Category: Corporate Services

Why use a UK Company?

The UK Government has introduced many changes to make the UK tax system more competitive. This has led to the return of UK holding companies, the re-shoring of manufacturing and increased UK based research and development (R&D).

United Kingdom (UK) entities have a respectable international image and can be used tax efficiently for cross border trading and as international holding companies.

Examples of how UK entities can be used are detailed below:

UK Resident Companies

Since 1 April 2017 the corporation tax rate has been 19%.

There are generous allowances for investment in R&D by small and medium sized entities. The tax relief on allowable R&D is 230%. That means that for every £100 spent on R&D you can claim a tax deduction of £230.

Where a company makes a profit from exploiting potential inventions those profits may be taxed at 10% rather than at the normal corporate tax rate.

UK Controlled Foreign Company Laws have been reformed with the aim of making the UK tax system competitive for multinationals.

There are no withholding taxes on dividends paid from the UK by companies.

UK Holding Companies

The UK has a participation exemption for foreign income dividends. The conditions for this vary according to whether the company is small or large.

As a result of this exemption most foreign dividends will be exempt from UK taxation when received by UK-resident companies. Where the exemption regime does not apply, foreign dividends received by a UK resident company will be subject to UK corporation tax, but relief will be given for foreign taxation including underlying taxation where the UK company controls at least 10% of the overseas company.

No capital gains tax is payable on the disposal of a trading company by a member of a trading group, subject to minimum holding requirements. This relates to disposal of all or part of a substantial shareholding in another trading company, or the disposal of the holding company of a trading group or sub-group.

UK Limited Liability Partnerships (UK LLP)      

A UK limited liability partnership is a separate registered legal entity with an address in the United Kingdom. No personal liability falls on a member of an LLP for the contracts or debts of the LLP.

As long as the UK LLP operates in a commercially orientated manner, e.g. carries on a business with a view to generating profit, the members will be treated for tax purposes as if they are partners. A non-resident partner of a UK partnership is not liable to UK tax on non-UK source income.

Therefore if a UK LLP has non-UK partners and is involved in non-UK trading (carried out entirely outside the UK), there will be no UK taxation on its members.

Non-Resident Companies

A UK non-resident company is one that is incorporated within the UK but is deemed to be resident in another country. This occurs when the effective management and control of a company is carried out in another country which has a Double Tax Agreement (DTA) with the UK. The DTA needs to specify that the country of residence of the company is that in which the effective management and control takes place.

Valuable tax planning opportunities are presented where there are treaties with countries offering low corporate tax rates, such as Cyprus, The Netherlands, Portugal and Switzerland. Malta also provides similar opportunities due to the Maltese system of tax refunds.

UK companies which are able to obtain a Certificate of Residence from a competent authority in one of these countries are not liable to UK tax other than that due on UK sourced income.

The UK non-resident company, therefore, offers a respectable and reliable legal personality, together with low taxation, depending on the treaty country used.

Formation of Companies in the UK 

General information is detailed below, outlining the formation and regulation of UK companies, as embodied in the Companies Act 1985 and Companies Act 2006, where currently in force.

1. Incorporation

Incorporation normally takes five working days, although same day incorporation is possible for an additional fee.

2. Shares

Shares are registered and a shareholders’ register is maintained at the registered office.

3. Shareholders

A minimum of one shareholder is required for a private limited company.  There is no maximum number of shareholders.

4. Registered Office

A registered office is required in the UK and can be provided by Dixcart.

5. Meetings

There is no restriction as to the location of meetings.

6. Accounts

Annual accounts must be prepared and filed with Companies House. A company may qualify for an audit exemption if it fulfils at least two of the following criteria:

• An annual turnover of no more than £2million.
• Assets worth no more than £5.1
• 50 or fewer employees on average.

An Annual Return must be filed each year.

7. Company Name

Any name may be chosen, provided that it is not the same as, or too similar to, any other company name currently in use.  Certain words, however, such as ‘Group’ and ‘International’ require special permission.

8. Taxation

The “main rate” of corporation tax is shown in the table below.

	MAIN RATE
Financial Year to 31 March 2020	19%

If you would like additional information regarding the formation of companies in the UK and the fees charged by Dixcart, please contact advice.uk@dixcart.com

Please also see our Corporate Support Services page for further information.

Updated: November 2019

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 by the rest of the EU for VAT purposes as if they are in the UK.

