Understanding UK Corporate Tax Residency: Key Points and Implications

From a UK perspective, the determination of corporate tax residency is crucial for understanding a company’s tax obligations. A company is considered a UK tax resident if it is either incorporated in the UK or if its central management and control (CMC) actually resides in the UK. This residency status dictates the scope of the UK’s taxing rights over the company.

Criteria for UK Tax Residency

  • Incorporation in the UK: Any company incorporated in the UK is automatically deemed a UK tax resident.
  • Central Management and Control: A company not incorporated in the UK can still be considered a UK tax resident if its central management and control abides in the UK. This criterion involves determining where the company’s ‘paramount authority’ is exercised, which typically involves the board of directors.

Tax Implications for UK Tax Resident Companies

UK tax resident companies are subject to UK corporation tax on their worldwide income and gains. This means that all profits, regardless of where they are generated, are taxable under UK law. In contrast, non-UK tax resident companies are generally only subject to UK corporation tax on profits attributable to a UK permanent establishment. Additionally, they are liable for UK income tax on certain UK-source income.

Determining Central Management and Control

The question of where a company’s central management and control resides is a factual one. Key points to consider include:

  • Exercise of Paramount Authority: The central management and control is where the company’s paramount authority is exercised, usually by the board.
  • Influence vs. Control: Influencing the board does not equate to controlling it. The distinction is crucial in determining the true locus of control.
  • Rubber Stamping: Courts are vigilant against scenarios where the board merely rubber-stamps decisions made by others, which would indicate that the real management and control lie elsewhere.

Dual Tax Residency

A company can be dual tax resident, meaning it is considered a tax resident in two countries. In such cases, the corporate residency rules of both countries must be examined. If a dual residency situation arises, a tax treaty (if one exists) between the two countries will typically determine which country has the primary taxing rights. These treaties often provide mechanisms to resolve dual residency conflicts to prevent double taxation.

Conclusion

Understanding where a company’s central management and control resides is essential for determining its tax residency and, consequently, its tax obligations in the UK. Companies must carefully assess their management structures and operations to ensure compliance with UK tax laws and to navigate the complexities of dual tax residency effectively. This explanation is a simplified overview, and there are many additional factors that can come into play. Therefore, it is always advisable to contact a tax professional to obtain tailored advice and ensure all specific circumstances and nuances are properly addressed.

For more information from us, or if you wish to discuss corporate tax residency, please use our enquiry form or email us at advice.uk@dixcart.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Government Incentives for Start-ups and Businesses in Portugal

Powering Up in Portugal: Government Incentives for Start-ups and Businesses

Portugal has emerged as a haven for entrepreneurs and established businesses alike with their government incentives for start-ups and businesses. To fuel this growth, the government offers a robust package of financial support, tax breaks, and regional perks. Let’s delve into the toolbox Portugal provides to jumpstart your venture and explore the Portuguese government incentives available for startups and businesses.

Key Requirements to access Government incentives for Start-ups and Businesses

Start-ups in Portugal are defined as:

  • Those in operation for less than 10 years,
  • Employing less than 250 employees,
  • With an annual turnover of less than €50m,
  • Not the result of transformation or split from a large company,
  • No large company holding a majority direct or indirect stake in its capital,
  • Has its headquarters or permanent representation office in Portugal (or employs at least 25 employees in Portugal), and
  • Meets the following conditions cumulatively:
    • Innovation & Growth: The company must be deemed innovative with high growth potential or have R&D activities recognized by the National Agency of Innovation (“ANI” or Agência Nacional de Inovação).
    • Funding: At least one round of venture capital financing or contributions from business angels.
    • Government Funding: Have been granted funds from the Banco Português de Fomento, or funds managed by this entity, or by its subsidiaries, or from one of its equity or quasi-equity instruments.

Financial Incentives:

  • Grants and Investment Funds: Several programs offer direct grants for innovation and development. Examples include the SI for Technological R&D and the SICE – Productive Innovation.
  • Access to EU Subsidies and Grants: Portugal is a member of the EU and thus may have access to EU based subsidies and grants available.

Tax Advantages:

  • R&D Tax Incentives: Portugal boasts a generous R&D tax credit system (SIFIDE). This program allows companies to deduct a significant portion of R&D expenditures, significantly reducing their tax burden.
  • Corporate Income Tax Deductions: Start-ups benefit from a recent tax code update offering an additional deduction on their tax base for increases in eligible equity.
    • Start-ups in Portugal are subject to a 12.5% corporate income tax rate (in Mainland Portugal) or 8.75% (in Madeira) on the first €50,000 of taxable income (the exceeding amount will be taxed at a rate of 21% in Mainland Portugal or 14.7% in Madeira);
    • Madeira IBC: Start-ups may consider moving the operations into the Madeira International Business Centre which offers a corporate tax rate of 5% on permitted activities, provided certain substance criteria are met, such as a €75,000 investment and a permanent employee tax resident in the island of Madeira. Click here for more information.
  • Patent Box Regime: Portugal’s Patent Box grants an 85% tax exemption on income derived from qualifying intellectual property (IP) like patents and copyrights. This incentivizes innovation and protects your intellectual assets.

Regional Support:

  • Focus on Specific Areas: Portugal recognises the importance of regional development. Many areas offer additional tax breaks and subsidies, for businesses operating in specific sectors or locations.

Finding the Right Fit:

To navigate this extensive support system, it’s crucial to identify the programmes that best suit your company’s needs and location.

Additional Benefits to Incorporating in Portugal:

Portugal’s appeal extends beyond financial incentives. The country boasts a skilled and multilingual workforce, a streamlined business setup process, and a flourishing startup ecosystem.

Portugal boasts a high quality of life for its residents. Its vibrant ecosystems foster a thriving startup community, incubators and co-working spaces encouraging collaboration, networking, and ample access to resources. This supportive environment and attractive incentives offer a fertile ground for startups and businesses to thrive.

Portugal consistently ranks among the safest countries in the world, offering a peaceful and welcoming environment with stringent safety and security processes.

Lastly, the mediterranean weather, diverse landscapes, and rich cultural heritage provide an attractive living environment for entrepreneurs and their teams.

Taking the Next Steps:

When partnering with a service provider who has an international and local presence, you are able to leverage government programmes and explore reginal benefits to turn your entrepreneurial goals into a reality.

Consulting with professionals such as Dixcart, ensures you are maximising the advantages available to your start-up or business. Reach out to our experts in Dixcart Portugal for more information on taking the next steps: advice.portugal@dixcart.com

Staying Ahead of the Curve: Malta’s Plan to Further Strengthen its Financial Services Offering

The financial services sector has been one of the pillars of the Maltese economy for over 30 years and has allowed Malta to establish itself as a reputable international financial centre.

