Note from the Editor Welcome to another edition of our Private Client Briefing. A politician once famously said a week is a long time in politics… well, two or three quarters is a long time in economics, set against the most enduring recession in a life‑time! So itʹs nice to be writing at last with a more favourable climate having taken hold around the globe, fragile though the recovery may yet be. In this latest edition of the Briefing we have another round‑up of insightful contributions from WFW lawyers based in a number of our offices. In the United Kingdom, we have now seen the introduction of a statutory residence test. This gives welcome clarity to the important question of when an individual will become UK tax resident. The rules are complex though – Penny Simmons in our London office tax group walks us through the new regime. In separate articles, Penny also tells us about a new tax aimed at curbing the use of companies to avoid tax on the purchase of expensive UK real estate and about an easing up by the UK tax authorities on the use of nominees by remittance basis taxpayers to claim UK business investment relief. Romain Girtanner, tax partner in our Paris office, explains the new procedure in France for non‑compliant French taxpayers with undeclared funds abroad to regularise their affairs. In other contributions, Romain summarises recent changes to France’s list of non‑cooperative countries and a new measure to limit the availability of interest offset for hybrid loans between affiliated companies. In Spain the government has introduced a new Golden Visa regime for non‑EU citizens acquiring real estate in Spain for €500,000 or more, amongst other qualifying assets – Luis Soto, tax partner in our Madrid office, reports.
Luis also updates us on the improvement of the Spanish REITs regime, an attractive tax regime on offer for investment in banking asset funds, on changes to the taxation of nonresident companies owning Spanish real estate and on reporting obligations in respect of assets held abroad. Raffaele Villa, our head of tax in Italy, gives an update on new exit tax options available to an Italian tax resident corporation when migrating its tax residency to another EU member state or qualifying EEA contracting state. WFW has a long tradition of advising on Yachts and SuperYachts and Romain Girtanner returns to summarise recent amendments in France to the VAT treatment of chartering these. We also regularly assist private clients needing UK Immigration advice. Angharad Harris, partner in the London office’s Immigration team, provides a case study that illustrates the added value our specialist expertise can bring. In a previous edition of Private Client Briefing, Felicity Jones, our Hotels expert, explained some introductory points about investing in the Hotel sector. In this edition Felicity takes a similar look, this time in relation to Serviced Apartments. I hope you enjoy reading this Briefing and find some interesting features. Please contact the relevant WFW contributor or any of our team on the final page if you would like more information on any of the matter raised.
Tax Update: UK Are you UK tax resident under the new Statutory Residence Test? Penny Simmons, Professional Support Lawyer, Tax, London Introduction A new UK statutory residence test (SRT) for individuals came into effect on 6 April 2013 and applies for the tax year 2013‑14 onwards. The SRT is contained in the Finance Act 2013, which was enacted on 17 July 2013. The SRT contains a series of tests to determine an individual’s residence status for UK tax purposes. This article outlines the various tests forming part of the SRT and the steps that should be followed when attempting to determine whether an individual is UK tax resident. Why is determining an individual’s residence status important? An individual’s residence status is important when determining that individual’s liability for UK tax. In most circumstances, individuals who are UK tax resident are liable to UK tax on some or all of their worldwide income and capital gains, whereas individuals who are not UK tax resident are generally only liable to UK tax on UK source income and in most circumstances will not be liable to UK tax on capital gains.
The UK Residence rules prior to 6 April 2013 Despite the importance of establishing whether an individual is UK tax resident, until the introduction of the SRT there was no definition for UK tax residence; rather the concept had been developed through case law and guidance from HM Revenue & Customs (HMRC). The courts established several factors that may be relevant when determining an individual’s residence status, including: UK accommodation; frequency and purpose of UK visits; and ties with the UK (for example, family and business links). However, there were no definitive rules prescribing when these factors would be sufficiently strong enough to make an individual UK tax resident. The Case for Reform The plethora of case law on this issue, coupled with ambiguity concerning the binding nature of HMRC guidance (particularly following the recent case of Gaines‑Cooper v Revenue and Customs Commissioners ) gave rise to much uncertainty regarding how UK tax residence was established. Consequently, at the 2011 Budget, the Government announced its intention to introduce an SRT. A lengthy period of consultation followed until draft legislation was eventually published in June 2012. The Government intends that the SRT will not affect the residence status of the majority of individuals. The Mechanics of the SRT Under the SRT, the basic rule is that an individual will be UK tax resident if he/she does not meet any of the automatic overseas tests and meets: 1. one of the automatic UK tests; or 2. the sufficient ties test. The Automatic Overseas Tests There are three automatic overseas tests: (1) the “16‑day” test; (2) the “46‑day” test; and (3) the “full‑time work overseas” test. Accordingly, an individual will be automatically non‑UK resident for tax purposes if he/she: was resident in the UK for one or more of the previous three tax years and spends less than 16 days in the UK in the current tax year and does not die in the current tax year; was not resident in the UK for any of the previous three tax years and spends less than 46 days in the UK in the current tax year; or works full‑time overseas without any significant breaks during the tax year, and: spends less than 91 days in the UK in the current