By Lynette Chaudhary, Tax Director, Sovereign Trust (Gibraltar) Limited

The new legislation (UK Finance Act 2025) which came into effect on the 6th April, is radically overhauling and modernising the UK’s tax system, significantly impacting the UK tax position for individuals moving from, or to, the UK.

This regime change may benefit Gibraltar residents, other non-UK residents, and those who could become UK resident in the future.

Liability to UK Inheritance Tax (IHT) on non-UK assets now determined by a new concept of ‘Long Term UK Resident’, replacing ‘Domicile’

IHT is a tax on transfers of value from an individual’s estate. It is principally charged on transfers on death but is also charged on transfers made within 7 years of death, some other lifetime transfers and on trusts within the UK’s relevant property regime.

Long-Term UK Resident (LTR)

Up until the 5th April 2025, the general law concept of domicile was fundamental to the scope of IHT, with UK domiciled individuals being liable to IHT on their worldwide assets, and non-UK domiciled individuals being liable to IHT on their UK sited assets only.

However, from the 6th April, the IHT, domicile has been replaced by the concept of Long-Term UK Resident (LTR).

• An individual is a LTR if they were UK resident for 10 or more of the previous 20 UK tax years.
• LTRs are liable to IHT on their worldwide assets.
• Non-LTRs are liable to IHT on their UK sited assets only

The general rule is that a LTR will retain this status (an IHT ‘tail’) until they have been non-UK resident for 10 consecutive UK tax years (i.e. not a LTR from the 11th UK tax year). A shorter tail applies for those who were UK resident for 10-19 UK tax years and different rules apply for individuals under the age of 20.

This makes it much easier for UK expats’ non-UK assets to fall outside the scope of IHT. Previously, UK domiciled individuals who left the UK may have struggled, for various reasons, to displace their UK domicile of origin with a non-UK domicile of choice, and if so, would have remained liable to IHT on a worldwide basis. Now, once non-UK resident for 10 consecutive UK tax years, their non-UK assets fall outside the scope of IHT.

IHT is levied at a 40% rate after the nilrate band and available exemptions/reliefs, so narrowing its scope from worldwide to UK sited assets could result in considerable succession tax savings.

The tax position in the individual’s country of residence and country of asset location should also be considered. For Gibraltar resident, non-LTRs, with all assets located in Gibraltar, assets can be transferred free of IHT (in UK and Gibraltar).

How this affects trusts needs to be considered separately, but it’s fundamental to note that assets in trust may (controversially) come in and out of the IHT regime based on the settlor’s residence status at the time of an event, which will be critical for trustees to monitor.

Abolition of the remittance basis and replacement with a UK tax exemption FIG

Additionally, from the 6th April, the UK’s remittance basis of taxation for non-UK domiciled individuals has been abolished and replaced with a new time-limited Foreign Income and Gains (FIG) regime linked to the number of years of UK residency.

This is a valuable regime for non-UK resident individuals considering moving to the UK.

This FIG regime is open to anyone (including those who would otherwise have been considered UK domiciled) who meets the Qualifying New Resident (QNR) conditions. This generally entails being UK resident after a period of 10 consecutive UK tax years of non-UK residence.

Crucially, QNRs will not be taxed in the UK on their qualifying FIG for the first 4 tax years of UK residency, even if the FIG is remitted to the UK.

This could be very beneficial for Gibraltar residents who have been non-UK resident for over 10 UK tax years and decide to move to the UK for a period (e.g. because of an elderly relative or child attending university).

Qualifying FIG includes non-UK: dividends; interest; pension income; property income; trust income; gains accruing on the disposal of non-UK assets etc. Specific types of income/gain should be checked for qualifying status.

Following this 4-year period, all UK residents are taxable in the UK on their worldwide income/gains.

UK’s Statutory Residence Test (SRT)

Under this regime, residency is determined using the SRT, the UK’s first formal tax residency test which took effect in 2013.

Following these 6th April changes, the SRT has a much broader application in assessing an individual’s UK tax position, making it even more important for internationally mobile individuals to understand their SRT position and monitor it on an annual basis. Up to date advice, specific to individual circumstances, could be crucial.

The post ‘Residency’ not ‘domicile’, modernising the UK tax system appeared first on Gibraltar International Magazine.

By Thomas Ramagge, Deloitte Limited

On the 6th March, as part of the Spring 2024 Budget, the UK Chancellor of the Exchequer Jeremy Hunt announced that the UK will abolish the non-domicile (non-dom) system of taxation for individuals and replace it with a new residence-based test. The non-dom system allows individuals who are tax resident, but not domiciled, in the UK to elect to be subject to UK tax under the remittance basis of taxation, such that, their non-UK income and gains are only taxable in the UK to extent that they are remitted to the UK. There is an annual charge of up to £60,000, based on the number of years the individual has been resident in the UK, for electing into the remittance basis of taxation.

