Transcript Slide 1

Maximising tax efficiency
22 November 2006
Eleanor Watts
Maximising tax efficiency –
Agenda
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Key considerations in relation to tax efficient structuring
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Options for investment in UK real estate
– Offshore Special Purpose Vehicle (“SPV”)
– Unit trusts
– Maintaining offshore residence
– UK REITs
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Typical structure for investment in European real estate
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UK legislation specific to Shariah compliant financing
Key considerations for tax efficient structuring
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Entry;
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Holding;
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Cash Repatriation;
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Exit;
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Gearing; and
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Further considerations
Key considerations for tax efficient structuring
Entry and Holding
Entry
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Local capital duty
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Local transfer taxes
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SPVs vs assets
Holding
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Offshore holding company – low tax jurisdiction
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Intermediate holding company – access to treaty benefits
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Taxation of local SPV
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Management and control / substance
Key considerations for tax efficient structuring
Cash Repatriation
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Cash repatriation can be achieved through:
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payment of dividends
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interest on shareholder loans
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capital redemption
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Withholding tax on payments of interest and dividends may be avoided through:
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EU Parent Subsidiary Directive
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EU Interest and Royalties Directive
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Tax treaty network
Restrictions if a lack of distributable reserves - “trapped cash”
Key considerations for tax efficient structuring
Exit and Gearing
Exit
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Aim to minimise tax on disposal of asset by:
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Holding local SPVs through intermediate holding company in a beneficial jurisdiction; or
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Holding assets through a two-tier Luxembourg structure.
Gearing
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Mitigation of tax liabilities in local SPV achieved by tax deductions for external and
internal “debt”
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External Shariah compliant financing - provided at SPV level / holding company level?
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Downstream loaning of investor equity through internal loans - increase gearing (and
therefore interest deductions) – Shariah compliant?
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Thin capitalisation and transfer pricing regulations
Key considerations for tax efficient structuring
Further considerations
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Management arrangements / fees
-Roles must be clearly structured and defined
-Optimisation of recovery opportunities for VAT
-Tax deductions for management fees paid
Options for investment in UK real estate Offshore SPV
Features
Features
TopCo
(non UK)
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SPV for each investment property
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Gives choice for purchaser to acquire asset or shares
Tax Issues
SPV (non
UK) Ltd
UK
Property
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SDLT efficient where shares in SPV are acquired
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Exempt from UK tax on capital gains
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22% UK income tax on net rent after expenses
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Non-resident Landlord’s scheme
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UK thin capitalisation / transfer pricing
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Local taxes, depending on jurisdiction
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Costs and practicalities of maintaining offshore tax
residence
Options for investment in UK real estate –
Unit trusts
Authorised – typically UK
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Exempt from tax on capital gains
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20% tax on income as property is currently
not a “qualifying investment”
Unit Holders
land transaction
Trust
land
holding
Unauthorised – typically offshore
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For capital gains purposes taxed as an
offshore company i.e. in principle exempt
from tax on gains
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Trust is tax transparent for income purposes
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Units in offshore vehicle can be traded free
of stamp taxes.
Options for investment in UK real estate Maintaining offshore residence
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Place where highest level of control is exercised
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Place where the Board meet and make key decisions (e.g. to invest, sell etc)
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Board should comprise a majority of non-UK people
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Board must have genuine decision-making power and the competence to exercise
this
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Documentation
Options for investment in UK real estate
UK REITs - requirements
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Company
- Closed-ended company, tax resident in UK
- Shares listed on a recognised stock exchange (not AIM)
- Only one class of ordinary share capital
- No one investor has beneficial entitlement to 10% or more of the shares/votes
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Qualifying activities
- Minimum 3 properties held, no single property totalling more than 40% fair value
- Excludes owner-occupied properties
- 90% of tax exempt profits to be distributed (not chargeable gains)
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Balance of business
- At least 75% of profits and assets must relate to qualifying rental business
- Profits before interest must be 1.25 times interest
Options for investment in UK real estate
Effect of REITs regime
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Entry charge 2% of market value
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Income and capital gains from qualifying activities tax exempt (residual activities
subject to corporation tax).
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Must distribute 90% of taxable profits from qualifying activities (but not capital
gains).
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Investors taxed on those dividends as if they were income from a property business
(but subject to tax treaties).
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Must impose 22% withholding tax on dividend payments from qualifying activities
Typical structures for investment in European real estate
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Two tier Luxembourg structure used
where tax treaty assigns taxation
rights on disposal to Luxembourg –
participation exemption
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Use of local SPV may be a legal
requirement. If taxation rights on
disposal are assigned to Luxembourg,
sell Local SPV – participation
exemption
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Where taxation rights are not allocated
to Luxembourg, a second holdco in a
favourable jurisdiction can be used to
access beneficial treatment (e.g. use
of Netherlands for investment in
Spain).
Haven
FundCo
Luxembourg
HoldCo
Luxembourg
SPV
Local
SPV
Local
HoldCo
Local
SPV
UK legislation specific to Shariah compliant financing
Treasury objectives:
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Ensure that Shariah compliant financial products are taxed in a way that is neither
more nor less advantageous than equivalent conventional banking products.
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Remove uncertainty / disadvantages from the tax treatment of such products.
Programme of legislation and consultation since 2003, including:
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Removing the double SDLT charge on Ijara, Murabaha and Diminishing Musharaka
mortgages – extended to corporate purchases in FB 2006
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Allowing a tax deduction for alternative financing costs –
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FA 2005: Mudaraba and Murabaha effective from 6 April 2005
FB 2006: Musharakah and Wakala effective from 1 April 2006