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The Court of Quebec has recently delivered a significant judgment in the case of Neko Trade v RQ.
The decision provides important insights into Quebec’s income tax legislation.
The court ruled that a loan from a corporation to its owner-manager for home refinancing did not constitute a shareholder benefit.
Instead, it fell under Quebec’s equivalent of a provision known as the Employee Dwelling Exception.
Additionally, the court criticized Revenu Québec’s (RQ) aggressive decision to reassess the owner-manager on a statute-barred year concerning this loan.
The Employee Dwelling Exception can reduce a seller’s capital gains tax rate from 20% to 10% for the first £1 million of lifetime qualifying capital gains, offering potential tax savings up to £100,000.
Historically, this provision has been risky for shareholder-employees due to the ambiguity in the criteria, which require the loan to be granted to the shareholder-employee as an employee, not as a shareholder, and that bona fide arrangements be made for repayment within a reasonable time.
Neko Trade provides valuable guidance for shareholder-employees considering this option.
The Canada Revenue Agency (CRA) and RQ often challenge any transfer of value from a corporation to a shareholder that is not reported as salary, dividend, or another taxable transaction.
The tax code prescribes tax consequences for taxpayers receiving such “shareholder benefits,” which include loans from a corporation to an individual shareholder. However, it also creates several exceptions, including the Employee Dwelling Exception.
This exception applies to loans given to a shareholder-employee (or their spouse) to acquire a dwelling for their habitation, provided specific conditions are met.
Neko Trade involved a corporation (Neko) established in 2009 by Dimitry Korenblit, its sole employee and shareholder.
During an audit of Neko’s 2015-2017 taxation years, RQ reviewed a loan made by Neko to Mr Korenblit in 2011 to refinance his home.
Mr Korenblit and his spouse initially financed their family residence with a bank mortgage and a line of credit.
In 2011, following advice from an accountant, Mr Korenblit arranged a loan from Neko to replace this temporary financing.
The loan was disbursed in three tranches, and all payments were duly recorded over the years.
Mr Korenblit transferred the residence title to his wife to mitigate financial risks related to his business, and they took out another bank loan secured by the residence’s value.
RQ argued that the Loan was a “smoke screen” to conceal a shareholder benefit and that a “simple employee” would not have obtained such a loan.
They cited several factors, including deficiencies in the loan documentation and the lack of a hypothec on the residence.
The Court concluded that the Loan qualified for the Employee Dwelling Exception, citing eight key factors:
The Court emphasized that the Loan was not a “smoke screen” and that Mr Korenblit was transparent in his tax returns.
RQ’s argument that the Employee Dwelling Exception cannot apply to refinancing an already-acquired residence was rejected.
The Court found that RQ’s published position allowed for such refinancing if agreed upon at the time of the original acquisition.
The Court also addressed the short possession period of the residence, noting that the Employee Dwelling Exception does not prescribe a minimum ownership period and that the transfer of title did not negate the Exception’s applicability.
Neko Trade offers encouragement to taxpayers in disputes over shareholder benefits, highlighting the importance of strict compliance with loan terms, specifying market rates and terms, and maintaining accurate corporate records.
The decision contrasts with the Tax Court of Canada’s 2013 decision in Mast, emphasising the need for detailed and transparent handling of shareholder-employee loans.
If you have any queries about this article on Neko Trade v RQ, or Canadian tax matters in general, then please get in touch.
The Federal Tax Authority (FTA) has recently released a guide outlining the conditions and procedures for applying corporate tax to free zone persons.
This guide aligns with the free zone tax regime, emphasizing the critical role free zones play in driving the state’s economic growth and transformation both locally and globally.
Free zones offer numerous advantages for businesses, including fewer restrictions on foreign ownership, simplified administrative procedures, modern and advanced infrastructure, and additional types of legal entities and commercial activities.
These benefits make free zones an attractive option for businesses looking to operate within the state.
The guide details the conditions that a free zone person must fulfill to be classified as a qualifying free zone person and benefit from a 0% corporate tax rate on qualifying income.
If these conditions are not met or cease to be met during any relevant tax period as prescribed by the FTA, the defaulting entity will lose its qualifying free zone status.
Consequently, it will not benefit from the 0% corporate tax rate from the beginning of the tax period in which the conditions were not fulfilled, continuing for the following four tax periods.
The guide also clarifies the treatment of income generated from immovable property and qualifying intellectual property, as well as tax compliance requirements.