Temporary Repatriation Facility

From the 6th of April 2025, the remittance basis regime will be replaced with a new residence-based test. Individuals who have not been UK resident during the previous ten tax years will be eligible for the new regime for the first four tax years of UK tax residence. UK income and gains will be fully taxable in the UK but foreign income and gains received during tax years in which the new regime applies to the individual will not be taxable in the UK, even if remitted. Distributions from non-UK resident trust distributions will also not be taxable during this period. There will also be transitional rules for current UK resident non-UK domiciled individuals, including a two year “Temporary Repatriation Facility” from the 6th April 2025 to allow foreign income and gains received pre-6th April 2025 to which the remittance basis applies to be remitted to the UK at a flat 12% tax rate, however, this facility will not be available to pre-6th April 2025 foreign income and gains generated in a trust or trust structure.

HNWIs

With the announcement of these changes, some individuals may be looking at other possible options available to them. In this respect, Gibraltar offers its own unique special tax status for High Net Worth Individuals (HNWIs). Subject to certain conditions being met, individuals who are awarded Gibraltar’s Category 2 status are only taxed on the first £118,000 of assessable income and gains that accrue in, derive from or are remitted to Gibraltar, resulting in a maximum annual tax liability of £42,380 (expected, for tax year 2024/2025). There is a minimum annual Category 2 tax liability of £37,000, provided that assessable income and gains accrued in, derived from or remitted to Gibraltar does not exceed £104,205 (threshold expected for tax year 2024/2025), at which point any excess will be taxed at the marginal tax rate 39% until the assessable income maximum cap of £118,000 is met. As with the UK’s non-dom regime, individuals with Category 2 tax status are not subject to Gibraltar tax on their unremitted worldwide income or gains, unless they elect to be taxed on their worldwide assessable income gains, again subject to the maximum tax liability of £42,380.

Category 2 status

Before designating a HNWI with Category 2 status, the Gibraltar Finance Centre Director must first be satisfied that the individual is of good standing and repute and normally will require character references as part of the application process. The individual must also be of sound financial standing and will be required to support this, normally by way of bank statements or written confirmation from a professional such as the applicant’s accountant or lawyer. A successful application also requires the applicant to have available to himself approved residential accommodation in Gibraltar adequate for himself and his family, which must remain at their continuous disposal.

Furthermore, the individual must not have been resident in Gibraltar during the previous five tax years, or have been engaged in any trade, business, or employment in Gibraltar within the previous five tax years other than in respect of duties incidental to any trade, business or employment based outside of Gibraltar.

Whilst the application fee for Category 2 status amounts to a non-refundable payment of £1,100, a successful applicant must also make a bond payment equal to the maximum Category 2 tax liability (i.e., £42,380 in the financial year 2024/2025). This bond would amount to a one-off payment which is refundable by the Gibraltar Income Tax Office, net of any taxes due, in the year of assessment in which an individual relinquishes their Category 2 status.

It is also worth noting that Gibraltar offers a range of other tax incentives and benefits, including but not limited to a low corporate tax rate of 12.5%, no capital gains tax, inheritance tax, wealth tax or VAT, and limited taxation on investment income, making Gibraltar a very attractive potential alternative for entrepreneurs and retirees alike.

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ISA (UK) 315 (revised July 2020) – Identifying and Assessing the Risks of Material Misstatement -came into force for accounting periods beginning on or after 15 December 2021. Heads of Internal Audit will have already noted that it is being applied to the current audit cycle at their organisations by their external auditors.

This is an important audit standard since it deals with external auditors’ responsibility to understand the entity and its environment (e.g. industry, regulatory and other external factors), the applicable financial reporting framework and the entity’s system of internal control, to be able to identify and assess risks of material misstatement and from this determine any additional audit procedures to be performed. The principal revisions to the standard aim to improve the consistency of risk identification and assessment, refine the approach to understanding the system of internal control and to ensure that certain IT risks are addressed sufficiently.

Impact on the external audit approach

The statutory audit risk model has not changed. External auditors are still required to identify risks of material misstatement at both the financial statement and assertion levels and where risks have been identified, devise appropriate audit procedures in response.

Financial statement level risks are those that relate pervasively to the financial statements as a whole such as going concern issues, external factors such as declining economic conditions or deficiencies in the control environment.

Assertions are used by auditors to determine the categories of material misstatement that may arise. These include assertions:

• about classes of transactions and events, and related disclosures, for the period under audit (occurrence, completeness, accuracy, cut-off, classification, presentation),
• about account balances, and related disclosures, at the period end (existence, rights and obligations, completeness, accuracy, valuation and allocation, classification and presentation)
• not directly related to recorded classes of transactions, events or account balances.

Risk at assertion level is the possibility that one or more of these assertions is incorrect to the extent that a material misstatement arises. Assertion level risk comprises inherent risk (the risk that a material misstatement of an assertion could arise before consideration of any related controls) and control risk (the risk that a material misstatement of an assertion will not be prevented, detected and corrected by the entity’s system of internal control).

The post External audit has sharpened its focus on systems & controls appeared first on Gibraltar International Magazine.

Changes to the Trust Registration Service (TRS) scheme by HMRC mean that, subject to limited exceptions, all existing UK trusts and some non-UK trusts, irrespective of whether the trust has a UK tax liability, will be required to register with HMRC by 1st September 2022. The UK Government introduced the Trust Register to provide greater transparency around the ownership of Trust assets and individuals connected with trusts. Since 2017, apart from some limited exemptions, most UK and non-UK tax resident trusts with a relevant UK tax liability (i.e. Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax or an equivalent devolved tax, and Stamp Duty Reserve Tax), have been required to register with the TRS (referred to as ‘taxable trusts’).

