directors of the company disposed of should continue to benefit from a flat tax rate of 34.5% (including 15.5% social contributions), subject to certain conditions relating to the period for which the share capital has been held and its amount. For sales occurring in 2012, capital gains realised by non French tax residents who, along with their family and relatives, held more than 25% of the share capital of the French company sold are subject to withholding tax at a fixed rate of 19%. In 2013, this fixed rate rises to 45%. French tax non residents owning less than 25% of the share capital of the French company continue to benefit from the tax exemption. The Amending Finance Law for 2012 also amends the exit tax regime for individuals leaving France. Calculation of the taxable capital gain takes into account the abovementioned holding rebate (20%, 30% or 40%). The taxpayer may benefit from a deferred taxation if constituting guarantees equal to 30% of the amount of capital gain. Additional tax on real estate capital gains The Amending Finance Law for 2012 provides a specific tax which applies to the sale of construction land whenever realised capital gains exceed 50,000 and where the gain is not exempt from taxation (such as an asset sold after 30 years). The tax rates vary from 2% on capital gains exceeding 50,000 to 6% for those exceeding 260,000. Other recent tax changes in France already adopted in 2012 Application of social contributions to French real estate owned by non French tax residents Foreign tax residents are now subject to French 15.5% social contribution on any income derived from properties they own in French territory. The social contributions apply to rental income and to capital gains. EU tax residents are now subject to a 34.5% capital gains tax and non EU tax residents to a 48.5% capital gains tax on the sale of their properties located in France. Further, non French tax residents may now be subject to tax and social contributions of up to 54.5% on capital gains from the sale of a French property. Depending on the tax residency of the investor and on the acquisition structure, it may be possible to avoid or mitigate the above capital gains tax costs.

7 PRIVATE CLIENT BRIEFING 07 French tax authoritiesʹ comments on new tax legislation for Trusts Trustees are now required to disclose their trusts to the French tax authorities when either the settlor is a French tax resident or a beneficiary is a French tax resident or an asset or right in the trust is located in French territory. On 16 October 2012, French tax authorities issued guidelines detailing the two tax forms that should be filed by trustees. Failure to file the required tax forms is subject to a penalty of 10,000 or 5% of the total value of the assets in the trust, whichever is the higher. Tax update: Germany Tax considerations for the purchase of real estate in Germany Verena Scheibe Partner, Tax, Hamburg The German real estate market is considered by many to be an attractive investment area in Europe due to both the size of the market and the economic stability within Germany. German real estate can be acquired either directly by way of an asset deal, or indirectly by acquiring shares in a legal entity holding ownership in real estate (a share deal ). Such legal entities are typically organised as a limited partnership (e.g. GmbH & Co KG) or as a limited liability company (e.g. GmbH). Real estate transfer tax Direct real estate asset deals are subject to Real Estate Transfer Tax ( RETT ) in Germany. RETT is levied by the tax authority relevant to the asset s location. The level of taxation is decided by the respective Federal State, and rates vary between 3.5% and 5.5%. The tax base for asset deals is the purchase price plus other obligations to be fulfilled by the buyer. The buyer and seller are both liable to pay RETT, however in practice the buyer usually bears the full cost of RETT and other transaction expenses (e.g. notary costs). The German real estate market is considered by many to be an attractive investment area in Europe due to both the size of the market and the economic stability within Germany. RETT may also apply in a share deal, depending on the legal form of the real estate entity acquired (corporation or partnership), and the respective shareholding (at least 95% transferred or total shareholding of the buyer). The tax base for share deals is the tax value of the real estate, which needs to be assessed by the tax authorities. However, market practice frequently means that certain acquisition structures are used in order mitigate RETT in a share deal. Details of these acquisition structures should be carefully considered in each individual case as there is the potential risk of contravening anti avoidance legislation. Income tax The acquisition of real estate (whether by share deal or asset deal) generally triggers capital gains taxation, which is applied to the seller. However, it is possible that the buyer might be held liable for certain taxes if it acquires a business as a going concern through an asset deal. In share deals, the buyer indirectly acquires all the tax liabilities of the acquired entity. The purchase price for buildings owned by a partnership can depreciate over the useful life of the asset, which is normally 33.3, 40 or 50 years. In the case of a share deal with a corporation as building owner the depreciation of the current book value remains unchanged and no step up of the book value is possible. The purchase price of land is excluded from annual depreciation. Watson, Farley & Williams March 2013