It specifies the qualifying and excluded activities for a qualifying free zone person, as outlined in Ministerial Decision No. 265 of 2023 regarding Qualifying Activities and Excluded Activities for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses.
To aid understanding, the guide provides examples illustrating the application of the corporate tax law to free zone persons.
It outlines how corporate tax is calculated for free zone persons, determining the qualifying income subject to the 0% tax rate and the income subject to a 9% tax rate.
Additionally, it includes conditions for maintaining an actual and sufficient presence in the free zones and the criteria for determining a local or foreign permanent establishment.
The FTA guide also states that when a qualifying free zone person operates through a permanent establishment in the UAE but outside the free zones or in a foreign country, the profits of such permanent establishments will be subject to a corporate tax rate of 9%.
The new FTA guide provides essential information for businesses operating in free zones, ensuring they understand the conditions required to benefit from the 0% corporate tax rate and the implications of not meeting these conditions.
If you have any queries about this article on Free Zone Persons, or UAE tax matters more generally, then please get in touch.
They must have thick skin, those HMRC people.
I sometimes wonder whether it’s provided when they join or if it accumulates over their time in post.
After all, it takes either fortitude or tone deafness to keep going in the face of seemingly endless criticism.
This year alone, among other things, HMRC has been accused of allowing customer service to plummet to an all-time low and performed a rapid about-face over proposals to hang up its helpline during the summer months.
Yet there are times when persistence appears to pay off.
Take the Diverted Profits Tax (DPT), for instance, which (whisper it!) looks as though it may be changing the kind of corporate shenanigans on the part of big multi-national businesses which in the past has enabled them to minimise the amounts which they make to the Revenue.
The tax came into effect in 2015. Whilst not applying to small and medium-sized enterprises (SMEs), it is a means of countering the exploitation of overseas offices (or ‘permanent establishments’, as they’re otherwise known) to artificially reduce their UK profits and tax liabilities.
For organisations with the kind of turnover and structures which make it possible, such paper shuffling can be incredibly lucrative.
There is a sting in the tail, though.
Get caught and the sanctions – including a six per cent surcharge on top of the normal Corporation Tax rate – can be enormous. An even higher rate of 55 per cent exists in respect of specific profits in the oil industry.
Figures released last month by HMRC show that DPT generated more than £8.5 between its introduction and March last year
The Revenue’s notable scalps include the likes of the drinks giant Diageo which agreed to hand over £190 million in 2018, a settlement which I discussed with The Times at the time .
Realising that it was onto a winner, HMRC subsequently turned those thumbscrews even tighter, launching something called the Profit Diversion Compliance Facility (PDCF) the following year.
It aimed to “encourage” companies identified by some of the near 400 Revenue staff working on international tax issues as having operations which might trigger a DPT liability to “review both the design and implementation” of their policies and pay any tax due.
In short, it offers a chance to ‘fess up to any mischief and avoid being hauled over the coals and, given that it’s eked more than £732 million extra income for the Revenue, could be said to have demonstrated its worth.
Cynics might suggest that the DPT performance record, in particular, indicates that its novelty is wearing off.
The £108 million recovered in the last financial year was less than half the sum reclaimed only 12 months before.
However, I take the opposite view.
I think it is evidence that instead of using offices in far-flung corners of the globe to manipulate their balance sheets and mitigate their UK tax bills, multi-nationals accept that they now have nowhere to hide.
Of course, that is not solely down to HMRC’s efforts.
The Organisation for Economic Co-operation and Development (OECD) has, since DPT was introduced, also unveiled the Global Minimum Tax (GMT) as part of its campaign to eradicate the use of profit shifting which led to the Diverted Profits Tax.
This new measure means that multi-nationals turning over more than €750 million (£633.38 million) will be subject to a minimum 15 per cent tax rate wherever they operate in the world.
It amounts to a combination, one-two punch for the UK tax authorities, in particular. The DPT can still address individual methods not covered by the GMT’s more broad brush approach.
However, the extent to which the UK will retain DPT is perhaps up for debate as well.
To all that, we can add the Revenue’s intention, announced in January, to actually reform DPT, making it part of the wider Corporation Tax for the sake of simplicity – something which in itself is a novel and noble development in UK tax procedures.
There are, I should point out, still some companies which appear reluctant to accept that the diverted profits game is up.