As part of the registration, trustees provide certain details relating to the trust, including the identity of the trustees, beneficial owners and trust assets. Trustees are also required to keep the information up to date or confirm annually there have been no changes.

As part of the UK’s implementation of the Fifth Anti-Money Laundering Directive, the scope of the TRS was further extended in October 2020 requiring the following trusts to also register (even if they don’t have a tax liability):

• All UK resident ‘express’ trusts, unless specifically excluded. An ‘express’ trust is one which is created deliberately by a settlor (e.g. a family discretionary trust) rather than a trust created through the operation of the law or a court decision. A UK resident trust is a trust where all of the trustees are UK resident, or there is a mix of UK resident and non-resident trustees and the settlor of the trust was either UK resident or domiciled when the trust was created or further funds added, or there is a UK resident corporate trustee.

Given the significant changes and recent extension to the scope of the TRS, it is imperative that both UK and non-UK trustees review their position to assess their registration obligations in relation to both registering and updating the UK Trust Register, to avoid penalties

Obliged entity

• Non-UK resident express trusts which:
  a) acquire land or property in the UK; or
  b) have at least one UK resident trustee and enter into a business relationship with an ‘obliged entity’. An obliged entity could include a financial institution, an accountant, tax adviser, legal professional or estate agent etc.
• Non-express trusts and certain excluded express trusts, which have a UK tax liability.

Certain trusts are excluded and are not required to register unless they are liable to pay UK tax. These include but are not limited to:

• Trusts required to open a bank account for a child;
• Charitable trusts;
• Trusts for bereaved minors or adults aged 18-25;
• Will trusts (but only for the first two years after date of death);
• Trusts imposed by courts or created by legislation;
• Co-ownership trusts. It is worth noting that bare trust arrangements and employment related trusts (e.g. Employee Benefit Trusts) are not excluded and may also need to be registered. The deadline for registering a taxable trust (i.e. one with a relevant UK tax liability) depends on when the trust was established and when the first relevant tax liability arises as shown in the chart above.

Trust Register

Non-taxable trusts (i.e. those with no relevant UK tax liability) in existence on or before 6 October 2020 that meet the conditions for registration must register on or before 1 September 2022. Relevant nontaxable trusts created after 6 October 2020 must register within 90 days of being created (or otherwise becoming registrable) and 1 September 2022, whichever is the later.

In addition, the Trust Register must also be updated within 90 days of any changes to the trust details or beneficial ownership. Where the trust is taxable, the trustees must also declare on their annual Self-Assessment tax return that the Trust Register is up to date.

Given the significant changes and recent extension to the scope of the TRS, it is imperative that both UK and non-UK trustees review their position to assess their registration obligations in relation to both registering and updating the UK Trust Register, to avoid penalties. KPMG can assist Trustees with reviewing their reporting obligations in this area.

The post The upcoming changes to the UK Trust Registration appeared first on Gibraltar International Magazine.

Taxation in a digitalised economy

Taxation in a digitalised economy In the second of their two part article, Gavin Gafan, Senior Tax Manager and Vickram Khatwani, Tax Director, Deloitte, focus on the proposals of the OECD’s Pillar Two

On 5 June 2021, the G7 group of largest economies communicated a high-level agreement on global tax reform, including the reallocation of the global residual profits of the largest businesses to market jurisdictions and a minimum effective tax rate on profits in each country in which businesses operate.

These reforms follow from the G20/OECD “Two Pillar” approach addressing the tax challenges arising from the digitalisation of the economy. The OECD has published two detailed “Blueprints” on potential rules for addressing these challenges.

In July 2021, the OECD Inclusive Framework on Base Erosion and Profit Shifting (“Inclusive Framework”), released a statement confirming that, as of 5 July 2021, 131 jurisdictions (including Gibraltar) have agreed to this “Two Pillar” approach.

In the last edition of this publication, a summary of the Blueprint on Pillar One was provided, covering the allocation of taxing rights between jurisdictions, which considered several proposals for new profit allocation and taxable presence (nexus) rules.

The second Blueprint, on Pillar Two, proposes a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries as set out below.

A.The Income Inclusion Rule and the Undertaxed Payments Rule

These rules have been designed to ensure that large multinational groups pay tax at a minimum level in each jurisdiction in which they operate, and is governed by the following:

•  Income Inclusion Rule – This principle rule triggers additional ‘top-up tax’ payable in a group’s parent company jurisdiction where the profits of group companies in any one jurisdiction are taxed at an effective rate below a global minimum tax rate; and
•  Undertaxed Payments Rule – This captures any low-taxed group companies not controlled by a parent company subject to the Income Inclusion Rule.
•  The minimum tax rate for the purposes of the Income Inclusion Rule and the Undertaxed Payments Rule will be at least 15%.

B. The Subject to Tax Rule

This is a separate rule which has priority over the above cited rules. Applied on a payment-by-payment basis, paying jurisdictions will be able to charge a ‘top-up tax’ in respect of specific types of intra-group payments made to other group companies, where the recipient jurisdiction has a nominal tax rate less than the minimum tax rate.

The minimum tax rate for the Subject to Tax Rule will be between 7.5% and 9%.