Isle of Man companies are therefore particularly useful for:

• Holding investment portfolios and participations in other companies. This is due to the zero rate of tax on such activities and the lack of withholding taxes on dividend income from such companies.

• Moody’s Investment – London 16 November 2019 – the Isle of Man’s credit rating is Aa2 negative , the same as the United Kingdom. The negative outlook on the IoM’s ratings reflects Moody’s view that the UK’s sovereign credit trend continues to have a significant impact on the IoM’s credit profile, due to the close and material institutional, economic and financial linkages between the two jurisdictions. Moody’s noted the IoM’s credit strength is the island’s very strong public finances. Very high wealth levels provide a significant buffer against shocks, and the IoM has a long track record of strong GDP growth, with very low volatility. Fiscal policies are forward-looking and prudent, exemplified by the large fiscal buffers accumulated over many years.

• Trading within the EU. Due to the zero rate of tax on trading income and the ability to quote an EU accepted VAT number.

• Holding UK commercial property. For VAT purposes the UK and the Isle of Man are treated in the same manner.

• Isle of Man companies wishing to borrow money from banks benefit from being in a well-regulated jurisdiction with a public register of mortgages and other charges.

• The Isle of Man is a signatory to the Paris Convention on Patents and Trademarks, and therefore many intellectual property companies base themselves in the Isle of Man.

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 2006 (“the Act”).  A second Jurisdiction Note is available which details companies governed by the Isle of Man Companies Act of 1931 (as amended). 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”.

2. Company Name

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

• Corporation
• Corp
• Incorporated
• Inc
• Limited
• Ltd
• Public Limited Company
• PLC

3. Capitalisation

A company may be incorporated with a single share, which can have a par value of zero.  Therefore no thin capitalisation applies.

4. Shareholders

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

       5. Nominee Shareholders

These are permitted and can be provided by Dixcart.

6. Minimum Number of Directors

The minimum number of directors is one. Directors do not need to be resident in the Isle of Man. Corporate Directors are permitted. In addition a single natural person can act as a Director of a 2006 company. 

7. Secretary

There is no requirement for a company secretary.

8. Registered Agent

A registered agent is required and can be an Isle of Man licensed corporate service provider.

9. Annual Return

There is a requirement to file an annual return.

10. Annual General Meeting

There is no requirement to hold an annual general meeting. 

11. Accounts

There is a requirement to “keep reliable accounting records” which:

• correctly explain the transactions of the company; and
• enable the financial position of the company to be determined with reasonable accuracy at any time; and
• allow financial statements to be prepared.

The accounting records are to be kept at the office of the registered agent of the company or at such other place as the directors of the company think fit.  Where records are not kept at the office of the registered agent, the company must provide the registered agent with a written record of the physical address of the place where the records are kept and copies of the records at intervals not exceeding 12 months.

There is no requirement to prepare financial statements however any member or director of the company may at any time demand that financial statements be prepared where the company has not prepared statements for a continuous period of 18 months.  Any such statements prepared, should relate to the period following the end of the financial period to which the preceding financial statements relate, or if no such previous financial statements exist, since the incorporation of the company.  Originals of statements prepared must be kept at the office of the registered agent of the company.

12. Audit

A company is free to appoint an auditor however where the company’s securities are listed or admitted to trade on a securities market or exchange, the company must appoint an auditor.  Any auditor appointed must be appropriately qualified in accordance with the Act.

13. Taxation

A tax return must be prepared and filed at the Isle of Man Treasury.

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 10% and banks are taxed on their banking business at a rate of 10%.

14. 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.

For VAT purposes, trading within the EU will be subject to the same rates as the UK.

15. 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

Updated 24.01.2020

It is possible for a company to be incorporated in one jurisdiction and to be resident in another. In certain circumstances this can generate tax efficiencies.

It is very important to always ensure that the company is properly managed and controlled from the jurisdiction in which it is resident.

The jurisdictions of Cyprus, Malta and the UK present a number of low tax trading opportunities, as detailed below.

Advantages Available to a Cyprus Company Resident in Malta

Foreign companies seeking to establish certain entities in Europe, for example a company set up for financing activities, should consider establishing a Cyprus company and managing it from Malta. This can result in double non-taxation for the passive foreign sourced income.