tax year; and works for no more than 30 days in the UK in the current tax year (where a working day is deemed to be at least three hours work). For the purpose of the third automatic overseas test, an individual is considered to work full‑time overseas if he/she works for “sufficient hours overseas”, which is calculated according to a prescribed formula. If an individual does not satisfy any of the automatic overseas tests, it will be necessary to consider whether one of the automatic UK tests applies. The Automatic UK Tests There are three automatic UK tests: (1) the “183‑day” test; (2) the “UK home” test; and (3) the “full‑time work in the UK” test. An individual will be automatically UK tax resident if he/she: spends at least 183 days in the UK in the tax year; has a home in the UK during all or part of the tax year, and that individual is present in that home on at least 30 days in the tax year; and while he/she has that home there is a period of at least 91 consecutive days (at least 30 days of which fall in the tax year) when that individual either has no overseas home or, alternatively, has one or more overseas homes but is present in each on less than 30 days in the tax year; or works full time in the UK over a 365 day period without a “significant break from UK work”; and all or part of that 365 day period falls within the tax year; more than 75% of the total number of working days in that 365‑day period are working days in the UK (where a working day is deemed to be at least three hours work); and at least one working day in the UK falls in both the 365‑day period and the tax year. For the purposes of the “UK home” test, an individual is present in his/her home on any day that he/she has been physically present in it, irrespective of how short a period this might be. Akin to the “full‑time work overseas” test, an individual will be considered as working full‑time in the UK, if he/she works for “sufficient hours in the UK”, which is calculated according to a prescribed formula. Broadly, for both the “full‑time work overseas” and the “full‑time work in the UK” tests, a “significant break” from work occurs where an individual does not work for at least 31 consecutive days. The Sufficient Ties Test If an individual does not satisfy either the automatic overseas tests or the automatic UK tests, it will be necessary to consider the sufficient ties test. The sufficient ties test involves considering an individual’s ties to the UK and combining those ties with the number of days that he/she spends in the UK to determine whether that individual is considered to be UK tax resident for a particular tax year. There are five UK ties: (1) family tie; (2) accommodation tie; (3) work tie; (4) 90‑day tie; and (5) country tie. Family Tie An individual has a UK family tie for a tax year if any of the following family members are UK tax resident in that tax year: Husband, wife or civil partner; Partner if living with the individual as husband, wife, or civil partner; or Child under 18‑years old. It should be noted that an individual will not have a UK family tie solely by virtue of spending time with his/her child in person in the UK on less than 61 days in the tax year. Additionally, children under 18 years of age will not constitute UK family ties if they are in full‑time education in the UK, but would not be UK resident if they were not in full‑time UK education and spend less than 21 days in the UK outside of term‑time (halfterm breaks and inset days are included as being term‑time).
Accommodation Tie An individual has a UK accommodation tie if he/she has a place to live in the UK and it is available to him/her for a continuous period of 91 days or more during the tax year; and he/she spends at least one night there during the tax year. If the available accommodation is at the home of a close relative, there will be a UK tie if that individual spends at least 1 6 nights there during the tax year. For the purposes of the SRT, a close relative will be a parent, grandparent, sibling or adult child or grandchild. Work Tie An individual has a work tie for a tax year if he/she works in the UK on at least 40 days in the tax year. Akin to other tests explained above, three hours of work will constitute a working day. There is no requirement for the 40 working days to be in a single continuous block. 90‑day Tie If an individual spends more than 90 days in the UK in either or both of the previous two tax years, he/she will have a 90‑day tie. Subject to certain exceptions, an individual is considered to have spent a day in the UK when he/she is in the UK at midnight. Country Tie This is only relevant to those individuals attempting to leave the UK and cease being UK tax resident. An individual will have a UK country tie if the UK is the country in which he/she is present at midnight for the greatest number of days in the tax year. The number of ties that will be required to make an individual UK tax resident will depend on the number of days that that individual spends in the UK in the tax year. The sufficient ties test reflects the concept that when an individual spends increasingly more time in the UK, fewer UK ties will be permissible if that individual wants to maintain a non‑UK resident tax status. The sufficient ties test also distinguishes between those individuals who have been UK tax resident for one or more of the previous three tax years (“leavers”) and those who have not been UK tax resident for any of the previous three tax years ( “arrivers”). It is harder for individuals to relinquish their UK tax residence status than for individuals to become UK tax resident. Accordingly, the thresholds are lower for individuals attempting to become non‑UK tax resident than for those individuals becoming UK tax resident for the first time. The table below details the minimum number of UK ties required to make an individual UK tax resident under the sufficient ties test.
Minimum number of UK ties required to make an individual UK tax resident Days spent in the UK Arrivers Leavers Fewer than 16 Always non‑resident Always non‑resident 16 – 45 Always non‑resident 4 46 – 90 4 3 91 – 120 3 2 121 – 182 2 1 183 or more Always resident Always resident
Special Rules It may also be worth noting that, when applying the SRT, special rules need to be considered if an individual dies in a tax year, and that additional rules also exist for those individuals with jobs working on board vehicles, aircraft or ships.