The industry has grown at an average rate of 8.3% since 2010 and is currently the sixth largest economic sector in the country, contributing to 9.1% of its Gross Value Added. The Maltese economy is well diversified, and its growth forecast is the highest in the European Union, being the only European country with an expected growth above 4% for both 2024 and 2025.

One of the distinctive elements of Malta has always been innovation, especially legislative innovation. The jurisdiction has consistently managed to be able to target specific market niches, combining agility with a robust regulatory framework.

This approach, carried out through  constant activity, ensures that legislation is always at par with the new products available in a very fast-paced, technology-driven environment. This keeps Malta at the forefront of innovation in the financial services space.

A strategy crafted by the industry and fully backed by the Government

In line with this spirit, on 29 March 2023, the Malta Financial Services Advisory Council presented the Malta Strategy for Financial Services for the 10 years to come. The document indicates over 170 initiatives to be implemented in order for Malta to maintain and further strengthen its position as an international financial centre. Over 100 professionals contributed to the drafting of the document, which was endorsed by the government, who has a major role in creating the conditions to enable the financial services industry to continue to prosper in the future.

The long-term vision for Malta as a jurisdiction is to be “recognised as a competitive, secure and credible jurisdiction for financial services”. This is to be achieved through a combination of innovation, solid technology foundations and a nimble, yet robust and coherent regulatory framework.

The strategy identifies key drivers to support the vision, as well as six priorities that underpin each activity and are cross-sectorial, because they are to be applied in each of the 175 initiatives identified in the document.

The six priorities are:

  1. Streamline regulation
  2. Standardise payments
  3. Consolidate identity
  4. Modernise taxation
  5. Reform financial law
  6. Build talent

Four enablers to enhance competitiveness

The strategy also identifies four transformational initiatives to significantly change and innovate the way in which the financial services sector operates in the jurisdiction. These are:

  1. Centralised identity management
  2. Digital payments hub infrastructure
  3. Regulatory process integration and digitisation
  4. Law reform and harmonisation

The centralised identity management / due diligence portal is fundamental to reduce bureaucracy and speed up due diligence processes through the launch of a digital platform that is centralised, standardised and used by all parties. The aim of the measure is to promote the once-only principle, meaning that individuals and companies would only need to provide certain information or documentation to the relevant authorities once, ultimately improving efficiency, reducing costs, and leading to standardisation. Private entities such as banks, lawyers, and accountants will have authorised access to certified documentation, subject to the individual’s consent.

Payments are crucial for every financial system, therefore having a national digital payments hub infrastructure would lead to a modern, user-friendly system that allows for secure, multi-currency, instant payments for both individuals and corporates. The infrastructure must be supported by state-of-the-art technology to ensure good user-experience and, at the same time, maintains high levels of AML/CFT standards through in-built capabilities such as, but not limited to, Suspicious Transaction Reporting.

The integration and digitisation of the regulatory process will be crucial to address bureaucracy bottlenecks that can hinder the inflow of Foreign Direct Investment, the activities of local operators and also the regulators themselves. Even in this case, the objective is to streamline processes while maintaining the rigorous controls that the jurisdiction needs to reinforce its position in the international scenario.

The above-mentioned activities need to be complemented by a legal system that operates in a timely manner and has the adequate resources to ensure efficiency and competence when dealing with financial crimes such as money laundering, fraud and tax evasion. The strategy suggests the creation of a Task Force on Financial Services Law Reform to review and propose legislative amendments that address and improve current weaknesses.

The crucial role of the public sector in the implementation of the strategy is reaffirmed when the document identifies the actors responsible for the execution of the four transformational activities, which are mostly public entities such as government ministries, the Central Bank of Malta, the Malta Business Registry, the Malta Financial Services Authority, the Financial Intelligence Analysis Unit and the Commissioner for Revenue. All players have already started implementation and this underlines, once more, the commitment of the government to support the industry based on the indications provided by the industry itself and included in the strategy.

Keeping an eye on the international developments

The challenges to be faced are not only related to internal aspects and procedures. There are other factors, resulting from international trends, that affect all countries, and therefore each jurisdiction needs to tackle them from a domestic perspective, but keeping in mind their cross-border nature. The two most important factors are taxation and talent.

Taxation will always be one of the main elements taken into consideration in business decisions. The Government has already assured, on several occasions, that the corporate system will not be drastically changed and therefore the Maltese tax system will go through some revisions to stay in line with international developments but will also retain attractive elements to be as competitive as possible.

With regards to availability of talent, many would say that Malta is victim of its own success: years of economic growth, combined with a small population, have stressed the need for Malta to rely on foreign talent to support the economic growth. The country is on the path of simplifying the process of applying for work permits and ease the procedures for applicants to bring their immediate families. Clear and swift procedures would make the country much more attractive for expats. In parallel, long-term policies are currently being studied to upskill in Malta as many individuals as possible through specialised courses and programmes, to be offered not only by the University of Malta but also by professional bodies and related associations.

The execution of the strategy is a vital step to maintain a competitive offering at the international level, but its maximum effectiveness will only be reached through an effective communication outside Malta, since investors need to be informed about the significant efforts that the jurisdiction is doing to enhance its offering.

Conclusion

Staying competitive and in line with the various developments currently happening is crucial to allowing the industry to continue thriving, and Malta has a solid plan to continue offering excellent solutions in the financial services industry for the years to come.

Dixcart in Malta

The Dixcart office in Malta has a wealth of experience across financial services and offers legal and regulatory compliance insight. Our team of qualified Accountants and Lawyers are available to set up structures and help to manage them efficiently.

Additional Information

For further information about Maltese companies matters please contact Jonathan Vassallo, at the Dixcart office in Malta: advice.malta@dixcart.com. Alternatively, please speak to your usual Dixcart contact.

Setting up a Cyprus Company: Is a Foreign Interest Company the Answer You Have Been Looking For?

Introduction

Cyprus has long been a hub for international businesses and individuals who wish to manage their wealth efficiently and effectively. As a result the Government of Cyprus, with the objective of enhancing the island’s position as an international high-growth business centre by attracting international investments and talent, approved the establishment of Foreign Interest Companies.

However, few know the advantages that a Foreign Interest Company (FIC) provides to global groups and individuals looking to optimise their wealth structuring.

What is an FIC?

An FIC is a company registered in Cyprus with the Registrar of Companies and Intellectual Property that meets the legislated criteria. Currently both a newly incorporated company and a company that is already established that meets one of the requirements below can register as an FIC.

Registering as an FIC does not affect the structure of your business or require any changes to the articles of association if your company is already in existence. Once a request is filed and approved, you will receive a FIC number and will be able to make the most of the new benefits available to you.

In order to be eligible businesses must have economic substance in Cyprus and meet one of the following criteria:

The most common criteria that are met are:

  1. The majority of the company’s shares are owed by third-country nationals.
  2. If this is not the case, then the company is eligible if the foreign participation has a value of at least €200.000.