8 08 PRIVATE CLIENT BRIEFING VAT Under German VAT law, the sale of real estate by way of an asset deal is either VATable but tax exempt, or non VATable when a business is transferred as a going concern. However, in a tax exempt case, the seller might choose to opt for a tax liable transaction for buildings with VATable leases in order to collect input VAT (e.g. on nonresidential (commercial) buildings). In this case the reverse charge mechanism is applicable. The structure of any share deal transaction has to be analysed to see whether or not it will be subject to German VAT law, as it is possible to treat these transactions as non VATable transfers of a business as a going concern. Alternatively, they can be VATable but (unless the seller opts out) tax exempt. The applicable VAT rate is currently 19%. Foreign investment structures Foreign institutional investors can often make use of special purpose vehicles ( SPVs ) in order to invest in the German real estate market. These are often set up as limited liability companies in the form of a Luxembourg S.à r.l. or a Dutch B.V. Such structures are typically used in order to mitigate German corporate income tax (which is currently 15% plus solidarity surcharge an additional 5.5%), and to exclude any further taxation in Germany, such as trade tax or withholding tax. However, the use of such structures may mean that there are practical business limitations, as they require that no permanent establishment be created in Germany. Furthermore, they are subject to German anti avoidance legislation and treaty overriding regulations. Therefore, it is important to analyse the use of such structures on an individual basis, as the most beneficial approach will vary depending on the structure of the transaction. As of 31 October 2012, the scope of the application of Transfer Tax on the acquisition of stock in companies with significant real estate assets has been significantly reduced. Tax update: Spain Investment in real estate mitigation of Spanish real estate transfer tax Luis Soto Partner, Tax, Madrid Changes to the Spanish Real Estate Transfer Tax ( Transfer Tax ) became effective as of 31 October Below we provide a summary. The legislative change was introduced with Law no. 7/2012 of 29 October, and was published in the Official State Gazette of Spain (BOE) on 30 October It contains an amendment to the Transfer Tax regime which entails a significant reduction of its scope of application on acquisitions of stock in companies owning substantial real estate assets in Spain. Previous regulation Article 108 of the Stock Exchange Act stated that the acquisition of securities is exempt from Spanish VAT and Transfer Tax. However, the acquisition of stock in companies with more than half of their total assets made up of Spanish real estate was subject to Transfer Tax, which is applied at a rate of 7% or more. The tax was only applied if the purchaser gained or increased their control over the company as a result of the acquisition.

9 PRIVATE CLIENT BRIEFING 09 The regulation applied to the transfer of any stock belonging to companies owning substantial real estate assets in Spain, regardless of whether the underlying real estate assets were linked to their business activities and regardless of whether there was an intention to avoid or reduce payment of the taxes applicable to a direct acquisition of real estate assets. Current regulation As of 31 October 2012, the scope of the application of Transfer Tax on the acquisition of stock in companies with significant real estate assets has been significantly reduced. Article 108 of the Stock Exchange Act will now only apply to transactions consisting of unlisted stock carried out in the secondary market for tax avoidance purposes. Another significant change is that now those taxable acquisitions made for tax avoidance reasons will not automatically be subject to Transfer Tax, but to whichever tax which would apply in a direct acquisition of real estate assets (rather than an acquisition of stock). This can be either Spanish VAT (normally applicable to business transactions conducted by companies or entrepreneurs) or Transfer Tax (generally applicable to private transactions carried out by individuals). Transfer Tax or VAT will apply under the following three circumstances: Where the acquisition is carried out in the secondary market. Acquisitions in primary markets have become exempt from Transfer Tax. Where the transaction consists of unlisted stock. Until now the acquisition of listed stock has been taxable under certain circumstances. Where the transaction is carried out for tax avoidance reasons (i.e. where at least 50% of the underlying assets of the acquired company are made up of Spanish real estate but it is not linked to its business activities). The new regime will mitigate taxation on the acquisition of stock in operating companies where real estate assets form an essential part of their operations (such as factories, utilities and renewable energy plants, hotels and retirement homes or real estate leasing). It is hoped that this will encourage the acquisition of stock in such companies going forward. Tax update: Greece & Italy Yachts: The Greek and Italian VAT regimes on chartering Vassiliki Georgopoulos Associate, Shipping Finance, Piraeus Until the financial crisis hit the southern European countries, new legislation and regulations in respect of yachting were being adopted by individual countries with a view to attracting interest from key players (owners, tax advisers, charterers, lawyers and banks) in the local yachting industry. With intense growth in the marine industry, the measures were also put in place to maintain competitive advantage in the light of innovative legislation occasionally passed by neighbouring countries. Today, such laws and regulations provide an alternative source of governmental funding often as part of austerity measures... Today, such laws and regulations provide an alternative source of governmental funding often as part of the austerity measures introduced (for example, in Greece and Italy) where governments have suffered from sharp falls in their revenue and want to reduce Watson, Farley & Williams March 2013

