A tale of two countries

Canada and Jersey (that’s the Channel Islands version, for our U.S. readers), don’t have a great deal in common, that’s for sure, but we’re trying our best to find a link for the purposes of this MTN as both jurisdictions get a couple of mentions. Brexit, however, comes to mind (and yes, we’re as sick of this as you are), with politicians seeming to prefer a Canada+++ deal (whatever that may be) to Theresa May’s much maligned Chequers Plan. In fact, the Jersey Evening Post reported on 5 July 2018 that “…the so-called ‘Jersey option’, which would see the UK remain within the EU’s Customs Union and Single Market for goods but not for services and freedom of movement, is understood to be the preferred Brexit model for the UK government.” Well, there you have it, the Chequers Plan has its heart in Jersey.

Staying with the Jersey theme, many readers will be aware of the new double tax treaty that has been signed by Jersey (and Guernsey and the Isle of Man) with the UK. This is based on the OECD Model and contains some interesting provisions, more of which in next month’s MTN. One interesting / nerdy point of note (depending on your persuasion) is that the new treaty is an “agreement” whereas the old treaty is an “arrangement”. What’s the difference I hear you ask? Well, you can’t have an agreement with yourself. Clearly HMRC, the Home Office or Bergerac have changed their minds as new double taxation “agreements” have been entered into by the UK and the Crown Dependencies and will come into force shortly (our guess is before 31 March 2019).

Anyway, back to the MO! We start this month with a tax case from Canada about company residence.  This is one that is likely to be quoted by HMRC in their arguments in the future as it is a rare case of the director being usurped by the shareholder. Next, we take our first visit to Jersey to look at the proposed substance requirements, before returning to Canada, amongst others, to discuss the UK’s approach to “acquired assets” before arrival. Finally, we make our second, and very brief visit, to Jersey to look at their limited liability company.

  1. Company residence in Canada – central management & control and how not to do it.
  2. Substance in Jersey – Keeping the EU happy.
  3. Exit charges and the UK – The UK doesn’t have a territorial system when it comes to capital gains.
  4. STOP PRESS: The Jersey LLC
  5. STOP PRESS II: The UK’s Digital Services Tax


Northern Exposure (not the 90’s sitcom or Sasha and Digweed for that matter)

One of the joys, curses, what you will, for international tax practitioners of the UK tax system is that judicial precedents of other common law countries can be persuasive for UK courts. This is especially the case for Andrew P’s favourite stomping ground of company residence. The case of De Beers Consolidated Mines Ltd v Howe underpins not only the UK concept of company residence (well, the case law version) but also that of many Commonwealth countries.

As you look at UK judgments relating to company residence you will see not only decisions from the UK’s courts, but also those from Australia, Canada and New Zealand, to name but three. Following a recent decision in Canada it is highly likely that another case will soon be cited in the First Tier Tribunal and beyond. This is the Scrabble points winning case of Landbouwbedrijf Backx BV vs The Queen.

The case related to a Dutch couple who had emigrated to Canada in May 1998. Prior to moving they had reorganised their affairs, setting up a Dutch company, Landbouwbedrijf Backx BV (LBBV) with Mrs Backx’s sister, Anna Van Gorp, who was resident in the Netherlands being the sole director.

The Backxes duly moved to Canada and they bought a farm in Ontario. They then entered into a farming partnership with LBBV, the Backxes having 51% of the partnership and LBBV 49%. In 2009, the Backxes set up a Canadian company and LBBV sold its share of the partnership to it, realising a gain of C$1.7mn. LBBV argued that the gain was not assessable to Canadian tax since it was solely resident in the Netherlands and under the Canada/Netherlands double taxation agreement (DTA), Canada was not able to tax the gain. (There were other arguments, but they are outside the scope of this article – but not the next one!)

The Canadian Revenue Agency took the view that LBBV was resident in Canada as the company’s central management and control was exercised not by Ms Van Gorp in the Netherlands, but by the Backxes themselves in Canada.

A brief judgment

In what, for a company residence case, was a remarkably brief judgment (only 20 widely spaced pages, compared to over 100 tightly packed ones for the last UK judgment, being Development Securities (No.9)), the Canadian court held that Ms Van Gorp in the Netherlands had been a nominee for the “real” directors Mr & Mrs Backx in Canada. Showing the interdependence of jurisprudence in this area, the Court quoted a number of UK decisions, De Beers, Unit Construction and Wood v Holden when discussing who exercised control of the company.

The Court acknowledged the concept clearly set out in Wood v Holden that there is a difference between someone who advises and influences the directors and someone who dictates to them. Here they found that the Backxes had made all the relevant decisions and Ms Van Gorp did not participate in any of the acts that could be said to be those of controlling the company. Her activity was limited to carrying out the decisions made by the Backxes, signing and delivering forms as they instructed her to do. Their activity had clearly gone beyond advising – they were dictating to the director. In UK terms, they had usurped the position of the director.