The latest detailed HMRC missive describes how it “is currently carrying out about 90 reviews into multinationals with arrangements to divert profits”, inquiries which involve some £2.6 billion in potentially unpaid tax.
Furthermore, the Revenue is involved in “various international tax risk disputes where the business was not prepared to change their arrangements”. Embroiled in those proceedings led by HMRC’s Fraud Investigation Service “are a number of large businesses” who face possible civil or criminal investigation.
It may well be that corporate titans once inclined to accounting mischief have just been worn down by the Revenue’s dogged investigators.
A change in personnel on the boards of these companies coupled with the prospect of a process lasting five years and a large penalty can also persuade even the hardiest souls to call a halt to such behaviour.
Even those who remain resistant to the newly knighted Jim Harra and his colleagues can’t escape the potential reputational damage arising from the leak of sensitive documentation as has happened successively with the Pandora, Paradise and Panama Papers.
Now that HMRC is finally and effectively calling the tune, there is – with no little apologies to Axl Rose and his bandmates – less of an appetite for diversion.
That is a situation for which and for once the Revenue deserves credit.
Thanks for your patience.
If you have any queries about this article on the UK’s diverted profit tax, or other UK tax matters, then please get in touch.
Look what you’ve reduced me to….
On April 25, 2024, the Internal Revenue Service (IRS) and the Treasury Department issued final regulations (the Final Regulations) for energy tax credit transfers under Section 6418 of the Internal Revenue Code (the Code).
Section 6418, introduced as part of the Inflation Reduction Act of 2022 (the IRA), allows eligible taxpayers to transfer certain clean energy tax credits to unrelated taxpayers for cash, creating a marketplace for these tax credit transfers and spurring investment in the energy sector.
Before the IRA, clean energy tax credits could only be used by taxpayers who owned the underlying clean energy projects, often involving complex tax equity structures typically accessible to large-scale projects and financial institutions.
The IRA addressed concerns about the sufficiency of the tax equity market to support clean energy adoption by introducing the transferability of clean energy credits, thus creating a broader market for these credits.
Any taxpayer that is not a tax-exempt organization, state, political subdivision, Indian Tribal government, Alaska Native Corporation, rural electricity cooperative, or the Tennessee Valley Authority. These entities can benefit from the direct pay mechanism under Section 6417.
Eleven tax credits are eligible for transfer under Section 6418, including:
The Final Regulations, which follow proposed regulations issued on June 14, 2023, adopt rules for making transfer elections with additional clarifications:
Section 6418 became effective for taxable years beginning after December 31, 2022, and the Final Regulations take effect from July 1, 2024.
These regulations provide additional certainty for taxpayers as the market for clean energy tax credit transfers grows. Congress is closely monitoring the performance of this new mechanism, which, if successful, could potentially expand to include other tax credits.
If you have any queries about this article on Transfers of Clean Energy Tax Credits, or US tax matters more generally, then please get in touch.
The Ministry of Finance (MoF) of the United Arab Emirates (UAE) held a public consultation to gather feedback on the implementation of the Global Anti-Base Erosion (GloBE) Model Rules, known as Pillar Two.
This consultation which started on 15 March 2024 and ended on 10 April 2024 aimed to refine the draft policy for applying these international tax rules within the UAE.
The consultation process was designed to collect insights from stakeholders on various aspects of the GloBE Rules implementation.
This includes the potential establishment of the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and a Domestic Minimum Top-up Tax (DMTT).
These discussions are pivotal as they will influence how multinational enterprises (MNEs) with substantial revenues are taxed, ensuring they meet a global minimum tax rate of 15%.
The MoF had provided two main documents for review:
Pillar Two aims to ensure that MNEs with consolidated revenues exceeding EUR 750 million pay a minimum tax rate of 15% in each jurisdiction they operate. This is enforced through two mechanisms:
The public consultation seeks feedback on several critical aspects:
For foreign entities and partnerships, the rules specify that these entities must be transparent, meaning profits pass through to the partners who are then taxed individually, subject to certain conditions including effective tax information exchange with the UAE.
The consultation clarifies that the GloBE Rules will primarily target large MNEs but provides room for applying these rules to smaller groups based on strategic economic considerations.
The application of these rules is not intended to impose undue burdens on smaller MNEs headquartered in the UAE.
The consultation process conclude on 10 April 10, 2024.
Undoubtedly, this was a critical step in adapting the global tax reform initiatives to fit the UAE’s unique economic landscape.