10 10 PRIVATE CLIENT BRIEFING their deficits by taking advantage of their geographical position. Some of the new VAT regulations recently adopted by Greece and Italy in respect of yachting are outlined below. With effect from 2010, the general VAT rule in respect of the supply of services is that it becomes payable at the applicable rate of the European Member State where the supply of services is taking place. In the case of yachting, if the yacht is made available to the hirer in an EU jurisdiction, it will be subject to VAT in that jurisdiction. Prior to this new rule, VAT was accounted for in the jurisdiction where the yacht owning/hiring entity was established. Yachting VAT (ΦΠΑ) in Greece The most straightforward route for chartering a yacht within Greek waters is by registering it under the Greek commercial flag. The option of chartering an EU registered yacht owned by an EU owning entity is also available although in reality the actual process may be time consuming through bureaucratic process and the fact that the process has only been put to the test in practice a few times. A licence to charter is required and with effect from 2003 such licence should be renewed every five years by submitting documentary evidence that the yacht was engaged for not less than 200 days of charter within the 5 year period (or 300 days in the case of yachts under 20 metres which may also be bareboat chartered). Although there are no VAT exemptions, the Greek maritime and tax authorities may apply, at their discretion, a reduced rate of VAT... VAT is payable in respect of all Greek charters within the Greek territorial waters. Until recently the applicable VAT on charter hire fees was 11% which has now been increased to 13%. If the yacht is not owned by a Greek registered entity (EPE (limited liability company), a Société Anonyme, or a NEPA (maritime company for pleasure yachts)) the owner will have to establish a branch office in Greece with a local VAT number in order to pay all relevant taxes (inclusive of VAT) to the Greek authorities. Although there are no VAT exemptions, the Greek maritime and tax authorities may apply, at their discretion, a reduced rate of VAT depending on the specifications of the yacht and provisions of the charter (e.g. duration). For VAT purposes commercial yachts are divided into three categories: 1. Large, 2. Medium and 3. Small. Such categorisation is determined by the Greek tax authorities based on the length, gross tonnage, VHF equipment and generally on the yacht s capacity of being able to operate short, medium or long term distance journeys, respectively. A guide in respect of the discount (in percentage terms) in the VAT rates which one may achieve is as follows: Small yachts, up to 40% Medium yachts, up to 50% Large yachts, up to 60%. The applicable reduced rate is ascertained only by the Greek tax and maritime authorities. In addition to the above, it should be noted that a charter commencing in Greece which relates to a yacht being engaged outside Greek waters at all times is not subject to VAT. It is also worth noting that an owner of a Greek registered yacht has the right to use their own yacht for a maximum period of 30 days (or 60 days in the case of yachts of less than 20 meters) during which period there is an obligation by that owner to pay VAT on charter hire fees which, despite not being payable to the owning entity, are being calculated at the market standard rate. If the owner wants to use its yacht for a period exceeding the maximum periods referred to above, that owner will have to pay the actual

11 PRIVATE CLIENT BRIEFING 11 charter hire fees (calculated as above) plus the applicable VAT. At a time when tax advisers and lawyers are struggling to interpret the meanings of market standard rate and the criteria pursuant to which the discounted rates of VAT may apply, the local legislators have acknowledged the need for an overall restructured framework in the yachting industry. Increasing competition between the international and European registries of shipping is putting pressure on the Greek government to simplify all procedures/paperwork in respect of the vessel registration process and eradicate all bureaucratic formalities. As tourism and shipping is the engine of the Greek economy, the Greek ministry of shipping is continually working to streamline and reform the system in order to provide more flexibility, obliterate the recently introduced luxury taxes and lift the cabotage restrictions in their entirety (such cabotage restrictions have been recently removed in respect of all vessels carrying more than 49 passengers) in order to make Greek waters more welcoming. Yachting VAT (IVA) in Italy The new VAT regulations relate to the following types of charter: In order to be able to pay VAT in Italy, the yacht owning entity will need to register for VAT there or appoint a fiscal representative. a. a short term charter (i.e. continuous possession or use of a vessel for a period not exceeding ninety days) provided that such charter commences in Italy, or if the first port is outside the EU, the yacht subject to that charter operates within Italian