Scope and operation of the Income Inclusion Rule and Undertaxed Payments Rule

The Inclusive Framework statement of July 2021 confirmed that multinational groups with consolidated revenues of at least EUR 750 million (or equivalent) would be in scope of these rules. Several entities/organisations are excluded from scope, which include but are not limited to investment funds, pension funds, governmental entities, international organisations and non-profit entities.

Any tax due under the Income Inclusion Rule would be calculated and paid by the ultimate parent company to its tax authority. Where the parent company jurisdiction has not implemented this rule, payment would need to be calculated and made by the next intermediate holding company in the ownership chain. The tax due is the ‘top-up’ required to bring the overall tax on the profits in each jurisdiction, where the group operates, up to the minimum effective rate. A similar rule (switch-over rule) is expected to allow parent jurisdictions to top up the tax on income of overseas Permanent Establishments (PE) to the minimum rate.

The Undertaxed Payment Rule applies in cases where the effective tax rate in a jurisdiction falls under the minimum rate, but where the Income Inclusion Rule has not been applied either by the ultimate or intermediate holding company. In this instance the required ‘top-up tax’ is allocated to other group companies by employing a formula-driven approach based on the amounts of deductible payments made by other group companies to the low-taxed company.

Effective Tax Rate (ETR)

The annual ETR required for any given jurisdiction will account for:

•  Total covered taxes – These are taxes on a group company’s income or profits (domestic and foreign taxes). Indirect, digital services, employment and property taxes are not covered taxes; and
•  Profit or loss before tax – This would be for each group company as used in the preparation of the parent company’s consolidated financial statements subject to a small number of adjustments.

The Blueprints also includes carry -forward provisions (e.g. on losses) to reduce the effect on temporary differences on the volatility of effective tax rates; formula-based profit carve-outs; simplification measures aimed at reducing the number of jurisdictions for which detailed annual effective tax rate calculations are required; simplified Income Inclusion Rules for associates and joint ventures.

Scope and operation of the Subject to Tax Rule

This rule allows for the taxation at source (i.e. withholding tax) as well as adjustment of the eligibility for treaty benefits on certain items of income where a payment is undertaxed in the jurisdiction of the recipient.

The rule applies to payments between connected persons, where the tax rate applicable to the recipient company, is below the agreed minimum rate.

The rule may apply to certain categories of payments deemed to be high-risk from a base erosion perspective, including but not limited to interest, royalties, insurance/reinsurance premiums, brokerage/financing fees, and fees for the supply of marketing, procurements, agency or other intermediary services.

Consistent with other Pillar Two rules, investment funds, pension funds, governmental entities, international organisations and non-profit entities may be excluded from scope. In addition, payments made to or by individuals are not within scope.

Conclusion

At their most recent meeting, the G7 agreed that the minimum effective tax rate in each country in which a business operates should be at least 15% (whereas the OECD Blueprint on Pillar Two was silent on what the minimum effective tax rate should be). Following this, the Inclusive Framework released a statement confirming that 131 jurisdictions agreed to the “Two-Pillar” approach.

Notwithstanding the inroads made to date, it is expected that significant further technical work is needed, and going forward, the Inclusive Framework members will agree and release an implementation plan, under which it is contemplated for Pillar Two to be brought into law in 2022 and to be effective in 2023.

The post Taxation in a digitalised economy appeared first on Gibraltar International Magazine.

By Gavin Gafan, Senior Tax Manager and Vickram Khatwani, Associate DirectorTax, Deloitte Limited

In 2019 Gibraltar joined the Organisation for Economic Cooperation and Development (OECD) Inclusive Framework (the ‘Inclusive Framework’) on Base Erosion and Profit Shifting (BEPS). The OECD’s BEPS Project, sponsored by the G20, sets out to create a set of international tax rules to address base erosion and profit shifting, thus aiming to protect tax bases of jurisdictions while offering increased certainty to taxpayers.

Back in 2013, the strategy behind BEPS was set out in a 15-point Action Plan to address base erosion and profit shifting along three key areas, being the introduction of coherence in domestic rules that affect cross-border activities, the reinforcement of substance requirements in existing international standards, and the improvement of transparency as well as certainty.

Since the release of the BEPS Action 1 Report in 2015, addressing the tax challenges raised by the digital economy has been one of the main priorities of the Inclusive Framework.

To this effect, in 2019, member countries of the Inclusive Framework agreed to assess proposals to address the challenges arising from digitalisation in the form of two pillars:

• Pillar One addresses the allocation of taxing rights between jurisdictions and considers several proposals for new profit allocation and taxable presence (nexus) rules.
• Pillar Two proposes a set of interlocking international tax rules designed to ensure that large multinational businesses pay a minimum level of tax on all profits in all countries.

In October 2020, two detailed ‘Blueprints’ on these pillars were released in relation to the ongoing work by the OECD however these are currently still undergoing review. A summary of Pillar One follows.

Pillar One

Pillar One seeks to achieve a global consensus for new businesses through the adaptation of current rules for allocating taxing rights and nexus rules applicable to business profits. The goal is to expand the taxing rights of market jurisdictions where businesses have active and sustained presence in the economy through activities carried out within, or remotely directed at, said jurisdictions.

Pillar One also seeks to improve tax certainty through the introduction of mechanisms on dispute prevention and resolution.