Under the SRT, an individual is either UK resident or non‑UK resident for the entire tax year. However, in certain circumstances split‑year treatment is available for those individuals who either start to live or work abroad or come from abroad to live or work in the UK during the tax year. Essentially, this involves splitting the tax year into two parts: a UK part, where an individual is considered to be UK tax resident and an overseas part, where an individual is taxed as non‑UK resident. Finally, it is important to note that time that an individual spends in the UK as a result of “exceptional circumstances beyond their control” will be disregarded when applying the SRT. Possible examples of “exceptional circumstances” could include: natural disasters; civil unrest; and a sudden serious or life threatening illness or injury. The number of days that will be disregarded is limited to 60. Comment The SRT provides a definitive set of rules to determine UK tax residence, creating clarity in the law that was previously lacking. This is to be welcomed. However, the rules are complex and lengthy and HMRC’s guidance can be difficult to navigate. Consequently, individuals should continue to consult specialist tax advisers when attempting to determine their tax residence status. UK: Business investment relief – remittance basis: HMRC confirms business investment relief available for investments made via nominees Penny Simmons, Professional Support Lawyer, Tax, London HMRC has now confirmed that an investment made via a nominee is capable of qualifying for the business investment relief available to remittance basis taxpayers. Business investment relief was introduced by the Finance Act 2012 with effect from 6 April 2012. The relief is designed to encourage remittance basis taxpayers to invest their foreign income and gains in UK business. One of the conditions for the relief is that a qualifying investment is made by a relevant person and that shares in the target company are issued to that relevant person. HMRC has clarified that it will not reject a claim for the relief where a relevant person subscribes for shares in a qualifying company through a nominee, provided that the relevant person can show he is the beneficial owner of the shares and all other conditions for the relief are met. HMRC emphasises that, in this situation, it is not treating the nominee as the relevant person but is effectively looking through the nominee to the real investor behind (the beneficial owner of the shares) who remains the relevant person for the purposes of the relief.
UK: Investing in UK residential property: tax developments Penny Simmons, Professional Support Lawyer, Tax, London Introduction The Finance Act 2013 received Royal Assent on 17 July 2013 and introduced a new “Annual Tax on Enveloped Dwellings” (the “ATED”). The ATED came into force on 1 April 2013 and is chargeable annually on certain “non‑natural persons” who hold an interest in a UK residential property that is worth more than £2 million on specific valuation dates. This article provides some background information to the ATED, before outlining the mechanics of the new tax. It should be noted that in the UK budget on 19 March 2014, the UK government announced its intention to extend ATED to UK residential properties that are valued at more than £500,000. This change is to be implemented in phases. From 1 April 2015, properties valued at more than £1 million will become subject to the ATED, and the ATED will only apply to properties valued at more than £500,000 from 1 April 2016. Background to the ATED The concept of the ATED was originally announced at the 2012 Budget, when the Government declared its intention to “tackle tax avoidance, including the wrapping of property in corporate and other “envelopes””. The use of a company to purchase a property, which then constitutes the sole asset of the company, is known as “enveloping”. Prior to 2012, it was becoming increasingly common for people to avoid paying Stamp Duty Land Tax (“SDLT”) by using a corporate entity as a conduit for the purchase of UK residential property. By transferring the ownership of a property indirectly through the sale of a company’s shares, SDLT did not become payable, since the property itself would not have changed ownership. Generally, the transfer of the company’s shares would attract stamp duty at a rate of 0.5% of the consideration payable. However, where an offshore company held the property, it is likely that no stamp duty would be payable unless the transfer of shares of the offshore company was effected in the UK. Essentially, the ATED has been introduced to discourage people from acquiring UK residential property through a corporate wrapper and, therefore, reduce the prevalence of SDLT avoidance. A consultation document detailing proposals for the new tax was subsequently published in May 2012 (please see our guide to the May 2012 consultation document), following which draft legislation was published in January 2013. The ATED was previously known as the Annual Residential Property Tax (ARPT). Mechanics of the ATED The ATED applies where a corporate entity acquires an interest in UK residential property that is worth more than £2 million. Acquisition by a Corporate Entity For the purposes of the ATED, a corporate entity will include a company, a partnership with a corporate member, or a collective investment scheme. It is irrelevant whether the corporate vehicle is incorporated or resident in the UK. A corporate trustee that acquires residential property in its capacity as a trustee or personal representative is not subject to the ATED.