waters; and b. a charter with a crew for the purpose of leisure travel (previously exempted under Sixth Council Directive 77/388/EEC (on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment, the Sixth Council Directive )). Until recently all charters falling under paragraphs (a) and (b) above were VAT exempted. The position has now changed and both charters falling under the two categories described above shall accrue VAT at a rate varying from 6.3% to 21% provided that the yacht is made available to the hirer (i) within Italian territory or (ii) outside the EU and is operating within the Italian waters. The rate of 21% is the standard VAT rate in Italy (IVA) however under certain circumstances it may be reduced depending on the size, type (motor or sailing) of the yacht and where the yacht is operating. In order to be able to pay VAT in Italy, the yacht owning entity will need to register for VAT there or appoint a fiscal representative. Italy changed its regulations by adopting new legislation in order to comply with Article 56 of Directive 2006/112/CE (as amended by Directive 2008/8/CE) and with the European Court ruling of 22 December 2010 in État du Grand Duché de Luxembourg v Bacino Charter Company SA where the ECJ found that in order for a hiring service to be capable of exemption under that provision [the Sixth Council Directive] the lessee of the vessel concerned must use it for an economic activity. Generally in assessing whether VAT is due on a particular charter, the Bacino case rules that where the services supplied consist of making a yacht available for charter and the hirer is a natural person who intends to use the yacht privately (for leisure purposes), VAT is due on that charter hire rate and cannot be automatically exempted from VAT under the Sixth Council Directive. Finally, it is worth noting that when the hirer takes physical possession of the yacht in the territory of another EU Member State such charter may not accrue Italian VAT despite the fact that it may operate within Italian waters. For example, if a charter commences in France, that charter is VAT exempted as France is still refraining from charging VAT in Watson, Farley & Williams March 2013

12 12 PRIVATE CLIENT BRIEFING respect of French charters. The European Court of Justice decision in the Bacino gives rise to the prospect that many of the VAT exemptions previously enjoyed by yacht owners are no longer going to be available. France is still resisting complying with the ECJ decision and the implementation of the relevant Directives and has yet to take any steps to charge VAT in respect of French charters. No doubt that the Bacino case and the European Commission will be putting pressure on the French legislators to amend this position. Case Study: UK Immigration Indefinite Leave to Remain Angharad Harris Partner, Employment and Immigration, London While immigration and business issues often relate, it is advisable to seek specialist advice before making any permanent changes, as one of our clients discovered: This case study highlights how important it is to plan for the future when considering legal status. Background: Our client was a high net worth US citizen who had previously obtained Indefinite Leave to Remain (ʺILRʺ) status in the UK. He decided that he wanted to be based more permanently in Spain and thought that, for tax reasons, he needed to renounce his right to permanent residency in the UK. He therefore wrote to the UK Border Agency (ʺUKBAʺ) confirming his intention to forfeit his settled status. No reply to this letter was ever received. Over the years that followed, the client continued to travel to the UK, where he had family and property. When coming to the UK, he sought entry as a visitor rather than relying upon his ILR visa endorsement. When we first met with our client, his personal circumstances had changed and although he had previously spent a lot of time travelling between Spain and the United States, he had decided that he now wanted to be based in the UK so that he could spend more time with his family. However, he was not permitted to do this on a permanent basis whilst in the UK as a visitor. Action/Results: We analysed our clientʹs personal circumstances and set out the various options that would enable him to retire permanently in the UK. We also liaised with senior UKBA staff to clarify whether he could rely on his ILR status and to confirm discrete points and maximise the chances of the application being expedited. It was found that the client could not rely on his ILR status, and we assisted in finding an alternative route applying under the Investor category which would enable him to continue to invest in the UK whilst acquiring the right to live in the UK as a retired person (without the need to work). The other advantage of the Investor category in this instance was that it still allowed him to spend prolonged periods of time up to 180 days each year outside of the UK without prejudicing his right to re acquire ILR status. In this case, that was a helpful point because he did not want to acquire British citizenship and therefore he did not need to satisfy the more onerous residence requirements required under the Nationality Rules. Conclusion: This case study highlights how important it is to plan for the future when considering