In both the above cases (1 & 2), the ultimate beneficial owner (UBO) must deposit an amount of at least €200,000 in an account held by the company in a credit institution licensed by the Central Bank of Cyprus.

Alternatively, the company can submit evidence of an investment amounting to €200,000, for the purposes of operating its business in Cyprus (e.g. purchase of office, equipment etc.).

If there is more than one UBO, then the amount of €200,000 can be deposited or invested either by a single UBO or collectively.

Other less common criteria that are available are:

  • Public companies registered on any recognised stock exchange
  • Former “Off-shore” companies, which operated before the change of regime and whose data is already held by the Central Bank of Cyprus.
  • Cypriot shipping companies.
  • Cypriot high-tech/innovation companies.
    • An enterprise qualifies as ‘High Technology Company’ if:
  • it is already established and has a presence in the market, and
  • it has a high level or experimental R&D intensity, and
  • it developed product/s that fall into one of the following categories: products related to aviation and space industry, computers, information and telecommunication technology (ICT), pharmaceuticals, biomedical, research and development equipment, electrical machinery, chemicals, non-electrical machinery.
  • Cypriot pharmaceutical companies or Cypriot companies active in the fields of biogenetics and biotechnology.
  • Companies of whom the majority of the total share capital is owned by persons who have acquired Cypriot citizenship by naturalization based on economic criteria, provided that they prove that the conditions under which they were naturalized continue to be met.
  • Cypriot Private Institutes of Tertiary (Higher) Education licensed by the Ministry of Education, Sport and Youth.

For cases 3 to 9, the investment criteria are also applicable. The company must make an initial investment in the Republic of at least €200,000. This must be proven by presenting the appropriate evidence, such as bank statements or proof of investment.

How can it benefit you?

In addition to the ordinary benefits available to Cyprus companies there are also specific benefits available to FICs and their directors. Below we have broken down some of the various benefits available to you as an individual being the UBO and the company.

Residency and work permits

One of the key benefits of an FIC is the ability to obtain residency and work permits for its Non-EU citizen Directors, Middle Management, Key Personnel and Specialists, as well as their families. It’s worth noting that EU citizens have the right to live and work in the republic already so don’t need this permit.

Personal income tax exemptions

As a result of living in the republic on this FIC enabled permit you and your staff are able to enjoy the perks of being a Tax Resident Non-Domiciled Individual and may be entitled to a 50% salary exemption as well as an exemption from personal income tax on dividends, interest and capital gains.

Corporate tax efficiencies

Cyprus has one of the lowest corporate tax rates in the EU at 12.5%. Which with the Notional Interest Deduction (NID) available in Cyprus this corporation tax could be as low as 2.5%. There is also an exemption on dividend income from corporation tax and dividend distributions to shareholders are not subject to withholding tax.

How can Dixcart help you?

Dixcart has been assisting its clients with international structing and company incorporation and management for over 50 years. We offer a wealth of in-depth local knowledge and our team at Dixcart Management (Cyprus) Ltd. have become experts in our field.

We are here help you every step of the way. Whether that be setting up and registering an FIC, providing management and accounting services, assisting with the immigration process for those wishing to make the most of the FIC’s residency and work permits, or even if you’re looking for serviced office space. Dixcart is your one stop shop for those looking to incorporate or register an FIC and make the most of the benefits available to you.

We will help you gather and collate all the required documents and assist in ensuring that all required criteria are met dealing with the governing bodies on your behalf to ensure that everything is fully compliant with local and international requirements and regulations.

If you would like to know more about the benefits of setting up an FIC or if you have any questions about how we can help you please contact us at the Dixcart office in Cyprus for further information: advice.cyprus@dixcart.com

Navigating Pillar II: Impact and Compliance for Private Companies and Family Offices

The global tax landscape is shifting dramatically with the implementation of Pillar II, a key piece of the OECD’s Inclusive Framework on BEPS (Base Erosion and Profit Shifting). While primarily targeting large multinationals, Pillar II’s reach may extend to many private companies and family offices operating internationally. There are, however, possible safe harbours that may be available.

What do Private Companies Need to Know About Pillar II?

The first step is to identify, by confirmation from your parent, whether your multinational group is within scope of Pillar II (the most notable revenue headline requirement of €750 million in two out of the four prior years immediately preceding the fiscal year being tested).

Further, understanding the reporting needs, and obtaining an implementation roadmap from your parent is needed, for a full understanding of tax and accounting reporting expectations. Reaching out to your multinational enterprise is an important step in communicating and understanding this.

Private companies will need to make an assessment on their current data and system structures to identify any system gaps that require remediation. A data strategy may then be deployed in rooted systems and processes, to ensure sufficient and appropriate reporting for the purposes of Pillar II.

More information on the requirements of Pillar 2 can be found here.

What is the Impact on Family Offices?

Even though family offices are not the intended target, their structures may bring them under the scope of Pillar II if they meet the respective criteria. Although entities within family office structures may not be required to prepare financial statements – either due to company law requirements in the jurisdiction they are located or due to the form, such as trusts or partnerships – hypothetical financial statements are applied as the starting point and applied against the Pillar II criteria.

Family offices operating in more than one jurisdiction may thus be subject to top-up tax. Family offices are recommended to assess the potential impact and explore mitigation options.

How May Pillar II Impact Private Companies and Family Offices?

If you form part of a group that falls within the scope of Pillar II, after consideration of the exceptions that are applicable (including excluded entities), consequences to consider may include:

  • Increased need to collect data and related reporting – companies may need to maintain books in terms of US GAAP or IFRS (depending on the multinational’s reporting framework), in tandem with records of local GAAP, which may create the need to maintain separate books.
  • Increased cash tax expense for any top-up payments required.
  • Possible impacts to tax and business structures.
  • Increased administration and compliance – with relation to set-up, track, report and documentation for Pillar II information.

What Else Should Private Companies and Family Offices Consider?

Although the minimum global tax is applicable to multinational enterprises, private entities have the onus of ensuring compliance. Family offices meeting the respective criteria also have the obligation of ensuring compliance. Confirming the appropriate tax advice is obtained is crucial, to ensure adherence to the tax reporting requirements under Pillar II.

Additional Information

Should your family office or private company have any questions on the related impact of Pillar II, reach out to Dixcart for more information. Please contact Dixcart Portugal for more information: advice.portugal@dixcart.com.

Disclaimer: This guide is for informational purposes only and does not constitute professional tax advice. Please consult with qualified tax professionals for specific guidance.

Using an Isle of Man SPV for Financing International Investment

We have now had an extended period in which world markets have been shaken by international events. For example, the value of the British Pound (£GBP) has been depressed (albeit showing signs of recovery due to Bond market performance) owing to a blend of home grown and global economic forces (Brexit, pandemic, war, inflation et al). But in this fiscal adversity lies a potentially lucrative opportunity.