To achieve these objectives, Pillar One contains three components:

(i) a proposed new taxing right allocating a share of global residual group profit to market jurisdictions using a formula-based approach, irrespective of local physical presence in said jurisdictions (Amount A);

(ii) a fixed return for defined ‘baseline marketing and distribution functions’ (Amount B);

(iii) processes to improve tax certainty through effective dispute prevention and resolution mechanisms.

(i) Amount A

The OECD Blueprint identified two main groups of businesses which can participate in an ‘active and sustained’ manner in the economy of a market jurisdiction, irrespective of local physical operational presence – these two groups would be in scope of Amount A.

1. Automated digital services (ADS): these businesses generate income from remote services to a global customer base. The Blueprint on Pillar One sets out an indicative non-exhaustive list of in-scope services, which includes but is not limited to online advertising services, digital content services, online gaming and cloud computing services.
2. Consumer-facing businesses (CFB): these businesses (including those operating through third-party intermediaries) generate revenue from the sale of good/services commonly sold to individual consumers and/or businesses that license or otherwise exploit intangible property connected to such goods/services.

A jurisdiction will be entitled to an allocation of Amount A if either an ADS or CFB nexus exists in that jurisdiction.

Some activities however are excluded in the Blueprint and therefore, if agreed, would fall out of scope of Amount A, including but not limited to certain natural resources, certain financial services and the construction, sale and leasing of residential property. There are also thresholds (the quantum of which is yet to be confirmed) applicable to multinational groups for Amount A to apply. It remains to be seen whether the Blueprint scope, which has been difficult to define and agree, is ultimately agreed by governments. The US Administration, in particular, is keen for the scope to be less targeted to types of activity and instead focussed on revenues and profitability of a smaller number of the very largest global multinationals.

The Blueprint sets out detailed rules on revenue sourcing to market jurisdictions and tax base determination.

(ii) Amount B

Amount B seeks to standardise the remuneration of related party distributors that perform ‘baseline marketing and distribution activities’ to simplify transfer pricing administration. Amount B potentially applies to all business sectors and is not subject to scope limitations. A fixed return commensurate with the arm’s length principle is proposed, the quantum of which is likely to be based on a comparable company benchmarking analysis.

For administrative ease and to limit disputes of what is in scope of Amount B, the Blueprint assumes that Amount B would apply to a number of in-scope activities as defined in a ‘positive list’ of typical functions performed, assets owned and risks assumed.

(iii) Tax certainty

For the purpose of increasing tax certainty for businesses and tax authorities, several measures are proposed. For Amount A, a binding dispute prevention process would be made available to businesses – this process will include a review panel as well as a determination panel to provide mandatory and binding outcomes.

Rules in respect of Amount B will be designed to limit potential for disputes, nevertheless mandatory binding dispute resolution mechanism will be available.

Conclusion

World economies are becoming ever more digitalised and businesses continue to transcend international borders. Accordingly, the proposals in respect of Pillar One heralds significant changes to the global tax landscape and its effects are expected to be far reaching. It is therefore important for businesses to monitor these developments to assess the potential impact of these proposals.

Whilst the Blueprints have been subjected to a public consultation process, there continues to be areas where the Inclusive Framework countries are not yet aligned, and substantial continued efforts are envisaged for a high level agreement to be reached in 2021.

In the absence of consensus, countries may still introduce elements of the OECD Pillars into domestic legislation, which, in the absence of a treaty between relevant jurisdictions, could result in a rise in double taxation and additional administrative burdens for tax authorities globally.

The post Tax developments in the digital economy appeared first on Gibraltar International Magazine.

By Lynette Chaudhary, Tax & Research Director, STM Fiscalis

Many non-UK residents own UK property. For Gibraltar residents this is often a result of retaining a previous UK residence or having built up a property portfolio in the UK. The law in this area has changed significantly in recent years and compounded with the radical shifts in property markets due to Covid-19 and government measures introduced to tackle this, keeping up with the changing UK tax landscape can be challenging for owners.

The following outlines the UK tax obligations if a Gibraltar resident individual or trustee disposes of UK property or UK land. It also highlights the temporary increase (due to Covid-19) of the Stamp Duty Land Tax threshold which may benefit purchasers until March 2021.

UK Capital Gains Tax position from April 2020

The changes since April 2020 require non-UK resident individuals and trustees to:

1. File a Capital Gains Tax (CGT) on UK Property Account online, within 30 days of completion of a direct or indirect sale of a UK property/land, and
2. Pay any CGT to HMRC in that timeframe.

For non-UK residents, there is no exemption from filing this CGT Account even if no capital gain (and hence no tax) arises on the disposal of the property. This position is different for UK residents. Furthermore, there are penalties for late filing.

HMRC guidance indicates that UK Government Gateway login details are required to file this Account. However, many non-UK residents may not be able to set up a Government Gateway account, for example, if they do not have a UK National Insurance number or UK Unique Tax Reference. In such cases, it is possible to access this CGT reporting service using an alternative process.

It is worth noting however that there is a specific CGT exemption for gains made by certain overseas pension schemes (e.g. QROPS/QNUPS). This exemption results in any gains made on the disposal of UK property/land by such schemes not being liable to UK tax. There are also special rules for qualifying Collective Investment Vehicles.