A company resident in Cyprus is taxed on its worldwide income. In order for a company to be resident in Cyprus it must be managed and controlled from Cyprus. If a company is not resident in Cyprus, Cyprus will only tax it on its Cyprus source income.

A company is considered resident in Malta if it is incorporated in Malta, or, in the case of a foreign company, if it is managed and controlled from Malta.

Generally foreign companies in Malta are only taxed on their Malta source income and income remitted to Malta. The exception is income arising from trading activities, which is always considered to be income arising in Malta.

• The Malta-Cyprus Double Tax Treaty contains a tie breaker clause that provides that the tax residence of the company is where its effective place of management is. A Cyprus company with its effective place of management in Malta will be resident in Malta and would therefore only be subject to Cyprus tax on its Cyprus source income.  It will not pay Maltese tax on non-Maltese passive source income not remitted to Malta.

It is therefore possible to have a Cyprus company resident in Malta that enjoys tax-free profits, as long as the proceeds are not remitted to Malta.

Advantages Available to a UK Company Resident in Cyprus

A number of foreign companies wishing to establish a trading company in Europe are attracted to the UK, for a number of reasons.  In April 2017, the UK’s corporation tax rate was reduced to 19%.

To enjoy an even lower tax rate might be an objective.

If it is not essential to manage and control a company from the UK, the tax rate can be reduced to 12.5% by managing and controlling the UK company from Cyprus.

Whilst a UK company is resident in the UK by virtue of its incorporation, the UK-Cyprus Double Tax Treaty specifies that when a person, other than an individual, is a resident of both contracting states, the entity will be resident in the contracting state in which its place of effective management is situated.

• A UK company with its place of effective management in Cyprus will therefore only be subject to UK tax on its UK source income. It will be subject to Cyprus corporation tax on its worldwide income, with the Cyprus rate of corporation tax currently being 12.5%.

Effective Place of Management and Control

The two structures detailed above rely on the location of the effective management and control being established in a jurisdiction other than the jurisdiction of incorporation.

To establish an effective location for management and control, a company must almost always:

• Have a majority of directors in that jurisdiction
• Hold all board meetings in that jurisdiction
• Implement decisions in that jurisdiction
• Exercise management and control from that jurisdiction

If the place of effective management and control is challenged, a court is likely to take into account the records that have been maintained. It is very important that these records do not suggest that the real decisions are being conceived and executed elsewhere. It is essential that management and control take place in the correct jurisdiction.

How Can Dixcart Help?

Dixcart can provide the following services:

• Company incorporation in Cyprus, Malta and the UK.
• Provision of professional directors who are suitably qualified to understand the business of each entity and to manage it appropriately.
• Provision of serviced offices with full accounting, legal and IT support.

Additional Information

If you would like additional information please contact Robert Homem: advice.cyprus@dixcart.com, Peter Robertson: advice.uk@dixcart.com or your usual Dixcart contact.

Please also see our Corporate Services page for further information.

Updated October 2018

On 30 October 2019, the Ukraine ratified changes to two Double Tax Treaties (DTAs), the treaty with Cyprus and the treaty with the UK, respectively.

Once the appropriate formalities have taken place in the reciprocal countries, these treaties are expected to come into force at the start of January 2020.

Ukraine: Cyprus Treaty 

The key changes are:

• A reduction in the withholding tax for dividends from 15% to 10% (if the paying company does not qualify for a lower rate).

• To enjoy a reduced withholding tax rate of 5% on dividends the following two conditions must now be met (previously it was only one of the two conditions):
• The company paying withholding tax holds a minimum 20% of the capital in the company distributing the dividends; AND
• The value of the investment held (directly or indirectly) is a minimum €100,000.

Ukraine: UK Treaty 

The key changes are:

• An increase from 10% to 15% on the withholding tax rate payable for dividends;
• A reduced withholding tax rate of 5% on dividends, where the company paying withholding tax holds a minimum 20% of the capital in the company distributing the dividends;
• An increase from 0% to 5% on the withholding tax rate payable for royalty payments;
• Measures to increase the exchange of tax information between the two countries.

Additional Information

If you would like additional information regarding Ukraine’s Double Tax Treaties and the opportunities that they might provide, please speak to the Dixcart office in Cyprus, the UK office or the Malta office on advice.malta@dixcart.com.

The Malta Financial Services Authority (MFSA) has published its Annual Report and Financial Statement for the year 2018. It presents an overview of the activities and work carried out by the MFSA, together with details about the industry’s performance and explains the Authority’s vision for the coming years.