It may be an opportune time for those based in the world’s more buoyant economies to look to international investment, monopolising on weakened currencies, undervalued markets, and any differences in interest rates etc. But for many with the resources to undertake such activity, such as Family Offices, Private Equity Funds or even HNWIs with significant assets, the question of how best to leverage this advantage can be complex and unwieldly, even resulting in decision-making paralysis – worse, this inertia could even lead to missing the boat altogether.

At Dixcart, we work with a wide range of professionals to deliver solutions for such clients. In this article we consider how you and your advisers could utilise an Isle of Man Special Purpose Vehicle (SPV) to unlock your next international investment opportunity:

  1. Why is the Isle of Man a Good Choice for Your Special Purpose Vehicle?
  2. Which Isle of Man Entities are Available to Act as Special Purpose Vehicles?
  3. Leveraging Against Your Existing Portfolio
  4. What Loan Facilities are Available to an Isle of Man Special Purpose Vehicle?
  5. How Could an Offshore SPV be Used for International Investment?
  6. How Can Dixcart Assist with Your Next International Investment?

1. Why is the Isle of Man a Good Choice for Your Special Purpose Vehicle?

Typically, an offshore SPV will be utilised to ringfence assets and liabilities in relation to a given activity or objective, thus mitigating risk. For example, to purchase an equity position in a company, to conduct mergers and acquisitions, provide angel investment to a start-up, securitisation of debt, raising additional capital, purchasing luxury assets etc. Structuring your investment vehicle in this way can have the broad effect of:

  • Protection against insolvency via ringfencing the assets and liabilities of the Beneficial Owner and SPV.
  • There may be no audit requirements where the SPV is below the earnings threshold.
  • Providing commercial privacy, dependent on the local regime e.g. there is no requirement for accounts to be made publicly available in the Isle of Man.
  • Can shield the SPV from legal action taken against the Beneficial Owners and vice versa.
  • Providing legal and tax certainty dependent on the jurisdiction of establishment.
  • And more…

Further to this, several features make the Isle of Man an attractive prospect for incorporating your SPV when undertaking international investment:

Tax Regime

The Isle of Man has a favourable tax regime for corporate entities, which makes it an attractive location for incorporating SPVs geared towards investment. Famously the island benefits from the following headline rates:

  • 0% Corporate Tax
  • 0% Capital Gains Tax
  • 0% tax on most Dividends and Interest payments

Further, the Isle of Man falls under the UK’s VAT regime, which can be beneficial in certain circumstances. Isle of Man Entities can register for VAT purposes, and benefit from service providers’ experience in this regime and a more responsive VAT Office generally.

However, it is important to note that there may be tax payable in the local jurisdiction where the activity is taking place depending on the nature of the proposed activity and the local tax rules. This is a complex area, and it is vital to engage an appropriate tax adviser when conducting such planning. Dixcart have a wide range of professional contacts and can make introductions as desired.

Legal Regime

The Isle of Man has modern and flexible corporate laws that allow for the creation of various types of SPV. The legislative environment is also politically agnostic, and therefore stable and reliable. The flexibility offered, allows SPVs to tailor their structures to meet their specific objectives, whilst the enduring nature of the legal regime provides certainty.

Additionally, whilst UK Case Law is persuasive, Manx Law is distinct and will only follow the Precedents of the Courts of England & Wales, in the absence of Manx authority. Further, foreign Court Orders are not directly enforceable without an equivalent Manx Court Order. As the Courts and laws of the Isle of Man are tailored to its requirements, it is particularly well placed to deal with matters relating to Company Law, Trust Law, and Tax etc.   

In addition, lenders can take comfort as registered legal charges are publicly available on the Isle of Man Companies Registry search. For example, this is a requirement for companies formed under the Companies Act 1931. Therefore, details regarding all existing registered charges are available to the lender online, on-demand.

Global Standing

The Isle of Man is OECD ‘Whitelisted’ and therefore regarded as a well-run financial centre. The island has a global reputation for being a well-regulated jurisdiction with a stable political and economic environment. The Isle of Man Financial Services Authority has a proactive approach to regulating financial services, ensuring good governance, which provides investors and lenders with confidence in the enterprise. This can make activities such as debt financing more attractive to lenders, as the Isle of Man is easy to do business with.

Regulated Professional Services

The Isle of Man has a heritage in international planning and offers a well-developed financial services industry, including highly experienced service providers, such as Dixcart, who can assist with the setup and ongoing management of SPVs. Further, the investor and lender can take comfort from the fact that Isle of Man corporate service providers must possess a license and are regulated, unlike their UK counterparts.

Proximity

The Isle of Man is located in the middle of the Irish Sea, between the UK and Ireland, making it easily accessible from both locations. But more importantly, operates in the same time zone as the UK and is just +1 CET for European activities. This proximity makes it a convenient location for individuals and companies looking to set up SPVs for access to markets in similar time zones, such as the UK or other European jurisdictions.


2. Which Isle of Man Entities Are Available to Act As Special Purpose Vehicles?

The Isle of Man offers a wide variety of vehicles to act as SPVs and undertake investment via debt or equity financing. A corporate entity can be incorporated on the island in 48 hours or less for a minimum Registry fee of £100 – quicker times are available for increased Government fees. It is important to note that the incorporation fee does not include the service provider’s onboarding fee.

Appropriate entities include:

Isle of Man Companies Act 2006 Company

The Isle of Man Companies Act 2006 (CA 2006) Company is a modern corporate vehicle that has a great deal of flexibility when compared to a more traditional Companies Act 1931 Company.

There are no thin capitalisation rules on a CA 2006 Co as the company may be incorporated with a single share, which can have a par value of zero. The CA 2006 Co simply requires a Registered Office, Registered Agent and a minimum of one Shareholder and one Director. The Director can be a non-Isle of Man Resident, and Corporate Directors are permitted. No Company Secretary is required.

All charges are deemed to be registerable under the CA 2006 and charges should be registered within 1 month of creation. The CA 2006 provides additional flexibility in this regard, as charges can be registered after this 1-month period. In reality the registration of such a charge will likely be a term of the Loan Agreement and as an SPV, the company is unlikely to have existing charges or trade debts etc.

Limited Partnership with Separate Legal Personality

As stipulated in the Isle of Man Partnership Act 1909, Limited Partnerships require a minimum of two Partners, made up of one or more General Partners (GP) and one or more Limited Partners (LP). A minimum of one Partner must be Isle of Man Resident.

A GP has unlimited liability and is free to engage in the day-to day management of the Limited Partnership i.e. administer the investment(s). The GP can be a Corporate entity. Due to this uncapped liability, the GP is typically an Isle of Man Limited Company.