Requirement for there to be a “chargeable interest” The ATED is only payable where there is a “chargeable interest” in UK residential property. Broadly, a chargeable interest will include: a freehold or leasehold estate; an easement or other right in or over land; the right to receive rent; and the benefit of a restrictive or positive covenant. However, the following do not constitute chargeable interests and will not be subject to the ATED: a security interest (other than a rent charge); a licence to use or occupy land; and a tenancy at will. The meaning of residential property The ATED is only payable on UK residential property. For the purposes of the legislation, UK residential property is referred to as a “single‑dwelling interest”. A dwelling has its normal meaning and will constitute a single unit of residential property, such as a house or self‑contained flat. A dwelling may form all or part of a larger, mixed use property that is not solely used for residential purposes. In such circumstances, only the residential part of the property would be subject to the ATED. Where a property consists of several self‑contained flats, each flat will usually be valued separately. The ATED will be chargeable on properties that are suitable for use as a dwelling and the onus will be on the corporate entity to produce evidence to the contrary. Where residential property is acquired “off‑plan” i.e. a purchaser contracts to purchase land and have a dwelling built on it, a liability for the ATED may also still arise. Certain types of residential property are specifically excluded from the ATED, including: residential accommodation for students and school pupils; hospitals; prisons; and hotels. There are various other issues to consider when determining the exact nature of a dwelling that may fall within the ATED, which are beyond the scope of this article. Valuation The ATED is chargeable on UK residential properties that are valued over £2 million. For ATED purposes, the basis of valuation will be the “open market value” of the relevant property at a specified valuation date. The initial valuation date is 1 April 2012, unless a property is acquired after that date. The valuation date will be revised in five years’ time (and is currently scheduled to be 1 April 2017) at which point properties will need to be revalued. Property valuations will be self‑assessed, although HMRC will have the usual powers to challenge valuations. If HMRC challenge and ultimately disagree with a valuation, the person responsible for paying the ATED may have to pay penalties, interest and any additional ATED due. HMRC is providing a pre‑return banding check service, in which HMRC will confirm that it agrees to a banding proposed by a taxpayer, although HMRC will not confirm that they agree a specific valuation for a property. The rate of ATED depends on the valuation of a property. The current rates are set out below. The ATED rates will be indexed to the Consumer Price Index (CPI) and accordingly amended each tax year.
Property Value Rate of ATED per annum Over £2 million to £5 million £15,000 Over £5 million to £10 million £35,000 Over £10 million to £20 million £70,000 Over £20 million £140,000
Administration and Payment of the ATED The ATED is an annual tax that is charged in respect of “chargeable periods”, which run from 1 April to 31 March. The first chargeable period is 1 April 2013 to 31 March 2014. The ATED will be paid through the self‑assessment system, using an ATED return form. Each year, an ATED return will need to be completed for every UK residential property that is valued at over £2 million and is owned, completely or partly, by a corporate entity as defined above. Only one ATED return will need to be completed per property, irrespective of how many corporates entities have an interest in that property. The first ATED return form for a property must be made within 30 days of the date on which the property comes within the ATED. Subsequently, each year, a corporate entity that owns a property within the ATED on 1 April (beginning of a chargeable period) will be required to file a return by 30 April. The ATED is usually payable on the filing date of the return. However, for the first year of operation, transitional rules apply, whereby the first ATED return will have been due by 1 October 2013 and payment will have been due by 31 October 2013. Reliefs and Exemptions from the ATED There are a number of reliefs that may reduce or eliminate the amount of ATED payable; however, these must be claimed in an ATED return. Reliefs Broadly, reliefs may be available for: property rental businesses; dwellings opened to the public; property developers; property traders; financial institutions acquiring dwellings in the course of lending; occupation by certain employees or partners; farmhouses; and providers of social housing. The availability of the above reliefs is dependent on the satisfaction of several conditions, an analysis of which is beyond the scope of this article. Exemptions There are a limited number of exemptions from the ATED. Most notably, subject to certain conditions, charitable companies using a dwelling for charitable purposes should be exempt from the ATED. In such circumstances, completion of an ATED return will not be required. A detailed review of the available exemptions is also beyond the scope of this article. Summary The ATED creates significant tax implications for individuals (both UK tax resident and non‑UK tax resident) holding interests in UK residential property through offshore companies and other specified corporate entities. Where a relief cannot be claimed, it may be beneficial for individuals to consider unwinding corporate structures; although, this may have adverse consequences for other areas of tax planning, such as inheritance tax. On this basis, it is advisable that affected individuals obtain specialist tax advice regarding the impact of the ATED as soon as possible.
Tax Update: France
New procedure for regularisation of undeclared foreign assets Romain Girtanner, Partner, Tax, Paris
Two French circulars issued by the Ministry of Finance on 21 June 2013 and 12 December
2013 have detailed new conditions under which individuals may regularise their foreign undeclared funds located abroad, and the tax consequences of such disclosure to tax authorities. Individuals are required to submit a file including the documents described below and send this to a new department (the “FSTDR: Service de traitement des declarations rectificatives”) created by the French tax authorities in relation to: income tax and social contributions since year 2006; wealth tax from 2007 onwards; and assets received from inheritance after 1st January 2007. The file submitted to the DNVSF must be supported by the following: (i) a written document detailing the origin of the foreign assets and any justification of such origin; (ii) any evidence of the value of the assets and of any income deriving from these assets over the period regularised; (iii) the amended tax returns for the fiscal years which are not statute‑barred; (iv) for assets donated or inherited, a certificate from the foreign financial institution that the account was not credited since the donation or the inheritance; (v) a statement from the individual asserting that their file is accurate and contains all elements in relation to their non‑declared foreign assets over the period. A lot of individuals are regularising their undeclared foreign assets and the French tax authorities highly recommend preparing and filing the required documents with the assistance of a tax lawyer. This will lead to the following tax consequences, depending on whether the individual is considered as active or passive: Source of foreign assets Penalty for intentional failure to declare Penalty for nonfiling of a foreign bank account or life insurance contract Late payment interests Asset received by donation or from inheritance (asset constituted by the individual while he was not French tax resident) 15% 1.5% of value on 31 December of concerned year 4.8% per year (or 0.4% per month) Any other situation (e.g: asset constituted by the individual while he was French tax resident) 30% 3% of value on 31 December of concerned year 4.8% per year (or 0.4% per month)
On 6 December 2013, the French Parliament adopted a new set of anti‑avoidance
measures against tax fraud. The rules included in this new law significantly increase the penalties, the criminal consequences related to the tax fraud and the powers of French tax authorities. Individuals who are French tax resident or who have been French tax resident are clearly encouraged to regularise their situation in relation to undeclared funds located abroad.