LBBV was therefore resident in Canada and had been since the Backxes moved there in 1998. This made the company dual resident and as the Canada/Netherlands DTA has a competent authority tie-breaker for company residence it will be for the Canadian and Dutch Competent Authorities to decide where LBBV is resident. The eventual outcome is unlikely to be made public, but our money is on the Canadians and Dutch agreeing that LBBV is solely resident in Canada.

In discussions between the competent authorities, whilst it is possible for an agreement to be reached that a company is dual resident, the more usual outcome is that the two countries will try to agree a single country of residence. Here, we have a company that was a partner in a Canadian farm, owned by two Canadian residents who ran the company over the head of the Dutch director. Tax is due in Canada and, although it is not mentioned in the Canadian case, we suspect that no tax is due in the Netherlands due to the Dutch not taxing profits and gains of foreign permanent establishments. We would therefore expect the Netherlands to cede residence to Canada. Even if tax was due in the Netherlands, we would expect the Dutch to cede taxing rights to the Canadians given the much greater economic ties to Canada (i.e. the farm). Also, as Canada took the company to court to prove its Canadian residence, we can’t see them agreeing to cede residence to the Netherlands. Therefore, even if the Netherlands do not give way, the company will remain Canadian resident.

As an aside, although Competent Authorities will usually try to agree a single country of residence for a company, there are occasions where they will either fail to agree (for national policy reasons say, or because both feel very strongly that they have the closer economic ties) or decide that leaving the company dual resident is the correct outcome. This latter reason is usually to stymie some cunning tax planning. This is because the tax residence of a company can often be moved by changing where it is managed, leading to it being tax resident in the country of incorporation as well as the country of management. The move may be motivated by, say, a desire to obtain beneficial withholding tax rates under the new country’s double taxation treaties.

However, where the treaties leave the residence tie-breaker to the Competent Authorities, if no agreement is reached or the Competent Authorities agree dual residence, then the treaty stops the company from accessing many benefits of the treaty, such as reduced withholding tax rates. This can therefore stymie the intended “mischief”. To prevent companies from “forcing” an agreement by invoking arbitration and so gaining treaty benefits, the UK has started to take company residence outside of the arbitration clause in its double taxation agreements.

In summary…

So, what can we take away from this decision? That laziness and ignorance are both fatal to any tax planning. Either Mr and Mrs Backx and Ms Van Gorp didn’t know that real power had to lie with Ms Van Gorp in the Netherlands, or they did know, but couldn’t be bothered with “all that rigmarole” and just did everything in Canada. This emphasises that, if you are not controlling a company yourself, you have to have people who know what they are doing as directors of the company.

We can also expect that HMRC will look to quote the case in appropriate circumstances and it may have far reaching consequences for trust and fiduciary providers whose interaction with the beneficial owners of structures they administer will need to be reviewed.

If you want to know more about company residence please contact Zoe at or +44(0) 20 7534 7183 or Andrew P at andy@milestonetax.comor +44(0) 7534 7184.


Economic Substance Requirements

The EU is once again flexing its political muscles into the world of business tax, this time through the EU’s Code of Conduct Group (Business Taxation) (the COCG). During the course of 2017, the COCG undertook a screening of over 90 jurisdictions, with the updated list of 6 non-cooperative jurisdictions published in October 2018.

Despite Jersey, Guernsey and the Isle of Man avoiding the dreaded non-cooperative status by the COCG, they made commitments to address concerns raised about economic substance in their jurisdictions. The three were also required to set out their commitments by 31 December 2018.

The main crux of the COCG’s concern with the Crown Dependencies is that there is no domestic legislation for a ‘legal substance requirement for entities doing business in or through the jurisdiction [which] increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial economic presence.

The problem that Jersey, Guernsey and the Isle of Man face is that failure to adequately address the COCG’s concerns risks being put on the non-cooperative jurisdictions list in the future. Apart from the ‘naming and shaming’ effect, the Council of the European Union encourages Member States to implement ‘effective and proportionate defensive measures’ against non-cooperative states, including increasing audits for taxpayers using these jurisdictions or implementing defensive legislation (i.e. anti-abuse provisions, including putting them on Controlled Foreign Company black-lists).

Jersey was the first of the Crown Dependencies to release draft legislation on 25 October 2018. The draft legislation remains broadly unchanged from the Consultation Document released in August 2018 and puts forward a 3-tier approach to address the COCG’s concerns.

Stage 1: Identify Companies Carrying on ‘Relevant Activities’

Companies are required to identify whether they undertake ‘relevant activities’. Relative activities are deemed to be those that are geographically mobile, including banking, insurance, fund management, financing and lending, headquarters, shipping, holding companies and intellectual property (IP).