The LP would be the investor, whose liability is fixed at outset and restricted to the capital or property contributed or outstanding. Conversely, the LP cannot engage in the day-to-day administration of the Partnership, lest they be deemed a GP and therefore be exposed to unlimited liability.

Further, under the Limited Partnership (Legal Personality) Act 2011, the Limited Partnership can be incorporated with separate legal personality, thereby being capable of contracting and being a party to legal action.

The Limited Partnership is a transparent entity for tax purposes and therefore Gains are realised on the Partner’s personal rates of taxation (e.g. income tax, Inheritance Tax etc.).

Protected Cell Company (PCC)

A Protected Cell Company (PCC) operates as an independent legal entity, equipped with the authority to engage in contracts, assume ownership of assets, and be subject to legal action. The structure of a PCC allows for the creation of an unlimited number of separate Cells. Each of these Cells serves as a compartmentalised unit with its own assets and liabilities, which are distinctly isolated from those of the other Cells and the PCC’s non-cellular assets and liabilities.

Alongside the non-cellular ordinary shares of the PCC, cellular shares can also be issued. The holder of these cellular shares is permitted to participate in the activities of the specific Cell they invest in, with rights outlined by the Articles of Association.

Accounting transparency is ensured by requiring a separate set of accounts and a tax return for each Cell. Moreover, each Cell must be clearly identifiable as part of a PCC, and all third parties transacting with a Cell must be aware of its status within a PCC structure.

The PCC model presents a valuable strategy for a Beneficial Owner aiming to delineate different activities and associated risks. For instance, one might isolate borrowing and financed activities conducted in one Cell from the private investment carried out in another. When a corporate investor such as a venture capital fund engages in multi-jurisdictional activities, like investing in startups, the Cells act as tangible barriers, segregating each business’s activities. They could also be tailored to reach maturity at varying dates, providing added flexibility.

Honourable Mentions

There are of course many more legal structures available to act as SPV, including; Limited Liability Companies, Foundations and Isle of Man Purpose Trusts. Each has distinct features that can make it appropriate in the correct context.

Economic Substance Considerations

It is important to note that there are rules around Economic Substance in the Isle of Man and Channel Islands. Incorporated entities in these jurisdictions, that undertake Relevant Sector Activity, will have to meet certain requirements to demonstrate the Core Income Generating Activity (CIGA) of the company occurs within the jurisdiction (Isle of Man or Channel Islands), to be Tax Resident. CIGA includes activity such as the entity being directed and managed in the jurisdiction, possessing an adequate and proportionate number of qualified employees (or working hours taking place) in the jurisdiction, possessing an adequate physical presence etc.

For example, if a corporate entity’s sole function is to acquire and hold equities, and the equities in question are controlling stakes in other companies, it is defined as a Pure Equity Holding Company for the purposes of Economic Substance. If the Pure Equity Holding Company derives income from this activity, it will have to demonstrate CIGA. This is accomplished via the provision of Directors, various management services and Registered Office on the Isle of Man or Channel Islands.

You can find the Isle of Man and Channel Islands guidance note on Economic Substance here.


3. Leveraging Against Your Existing Portfolio

As noted in the introduction, markets are tough at the moment and for those with money tied up in their portfolio, liquidating may not be in their best interests e.g. it may compound any losses. Considering debt financing your next international investment can be a good solution under the correct circumstances, but how do you unlock the value in your existing portfolio without compromising growth?

In today’s world it is commonplace for investors to arrange asset-based financing against less conventional security. For example, loan arrangements such as Lombard lending provide a credit facility secured against the investor’s more liquid personal investments, such as equities, bonds, or funds. The methods of how such facilities operate are discussed briefly in section 4.

Further, having initially started in the USA, specialist lenders have started to emerge across the world who can consider more complex arrangements that take into account Illiquid, sticky, or intangible assets. Such assets often present a challenge to use as collateral for financing as they do not have a readily available market value like liquid assets. As such, lending against these non-traditional asset classes is now made possible via insurances contracts that provide a market value guarantee in the event of default.

Illiquid assets are somewhat more straightforward than sticky and intangible assets. Such arrangements may simply require the creation of a charge over the purchased asset being financed e.g. where an aircraft is being constructed, a charge may be created over the aircraft, thus allowing the lender to take lawful possession in the event of default. It is quite normal for the lender in such instances to also take security over other assets in the borrower’s portfolio, such as the Lombard-style arrangement noted earlier, providing the lender with additional certainty to protect against loss.

It is important to work with a specialist lender or professional adviser when attempting to use such assets as collateral to ensure that you are getting a fair and accurate valuation.


4. What Loan Facilities are Available to my Isle of Man Special Purpose Vehicle?

While the Special Purpose Vehicle (SPV) can raise funds through diverse methods like issuing debentures or debt notes, it has a plethora of other financial strategies at its disposal, including acquiring debt financing through banking institutions or other financial intermediaries. Even though numerous banks operate on the Isle of Man – such as Barclays, RBSI, HSBC, NatWest, and others – the Isle of Man entity is not confined to these financial institutions, and deals can be orchestrated with virtually any global lender, given they meet the necessary compliance standards. A multitude of loan facilities are available in these scenarios, but Carried Interest Facilities, Capital Call Facilities, Margin Loan Facilities, and notably, Net Asset Value (NAV) Facilities are some of the most prevalent.

NAV Facilities, in particular, have witnessed escalating popularity, especially amid the prevailing bearish market conditions, where Beneficial Owners might prefer to avoid liquidating their investments at a probable loss. But what are NAV Facilities?


Net Asset Value (NAV) Facilities

NAV Facilities are a form of secured loan, where the collateral consists of assets from an investment vehicle, like a Private Equity Fund, Hedge Fund, or an investment portfolio. They provide investors the means to borrow against their assets’ value without divesting their holdings. The extent of the loan facility is determined by the ‘Net Asset Value’, which is calculated as the total worth of the packaged assets, after deducting liabilities and debts.

Under these provisions, lenders typically extend a line of credit based on a certain proportion of the Net Asset Value. The loan amount hinges on the lender’s evaluation of the quality and liquidity of the underlying assets, as well as the cash flows and distributions that ascend to investors from those assets.

In most instances, the lender will obtain security over the relevant assets, such as shares in the Master Fund/Feeder Fund or the investment holding vehicle. However, the terms of NAV Facilities can greatly vary, depending on the lender, connected parties, any holding vehicle involved, and the nature of the underlying assets. Additionally, the interest rates could be fixed or variable, and the lender might reserve the right to seize the assets or compel a sale in case of an SPV loan default.

NAV Facilities afford investors easy access to liquidity without compelling them to offload their investments. This, in turn, enables them to leverage new investment prospects promptly, without impacting the compounded growth of their leveraged assets. The loan facility can also cover any ongoing or unforeseen expenses, like redemptions or legal fees, endowing the investment vehicle with an element of stability and resilience.