13 PRIVATE CLIENT BRIEFING 13 legal status. People s long term plans and objectives change, so when acquiring a valuable right such as ILR, it is very important to take immigration advice before renouncing that right. Case Study: UK Real Estate Caveat Emptor (or Buyer Beware ) Gary Ritter Partner, Real Estate, London When purchasing a property in the UK, the Caveat Emptor (or let the buyer beware ) principle applies, placing the onus on the buyer to fully investigate a property before the exchange of contracts (which is the point at which they are legally obliged to complete its purchase). It is therefore of critical importance to allow enough time to carry out sufficient research on a property, as one of our clients discovered: Background: We were instructed by Eastern European clients who asked us to assist them with their purchase of a detached house for 7m on a prestigious country estate in Surrey, England, and to act for their lender in relation to its financing. This would be the clientsʹ first acquisition of property in the UK, and as they had no prior knowledge of the process for purchasing property in England, it was important for us to guide them through each step as the transaction progressed. Action/Results: The sellers were pressing our clients to exchange contracts within an extremely tight timeframe. However, we emphasised the importance of ensuring that we obtained (and the sellers disclosed) as much information as possible about the property before exchange of contracts....we emphasised the importance of ensuring that we obtained (and the sellers disclosed) as much information as possible about the property before exchange of contracts. The process of investigating matters relating to the property before exchange of contracts meant that the majority of our work for the clients was ʺfront endedʺ. A large part of our due diligence was focused on works carried out to the property by the sellers (who had renovated the property significantly when they bought it) and their predecessors. This involved us raising enquiries of the sellersʹ solicitors, carrying out enquiries of the local authority and liaising with our planning and construction teams to check whether all necessary consents had been obtained in respect of the works carried out and to ensure that there had been no breach of public authority requirements, which could be enforced against the clients once they had bought the property. In addition, our clients had told us that they intended to carry out works to the property themselves once their purchase had completed, so it was vital that they took planning advice early on in the process to establish if they needed any public authority consents. This was particularly relevant as the property was located within an area of Surrey with strict local and national ʺGreen Beltʺ development policies, which meant that the local authority was likely to be strict on controlling the development of the property. As a Watson, Farley & Williams March 2013

14 14 PRIVATE CLIENT BRIEFING result, it was also important for us to analyse public authority permissions which had previously been granted, to check what conditions had been imposed by the local authority which might restrict or prohibit certain works for the clients at the property in the future. There were a number of restrictive covenants registered against the property at the Land Registry, restricting its use and development to preserve the character and environment of the private estate on which it was located, with which our clients would be required to comply. The location on a private estate meant that we also discovered, and disclosed to our client, that the owners of all properties on the estate had to pay an annual contribution towards the cost of repairing, maintaining and lighting the roads on the estate, as a result of the roads being private and therefore not maintained by the local authority. Conclusion: Property transactions are rarely straightforward and this case emphasises how important it is to allow sufficient time to properly investigate a property, both in terms of its current status and any on going additional costs or restrictions, so that a buyer only agrees to exchange contracts once they are fully aware of their responsibilities when purchasing the property. Special Report: Investing in hotels: an overview Felicity Jones Partner, Corporate, London As with any investment, one of the most important actions for those considering investing in the hotel sector is to seek appropriate advice at an early stage. Last year, we witnessed a significant increase of interest in the hotels market and advised both corporate and private investors in Africa, Asia and key European cities. As with any investment, one of the most important actions for those considering investing in the hotel sector is to seek appropriate advice at an early stage. In our recent experience of buying and selling hotel assets, the transactions have always been smoother in instances where the expectations of each party are made clear at an early stage. For example, an upfront feasibility study can make the potential owner more aware of potential costs, risks and rewards and the early funding discussions significantly easier, as any investment into an existing hotel will be valued on the basis of cash flow (although trophy products will often only see a return in terms of real estate value). Part of the appeal of the hotel sector is that investment in a hotel will usually mean the acquisition of a real estate asset as well as cash flow. Any hotel owner and/or funder should be confident that they have selected the right brand/operator. Consideration will need to be given to whether operation should be by one of the major brands (Hilton, Marriot, Hyatt, Intercontinental Hotels Group, etc.), a smaller brand or an independent operator and whether the return on the investment would be best delivered under a lease agreement, a management agreement and/or a franchise.