Stage 2: Impose Substance Requirements on Companies Undertaking ‘Relevant Activities’

Once companies have identified if they are undertaking relevant activities, they will be required to meet substance requirements. This stage is divided into general and industry specific requirements.

The general requirement is that Jersey resident companies undertaking ‘relevant activities’ will be required to demonstrate that they are ‘directed and managed’ in Jersey. This includes matters such as the frequency of board meetings in Jersey, the number of directors present in Jersey, evidence that the strategic decisions were made during those board meetings, company records and minutes are held in Jersey and the board is comprised of individuals with adequate expertise. So, nothing ground-breaking or insurmountable.

The industry specific requirements apply to financial services, headquarter companies, shipping, holding companies and IP companies. Companies in these industries that are resident in Jersey must demonstrate that their ‘relevant activities’ are undertaken in Jersey. Examples given include, raising funds for companies within the banking industry, or agreeing funding terms for those within the fund management sector.

All Jersey companies with relevant activities must also demonstrate that there is an adequate level of (qualified) employees/annual expenditure in Jersey including physical offices / premises sufficient for the needs of the company’s activities. It should be noted that the above substance requirements include outsourcing to third party service providers on the Island.

Stage 3: Enforce the Substance Requirements

Compliance with the substance requirements will, first and foremost, be completed through amendments to a company’s corporate tax returns. Additional clauses will be added from the 2019 year of assessment whereby a company must confirm:

  • its business activities;
  • amount and type of gross income;
  • amount and type of expenses and assets;
  • details of its premises; and
  • the number of employees.

Penalties imposed on a Jersey resident company for failing to meet the substance test are up to a maximum of £10,000 or up to £100,000 if a notice has been issued instructing the company to comply in a previous financial period.

The Jersey government has issued a statement confirming they will provide guidance notes on the application of the new legislation before 5 November 2018. Given the fast-approaching 31 December 2018 deadline, we consider it unlikely that there will be any significant changes to the bill as it makes its way through Jersey’s Parliament.

Most service providers will be unphased by these new compliance requirements, but they will nonetheless create additional costs which will no doubt be passed on to the clients. The rules will affect all companies, but the biggest impact is likely to be for small – medium sized companies that are perhaps less aware of the fast-paced changing world of tax transparency and compliance. Provisions will therefore need to be adopted in time for the New Year.

If you would like more information on Jersey’s substance requirements, please contact Miles at or +44(0) 20 7534 7181 or Andy M at or +44(0) 7534 7182.

Exit Taxes

Double Trouble?

We were recently retained to advise a client in respect of their departure from the UK and a subsequent disposal they were planning that would give rise to a substantial capital gain. When researching the tax issues, we were reminded of how the UK tax system does not help those coming to the UK from countries that impose exit charges.

Consider the situation of a person who owns moveable property (e.g. shares) that is pregnant with gain. Let’s assume they are resident in a country that imposes an exit charge and they want to move to the UK. As they leave their country of residence the asset is subject to an exit charge that triggers a tax liability (see MTN August 2018 and the South Africa exit charge). Not long after they arrive in the UK someone makes them “an offer they can’t refuse” for the asset and they sell, incurring UK capital gains tax.

This scenario leads to true juridical double taxation. When leaving their original country, the individual would be treated as if they had disposed of the asset the moment before leaving and taxed on the resulting deemed gain. When selling the asset once resident in the UK, the deemed disposal prior to arrival is ignored and the chargeable gain is for the full gain, that is, from when the asset was originally bought until the actual sale. They would effectively be charged to tax twice on the value used for the exit charge.

To make matters worse, the UK would not give double taxation relief in respect of the foreign tax paid for the exit charge. This is a foreign source gain and so within the credit article of the relevant UK double taxation agreement (DTA), but it is not the gain upon which the UK is charging tax. When the UK comes to charge tax, the individual is resident in the UK and the source of the gain is a UK one, therefore the credit article does not help. Further, the Capital Gains article of the relevant DTA gives sole taxing rights to the country of residence (i.e. the UK).

In the UK’s eyes the exit charge country should provide relief, but is unlikely to: the exit charge is a deemed disposal and a domestic, rather than international issue. Furthermore, it is unlikely that the Mutual Agreement Procedure will help either because there has been no double taxation on the actual disposal of the asset.

What’s the alternative?

Contrast this with the treatment in some of the UK’s major trading partners (we could say competitors). Australia, Canada and the Netherlands all offer some sort of step up in basis for assets owned by new arrivals. (Interestingly, this was one of the alternative arguments raised in the Canadian company residence case covered above). They also have exit charges giving rise to a true territorial system. By having both a step up on arrival and an exit charge on departure, a country is only taxing an increase in value while the asset was benefiting from a link to the relevant country. It is not gaining any sort of windfall from increases that happened prior to arrival, and by imposing an exit charge it is not forgoing any tax on the part of a gain that arose while the asset was “here”.