Annual UK Self-Assessment also required

A non-UK resident individual or trustee may feel quite satisfied that they’ve “ticked their UK tax compliance box” after submitting the required CGT Account and paying any CGT, within the required timeframe. However, they also need to file their annual UK Self-Assessment Tax Return in which details of the property disposal and CGT Account must be included.

Currently non-UK residents cannot utilise HMRC’s Self-Assessment online service, although many mistakenly think that they can, by erroneously filing with HMRC as a UK resident (which can lead to further issues)!

Non-UK residents must either complete a paper Self-Assessment Tax Return and send it to HMRC by post, or use commercial UK tax software that supports their non-UK resident filing position, often by engaging the services of a suitable tax adviser.

Separately, since April 2019, non-UK resident companies are required to register for UK Corporation Tax within three months of a disposal of UK property/land.

Gibraltar/UK Double Taxation Agreement

For Gibraltar residents, whilst there is no CGT payable in Gibraltar on the UK disposal, liability to UK tax remains. The Double Taxation Agreement (DTA) in force between Gibraltar and the UK continues to generally give the UK the right to tax such capital gains on UK property/land disposals, unless less than 50% of the gain relates to the UK property.

Stamp Duty Land Tax temporary “holiday”

In an effort to boost the UK property market due to the effects of Covid-19, the UK Government introduced a temporary increase of the Stamp Duty Land Tax (SDLT) threshold for residential properties to £500,000, which applies from July 2020 to March 2021. As a result, purchasers can potentially save up to £15,000 in SDLT. This temporary increase of the threshold applies to UK and non-UK resident investors alike.

However, where purchasers are acquiring an additional residential property, a 3% SDLT charge continues to apply. Furthermore, draft UK legislation published in July 2020 introduces a new 2% SDLT surcharge from April 2021 for non-UK resident purchasers of residential property. This brings the concept of tax residence into SDLT, which until now has been levied only on the basis of where the property is located.

The need to review

Many non-UK residents are unaware of these changes in the UK tax landscape, and some may still believe that CGT does not apply to them because they are non-UK resident. This ceased to be the case from April 2015 for UK residential property and April 2019 for UK commercial property. To exacerbate this, many advisers in the UK are experienced in dealing with the tax regime for UK residents only and are not fully aware of the changes that apply to non-UK residents. The 30 day filing requirement also means that owners must act quickly on completion in order to avoid costly penalties.

The post The changing UK tax landscape appeared first on Gibraltar International Magazine.

By Donna Barratt (GI), Senior Associate, PwC

The EU Council Directive 2011/16 (as amended by EU Council Directive 2018/822) in relation to cross-border tax arrangements, known as DAC6, has been in force since 25 June 2018 and it aims at transparency and fairness in taxation.

DAC 6 imposes a new obligation on EU-based tax consultants, banks, lawyers, and other intermediaries to disclose any cross-border arrangement that contains one or more features or “hallmarks,” if they are identified as intermediaries for the purposes of the Directive

There is no requirement to report on purely domestic arrangements and VAT, customs and excise duties are also outside the scope of the new reporting regime. The reporting obligations only arise if one or more of these hallmarks is triggered. There are 2 types of ‘hallmarks’ – known as generic and specific hallmarks.

Generic hallmarks can be used by the authorities to catch new and innovative tax planning arrangements which may confer other benefits that do not give rise to obtaining a tax advantage and that is why they cannot be viewed in isolation, but must be considered along with the main benefits test (MBT).

Specific hallmarks are used to target known vulnerabilities in the tax system and techniques that are commonly used in tax avoidance arrangements such as loss creation. There are also specific hallmarks that look to hinder automatic exchange of information or beneficial ownership reporting, and transfer pricing.

The hallmarks themselves are categorised:

Category A

Generic hallmarks – require MBT consideration

Examples would be the use of standardised documentation and or structure which is made available to more than one taxpayer, a confidentiality condition or an arrangement where the intermediary is entitled to receive a fee based on the tax advantage received.

Category B

Specific hallmarks – require MBT consideration

Examples may be loss creation or buying a loss-making company to exploit its losses; converting income to capital; back to back intercompany loans with no other commercial function.

Category C

Specific hallmarks for cross border transactions – some hallmarks require MBT consideration, others do not

Examples may be deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax. Another hallmark is about deductions for the same depreciation on an asset claimed in more than one jurisdiction.

Category D

Specific hallmarks for automatic exchange of information and beneficial ownership – no MBT consideration

Arrangements which have the effect of undermining reporting requirements such as by reclassifying products into other types of income not reportable under automatic exchange of information rules or by transferring assets out to jurisdictions that are not bound by the same rules. Setting up structures that obscure the actual ultimate beneficial owner by use of blacklisted jurisdictions.

Category E

Transfer pricing – no MBT consideration

Examples might be the use of transfer pricing safe harbour rules or transfer of hard to value intangibles where there is no reliable comparable data.

Main benefit test

The main benefit test will be met if it can be established that the main benefit (or one of the main benefits) will be that the arrangement will reasonably mean that a person could obtain a tax advantage. However, the presence of certain conditions (such as the recipient being in a jurisdiction that doesn’t impose corporate tax or at a very low rate, the payment benefitting from a full exemption from tax or from a preferential regime in the other jurisdiction) doesn’t in itself mean that the main benefits test is satisfied.