France: New list of non‑cooperative states and territories (NCSTs) for French tax purposes Romain Girtanner, Partner, Tax, Paris
On 28 August 2013, the French Government published a Ministerial Decree updating the list of non‑cooperative states or territories (NCSTs). Under the terms of this Decree, Philippines are removed from the list but British Virgin Islands (BVI), Bermuda and Jersey are now included to the list with a retroactive effect on 1 January 2013. It is worth noting that BVI, Bermuda and Jersey had signed a treaty with France providing an obligation for the exchange of information, however the French Government has decided that the treaties have not been effectively applied by these countries and therefore these countries should now fall within the new scope of the list of NCSTs. The entire list, which came into effect on 1 January 2013, is composed of: Bermuda, Botswana, Brunei, Guatemala, BVI, Jersey, Marshall Islands, Montserrat, Nauru, Niue. On 17 January 2014, the French Government published another Ministerial Decree indicating that Bermuda and Jersey will be removed from the list of NCSTs as from 1 January 2014. In practice, BVI will be the only new territory suffering the terms, the penalties and the adverse tax consequences described hereafter from 1 January 2014. The other countries and territories which remain on the list (Botswana, Brunei, Guatemala, Montserrat, Nauru, Niue) remain subject to the adverse tax consequences which applied at the time of their inclusion on the list. The main tax consequences are: i. A 75% withholding tax on interest payment made from France in an NCST; ii. A 75% withholding tax on capital gains realised in France by a tax resident of an NCST; iii. A 3% tax due every year on the fair market value of a property located in France indirectly owned by an entity established in an NCST. The 3% tax can be avoided by foreign entities if, among other conditions, the entity is located in a country which has signed a treaty with France relating to administrative assistance and declares each year the identity of its shareholders having more than 1% of the share capital in the entity. In our experience, it is common for entities located in Bermuda and Jersey to be used by
ship owners. Entities located in BVI are also used for acquiring real properties in France. If entities located in these countries either directly or indirectly own an asset located in France, receive French income, or should realise French capital gains it is highly recommended that they review their tax structuring in order to mitigate the above adverse French tax consequences. France: Limitation of interest deductibility in relation to hybrid loans between affiliated companies Romain Girtanner, Partner, Tax, Paris
A hybrid loan arrangement is a financial instrument that has characteristics of both debt and equity due to the difference between the tax rules of the country where the borrower is tax resident and the tax rules of the country where the lender is tax resident (e.g. a profit participating loan). Interest generally constitutes a deductible interest expense at borrower level, and counts as income benefitting from a participation exemption regime at lender level. Following the OECDʹs Base Erosion and Profit Shifting (BEPS) Action Plan published in July 2013, the French authorities have decided to limit the tax optimisation of hybrid products. As a consequence, the draft French Financial Bill for 2014 provides for the nondeductibility of interest paid to a related entity, when such interest is not taxed at the level of the affiliated lending company, up to a corporate tax amounting to at least 25% of the corporate income tax rate applicable in France, which amounts to 33.33%. In order to be entitled to deduct the interest expenses related to a loan granted by a foreign affiliated company, the French company must now be able to demonstrate to the French tax authorities that the interest has been effectively taxed at the level of the lending company. The new law does not only apply to hybrid products but to all loans granted by an affiliated company to a French company. This measure applies to fiscal years ending after 25 September 2013.
Tax Update: Spain New Spanish Golden Visa Luis Soto, Partner, Tax, Madrid Act 14/2013 of 27 September 2013, on support for entrepreneurs and internationalisation, facilitates and expedites visas and residence permits to non‑EU citizens. Investors, entrepreneurs, employees of international corporations, highly qualified professionals and researchers, as well as their spouses and children, can benefit from this new Golden Visa regime, through a fast‑track procedure before a single authority.
The Investorsʹ Residence Visa can now be obtained by acquiring real estate in Spain with an investment of €500,000 or more. This investment must be free and clear of all liens and encumbrances; however, the part of the investment over and above the initial €500,000 can be subject to encumbrances (e.g. a mortgage loan). The Investorsʹ Residence Visa entitles an investor to reside in Spain for up to one year. Alternative investments can be made in Spanish Government bonds with values of €1,000,000, €2,000,000, or more ‑ these make take the form of stocks in Spanish companies or deposits in Spanish banks. Those investors who wish to stay longer in Spain must also qualify for an Investor Residence Permit. This permit entitles an investor to live for up to two years in Spain and it can be renewed for subsequent periods of two years. In addition, foreign citizens who have legally and continuously resided in Spain for a period of five years continue to have the right to obtain a Long‑term Residence Permit, which entitles them to work and reside in Spain indefinitely.