The reality of exit charges is that they need to be paid when there is often little or no liquidity and can cause significant hardship to people subject to them (or force a fire sale of assets in order to pay the charge). They can also be problematic to administer for individuals, given how many people emigrate each year.

ATAD again

It is worth pointing out the difference between individuals and companies in the UK when it comes to immigration and emigration. Individuals do not get a step up in the acquisition cost upon arrival in the UK, but they are also not subject to an exit charge (although the temporary non-residence rules give rise to a 5 year claw-back for income and gains which is akin to an exit tax).

By contrast, companies moving to the UK will get the benefit of a step up in the acquisition cost for any assets that have been subject to an Exit Charge in the EU. This provision is in schedule 16 to the Finance Bill 2018-19 and, provided it is passed by Parliament, will come into force on 1 January 2020.  As this provision only applies to migrations from EU countries, while the corporate exit charge applies worldwide, it is very likely that this part of Anti-Tax Avoidance Directive was brought in with gritted teeth. We don’t expect to see it widened either pre or post Brexit.

If you have any queries concerning migration to or from the UK, or the treatment of gains, please contact Miles at or +44(0) 20 7534 7181 or Zoe at +44(0) 20 7534 7183.

Jersey (again)

Another rival to Delaware?

Everyone will be aware of the Delaware Limited Liability Company (LLC) not least from the Supreme Court decision in Anson (Andrew P’s claim to fame is that you can see him in the background on the webcast of the hearing) and its siblings in the other 49 States.

There is, however, a new kid on the block, the Jersey Limited Liability Company. This is aimed squarely at attracting more U.S. business to the Island as it is an entity the Americans are very at home with. An interesting feature of the new Jersey entity is that section 2(2) of the Limited Liabilities Companies (Jersey) Law states that the LLC will have a separate legal personality to its members, but it will not be a body corporate.

There is no explanation for this little quirk and we have been scratching our heads as to what it means for LLCs. If they are not bodies corporate, are they bodies of persons? Is it Jersey’s answer to the Anson case and are they trying to ensure that its LLCs will be treated like a partnership for UK tax purposes? But Jersey already has Limited Liability Partnerships, so is there another reason? We will have to wait and see what HMRC make of them.

We can’t help but point out that the Jersey LLC arrives on the scene not long after the Cayman Islands and Bermuda introduced their own LLCs, but a good 20 years after the Isle of Man did. The question now is, how long before Guernsey introduces them?

If you want to know more about LLCs or other entities in Jersey please contact Andy M at or +44(0) 20 7534 7182 or Andrew P at or +44(0) 20 7534 7184 (and yes, we do know they should really swap their email addresses.)

The UK

Digital Services Tax

The Budget was delivered by Spreadsheet Phil on Monday 29 October to a largely positive reception. However, the one announcement that caught the eye was the Digital Services Tax (which isn’t a sales tax honest guv). Like the Diverted Profits Tax (the Google Tax) before it, this new tax, on the face of it appears to address a significant imbalance between domestic retailers and online giants (mainly the nasty American ones). Our view is that this is either bonkers or pure political game-playing.

When it was leaked that Phil was considering introducing a new tax (that will undoubtedly be passed onto consumers even though it isn’t a sales tax) Miles commented:

“At a time when the UK must pull out all the stops to attract inward investment with Brexit looming on the horizon, it beggars belief that a Conservative Chancellor should contemplate levying a brand new tax on companies that have already invested heavily in the UK, employ thousands of people and who total tax contribution is very often overlooked.

The reality is that Philip Hammond needs to raise revenue somewhere but inventing a digital services tax isn’t the answer.

The idea that the UK is prepared ‘to go it alone’ without any international consensus is ridiculous and will undoubtedly lead to a retaliatory response from trading partners, most likely the US.”

Lo and behold, fast forward two days and the news that Senior US officials have warned that Phil’s 2% tax would set a “dangerous precedent” and have a chilling effect on investment in the UK. 

In response to which, Miles today commented:

“It was blindingly obvious to anybody with any common sense that the introduction of a Digital Services Tax would elicit this reaction from the US.

The Digital Services Tax is akin to the Diverted Profits Tax, that’s to say a vote winner introduced purely for political ends. This is a pitiful move to shore up support for a faltering party which has allowed themselves to be cowed by the hard left. 

The Conservative Party will now likely put out a consultation document that the big tech firms and their advisers will then lobby hard against. This will allow the government to kick the can down the road in time for the OECD to catch up, which they will do.” 

More on the Budget in next month’s MTN.

Happy Reading!

The Milestone Tax Team