Despite a challenging and highly competitive environment, in 2018, the Maltese financial services sector continued to register significant growth rates, with a growth of 9.5% over the previous year.

Financial Services in Numbers

The MFSA registered an additional 144 new entities, as an increased number of businesses decided to make Malta their jurisdiction of choice, bringing the number of entities licensed by the MFSA up to over 2,300.

The financial services industry in Malta is a key pillar of the Maltese economy, contributing around 6% of Gross Value Added (GVA) in 2018, as shown in Chart 1.

At the end of 2018, the sector employed more than 12,000 people, 1,000 of which were new jobs created during that year. This brings the share of local employment within the financial services sector to 5.3%, almost double that recorded as the average for other member states of the European Union, which stands at 2.9%.

Deposits within domestic banks grew by 6.1%. These were mainly concentrated in current account deposits, with the share of such deposits amounting to around 70.3%. The amount of bank loans and advances grew for domestic banks: 6.3% for core and 18.0% for non-core.

The total assets of the securities and investment services sector in Malta grew by 8.3%, amounting to €11.7 billion in 2018. Corporate bond trading reached €93.7 million in 2018, up 22.5% from 2017.

The aggregate net asset value of Funds Domiciled in Malta totalled €11.7 billion, up 8% from 2017 and the locally managed assets of non-Malta domiciled funds grew by 9.1%, to €24 billion.

MFSA Vision for the Future

During 2018 MFSA published over 600 regulatory notifications to guide regulated entities and to safeguard the consumers of financial services.

The Virtual Financial Assets (VFA) Act came into force in November 2018, making  Malta a pioneer in the world of distributed ledger technologies and digital asset legislation.

The MFSA also signed a Memorandum of Understanding (MoU) with the Maltese Financial Intelligence Analysis Unit (FIAU) to enhance collaboration and improve the thoroughness of ‘Anti-money Laundering’ and ‘Customer Facing Staff’ on-site reviews and inspections.

Additional Information

If you would like further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Malta is an attractive and progressive jurisdiction for company incorporations. Located within the EU, it is introducing new laws and regimes, on an on-going basis, to consolidate this position. New laws include ‘New Consolidated Group Rules,’  introduced in May 2019, and new ‘Patent Box Regime Rules,’ implemented in August 2019.

NEW CONSOLIDATED GROUP RULES

Malta Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid, by the company distributing dividends, is made available to shareholder as a tax credit.

A non-Malta resident shareholder receiving profit dividends, can request a tax refund.

New Consolidated Group Rules – Cash Flow Benefits

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These come into  effect for tax year 2020, relating to relevant organisations with accounting periods in calendar year 2019.

• One of the advantages of the new consolidation regime is that cash flow benefits can be enjoyed by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

Further details can be found in Article: IN609 Malta Introduces Consolidated New Group Rules – Offering Cash Flow Advantages.

NEW PATENT BOX REGIME

Malta’s New Patent Box Regime

Malta published new Patent Box Regime (Deduction) Rules in August 2019 and the Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that can be deducted from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Further details can be found in Article: IN610: Malta’s New Patent Box Regime.

   Additional Information

If you would like further information regarding The New Consolidated Group Rules or the New Patent Box Regime in Malta, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Malta published new Patent Box Regime (Deduction) Rules  in August 2019. The rules apply to relevant income derived from qualifying intellectual property (qualifying “IP”) as from 1 January 2019.

Qualifying Intellectual Property

Qualifying IP is defined as:

• a patent or patents, whether issued or applied for (if applied for it assumes the patent is granted);
• assets for which protection rights have been granted in relation to national, European or international legislation;
• utility models;
• software, protected by copyright, under national or international legislation;
• in relation to small entities, other IP assets defined as being, ‘useful, novel and having features similar to those of patents’. Malta Enterprise will define and confirm this category by issuing certificates as appropriate

Marketing related intellectual property assets including; brands, trademarks tradenames do not constitute qualifying IP.

Conditions

Detailed information regarding the conditions, to claim the deduction, are available from the Dixcart office in Malta.