Conclusion

As can be seen from the examples, the directive’s scope is necessarily wide, and the hallmarks are vague, which can make it difficult for taxpayers and intermediaries to know whether to report. Indeed, it is possible that a taxpayer may accidentally fall into this reporting regime by following a tax strategy which includes one or more of the hallmarks discussed which, despite the main benefit test, means they will be required to report. It is important to note that DAC6 applies retrospectively and applies to all cross-border arrangements between 25 June 2018 and 1 July 2020, with reporting starting on 1 July 2020.

This article summarises the key points. It is intended to provide a general guide to the subject matter and is in a condensed form. It should not be regarded as a basis for ascertaining the liability to tax or report in specific circumstances. Seeking professional advice is recommended.

The post Cross-border tax arrangements DAC6 appeared first on Gibraltar International Magazine.

By Gavin Gafan Senior Manager, Tax, Deloitte Limited

It is evident that EU Member States (and indeed authorities at a global level) are improving how they communicate with each other on taxation, particularly so when it comes to curbing aggressive tax practices. The Directive on Administrative Cooperation (DAC) in the field of taxation, which has been ratified into Gibraltar’s tax legislation, aims to provide the necessary procedures and platform to enable greater cooperation with other Member States, in order to help combat tax fraud and evasion. However, in light of international tax scandals, the EU has embarked on initiatives for the mandatory disclosure of information on potentially aggressive tax planning arrangements along the lines of Action 12 of the OECD’s BEPS project. In this context, the European Parliament called for tougher measures against intermediaries who assist in arrangements that may lead to tax avoidance. The EU has issued new rules (phase 6 of the existing Directive – DAC6) set out within the EU Directive 2018/22, with the aim of obliging intermediaries to inform tax authorities of certain cross-border arrangements that could potentially be used for tax avoidance.

The provisions of DAC6 will need to be ratified into Gibraltar’s Income Tax Act by no later than 31 December 2019. These rules will require intermediaries to report to the Gibraltar Tax Authorities on any cross-border arrangement that shows at least one of the indicators (hallmarks) stipulated in the Directive. It should be noted that the definition for an intermediary is broad and should include lawyers, accountants and tax advisers, but is also expected to apply to banks, trustees, insurance companies and asset managers.

Where no EU intermediary is involved, or where an intermediary can assert legal professional privilege, the reporting obligation will fall on the taxpayer. Applicable penalties for non-compliance should apply, the severity of which should be clarified once Gibraltar’s tax legislation is updated to ratify the rules set out in the Directive.

The hallmarks outlined by the Directive are complex and require careful consideration against all business activities. There are five hallmarks (A to E), of which hallmarks under category A and B as well as points 1.2, 1.4 and 1.5 of Category C may only be taken into account if the main benefit test is fulfilled (i.e. where the main or one of the main benefits of the arrangement is to obtain a tax advantage). For avoidance of doubt, it should be noted that the main benefit test does not apply to hallmarks under category D and E as well as points 1.1 and 1.3 of Category C. That is to say, these would be taken into account irrespective of whether the main (or one of the main) benefits of the arrangement is to obtain a tax advantage.

These hallmarks can be summarised as follows:

A. Generic hallmarks linked to the main benefit test:

A.1. Arrangements where a taxpayer complies with a condition of confidentiality which may require them not to disclose how said arrangement could secure a tax advantage;

A.2. Arrangements where the intermediary is entitled to receive a fee fixed to the amount of tax advantage derived, or whether or not an advantage is derived by a taxpayer;

A.3. Arrangements utilising standardised documentation and/or structure customised for implementation and available to more than one taxpayer.

B. Specific hallmarks linked to the main benefit test:

B.1. Arrangements where contrived steps are taken by the participant to said arrangement for the purpose of acquiring a loss-making company, discontinuing the main activity of said company and then using its losses to reduce its tax liability;

B.2. Arrangements which have the effect of converting income into other categories of revenue (e.g. capital or gifts) which are taxed at a lower rate or exempted from tax;

B.3. Arrangements which include circular transactions resulting in the round-tripping of funds mainly through interposed entities without other primary commercial function.

C. Specific hallmarks related to cross-border transactions:

C.1. Arrangements involving deductible cross-border payments made between two (or more) associated enterprises, where at least one of the following conditions are met:

1. The recipient is not tax resident in any jurisdiction;
2. The recipient is tax resident in a jurisdiction that taxes at the rate of zero (or almost zero);
3. The recipient is tax resident in a jurisdiction listed by the Organisation for Economic Co-operation and Development as non-cooperative;
4. The payment is exempted from tax in the jurisdiction where the recipient is tax resident;
5. The payment benefits from a preferential tax regime in the jurisdiction where the recipient is tax resident.

C.2. Arrangements where depreciation deductions are claimed in more than one jurisdiction on the same asset;

C.3. Arrangements where relief from double taxation is claimed in more than one jurisdiction on the same item of income or capital;

C.4. An arrangement where there is a material difference in the amount being treated as payable in consideration for the assets in the relevant jurisdictions involved.

