I recently watched a UK television programme which focused upon the best destinations to own a holiday home. The emphasis was not on climate but the location which offered the best potential capital gain on the investment for the UK investor. Surprisingly it was the countries that have recently joined the EU and those other countries which are about to join in the near future which came out best in the opinion of the presenter.
Likewise, as the EU has expanded I have noticed an increased demand from person's in newly elected member states who have expressed an interest in acquiring investment property in the United Kingdom. In such instances it is common practice to recommend that the client holds his UK property investment through an offshore company, such as a British Virgin Islands IBC, in order to protect himself against UK inheritance tax. While such an arrangement is perfectly acceptable for a passive investment generating rental income, what about the foreign individual who wants to undertake a property development in the United Kingdom; will an IBC suffice? The simple answer is no, as the trading profits will not be protected from UK tax.
The solution is to identify a jurisdiction which has a suitable double taxation agreement with the United Kingdom and at the same time offers an attractive tax rate. There are numerous treaties with the United Kingdom, the most recent being based upon the OECD model. As a company’s residence and the establishment of a “permanent establishment” are critical issues, I was interested to compare a number of treaties.
In more recent treaties, a resident of a contracting state is a person liable to tax therein by reason of domicile, residence, place of management or other criterion of a similar nature. This is a fairly far reaching definition that could give rise to a person being resident in both of the contracting states. This, however, is dealt with by a “tie-breaker” provision. In most treaties the term “permanent establishment” means a fixed place of business in which the enterprise is wholly or partly carried on. The definition is expanded to include a place of management, a branch, an office and even a building site or construction if the project lasts more than 6 months.
When I contrasted these findings with the Double Taxation Agreement with the UK and Jersey made 6th March 1952 the results were enlightening.
This Double Taxation Agreement has a more simpler view of residence. A company is to be regarded as resident in the United Kingdom if its business is managed and controlled in the United Kingdom and as resident in Jersey if its business is managed and controlled in Jersey. The possibility of the company having a dual residence is not dealt with. Furthermore in this Arrangement the term “permanent establishment” when used in this context means a branch, management or other fixed place of business, but does not include an agency.
Such profits of a Jersey enterprise, being a company resident in Jersey for the purposes of Jersey tax shall not be subject to United Kingdom tax unless the company is engaged in trade or business through a permanent establishment situated therein. It follows that a Jersey resident company will be in a position to undertake a property development in the United Kingdom and engage the services of contractors to undertake the work without creating a permanent establishment. It is important to take care and exercise appropriate management and control outside of the United Kingdom, and in practice it is wise to ensure that all contracts and negotiations are conducted outside of the United Kingdom.
In such a case, we will have created a situation where a Jersey resident company, properly managed and controlled in Jersey, can undertake a property development for the benefits of the foreign investor. The profits arising from the development will not be subject to UK tax but to Jersey income tax at the rate of 20%. By concession the Comptroller of Income Tax in Jersey will allow a further deduction in the form of a management charge to be made before the taxable profits are determined. The management fee is ordinarily paid to another Jersey company which is exempt from Jersey income tax by virtue of the fact that the company is not owned by Jersey resident, neither does it conduct business in the Island.
In practice a management agreement is drawn up between the Jersey resident and the Jersey exempt company. This provides for the Jersey exempt property management company to receive a remuneration equivalent to 90% of the profits of the trading enterprise. This gives an effective tax rate of 2% as evidenced in this example.
The effective tax rate is 2% of the net profit after administration fees. The management fee being income of the Jersey exempt company is not subject to income tax beyond the £600 being the tax exemption fee.
I have made specific reference to the use of the Double Taxation Agreement insofar as it can apply to a property development in the United Kingdom. However, as I indicated in the introduction, this arrangement can apply equally to the industrial and commercial profits of any enterprise which does not maintain a permanent establishment in the United Kingdom. It is worth noting that an enterprise shall not be deemed a permanent establishment merely because it carries on business dealings through a bona fide broker or a general commission agent acting in the ordinary course of his business.
The more interesting aspects are in future when the domestic tax system changes in Jersey which is scheduled for 2008. The new regime referred to as “zero and ten” affects company taxation. The changes are designed to replace the “exempt company” taxation regime.
The effect is that companies that are not owned by Jersey residents will pay income tax at the basic rate of 0% rather than the existing tax exemption fee of £600. A tax rate of 10% will be applied to companies involved in the finance industry.