5. How Could an Offshore SPV be Used for International Investment?

Once the capital has been secured via private funding, loan arrangement etc. there are many ways in which an Isle of Man SPV may be utilised to achieve your financial objectives. Typically these include activities such as packaging assets as securitisation, engaging in structured finance, as an investment vehicle, purchasing a luxury asset etc.

Some of the most common uses we see are:

Investment Vehicle

Whilst an Isle of Man SPV can be used to structure open or closed ended investment vehicles for entities such as hedge funds, private equity funds, or venture capital funds undertaking international investment, simple investment companies are often used for private arrangements. The archetypal investment company will use the Isle of Man SPV to co-ordinate the investment capital from investors in multiple jurisdictions or who are looking to undertake investment activity in a foreign market. For example, the funds may come from Hong Kong, Singapore and any number of equivalent jurisdictions, into the Isle of Man SPV that then purchases the equity in a UK SPV undertaking the build and subsequent leasing or sale of UK Real estate, start-ups or growing businesses, with a view to receiving and accumulating Dividends paid to shareholders for reinvestment.

Purchasing a Luxury Asset

In almost every instance, where a client is seeking to acquire a prestigious asset, such as a yacht or jet, an SPV is the best method of purchase. The exact structuring will be guided by the tax and legal advice but will normally carry many benefits for the Beneficial Owner e.g. limiting liability / exposure, tax planning, potential VAT exemptions or recoverability etc. IOM SPVs are very attractive for those non-EU Tax Resident individuals utilising the craft for personal use, or in some circumstances a blend of personal use and commercial charter.Your Attractive HeadingYour Attractive Heading

You can read more about the various uses and features of Isle of Man Companies here.


6. How Can We Assist with Your Next International Investment?

Dixcart can assist with your international structuring, setting up and administering the offshore structures required by your planning. We work closely with clients and their advisers to ensure that the SPV is managed optimally, to facilitate your objectives.

The Dixcart Group has been delivering high quality offshore services to clients and their advisers for over 50 years, with the Isle of Man office trading since 1989. Over this time, we have developed strong working relationships with some of the world’s leading advisers – therefore, If you have not yet engaged a professional adviser, we can make an introduction as appropriate.

*Please note this information should not be considered financial advice, and we would recommend getting in touch with us via the details provided or discussing with your professional adviser before taking any action.


Get in Touch

If you require further information regarding the use of Offshore SPVs, or Isle of Man structures, please feel free to get in touch with David Walsh at Dixcart: advice.iom@dixcart.com

Alternatively, you can connect with David on Linkedin.

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

Formation of Companies in the Isle of Man Companies Act 1931

Why Use the Isle of Man?

Isle of Man companies benefit from a zero rate of tax on trading and investment income.  They are also able to register for VAT, and businesses in the Isle of Man are treated as if they are in the UK for VAT purposes. There is also no withholding taxes on dividend income from Isle of Man companies.

Isle of Man companies are therefore particularly useful for activities such as:

  • Holding Companies e.g. equity, real estate, superyachts, aircraft, investment portfolios etc.
  • Estate Planning
  • International Structuring e.g. multi-jurisdictional or cross-border businesses

The key points above outline some of the most frequent reasons for the use of Isle of Man companies. Please note it is not a definitive list of reasons for using such companies.

Formation of Companies in the Isle of Man

Isle of Man companies can currently be formed and regulated under two separate Acts.

This Jurisdiction Note outlines the formation and regulation of companies as embodied in the Isle of Man Companies Act of 1931 (as amended).  A second Jurisdiction Note is available which details companies governed by the Isle of Man Companies Act of 2006.  Please request this second note if you wish to consider both types of Isle of Man company.

  1. Incorporation 

Standard incorporation of a Company occurs within 48 hours of receipt of the relevant documents to the Isle of Man Registry, however for an additional fee companies can be incorporated in 2 hours or “while you wait”.

  1. Company Name

The proposed name must be approved by the Companies Registry. The Company can have its name ending in any of the following:

  • Limited
  • Ltd
  • Public Limited Company
  • PLC
  1. Capitalisation

Companies may be incorporated with a single share, which can have a par value as low as one pence. There are thereforefe no thin capitalisation rules.

  1. Shareholders

Companies can be incorporated with only one shareholder. Shareholders need to be recorded at the registered office of the company and at the Companies Registry.  

  1. Nominee Shareholders

These are permitted and can be provided by Dixcart.

  1. 6Minimum Number of Directors

The minimum number of directors is two. Directors do not need to be resident in the Isle of Man. 

  1. Secretary

A company secretary is required. The secretary does not need to be resident in the Isle of Man.

  1. Registered Office

The registered office must be situated in the Isle of Man.

  1. Annual Return

There is a requirement to file an annual return.

  1. Accounts

Accounts must be prepared but these do not need to be filed with the Companies Registry.

  1. Audit of Accounts

A company need not have its accounts audited if it meets two of the three following criteria:

  • Its annual turnover is £5.6 million or less
  • Its balance sheet total is £2.8 million or less
  • Its average number of employees is 50 or fewer 
  1. Taxation

A tax return must be prepared and filed at the Isle of Man Treasury. These are not publicly available.

All Isle of Man companies are now treated as resident companies.  Resident companies are taxed at a rate of 0% on their trading and investment income.  Income derived from land and property situated in the Isle of Man is taxed at a rate of 20% and banks are taxed on their banking business at a rate of 15%.

  1. VAT

The Isle of Man has a Customs and Excise agreement with the UK. This means that for VAT, Customs, and most Excise duties, the two territories are treated as one.

  1. Beneficial Ownership Register and Nominated Officer

The Isle of Man operates a non-public Beneficial Ownership Register and a nominated officer is required for each entity, a service which can be provided by Dixcart. The register is only accessible by Isle of Man regulatory bodies and/or law enforcement agencies for a permitted purpose. It is not available to the public.

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

Converting an Isle of Man Companies Act 2006 Company to a Companies Act 1931 Company – Overview

With the introduction of the Companies (Amendment) Act 2021 (the Act) Isle of Man companies incorporated under the Companies Act 2006 (CA 2006) can now re-register as a Companies Act 1931 (CA 1931) company.

This all sounds great, but what does this actually mean for you and your clients? In this article we’ll consider the what, how and why of the Act in respect of private limited companies. We’ll cover:

Re-Registration: What Happened Until Now?

When the CA 2006 was introduced into Manx law, s148 of the Act included the power to re-register CA 1931 companies to a CA 2006 company, but not vice versa. It is difficult to know why this one-way system was created. Presumably it was thought that the more flexible and less onerous CA 2006 company would eclipse the need for CA 1931 companies. You can find out more about the differences between CA 1931 and CA 2006 companies here in our guide.