Spain: New regulation of the Spanish REITs (“SOCIMIs”) Luis Soto, Partner, Tax, Madrid
Act 16/2012 of 27 December 2013, introduced significant amendments to the legal and tax regime relating to SOCIMIs in order to simplify requirements and make the regime more attractive to investors. Such changes became applicable for tax periods commencing on or after 1 January 2013. SOCIMIs must be incorporated under the legal form of a joint‑stock/public limited company (sociedad anónima). Their main corporate purpose is to hold leased urban property as a result of acquisition or development. They can also hold registered shares of other SOCIMIs or foreign REITs. The main amendments included in the new Act are: The Corporate income tax rate is reduced from 19% to 0% (“zero taxation”); The minimum share capital is reduced from €15 million to €5 million; A “special levy” of 19% shall be paid on dividends distributed to shareholders holding an interest of at least 5%, provided that such dividends are either tax exempt or subject to a rate under 10%; Only one real estate asset is now required to set up a SOCIMI; Real estate assets must be leased for a minimum of three years; Restrictions to external financing have been removed; and It is now possible to list on a multilateral trading system (e.g. the Spanish Alternative Stock Market or “MAB”). Additionally, the Spanish Government has announced that the mandatory dividend derived from rental income has been reduced from 80% to 60% as a way to facilitate the repayment of loans.
It is also planned to exempt SOCIMIs from municipal capital gains tax due on the transfer of urban properties (“Impuesto sobre el Incremento de Valor de los Terrenos de Naturaleza Urbana”). Banking Assets Funds (“Fondo de Activos Bancarios” or “FAB”) The Spanish public bank “Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, S.A.” (“SAREB”), which was recently created for managing and selling the real estate assets and mortgages transferred by several Spanish banks, is likely to incorporate separate investment vehicles (“FABs”), as regulated by Act 9/2012, of 14 November 2013. The securities issued by the FABs have a minimum unit value of €100,000 and can only be distributed amongst qualified investors. FABs offer an attractive tax regime as: The Corporate income tax rate is 1%; and Income obtained by non‑resident investors will be tax exempt in Spain. Taxation of non‑resident companies owning Spanish properties As of 2013, the annual Special Tax on Real Estate Assets held by Non‑Resident Entities (3% of the cadastral value of the property) is only applicable to companies located in “tax haven” jurisdictions. Declaration of assets located abroad Act 7/2012 of 29 October 2013 has introduced an annual obligation, mainly applicable to Spanish tax resident individuals, to report the following categories of assets located abroad: Bank accounts; Securities, stock, insurance policies and similar rights in non‑Spanish entities; and Real estate properties. There is no obligation to report if the aggregated value of each category of assets is less than €50,000 (e.g. if the amounts deposited in foreign bank accounts do not exceed the €50,000 threshold). Going forward, it will only be compulsory to disclose the assets abroad when their value has increased to more than €20,000. The annual return (form 720) must be filed between 1 January and 31 March of the following year. The lack of reporting such information is subject to penalties of €5,000 per asset with a minimum penalty of €10,000 per category.
Italy: Tax Update Private Client Tax Matters in Italy Raffaele Villa, Head of Tax, Italy
Within the framework of the tax competition among different jurisdictions, companies may wish to relocate to simple and beneficial tax systems to reduce their overall effective tax rate and maximise shareholder returns. The same can be said in respect of the migration of individuals who are minded to move away from complex and burdensome tax systems. The simplest way to achieve this is by ending the substantive ties with
their former residence state, creating substantive ties with a new residence state and becoming tax resident there. Italy, in order to maximise its fiscal territoriality, imposes an exit charge on the unrealised gains accrued in Italy by business operators (i.e. corporations, partnerships, individual entrepreneurs, and certain other entities) that cease to be Italian tax resident. However, in a precedent laid down in ECJ case C‑371‑10 (National Grid Indus BV), Italy changed its exit tax rules in January 2012 in order to give taxpayers moving to another EU Member State or to a State adhering to the EEA Agreement the chance to choose between immediate taxation of any accrued capital gains and deferral (please note that the latter only applies id the jurisdication is “white listed” and has implemented an agreement concerning mutual assistance for the recovery of claims relating to taxes). A Ministerial Decree dated 2 August 2013 has implemented these new exit tax rules. This article provides a summary, taking the case of corporations as the simplest example. A corporation resident in Italy is normally subject to corporation tax on all of its chargeable profits on a worldwide basis. A corporation is deemed resident in Italy if either the registered office, the main business activity, or the management office is in Italy (the last being a concept similar, but not identical to, that of the place of effective management (“POEM”) adopted in the tie‑breaker rule in the relevant double tax treaty to solve conflicts of dual residence). The Italian exit tax applies if the corporation either loses all three ties with the Italian territory, or if it is deemed tax resident in another country as a result of a double tax treaty because, for example, it has moved the POEM to a country in which the tax residence is accorded to corporations which have their POEM within its borders. The result achieved with the application of the exit tax is similar to that which would be achieved if the corporation had disposed of all its assets at their fair market value. Certain assets are excluded from the charge. If the migrating corporation continues to trade in Italy through a permanent establishment to which the assets can be attributed, the exit tax does not apply. If this is not the case, the exit tax is payable immediately. However, if the corporation migrates to another EU Member State or a Qualified State, the options are as such: i. immediate taxation; ii. deferral of payment on the unrealised capital gains either on