D. Specific hallmarks concerning automatic exchange of information and beneficial ownership:

D.1. Arrangements which undermine reporting obligations under EU legislation or agreements on automatic exchange of information, or which takes advantage of the absence of such legislation/agreements;

D.2. Arrangements involving non-transparent legal or beneficial ownerships that have little substance or are established in a jurisdiction other than that of the beneficial owner.

E. Specific hallmarks concerning transfer pricing:

E.1. Arrangements involving the use of safe harbour rules;

E.2. Arrangements involving the transfer of hard-to-value intangibles;

E.3. Arrangements involving intra-group cross-border transfer of functions and/or risks and/or assets if the projected earnings before interest and taxes (EBIT) during the three year period after the transfer, of the transferor(s) are less than 50% of the projected annual EBIT of such transferor(s) if the transfer had not been made.

Whilst the application of the hallmarks is expected to be clarified once domestic legislation is in place, it is evident that significant tax knowledge and judgement is expected to be needed to determine whether a reporting obligation arises.

Intermediaries or taxpayers will be required to disclose reportable cross-border arrangements implemented in the period 25 June 2018 to 1 July 2020 to the Gibraltar Tax Authorities by no later than 31 August 2020, subsequent to which, all future reporting will be within 30 days (whichever occurs first) beginning:

1. On the day after the reportable cross-border arrangement is made available for implementation; or
2. On the day after the reportable cross-border arrangement is ready for implementation; or
3. When the first step in the implementation of the reportable cross-border arrangement has been made.

The provisions of this Directive aim to enhance transparency within the EU by promoting mandatory reporting between intermediaries and/or taxpayers and their local tax authorities. The information will be exchanged between EU tax authorities and may lead to further, targeted anti-avoidance measures being introduced.

The post Enhanced Tax Transparency in the European Union appeared first on Gibraltar International Magazine.

By Lynette Chaudhary, International Tax & Research Director, STM Fiscalis Ltd

The changes to extend the UK’s grip on the taxation of UK land and immovable UK property (UK land or property) came into law in April. These changes are onerous and therefore any Gibraltar resident (or in fact any non-UK resident) owner of UK land or property should take note.

All types of UK property

From 6 April, gains made on the disposal of all types of UK land or property, directly or indirectly held, are chargeable to UK tax, regardless of the residency of the owner.

The inclusion of indirect disposals means that, for example, gains made on the disposal of shares in a company holding UK land or property will fall within the UK tax charge. This applies if the company is “property rich” and the shareholder has at least a 25% interest. Whilst there is a tax exemption for indirect disposals if the property is used in the course of a qualifying trade, the simple activity of letting out property is in itself not a trade.

For Gibraltar resident owners, this means that gains made on the direct or indirect disposal of all types of UK land or property are within the scope of UK tax. For Gibraltar resident individuals or trusts non-resident UK capital gains tax (NRCGT) needs to be considered, and for Gibraltar resident companies UK corporation tax is payable on any gains realised on the disposal of the UK land or property.

The applicable rate of UK tax depends on the circumstances, for example:

♦ whether the property is residential

or not

♦ if it’s a direct or indirect disposal

♦ if it’s a disposal by a company or by another entity or person, and

♦ for individuals the amount of their taxable income and other gains in the tax year in which the disposal occurred.

Such disposals have to be reported to HMRC within the tight timeframe of 30 days, with, in some cases NRCGT paid within this timeframe. Even if a disposal does not result in a gain or it is sold at a loss, it must still be reported.

It is worth noting however that there is currently, and looks set to continue, a specific exemption from UK tax for gains made by certain overseas pension schemes.

UK commercial property

This is a significant tax change for Gibraltar owners of UK commercial property, who have been outside the scope of UK tax on any gains until now (Gibraltar owners of UK residential property have been within the scope of NRCGT since 2015).

Most property not already within the scope of UK tax (i.e. UK commercial land or property) has been rebased from April so that only gains arising after that date are chargeable. It is therefore advisable to obtain valuations of such land or property in order to know the base cost for any future disposal, although there may be rare occasions where it may be advantageous not to rebase the value of the land or property.

Further change for non-UK resident corporate owners

On a related note, from 6 April 2020, non-UK resident companies will be brought within the charge to UK corporation tax on their UK rental profits (such companies are currently liable to UK income tax on their profits).

Challenges and review for the future

This rapid pace of tax change poses considerable challenges for non-UK resident owners of UK land or property. They are often unaware of such developments and fitting into the UK’s Self-Assessment system can involve delays and difficulties. The 30 day filing requirement also means owners have to act quickly on completion in order to avoid costly penalties and professional guidance should be taken to ensure that any tax filings are made in good time.

Furthermore, the UK penalties associated with recovering lost tax where an offshore position exists were dramatically increased from 1 October 2018. This is a direct consequence of the ‘failure to correct’ regime that was introduced and which increases the penalties on undisclosed or understated income and gains arising before 6 April 2017. Couple this with increasing international tax transparency and information exchange, and the pressure on non-UK resident owners of UK land or property to keep up to date intensifies.

Therefore, for any Gibraltar residents owning (directly or indirectly) UK land or property, they should review their UK tax position now in order to plan for the future and to avoid any nasty surprises. Planning ahead is essential and a review undertaken in good time can save considerable cost and anxiety in the long term.

The post Regime change for non-UK resident owners of UK land or property appeared first on Gibraltar International Magazine.