UK

Added Incentive for Overseas Buyers to Act Before April 2021: Purchase of Residential Property in the UK

Background

In July 2020 the UK government published draft legislation that will see a 2% Stamp Duty Land Tax surcharge (“the surcharge”), being applied to purchases of residential property in England and Northern Ireland from 1 April 2021.

April 2021 will also introduce new residency tests linked to the timing of a transaction and dependent upon whether the purchaser is UK resident or non-resident.

The surcharge will not apply to commercial property.

So, How Does it Work?

The surcharge will be levied on top of all other Stamp Duty Land Tax (“SDLT”) payable, including the higher levels of SDLT introduced in April 2016 on second homes and buy-to-let purchases, in England and Northern Ireland. Looking at this in simple terms:

Property value or lease (with over 21 years left to run) premium or transfer valueResidential property SDLT payable by UK residentsResidential SDLT assuming a second property (or more) surcharge of +3%Non-resident surcharge of +2%
£40,001 to £125,000zero3%5%
the next £125,001 – £250,0002%5%7%
the next £250,001 – £925,0005%8%10%
the next £925,001 – £1.5 million10%13%15%
the remaining portion above £1.5 million12%15%17%

To Which Non-UK Residents will the Rules Apply?

There are a number of exclusions that apply and businesses with complex ownership structures will require careful consideration when assessing whether the surcharge applies.

At their simplest, the rules will apply to the following:

  • if the purchaser (or any one of the purchasers) is an individual outside the UK for at least 183 days out of a 365 day period beginning 12 months before the transaction and ending 12 months after (in which case the surcharge is payable at the point of acquisition but a refund can be applied for);
  • certain unit trusts and Jersey Property Unit Trusts, having regard to the status of the trustees;
  • a company not resident in the UK for corporation tax purposes;
  • a company that is resident in the UK for corporation tax purposes but is a close company and controlled by a non-UK resident individual(s) and is not a UK real estate investment vehicle nor group member of one, nor a Jersey Property Unit Trust;
  • a partnership where one of the partners is treated as non-resident; and
  • where UK property is to be held in a trust, the residential status of the beneficiary is considered, failing which the residency tests are applied to the trustees themselves.

It is important to note, that the surcharge will apply to a transaction where any one of the joint purchasers is non-UK resident. This applies to a spouse too. If a couple are buying jointly but one spouse works outside of the UK, the surcharge will apply.

Land transactions where contracts are exchanged before the 10March 2020, but not completed or substantially performed until on or after 1 April 2021, are likely to be subject to transitional rules

Why Now?

A surcharge has been on the cards for a while. The UK government announced its plans as far back as the Budget in 2018 and rates between 1% and 3% were considered during a consultation that ran on until May 2019.

The government states that the “measure may help to control house price inflation, by leading to a reduction in residential property purchases by non-UK residents, some of which is offset by an increase in purchases by UK residents”.

What will be the overall impact of the surcharge?

Only time will tell. The proposed surcharge has been criticised in the UK for its failure to deal with purchasers claiming multiple dwelling relief (requiring the purchase of no less than 6 dwellings), and with overseas buyers buying off-plan who then “flip” the property onto a UK resident who then enjoys sub-sale relief from the surcharge.

For more information see the Government guidance: New Rates of Stamp Duty Land Tax for non-UK Residents from 1 April 2021.

Additional Information

Dixcart Legal can assist with your property related enquiries in the UK. If you have any questions about this article/require any further information, please contact Kuldip Matharoo: advice@dixcartlegal.com.

Economic Substance Requirements – An Update From the Isle of Man

Background

The Crown Dependencies (Guernsey, Isle of Man and Jersey) introduced economic substance requirements in January 2019. Together with the Channel Islands, the Isle of Man’s tax legislation requires Isle of Man tax resident companies, deriving income from relevant sector activities, to comply with the economic substance test. These requirements are effective for accounting periods commencing on or after the 1st January 2019. 

Specific ‘relevant activities’ are defined as:

  • Banking
  • Insurance
  • Shipping
  • Fund Management (this does not include companies that are Collective Investment Vehicles)
  • Financing and Leasing
  • Headquarters
  • Distribution and service centres
  • Pure Equity Holding Company; and
  • Intellectual Property (for which there are specific requirements in high risk scenarios).

How has Covid-19 affected Economic Substance?

The outbreak of Covid-19 hs caused issues for companies required to comply with economic substance. Legislation introduced in response to the Coronavirus pandemic, included significant restrictions on the movement of people. This applies not only to international travel with the closure of borders and the suspension of flights and other forms of transport, but also in relation to travel within countries themselves.