Deduction Calculation

The Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that is deductible from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Qualifying IP Expenditure

The income or gains derived from qualifying IP include:

• taxable income which is derived from the use, enjoyment and employment of the qualifying IP;
• royalty or similar income;
• advances and similar income derived from the qualifying IP;
• any sum paid for the granting of a licence in relation to the qualifying IP;
• compensation for infringements in respect of qualifying IP;
• gains on disposal of qualifying IP.

The determination of qualifying income or gains must always be made using an appropriate Transfer Pricing method.

The costs taken into account when calculating Qualifying IP Expenditure consist of:

• expenditure incurred directly and/or relevant subcontracting costs; and
• other equivalent expenditure but excluding; interest payments, building costs, acquisition costs and/or any costs that cannot be directly linked to a specific qualifying IP asset.

Expenditure for general and speculative R&D which cannot be included in the qualifying IP expenditure of a specific qualifying IP asset can be divided pro rata across all of the qualifying IP assets.

Total IP Expenditure

Qualifying IP Expenditure can never exceed Total IP Expenditure.

Total IP Expenditure comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP:

• relevant expenditure incurred by the beneficiary and constituting qualifying IP expenditure and other expenditure incurred by another person which would constitute qualifying IP expenditure had it been incurred by the beneficiary; and
• acquisition costs and expenditure for outsourcing activities.

Losses from Qualifying IP

If the beneficiary incurs a loss in respect of the qualifying IP which he is entitled to set against income or gains he can elect to benefit from one of the following:

• a deduction corresponding to 5% of the loss; or
• a deduction corresponding to the full amount of the loss subject to:
  • the beneficiary not being entitled to claim the tax treatment for any subsequent year of assessment; and
  • in any subsequent year of assessment, any such loss being deducted from the “Income or Gains derived from qualifying IP” until such losses are fully utilised.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Malta – Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid by the company distributing dividends, is made available to the shareholder as a tax credit, to avoid double taxation on the same income (for the company and subsequently for the shareholder).

A shareholder receiving profit dividends can request a tax refund on those profits paid by the company in Malta. The amount of the refund depends on the nature of the distributed profit and if these have benefited, or not, from double taxation relief.

Cash Flow Benefits of New Consolidated Group Rules

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These will come into  effect for year of assessment 2020, relating to ‘fiscal units’ with accounting periods commencing in calendar year 2019.

• One of the advantages of the consolidation regime is the cash flow benefits that can be enjoyed, by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

The new ‘Consolidated Group Rules’ will make income tax calculations, reporting of group companies and other group matters, easier, as detailed in the next section. This is because all income, outgoings and expenses derived by ‘transparent companies’ will be considered as if incurred by the principal taxpayer. The same applies to  transactions between the principal taxpayer and ‘transparent subsidiaries’.

What is a ‘Fiscal Unit’ and How is it Established?

The parent company, and any relevant subsidiaries, can make an election to form a ‘fiscal unit’, provided that each subsidiary has the same accounting period as the parent company and as long as two of the following conditions are met:

• The parent company holds at least 95% of the voting rights in the subsidiary company;
• The parent company is beneficially entitled to at least 95% of the profit available for distribution to the ordinary shareholders of the subsidiary company;
• The parent company would be beneficially entitled to at least 95% of the assets of the subsidiary company available for distribution to its ordinary shareholders, in the event of a winding up.

Where such an election has been successfully made, each ‘95% subsidiary’ will form part of the ‘fiscal unit’ of the parent company, with such subsidiaries being referred to as ‘transparent subsidiaries.’ Where a ‘transparent subsidiary’ is itself a parent company, its ‘95% subsidiaries’ will also join the fiscal unit.

Companies which are not resident in Malta can form part of a ‘fiscal unit’, however the principal taxpayer must at all times be a company registered in Malta, and with a permanent establishment in Malta.

The ‘Fiscal Unit Regime’ is optional.

Chargeable Income

Members of a fiscal unit, other than the principal taxpayer, will be considered transparent entities for Maltese income tax purposes. As a result, income and gains earned by these transparent subsidiaries will be attributed to the principal taxpayer. Similarly, expenditure and capital allowances incurred by transparent subsidiaries will be attributed to the principal taxpayer.

Transactions between members of the fiscal unit will not be taken into account, with the exception of transfers of immovable property situated in Malta, and transfers of property companies.

Income or gains allocated to the principal taxpayer will retain their nature and source. The ‘rules’, however, incorporate a number of ‘deemed source rules’.