I have made enquiries of the Comptroller of Income Tax in Jersey and I am advised that there are no plans to amend the existing Double Tax Arrangement with U.K. In 2008, will our foreign investor be in Utopia and able to take advantage of the Double Tax Agreement, not paying income tax in either the United Kingdom or Jersey?
DOUBLE TAXATION RELIEF (ARRANGEMENT WITH THE UNITED KINGDOM) (JERSEY)
(Promulgated on the 15th day of March, 1952).
STATES OF JERSEY.
The 6th day of March, 1952.
Whereas it is provided by paragraph (1) of Article 16A of the Income Tax (Jersey) Law, 1937, as amended, that, if the States by Act declare that arrangements specified in the Act have been made with the Government of any territory outside the Channel Islands, with a view to affording relief from double taxation in relation to income tax and any tax of a similar character imposed by the laws of that territory, and that it is expedient that those arrangements should have effect, the arrangements shall have effect in relation to income tax notwithstanding anything in any enactment;
Now, therefore, the States, in exercise of the powers conferred upon them by the said paragraph (1) of Article 16A of the Income Tax ( Jersey) Law, 1937, as amended, and of all other powers enabling them in that behalf, have made the following Act:-
F. DE L. BOIS,
Greffier of the States.
ARRANGEMENT BETWEEN HER MAJESTY'S GOVERNMENT AND THE STATES OF JERSEY FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.
The income tax (including surtax) and the profits tax (hereinafter referred to as “United Kingdom tax”).
The income tax (hereinafter referred to as “Jersey tax”).
An enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carries on business dealings in that other territory through a bona fide broker or general commission agent acting in the ordinary course of his business as such.
The fact that an enterprise of one of the territories maintains in the other territory a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute that fixed place of business a permanent establishment of the enterprise.
The fact that a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territory or which is engaged in trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company.
then any profits which would but for these conditions have accrued to one of the enterprises but by reason of those conditions have not so accrued may be included in the profits of that enterprise and taxed accordingly.
as respects income tax, for any year of assessment beginning on or after the 6th April, 1951;
as respects sur-tax for any year of assessment beginning on or after the 6th April, 1950; and
as respects profits tax, in respect of the following profits i. profits arising in any chargeable accounting period beginning on or after the 1st April, 1951;
ii. profits attributable to so much of any chargeable accounting period falling partly before and partly after that date as falls after that date.
iii. profits not so arising or attributable by reference to which income tax is, or but for the present Arrangement would be, chargeable for any year of assessment beginning on or after the 6th April, 1951;
as respects income tax, for the year of assessment beginning on the first day of January, 1951, and subsequent years.
as respects income tax for any year of assessment beginning on or after the 6th April in the calendar year next following that in which the notice is given;
as respects sur-tax for any year of assessment beginning on or after the 6th April in the calendar year in which the notice is given; and
as respects profits tax, in respect of the following profits
i. profits arising in any chargeable accounting period beginning on or after the 1st April in the calendar year next following that in which the notice is given;
ii. profits attributable to so much of any chargeable accounting period falling partly before and partly after that date as falls after that date;
iii. profits not so arising or attributable by reference to which income tax is chargeable for any year of assessment beginning on or after the 6th April in that next following calendar year;
as respects income tax, for any year of assessment beginning on or after the first day of January in the calendar year next following that in which such notice is given.
To be printed, published and posted.
F. DE L. BOIS,
Greffier of the States.
DOUBLE TAXATION RELIEF (ARRANGEMENT WITH THE UNITED KINGDOM) (JERSEY) ACT 1994
(Promulgated on the 28th day of September 1994)
STATES OF JERSEY
The 27th day of September 1994
THE STATES, in pursuance of Article 111 of the Income Tax (Jersey) Law 19611 as amended, and of all other powers enabling them in that behalf, have made the following Act
Deputy Greffier of the States.
ARRANGEMENT BETWEEN HER MAJESTY'S GOVERNMENT AND THE STATES OF JERSEY AMENDING THE 1952 ARRANGEMENT BETWEEN THE TWO GOVERNMENTS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
in respect of any income or profits shall not be entitled under this Arrangement to any relief or exemption from United Kingdom tax which is computed by reference to that income or those profits, unless that person is assessed under those provisions on the whole of that income or those profits at a rate which is not less than the standard rate for the year in question under the Finance (Jersey) Law 19945 and subsequent enactments.”.