15 PRIVATE CLIENT BRIEFING 15 As a general rule, international operators prefer to manage rather than lease and they seek the control over the asset that a property right would give them without the liability. Larger brands are unlikely to take a lease other than through a special purpose vehicle or where the hotel is located in a jurisdiction in which management agreements are not effective under local law. For hotels in the right location or as part of specific development projects, the larger brands may be prepared to put in a sliver of funding/equity which is increasingly common in an economic climate where bank funding is tight (although the price may be high and an owner may be better off simply seeking a guaranteed minimum return for the early years). Of course, under a traditional lease (as opposed to a funding mechanism) the owner of the hotel will not usually benefit from a hotel s booming trade (save insofar as it may affect the value of the land) but equally the owner s risk will be greatly reduced if the operation of the hotel does not generate the anticipated levels of revenue. A hotel may also be operated through a franchise agreement with a brand but an owner may also need an experienced operator to run the business. Under a franchise agreement an owner would expect to pay 5 to 8% of rooms revenue to the franchisor, compared to 3% revenue and 10% of gross operating profit under a management agreement. The fees are by no means the only charges made by the brands; reservations, central services and loyalty programmes will represent a cost to the owner and a return to the brand. If the owner is not in a position to operate the hotel itself, there will also be the operator s fees to consider. Irrespective of jurisdiction, the usual practice is for a brand to produce the first draft of the management agreement. In many instances the brands will strongly resist any negotiations or substantial amendments to their standard form. It is advisable for investors to conduct a feasibility study as a preliminary step and to consider an operator should also consider whether the added value is sufficient to justify the fees. Balancing risk and reward and finding a brand that an owner can work with for 20 years can be a long and difficult process. Balancing risk and reward and finding a brand that an owner can work with for 20 years can be a long and difficult process. Finally, it is worth noting that the increasing costs of online travel consultants is a current hot topic that is hitting owners hard. Although some of the practices of some online agents are being challenged on competition grounds, they can often seek up to 30% of the room charge by way of fees. With costs such as these associated with generating revenue from an investment, it is clear that the role of online travel agents is significant and needs to be factored in to any projections and any agreement. Watson, Farley & Williams March 2013

16 16 PRIVATE CLIENT BRIEFING Contacts Should you like to discuss any of the matters raised in this briefing, please speak with a member of our team below or your regular contact at Watson, Farley & Williams. David Harvey Consultant Swiss Desk, London dharvey@wfw.com Michael LʹEstrange Partner Tax, London mlestrange@wfw.com Sarah Gatley Associate Tax, London sgatley@wfw.com Romain Girtanner Partner Tax, Paris rgirtanner@wfw.com Verena Scheibe Partner Tax, Hamburg vscheibe@wfw.com Luis Soto Partner Tax, Madrid lsoto@wfw.com Raffaele Villa Associate Tax, Milan rvilla@wfw.com Lindsey Keeble Partner Yachts, London / Paris lkeeble@wfw.com Vassiliki Georgopoulos Associate Yachts, Piraeus vgeorgopoulos@wfw.com Angharad Harris Partner Employment and Immigration, London aharris@wfw.com Gary Ritter Partner Real Estate, London gritter@wfw.com Felicity Jones Partner Hotels, London fjones@wfw.com All references to Watson, Farley & Williams and the firm in this briefing mean Watson, Farley & Williams LLP and/or its affiliated undertakings. Any reference to a partner means a member of Watson, Farley & Williams LLP, or a member of or partner in an affiliated undertaking of either of them, or an employee or consultant with equivalent standing and qualification. This briefing is produced by Watson, Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson, Farley & Williams. This publication constitutes attorney advertising. Watson, Farley & Williams LON KW KW 08/03/2013 wfw.com