One such rule is that income or gains, earned by a non-Malta tax resident transparent subsidiary, will be attributed to the permanent establishment of the principal taxpayer situated outside of Malta, as long as the transparent subsidiary maintains sufficient substance in that particular jurisdiction.

Compliance Obligations

The principal taxpayer will be required to prepare a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit.

The principal taxpayer will also be responsible for filing the tax return of the fiscal unit. The other ‘members’ of the fiscal unit are exempt from filing their respective tax returns, however, all members are jointly and severally liable for the payment of tax.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

The EU Code of Conduct Group (Business Taxation) (“the COCG”) have been working with the Crown Dependencies (Guernsey, Isle of Man and Jersey) to review ‘economic substance’. The EU Code Group concluded that the Isle of Man and Guernsey were compliant with most of the EU principles of good tax governance, including the general principles of “fair taxation”. However, one area that raised concern was the area of  substance.

The Isle of Man and Guernsey, have made a commitment to address these concerns by the end of 2018 and the islands have subsequently worked together with the COCG to develop proposals to meet their commitments.

Implications

Increasingly substance must be demonstrated, and clients are advised to use professionals such as Dixcart, who are experienced in providing the level of substance needed to ensure that the appropriate measures are in place.

The main elements of the COCG proposals include:

Identification of Organisations Conducting “Relevant Activities”

The classification of “relevant activities” has been derived from ‘categories of geographically mobile income’, as identified by the OECD Forum on Harmful Tax Practices. These include organisations undertaking the following activities:

• banking
• insurance
• intellectual property (“IP”)
• finance and leasing
• fund management
• headquarter type activities
• holding company activities; and
• shipping

Impose Substance Requirements on Organisations Undertaking Relevant Activities

This is a two part process.

Part 1: “Directed and Managed”

Resident companies undertaking relevant activities will be required to demonstrate that the company is “directed and managed” in the jurisdiction, as follows:

• Meetings of the Board of Directors in the jurisdiction at adequate frequency, given the level of decision-making required.
• During these meetings, there must be a quorum of the Board of Directors physically present in the jurisdiction.
• Strategic company decisions must be made at the meetings of the Board of Directors and the minutes must reflect those decisions.
• All company records and minutes must be kept in the jurisdiction.
• The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Part 2: Core Income Generating Activities (“CIGA”)

Tax resident companies, in any of the Crown Dependencies must demonstrate that the core income generation activities are undertaken in that location (either by the company or a third party – with suitable resources and receiving appropriate payment).

Companies conducting a relevant activity must demonstrate:

• That an adequate level of (qualified) employees are employed in the appropriate Crown Dependency location, or that there is an adequate level of expenditure on outsourcing to a suitably qualified service company in that location, proportionate to the activities of the company.
• That there is an adequate level of annual expenditure incurred in the appropriate Crown Dependency, or an adequate level of expenditure on outsourcing to a service company in that location, proportionate to the activities of the company.
• That there are adequate physical offices and/or premises in the appropriate Crown Dependency location, or an adequate level of expenditure on outsourcing to a service company in that location, commensurate with the activities of the company.

Enforcement of the Substance Requirements

In order to demonstrate the effective enforcement of these measures, companies that refuse to comply with the provisions will suffer penalties and sanctions, and could ultimately be struck off.

Impact on Other Jurisdictions

These measures, and the relevant processes, apply to jurisdictions other than Guernsey, Isle of Man and Jersey, and include Bermuda, BVI, Cayman Islands, UAE, and an additional 90 other jurisdictions.

Summary

Whilst the measures are significant, much of what is required is already in place in a number of the relevant jurisdictions.

Clients, however, need to appreciate that if a business is based ‘offshore’ it must have a ‘Permanent Establishment’ with real substance and value in that specific jurisdiction.

How Dixcart can Help Provide Substance, Management and Control in Guernsey and the Isle of Man

Dixcart has Business Centres in Guernsey and the Isle of Man which offer serviced office space and can also assist with the recruitment of staff and the provision of professional services, if required.

The Dixcart Group also has a long history of providing professional management to the shareholders of companies, with services including:

• Full management and control of companies through the appointment of Dixcart directors. These directors not only manage and control the company in the Isle of Man and Guernsey, but also provide an auditable record of that management and control.
• Full administration support, including day to day bookkeeping, accounts preparation and tax compliance services.
• In certain circumstances Dixcart can provide non-executive directors to sit on the Boards of companies. These non-executive directors will monitor developments in the company and help protect the clients’ interests.