These restrictions, compounded with the practice of social distancing, or in some cases isolation, have changed the way corporate meetings have been held all over the world.

The economic substance laws and regulations have remained in place during this time, and it has been important for entities to demonstrate how they are complying with these requirements.

Companies must continue to ensure they are following the regulations as much as possible, and comprehensively record any instances where compliance might not be possible due to travel restrictions and social distancing measures outside their control.

They should maintain relevant records, showing both local regulations and their own internal policies, in respect of restrictions on travel for company officers, and the period of time for which these policies are in place.

This will ensure that companies can demonstrate that COVID-19 restriction measures prevented the company from holding an adequate number of board meetings on the island, or temporarily required meetings to be held virtually, for example; conference calls, video conferencing, Skype or similar. Normal protocols for such meetings should be observed, as far as possible.

Companies should also keep records and document, where possible, all new measures they have made to modify working arrangements, on a case by case basis.

How Can Dixcart Help?

Dixcart proactively encourages clients to demonstrate real economic substance and are ideally positioned to provide advice and assistance in relation to these matters, especially during these unprecedented times.  

We can advise companies on how to document working arrangements, board meetings and virtual meetings, for example conference calls, video conferencing, Skype or similar.

We have established extensive serviced office facilities in the Isle of Man, and we employ senior, professionally qualified staff, to support and direct international functions for our clients. These professionals are competent to take responsibility for different roles, including, as appropriate, finance director, non-executive director, industry specialist, etc. and, if needs be, can act as alternate directors and assist the affected entities with substance issues generally.

Dixcart professionals are also available to provide advice and assistance to businesses on the implications of economic substance and other Isle of Man tax related matters. 

Summary

Dixcart perceive this as an opportunity for clients to demonstrate true tax transparency and legitimacy. These measures also encourage real economic activity and job creation, in the Crown Dependency jurisdictions, moving forward.

Additional Information

Please contact us if you need advice to help you to meet economic substance requirements during this challenging time.

If you require additional information on this topic, please speak to Steve Doyle, who is based at our Dixcart office in the Isle of Man: advice.iom@dixcart.com.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Isle of Man Government – Economic Substance

Portuguese Venture Capital Funds: What and Why?

Background

Until the recent pandemic, the Portuguese economy has been one of the most buoyant in Europe and this has helped fuel interest in Portuguese Venture Capital Funds. Despite predictions of venture funding slowing down due to Covid-19, high net worth individuals and companies are continuing to look for new opportunities and request Venture Capital Fund Management companies manage their investment portfolios for them, to invest in start-ups and small to medium sized companies in exchange for equity. 

Another factor which has really driven interest in investing specifically in a Portuguese Venture Capital Fund is the Non-Habitual Residents Scheme and the Portuguese Golden Visa, which allows for Portuguese residency.

A Portuguese Venture Capital Fund works the same as any Venture Capital Fund. What is different is that individuals who invest in a Portuguese Venture Capital Fund, can, by extension, apply for a Portuguese Golden Visa.

Obtaining a Portuguese Golden Visa Through Investing in a Venture Capital Fund

The Portuguese Golden Visa scheme enables non-EU individuals to obtain the right to reside in Portugal for up to five years. This allows them and their family to travel freely to and from the majority of European countries.

To qualify for a Golden Visa, an individual must meet and maintain one of a number of qualifying investment options. Property is usually the preferred route; however, one option is to invest €500,000 in Investment Funds or Venture Capital; a considerably lower requirement compared to the level of investment required by other investment routes.

The specific criteria for investing in a Venture Capital Fund under the Golden Visa investment route is:

  • A minimum investment of €500,000 in Investment Funds or Venture Capital The fund must provide capital to companies, with at least 60% of the investment being made in a commercial company with a head office in Portugal.

What is a Venture Capital Fund?

Venture Capital Funds are investment vehicles with the objective of investing into a portfolio of assets, mainly composed of several companies offering high growth potential. They take a more active and overseeing role in the day to day management of the companies where the investments have been made and provide consultancy and business guidance services to help ensure that the companies receiving the investments, achieve their full potential.

Investments are generally made into a distinct sector of activity. The firms that receive venture capital investment have the capacity to deliver potentially attractive returns, for investors with different risk appetites, but with a long-term investment horizon.

Stages of Fund Investment

Portuguese companies can be invested into at different stages of their life-cycle.