all or on individual assets (“Cherry Picking Mechanism”) until their actual disposal. Decreases in value after the migration may not be taken into account. This option requires tracing the relevant assets after the migration until the moment of effective realisation as well as a guarantee to ensure that the exit tax will be duly paid; or iii. payment of the exit tax due, with possible application of the Cherry Picking Mechanism, in ten annual instalments. As with the deferral option above, decreases in the value of the assets cannot be taken into account. This option however does not require the monitoring of the assets after the migration; however it does require the payment of interest and the issuance of a guarantee. For the purposes of the deferral, an asset is also deemed disposed of if: it is lost or damaged to the extent that compensation is paid; it is attributed to the shareholders; or it is allocated for purposes other than business. The option to defer payment until the actual disposal of the asset can be revoked, meaning that the exit tax must be paid immediately, if the corporation either: i. transfers the going concern to which the assets are connected into another state which is not an EU Member State or a Qualified State by migrating its tax residence, or by way of a transaction such as a merger, division or contribution which entails the change of the legal owner of the going concern; or ii. is wound up. Tax losses which exist at the time of migration and are carried forward may be offset against any unrealised capital gains after their previous use against the taxable base, if any, of the last fiscal year during which the corporation was still Italian tax resident. If the corporation has a tax loss in the last fiscal year, it increases the available pool of tax losses which can be used against the taxable base used to calculate the exit tax. However, it should be noted that only tax losses which occurred during the first three years after incorporation may be wholly off‑set against unrealised capital gains. A maximum of 80% of the tax losses originated after the fourth year of incorporation may be off‑set against the taxable base of the exit tax. Should the corporation have generated tax losses in both periods the most tax efficient method of paying the exit tax is the prior use of the tax losses generated after the fourth year in combination with tax losses generated during the first three years. The unused and carried forward tax losses, if they cannot be attributed to any permanent establishment in Italy by means of the migration of the tax residence of the corporation, could be taken into account by the jurisdiction of arrival, but only after the migration, and in accordance with the principles laid down in the ECJ case C‑123‑11 (A OY). The Decree also provides for the inclusion of goodwill and other intangibles in the taxable base of the exit tax. In particular, the Decree applies the OECD transfer‑pricing principle of dealing at arm’s length, stating that their current value coincides with the consideration that would be agreed between independent parties. It is worth noting that it is not crystal clear whether the aforementioned principle should also apply in respect to the computation of the unrealised capital gains in relation to other assets. Indeed, the primary law regarding the exit tax mentions that fair market value (valore normale) is the method of evaluation, which is not the same as arm’s length. It is worth noting that the Decree does not allow for the deferral of payment of the tax due on unrealised capital gains in relation to assets which are not attributed to a permanent establishment in Italy, and which arise in connection with transactions governed by the EU Merger Directive (e.g. mergers, divisions, etc.). However, it may be possible to claim such benefit by invoking the same principles applied in ECJ case C‑371‑10 which, as mentioned above, determined the change of the provisions regarding exit tax. The Decree makes reference to future regulations to be enacted by the Director of the Revenue Agency which will provide further details regarding the exercise of the options, the deferral of the payment, the granting of the guarantees and the tracing of the assets after migration.
UK Immigration: Case Study: International Business Interests Angharad Harris, Partner, London Our immigration team has expertise in both executive and personal immigration matters. This includes working with high‑net‑worth individuals seeking to relocate themselves and their families to the UK. We work closely with our clients to identify the best immigration options and provide tailored legal solutions. The following case study illustrates our approach: Background We were approached by a Korean national who was residing in the UK as a student. She had recently completed her Bachelor’s degree course at a UK University and built strong ties with the UK. The client’s long‑term intention was to acquire international business interests, but her ultimate objective was to acquire a British passport. Notably, she had been gifted a significant amount of money by her parents, which was deposited in her UK bank account. Action/Result We provided extensive advice in relation to the client’s immediate and long‑term immigration options, taking into account her business needs and personal circumstances. We identified the Tier 1 Investor and Entrepreneur routes for high‑net‑worth individuals interested in investing in the UK. Following in‑depth discussions regarding the requirements and implications of each category, the client decided to apply as an Investor and invest £1 million in the UK to give her maximum flexibility with regard to her level of involvement in the business. We liaised with the client’s financial advisers to ensure that the investment portfolio was compliant with Home Office requirements and documented correctly (both in relation to the immediate application and any future application). Other WFW departments were able to assist with related tax issues, as well as the client’s property purchase. The client was granted a Tier 1 (Investor) visa and successfully extended her visa after three years. Further to five years’ residency in the UK, we were brought in again to guide her through the complex settlement process. This case study highlights the added value that we can bring from acquiring an in‑depth knowledge of our client’s personal and business objectives and ensuring that appropriate specialists are assigned to deal with different legal issues as that business evolves.