Initially this was shown to be true, with CA 2006 companies steadily overtaking the number of new CA 1931 companies being incorporated, peaking in 2016, accounting for 62% of Limited Company incorporations.

However, the growth in incorporations of CA 2006 companies has slowed, and there is now more or less parity in the numbers of CA 1931 and CA 2006 entities: in 2020 CA 1931 @ 51% / CA 2006 @ 49%.

With time we have discovered that the CA 2006 company, whilst possessing a great deal of flexibility and presenting a streamlined trading structure, is not the clear choice. As with almost everything, corporate structuring and tax planning is not a ‘one size fits all’ scenario.

Re-Registration: Where are we now?

The Act has now remedied the inconsistency regarding re- registration from CA 2006 to CA1931 and visa versa.

The Members can vote to re-register whilst the company has a Registered Agent appointed, requiring a special resolution (“SR”) passed by members holding 75% or more of the voting rights. 28 clear days’ notice must be given to the Registered Agent of the intention to re-register. A shorter notice period can be agreed with the Registered Agent.

The SR will consider the approval of the re-registration from CA 2006 to CA 1931, the submission of revised constitutional documents (Memorandum and Articles) – ensuring nothing within the Articles prohibits such action.

The re-registration process will require the submission of various documents, including the application for re-registration (Form 101), re-registration fee of £100, certified copies of the requisite resolutions along with the revised Memorandum and Articles. Note that the company can only re-register in line with the type previously adopted i.e. a company limited by shares can only re-register as a company limited by shares etc.

In addition, any outstanding filing fees must be settled, which includes filings due within one month of re-registration.

Once the new filings have been accepted and a certificate of de-registration is issued, the company is then beholden to the CA 1931. It’s important to note that re-registration of the company does not form a new entity, nor does it affect the rights of creditors concerning any previously registered charges, which do not need to be re-registered. The Isle of Man Companies Registry have produced a useful practice note covering the changes. Please note, CA 2006 companies re-registering to become a CA 1931 company who have not yet registered charges will need to do so prior to beginning this process.

It is worth noting that the now CA 1931 company will require a minimum of two Directors, a Company Secretary and still needs an Isle of Man Registered Office. 

Other updates: Registration of Directors

The Act also introduces the requirement for CA 2006 entities to notify the Registrar of any removals/appointments of Directors within one month of the change – bringing such filing requirements in line with CA 1931 companies. Please note that this has not yet come into force and is not currently mandatory for CA 2006 companies.

Why Would a Company Voluntarily Re-Register Under Another Act

Where a client wishes to redomicile a company, it is currently less onerous, more efficient and therefore less costly to first establish a CA 2006 company. The company now has the choice to then re-register as a CA 1931 entity if desirable; this can be attractive if the intention is eventually to physically manage the company from the Isle of Man.

At the time of incorporation, the CA 2006 company only requires one Director, does not require the appointment of a Company Secretary and of course must have a Registered Agent; this can be especially attractive for start-ups and burgeoning businesses with lower resources. In the future, when there are higher staffing levels, the company may wish to re-register as a CA 1931 company, now able to meet the minimum of two Directors and a Company Secretary; dispensing of the requirement for a Registered Agent.

Supporting the Re-registration of Isle of Man Companies

At Dixcart, we have been providing Corporate Services and guidance for over 45 years; assisting clients with the effective structuring and efficient administration of companies tailored to their individual objectives.

We have developed a full suite of company services for advisers and their clients, which includes supporting the planning, incorporation, directorships, administration, redomicile and of course re-registration of companies.

Get in touch

If you require further information regarding the Isle of Man Foundations, their establishment or management, please feel free to get in touch with David Walsh at Dixcart: advice.iom@dixcart.com

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

Setting Up a Business in Switzerland

Switzerland is a friendly place to start a business, with many international companies having their headquarters in the country. Companies both large and small are attracted to Switzerland for its stability, the strength of its currency and some of the lowest corporation taxes in Europe.

So you have decided to start a business in Switzerland? You have a business plan and are ready to get started.

Legal Structure

Entrepreneurs can choose from several legal structures when setting up a business in Switzerland, including:

  • Sole Proprietor: A business structure where a single individual owns and operates the business, assuming full personal liability for its obligations.
  • Partnership: A legal form where two or more individuals share ownership and responsibility for a business, with options for general and limited partnerships.
  • Limited Liability Company:  A legal business entity that combines elements of partnership and corporation, providing limited liability to its owners while maintaining operational flexibility.
  • Branch: A business extension of a foreign company in Switzerland, operating as a dependant part of the parent company and subject to Swiss regulations.

Each structure has its advantages and implications for liability, taxation and governance, so it is crucial to select the most suitable option based on the nature and scale of the business.

Registration Process

The registration process varies depending on the chosen legal structure. However, in general, the following steps are involved:

  1. Choose a business name and verify its availability.
  2. Open a bank account with a Swiss bank to deposit the share capital.
  3. Prepare the necessary documentation.
  4. Founders Meeting with a Public Notary.
  5. Register the business with the relevant commercial register and tax authorities.
  6. Obtain any required permits or licenses based on the industry and activities of the business.

Once you have chosen your Legal Structure and started the registration process, important next steps are to understand your accounting requirements and tax considerations.

Accounting and Reporting Requirements

Swiss companies are required to maintain and file accurate accounting records in accordance with established financial standards ensuring compliance with the regulatory requirements.

Tax Considerations

Switzerland offers a competitive tax environment for businesses, with varying rates between cantons. Key aspects of taxation include:

  • Corporate tax: businesses are subject to federal, cantonal, and municipal taxes and it is essential to understand the tax implications based on the location and nature of the business activities.
  • Value Added Tax (VAT): Businesses with annual turnover exceeding CHF 100,000 or more a year must register for VAT and charge VAT on their goods and services. Value-added tax is a general tax levied on the distribution, import, export and sale of a product or service by any company in Switzerland. 
  • Double Taxation Treaties: Switzerland has double taxation treaties with numerous countries to avoid double taxation of income in multiple jurisdictions.

Employment Regulations

Switzerland’s employment laws are characterised by flexibility and employee protection. These considerations include:

  • Employment Contracts: Written contracts outlining terms of employment, including wages, working hours and benefits are standard practice.
  • Work Permits: Foreign nationals working in Switzerland may require work permits, which are subject to specific conditions depending on the individual’s nationality and qualifications.
  • Minimum Wages: While Switzerland does not have a statutory minimum wage at the federal level, certain cantons and industries may have minimum wage regulations.