Venture Capital Companies play an active role in a Fund’s Life-cycle, from sourcing and identifying the investments, raising equity from investors, monitoring the investment and growth of the companies’ value, to exit/liquidation of the funds and distribution of the earnings amongst the participants. That is the ultimate goal.

Any fund management company is reliant on the quality and experience of its professionals, who will seek to structure and promote Venture Capital Funds with investments in various fields of activity. Investments in Portugal are generally, but not exclusively, made into start-ups, in business categories such as; Tourism related areas, Hospitality, Health and Healthcare, and Technology, as well as into others sectors that are deemed to offer opportunities to generate high growth and commercial opportunities.

‘Seed Capital’

The term seed capital refers to the type of financing used in the formation of a start-up.

In this case the funding is provided by private investors, usually in exchange for an equity stake in the company, or for a share in the profit of a product.

The majority of the seed capital a company raises, generally comes from business owner(s) and often family, friends, and other acquaintances.

Seed capital funding is considered high-risk because the business is not fully functional and has no track record. Investors who provide seed capital funding often therefore do so for a stake in the company.

Once a start-up has demonstrated feasibility, it is more likely to attract venture capital or ‘angel’ investment, to provide the additional funds necessary to really get the business up and running.

Start-ups’

Venture capital investment companies (usually referred to as start-ups), are generally focused around a single flagship product or service, that the founder wants to bring to the international market.

These companies typically do not have a fully developed business model and, more importantly, lack adequate capital to move on to the next phase of business.

Generally, the capital, raised at this stage will be used for marketing, creation of stock or the launching of a product (existent or new) and/or service.

‘Early Stage’

This investment is aimed at newly established companies, which have completed the product development phase and have already managed to start a trade but are not as yet earning any profit.

Such funding is generally dedicated towards improving the manufacturing and distribution process, as well as undertaking marketing.

‘Growth Stage’

Investment is targeted at companies that have proven their product in the market and have secured finance and income. They are in the process of growing and trying to scale up but are possibly encountering some obstacles to achieving this growth.

The focus here is not on pure innovation but expanding on what is already working for the business.

The Benefits of Investing in a Venture Capital Fund?

  • Venture Capital Funds are managed by a Fund Manager with the inside knowledge to manage an individual’s investment portfolio and maximise the investors’ equity stake.
  • Venture Capital Funds are regulated and must comply with the rules stipulated by the Portuguese Securities Market Commission (CMVM). This means Fund Managers are regular audited by third parties and meet the highest levels of efficiency, transparency and due diligence.
  • You can obtain Portuguese residency as an extension of investing in a Portuguese Venture Capital Fund.

Portugal Tax Benefits

There are a number of tax benefits associated with investing in a Venture Capital Fund. These include:

  • Exemption from corporate income tax.
  • Exemption from withholding tax on payment of the capital generated by the fund if the investor is a non-tax resident in Portugal.
  • Withholding tax of 10%, on payment of the capital generated by the fund if the investor is tax resident in Portugal.
  • 10% tax on capital gains arising from the sale of company shares or the sale of commercial property.

A Number of Individuals Forming their Own Venture Capital Fund

Dixcart has assisted several individuals to form their own Portuguese Venture Capital Fund. This provides an opportunity for more substantial amounts of money to be raised to undertake various local projects in Portugal. These projects generally include investment in commercial real estate.

In Portugal all Venture Capital Fund Management Companies and Venture Capital Funds are supervised by the Portuguese Securities Market Commission (www.cmvm.pt) and Dixcart works closely with a licensed fund management company in Lisbon.

Additional Information

If you have any questions or require additional information regarding Portuguese Venture Capital Funds and the opportunities that they present, please contact Antonio Pereira at the Dixcart office in Lisbon: advice.portugal@dixcart.com

Brexit Implications for UK Nationals Residing in Cyprus

Background

On the 31 January 2020, the UK withdrew from the EU and the implementation of the Withdrawal Agreement, which is legally binding for all Member States, was applied on 1 February 2020. The Withdrawal Agreement allows a transition period from 1 February 2020 until 31 December 2020. 

Status for UK Citizens in Cyprus or Wishing to Move to Cyprus

The implementation of the Withdrawal Agreement means that:

  1. UK nationals and their family members who, have been continuously resident in Cyprus for five years, by 31 December 2020, will be eligible for permanent residence.

UK nationals and their family members, who are covered by the Withdrawal Agreement (UK nationals and their family members who have already exercised, or will exercise their free movement rights in Cyprus before 1 January 2021), will be able to continue living in Cyprus with the same access to work, study, benefits and public services that they have enjoyed up to the end of 2020, subject to the specific provisions provided for in the Withdrawal Agreement.