Yachts: Special Report: French VAT on Yacht Charters Romain Girtanner, Partner, Paris
Further to the decision of the European Court of Justice on 21 March 2013, the French tax authorities have amended the VAT treatment applicable to charter operations for leisure use. The new French regulations came into force on 15 July 2013 and provide that French VAT (standard rate at 19.6% and 20% as from 1 January 2014) applies to yacht chartering for private or pleasure use, even if the yacht has a professional crew and is operating on the high seas. Under French VAT regulations, chartering a yacht is not subject to French VAT where the yacht is used outside the EU. Therefore, suppliers should in principle be able to justify time spent outside of EU waters in order to apportion the taxable basis and determine whether or not they are subject to French VAT. The French tax authorities have commented that the taxable basis of chartering yachts which are used in both EU and non‑EU waters is to be reduced by 50% (this reduction is already in operation, and is not exclusive to yachts). The charterers do not have to demonstrate the exact time spent in EU or non‑EU waters. Charterers based outside the EU and operating yachts in French waters are subject to French VAT and are required to appoint a French VAT representative in order to conform with French VAT rules. This last change in the French regulations is the result of a rather long procedure started by the EU Commission against the French Government. The charter agreements for private or pleasure use must now conform to the above mentioned VAT rules.
Real Estate: Special Report: Serviced Apartments Felicity Jones, Partner, London
In the last edition of our Private Client Briefing we addressed the matters an owner should consider when contemplating finding a branded operator of a hotel. Many of the same considerations apply in relation to the serviced apartments sector. Serviced apartments are increasingly recognised as a sector in their own right (although, again in common with the hotel sector, there are various shapes and sizes as well as brands to fit them). Some operators have focussed exclusively on the serviced apartment sector and many of those are expanding their operations globally. At the same time, a number of hotel operators are expanding their portfolios of brands by way of ʹaparthotelsʹ or extended stay products which compete directly in the serviced apartment market. A product may be a blend of housing (short stays with no services), serviced apartments (effectively short stay accommodation with some services) and aparthotels or ʹextended stayʹ products (both of which tend to be in the nature of hotel accommodation with some kitchen facilities). Whilst there may be more limited branding recognition in the UK compared with traditional hotels at this stage, interest in serviced apartments is undoubtedly growing.
The serviced apartment sector has a significant number of similarities with the hotels sector including:‑ a. the operational aspects (although of course the service and staff requirements are significantly less than for the hotel market); b. the product range from five star to more basic accommodation; c. the variety of models which may be a management agreement, a lease or, in rare cases, a franchise (we have not seen one of these in the UK sector but we have encountered them in other jurisdictions); d. in some respects the rates are not dissimilar but it is likely that a serviced apartment would offer additional space to attract the traveller out of a hotel; e. a feasibility study would usually be the starting point of a project or operator selection; f. it is likely that operators will increasingly target the corporate guest segment to really compete with the hotel product. There are also some significant differences:‑ i. the lower service levels and staffing requirements can allow more flexibility in both the model and the nature of the accommodation; ii. planning may be an issue. Unlike the hotel market there is often more confusion in the minds of the planning authorities as to the nature of serviced apartments and whether they should be treated as residential accommodation. Particularly in London a restriction on letting for periods of less than 90 days can be too restrictive. If found in breach of the London Planning Authorities enforcement notices can be issued requiring the operator to cease trading. There is some lobbying underway to encourage recognition of the serviced apartment sector in planning terms. It is anticipated that going forward the grey area may reduce and the sector be legitimised in planning terms. In terms of the nature of investors, in the United Kingdom a number of owners of substantial portfolios of residential accommodation are looking to serviced apartments as an alternative to granting individual tenancies which may carry rights to extend. However, the more significant development is the entry of private equity funds and wealthy overseas individuals/funds who are entering the London market as an alternative or addition to their existing property portfolios. These investors understand that with the right operator it can show a satisfactory cash flow and there are some aspects that may be open to negotiation, such as the employment of the staff by the operator rather than the owner (it should be noted this does not necessarily avoid employment implications at the end of the relevant operating agreement or lease, but it may be appealing in terms of an operating model). Finally, there are strong parallels to hotel models where the operator leases or manages a block of apartments. Nevertheless, the operator should ensure they are aware of exactly what the owner will expect and for the owner to appreciate that not all operators/brands would operate with the same model. Whilst most operate on a model that is nearer to the hotel approach, there are some branded operators who will enter into very short‑term arrangements with numerous owners and will take a variety of different spaces onto their books under the same brand. The owner will need to think fairly carefully before selecting its brand (and will need to be comfortable that a branded operator is actually going to bring more to the operation than the direct employment of a limited number of appropriately qualified staff).