Compliance and Regulatory Matters

Switzerland has a well-established regulatory framework governing various aspects of the business operations, covering:

  • Company Law: Compliance with Swiss company law, including corporate governance, shareholder rights and disclosure obligations.
  • Anti-Money Laundering Regulations: Implementation of AML compliance programmes to combat money laundering and terrorist obligations.
  • Data Protection: Adherence to data protection regulations, ensuring privacy and security of personal data.
  • Regulatory Authorities: Oversight by regulatory bodies specific to industries or activities, such as FINMA for financial institutions.

Advice and Additional Information

Dixcart has had an office in Switzerland for over twenty-five years and is well placed to provide advice regarding the establishment of companies here. Please contact Christine Breitler at the Dixcart office in Switzerland: advice.switzerland@dixcart.com.

Minimum Global Tax on Multinational Businesses

As of 1 January 2024, Pillar 2 (BEPS 2.0) came into effect, as recommended by the OECD, where multinational companies are subject to a global minimum tax of 15% which will apply for the first time for certain large economies – agreed by more than 140 countries under the OECD Inclusive Framework.

In the digital age and face of globalisation, the global economy has transformed – with countries facing pressure to lower their corporate income tax rates to offer incentives to compete for capital and investment. Building on BEPS actions and placing a floor under tax competition, the OECD, together with member countries, have addressed the collective action problem for the so-called race to the bottom.

A series of interlocking rules apply to companies taxed below the 15% rate in one country (with the possibility of other countries being able to apply a top-up tax), which is summarised below in six steps:

Step 1: Determination of Multinational Groups in Scope

The following steps apply in determining which multinational groups are in scope:

  1. Internationally active groups – determination as to whether the group has entities or permanent establishments in more than one jurisdiction, is required;
  2. Groups with annual revenue of €750 million or more, in at least two out of the four prior years immediately preceding the fiscal year being tested; and
  3. Identify excluded entities from the application of the Pillar II rules (but note that these are not excluded from the revenue threshold calculation above).
    1. Public interest entities, such as governmental and non-profit organisations, tax-neutral entities (such as pension and investment funds), and certain asset-holding companies are excluded.

Step 2: Allocation of Income to Constituent Entities on a Jurisdictional Basis

The multinational group needs to determine the income (abbreviated as FANIL for Financial Accounting Net Income or Loss – determined by accounting standards for financial reporting) and the location of each constituent entity, to identify the respective local tax treatment.

Step 3: Calculation of GloBE Income

Global Anti-Base Erosion (GloBE) income is calculated by making adjustments to FANIL to align the tax base for the global minimum tax with those that are typically applied for local tax purposes. Types of adjustments include:

  1. Adjustments to financial accounting income to better align with taxable income – net taxes, dividends (avoid double counting profits within a group), equity gains and losses (unrealized – no impact for GloBE; realized – may need adjustments for timing differences between accounting and tax), asymmetric forex gains and losses (differences in treatment between accounting and tax require reconciliation to align with taxable income), pension expenses (use of tax accounting principles), stock-based compensation (portion deductible for tax added to GloBE income);
  2. Correct allocation of income between jurisdictions is adjusted for – such as transfer pricing adjustments and intra-group financing;
  3. Policy-based adjustments – such as the disallowance of illegal payments such as bribes, or payments of fines and penalties (only allowed to a maximum of €50,000).

Step 4: Determination of Adjusted Covered Taxes

For each constituent entity, the GloBE income or loss is calculated. The tax associated with the income must then be calculated using the following steps:

  1. Determination of covered taxes – the current tax expense as shown in the financial accounts (includes incomes taxes, but does not include non-income-based taxes such as indirect taxes, payroll and property taxes);
  2. Adjustment to covered taxes – to consider taxes that are not recorded in the tax line of the profit or loss statement and exclude taxes not related to GloBE Income or Loss, addressing of temporary differences as well as tax credits;
  3. Cross-border allocation – adjustment to allocate certain cross-border taxes to the proper constituent entity (like taxes imposed under a CFC regime, distribution taxes, withholding tax on dividends paid, or other taxes paid);
  4. Post-filing adjustments – in the case of post-filing adjustments, generally an ETR recalculation is required for the relevant fiscal year (examples include audit or transfer pricing adjustments).

Step 5: Computation of ETR and Calculation of Top-Up Tax

GloBE income or loss and covered taxes (steps 3 and 4 above) from the same jurisdictions must be added together to determine the jurisdictional effective tax rate (ETR).

Note an exemption applies for multinationals that have limited operations, namely, below the de minimis thresholds of €10m for revenue and €1m for income.

From GloBE, a substance-based income exclusion is deducted to reduce the potential burden on multinationals with genuine operations and investments in a jurisdiction. A percentage of tangible assets and payroll expenses is applied for the purpose of the substance-based income exclusion.

The top-up tax percentage is due on the difference between the 15% minimum rate and the ETR in the jurisdiction – the delta which is applied to the GloBE income or loss in the jurisdiction, after deducting a substance-based income exclusion.

Each constituent entity, with GloBE income, is subsequently allocated top-up tax.

Step 6: Charge the Top Up Tax under QDMTT, IRR, or UTPR

A member jurisdiction has a liability towards a top-up tax for a multinational group under three types of provisions, in the following agreed rule of order:

  1. If your domestic tax already hits the global minimum, you won’t be hit with extra “top-up” taxes from other countries – referred to as the Qualified Domestic Minimum Top-Up (QDMTT);
  2. If the jurisdiction where the low-taxed constituent entity is located does not have a domestic minimum top-up tax, the ultimate parent entity, in proportion to its ownership interest, might collect the top-up tax under IRR (Income Inclusion Rule);
  3. If the ultimate parent entity is in a jurisdiction that has not implemented a domestic minimum top-up tax, then the top-up tax will be levied on the next entity in the ownership chain that is located in a jurisdiction with an IRR following a top-down approach;
  4. Where IRR does not apply, the Under-Taxed Payment Rule (UTPR) becomes applicable. UTPR acts as a back-up to the IRR, ensuring a top-up tax payment within jurisdictions applying this rule.

Specific Rules for Each Jurisdiction

Members will need to implement the GloBE rules in a way that is consistent with the outcomes provided in the agreed rule order, to ensure transparent and predictable outcomes across jurisdictions. Note that the legislative draft GloBE rules accommodate a wide range of multinational groups and tax systems. The OECD have recommended Pillar 2 rules to become effective in 2024.

Conclusion

The implementation of Pillar 2 marks a significant step towards creating a more level playing field and addressing tax challenges arising from the digital economy. Ultimately, Pillar 2 represents a critical step towards a more equitable and sustainable global tax system. Its impact will depend on effective implementation, addressing potential concerns, and continuous evaluation to ensure it meets its intended goals.

Additional Information

If you would like to discuss any of the matters raised in this Article, please contact Lionel de Freitas, a director of our Dixcart office in Portugal: advice.portugal@dixcart.com.