2. UK nationals and their family members that are already residing in Cyprus, or who arrive by 31 December 2020, but will not have been continuously resident in Cyprus for five years, will be eligible for temporary residence. This will enable them to stay in Cyprus for five years, and then they will be entitled to apply for permanent residence.

3. UK nationals who want to relocate to Cyprus after the 31 December 2020, the end of the transition period and whose rights do not fall within the scope of the Withdrawal Agreement, will need to meet Cyprus immigration rules for third country nationals.

Documentation and Procedures

UK nationals and their family members will not need to replace their pre-existing residence documents: MEU1, MEU2, MEU3, in order to obtain the new residence document that will be issued from 1 January 2021. After the transition period, UK nationals and their family members who are covered by the Withdrawal Agreement, will have the right to receive, if they choose to, a new residence document which will include a statement that it has been issued in accordance with the Withdrawal Agreement.

Residence applications which are submitted after 31 December 2020 by UK nationals and their family members, who are covered by the Withdrawal Agreement (meaning that the applicant has already exercised or will exercise their free movement rights in Cyprus before 1 January 2021), will be issued with forms: UK1, UK2 or UK3.

Applications must be submitted to the Civil Registry and Migration Department of Nicosia, or to the District Unit of the Aliens and Immigration Service of the Police, depending on the area (province, district) where the applicant decides to have his/her place of residence.

Other Countries in the EU

Arrangements regarding the status of UK citizens living in EU countries, varies on a country by country basis. For countries other than Cyprus, please seek professional advice or speak to Dixcart regarding the precise status in Malta and Portugal: advice@dixcart.com.

Additional Information

Dixcart can assist with residence applications in Cyprus before and after 31 December 2020.  The key criteria in terms of applying for residence documentation is that the main applicant must be resident in Cyprus before the end of the transition period.

For more information, please contact the Dixcart office in Cyprus: advice.cyprus@dixcart.com, or get in touch with your usual Dixcart contact.

Malta

Opportunities for the Segregation of Risk and Operational Management for Shipping and Aviation Companies Through the Use of A Maltese Cell Company

Extension of the Ability to Use a Cell Company in Malta

Shipping and Aviation Cell Company Regulations were issued in Malta, earlier this year. The purpose of these regulations is to provide the opportunity to use a new cell structure for companies operating in the fields of shipping and aviation.

Cell companies, for use in the insurance and securitisation sectors, have already been successfully established in Malta, under the Companies Act for Cell Companies. It was felt beneficial to extend this type of corporate structure to the shipping and aviation industry.

Benefits Cell Companies Offer

The definition of a cell, within the relevant Malta Companies Act, summarises the benefits available; a cell company creates ‘within itself one or more cells for the purpose of segregating and protecting the cellular assets of the company in such a manner as may be prescribed’.

Each cell is treated as a separate legal entity which allows for the segregation of assets and liabilities relevant to the individual cell, from the assets and liabilities of the non-cellular element, and from the other cells.

A cell company may have more than one cell and each cell is treated independently from any other cell forming part of the same cell company. A cell company therefore provides protection for cells, from the other cells within the same company.

Obligations Cell Companies Must Meet

Cell Companies are distinguished from other companies by their name, which must include the words; ‘Mobile Assets Protected Cell Company’ or ‘MAPCC’.

Companies with such a structure may be formed or constituted as a cell company to conduct shipping or aviation business. Alternatively, a company conducting such business can be converted into a cell company, if permitted to do so by its memorandum and articles of association.

The assets of a cell company can be cellular or non-cellular assets. Such assets consist of the cell’s capital and reserves, as well as all other assets attributable to the different cells.

A cell company may, in respect of any of its cells, create and issue shares, these are known as ‘cell shares’. The proceeds of the issue of this ‘cell share capital,’ will form the assets of the cell.

Cell companies must inform all third parties that they are dealing with a cell company, and that there are two regulations which specifically deal with creditors and the recourse available for creditors in relation to cellular assets.

Examples – How Aviation and Shipping Companies Can Use a Cell Company

There are numerous examples of how a cell company can be effectively used to segregate assets in the fields of aviation, shipping and yachting:

  • In relation to aviation, for example; one cell could own the plane, the second cell the engine, the third cell ‘aircraft management’ and a fourth cell might relate to the employees’ pension fund.
  • A similar, relatively simple example in relation to yachting, might be where one cell owns yacht A, the second cell owns yacht B, the third cell owns yacht C, and cell D owns the business matters in relation to ‘yacht management’.