Additional Information

If you would like additional information, please speak to the Dixcart office in Guernsey: advice.guernsey@dixcart.com or to the Dixcart office in the Isle of Man: advice.iom@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey. Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

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

History –  The ‘Substance Regime’

On 1^st January 2019 the ”substance-based regime” was introduced into the Crown Dependencies (Guernsey, Jersey and the Isle of Man).

This has meant that since January 2019, companies engaging in “relevant activities” have had to demonstrate that they meet specific substance requirements, to avoid sanctions.

This ‘Order’ is in response to a comprehensive review, carried out by the EU Code of Conduct Group on Business Taxation (COCG), to assess over 90 jurisdictions, including the Crown Dependencies, against standards of:

– Tax transparency;

– Fair taxation;

– Compliance with anti-BEPS (base-erosion profit shifting).

The review process took place in 2017 and although the COCG were satisfied that generally the Crown Dependencies met the standards for tax transparency and compliance with anti-BEPS measures, the COGC raised concerns that the jurisdictions did not have:

“A legal substance requirement for entities doing business in or through the jurisdiction.”

Crown Dependencies – Response

Stage 1  –  To identify  “relevant activities”.

The type of structures that were reviewed, included:  banks, insurance, shipping, and fund management. It would generally be expected that substance obligations would need to be met for these “relevant activities”.

Where it is greyer and more challenging is in relation to corporate and private client relevant activities, where substance is not straightforward. Specific areas that need to be considered, by professional advisors, include:

• Financing and leasing operations;
• Headquarter Companies and activities;
• Holding Company activities;
• The holding of Intellectual Property;
• Distribution and service centres.

These latter five areas have the potential to be forgotten, by many private client and group organisations.

Not only are offshore jurisdictions being challenged but also onshore jurisdictions, such as: Ireland, Netherlands and Luxembourg, are starting to bring in their own version of the substance requirements.

Stage 2 – To impose substance requirements on companies undertaking relevant activities.

This will be achieved through the completion of local tax returns in the jurisdiction where the entity is established. Additional detail is required in several areas, including; levels of employment (in and out of the jurisdiction), outsourcing services, permanent establishment (rent, infrastructure), true control and management, and the use of local skills.

Failure to meet substance requirements will result in penalties, and ultimately ‘striking off’ of the company, and the assets de-faulting to the state.

Why are Jurisdictions Enforcing Such Regimes?

Each jurisdiction has agreed to undertake assessment by the Organisation for Economic Cooperation and Development (OECD), to monitor the implementation of the substance based regime. The failure of a jurisdiction to implement a suitable economic regime will result in it becoming a “grey” or “black” list regime, which will ultimately lead to economic sanctions against the jurisdiction. No jurisdiction, at a political or economic level, can afford for this to happen.

Tax transparency and substance must be met by organisations. They need to comprehensively address these requirements through action and investment to help find long term solutions.

The “True” Tool Kit to Meet the Requirements of a Substance Based Regime   

Dixcart have invested extensively, over the past ten years, to help establish economic substance with clients. This has been achieved through investment in several different aspects of the business:

1. The provision of serviced offices across five locations within the Dixcart Group – many Dixcart clients have taken up the opportunity to use serviced offices within the Dixcart Group.

2. The provision of suitably qualified and experienced Dixcart professionals to appropriate company boards, often where specific industry knowledge is required.

3. The provision of cross border arrangements where the client and Dixcart directors provide a joint working environment to deliver a long-term solution for the client position. Dixcart provide the statutory legal support and the client the in-depth specific knowledge in relation to the industry and business.

4. ‘Local’ advice regarding the recruitment of staff and Non-Executive Directors to the Board.

5. Introductions locally to other services providers with relevant skills: banks, compliance, regulators, IT, etc.

Please visit the Dixcart Business Centre website for further information regarding the Dixcart serviced office facilities: www.dixcartbc.com

Additional Information

If you would like additional information regarding the Dixcart Business Centres in: Guernsey, Isle of Man, Malta, Portugal and the UK, please speak to your usual Dixcart contact or to the Dixcart offices in Guernsey or the Isle of Man: advice.guernsey@dixcart.com and advice.iom@dixcart.com.

An additional Dixcart Business Centre is opening in Cyprus, later this year (2019).

 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

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