Additional Information

If you would like further information regarding Malta Cell Companies and the opportunities that they provide and/or the registration of a ship, yacht or aircraft in Malta, please contact Jonathan Vassallo at the Dixcart office in Malta at advice.malta@dixcart.com.

UK

Establishing a Company in the UK and Using Share Schemes to Recruit and Retain Key Employees

Background

Once it has been decided that the UK is the correct location to establish a business, the next key decision is how this should be structured. One of the most popular structures is a limited company.

Recruiting high quality staff is also a priority and the availability and tax efficient nature of UK share option schemes can help achieve this objective.

Situations Where a Limited Company is Most Appropriate

Limited companies can offer a number of advantages.

They can be of particular benefit where:

  • The business is being set-up with other people;
  • There is a wish to incentivise staff though share schemes;
  • The company will be receiving external funding;
  • The company will be claiming Research and Development tax relief (R&D).

Forming a Company in England & Wales

The company formation process is relatively quick and easy.

All you need to start a company is an address within England & Wales for the registered office, at least one shareholder and at least one director (these two may be the same person). There is no minimum initial cash investment and the company can be formed in a matter of hours.

Why Use a Limited Company?

The main benefit of a limited company is the limited liability of the company’s officers and shareholders. This means that unlike the situation of a ‘sole trader’ or ‘partnership’ personal assets are not at risk in the event of a failure of the business.

Other considerations are:

  • The company has a legal existence separate from its management and its members (the shareholders).
  • The company’s name is protected.
  • The company continues despite the death, resignation or bankruptcy of the management and/or members.
  • The interests and obligations of management are defined.
  • Appointment, retirement or removal of directors is straightforward.
  • It is an easy process to gain new shareholders and investors.
  • Employees can acquire shares.
  • Companies are often perceived as more robust and more business-like than sole traders.
  • Companies can provide tax advantages such as lower tax rates, R&D incentives, extraction of profits via dividends, etc.

Recruiting and/or Incentivising Employees Using Share Schemes

Finding the right calibre of staff is vital to the success of a business, wherever it is located.

Employers in the UK often use share schemes to recruit important members of staff and as a way of incentivising employees to work hard and remain with the business for the medium to long term.

There are a number of ways to do this, as detailed below. The most popular is the Enterprise Management Incentive (EMI) share option scheme as it is particularly tax efficient:

Enterprise Management Incentive (EMI)

Eligible companies frequently use an EMI share scheme, because the tax advantages are attractive. The EMI share option scheme is Government approved, tax beneficial and a very flexible way of incentivising staff.

Under the EMI scheme, options are issued over an agreed number of shares. No tax is paid when the option is granted. When the option is exercised, which means converted into shares, there is no tax to pay provided that the agreed exercise price is no lower than the market value of the shares on the day that the option was granted.

When the shares are sold, the capital gain is usually taxed at 10% in situations where ‘Business Asset Disposal Relief’ (previously known as Entrepreneurs Relief) is available.

Growth Share Scheme

Where companies cannot use EMI, a growth share scheme is often used instead. This type of scheme is not appropriate for a start-up, it is only relevant to an established company.

Under this share scheme, on the sale of a company employees benefit only from the growth in the value of the shares, not the historic value built up until the date of the share issue. This is achieved by valuing the company and then issuing shares of a different class, which only benefit from value generated above an agreed threshold.

For example, if the company is worth £10m, a growth share scheme may allow holders to share in the proceeds, only if they exceed £12m. The value of the growth share, on issue, would be low because it would not have the ‘right’ to any of the value built up previously. Income tax charged on acquisition of the shares would consequently be low.

Phantom Share Scheme

A phantom share scheme is essentially a cash bonus scheme.

This arrangement allows an individual to receive a cash payment equal to the value of shares, or the increase in value of shares, above a notional exercise price. No actual shares or share options are issued. The idea is that individuals are incentivised because the level of any payment is linked to an increase in the value of the company’s shares.

Additional Information

If you would like additional information regarding setting up a company in the UK and using a share scheme to recruit or incentivise staff, please speak to Paul Webb or Sarah Gardner at the Dixcart office in the UK: advice.uk@dixcart.com

The Dixcart office in the UK has extensive expertise in forming UK companies, establishing the most appropriate corporate structure and meeting all relevant compliance obligations. Dixcart UK is also experienced in building EMI schemes to meet specific needs and liaising with the UK tax authorities (HMRC), to gain advance approval and for the drafting of relevant share option agreements.