By actively seeking input from stakeholders, the UAE MoF aims to craft a regulatory environment that is fair, competitive, and compliant with international standards.
The feedback gathered will play a substantial role in finalizing the UAE’s approach to implementing the GloBE Rules, potentially affecting a wide range of companies and the overall investment climate.
This initiative reflects the UAE’s proactive stance in aligning with global tax reform efforts while considering the impact on its national economic interests.
If you have any queries on this article on the UAE Public Consultation on Implementing Global Minimum Tax, or UAE tax matters in general, then please get in touch.
On Tuesday, April 4th, 2024, the Brazilian Federal Government published Provisional Measure (PM) No. 1,227/2024, introducing significant changes to tax regulations.
As a PM, this measure has the immediate force of law but must be approved by Congress within 120 days to remain effective.
The measure revokes previous provisions that allowed taxpayers to recover presumed PIS/Cofins credits in cash.
Under the new legislation, companies can only offset these credits against other federal taxes.
This change limits the flexibility businesses previously had in managing their tax liabilities.
One of the most controversial aspects of the PM is the prohibition on offsetting PIS/Cofins credits, calculated under the non-cumulative system, with other federal taxes.
Previously, taxpayers could offset these credits with taxes such as Corporate Income Tax (IRPJ) or Social Contribution on Net Profit (CSLL).
Now, PIS/Cofins credits can only be offset against debts of the same contributions, although requesting reimbursement in cash is still possible in certain legislatively defined cases.
The PM imposes a new obligation on taxpayers to declare their tax benefits.
Taxpayers must inform the Federal Revenue Service about the incentives, exemptions, benefits, or tax immunities they enjoy, as well as the corresponding tax credit value.
Failure to report or late reporting of this information can result in fines of up to 30% of the value of the tax benefits.
The Government has stated that these measures aim to balance public accounts, particularly in light of payroll tax exemptions.
To provide further clarity, a Normative Instruction will be issued, detailing the changes, especially those concerning the declaration of tax benefits.
We would suggest that any taxpayers who might be affected by these changes should seek advice in relation to them.
If you have any questions regarding this Provisional Measure Limiting Compensation, or other tax matters in Brazil, please get in touch.
Diversification is a strategic business move that improves a company’s financial health and opens up many opportunities for growth by capturing a larger market share outside its current market. The core idea of business diversification is to spread out investments to stabilise earnings and increase profitability.
It also allows companies to leverage their strengths and capture new customer segments, whether introducing new products, entering different industries, or expanding into newer locations.
In this Tax Natives blog post, we’ll look at examples of real-life business diversification, its pros and cons, and tax implications to understand it better.
Key Points
There are several types of diversification, each serving unique purposes within the growth strategy of a parent company.
Concentric diversification involves introducing new, related products or services that capitalise on existing capabilities or markets. This allows companies to exploit technological or marketing harmonies, leading to better market penetration and a larger customer base.
A real-life example of concentric diversification is Apple’s expansion into wearable technology with the Apple Watch. Already a dominant player in personal computing, smartphones, and digital music players, Apple leveraged its brand reputation and tremendous resources to introduce a smartwatch to achieve the following:
This move into wearable technology was a natural extension of its existing product lines. It capitalised on the growing market for health and fitness gadgets, demonstrating how companies can successfully diversify their offerings while staying true to their core business strengths.
Horizontal diversification is when a company introduces new products or services that do not necessarily relate to the existing lines but still cater to the established customer base. This strategy can quickly increase a company’s footprint by staying within its core remit.
Amazon.com is a clear example of horizontal diversification. Initially an online bookstore, Amazon expanded its offerings to include electronics, clothing, and a wide range of consumer goods.
This expansion into numerous product categories allowed Amazon to capitalise on its established customer base and distribution network, transforming it into a one-stop online retail giant.
Conglomerate diversification is more risky and involves moving a business into completely unrelated business areas. It is often used to hedge against sector-specific risks, allowing the parent company to venture into new territories regardless of their connection to current business operations.
General Electric (GE), founded initially as an electrical company focused on lighting, has transformed its business model through strategic conglomerate diversification. Over the decades, GE has expanded into industries far removed from its origins, notably aviation, healthcare, power generation, and financial services.
This approach diversified GE’s business risks and positioned the company to capitalise on cross-industry growth opportunities, stabilising its financial outlook across economic cycles.
Also known as vertical integration, this sees a company expanding into its supply chain. This strategy can control costs and improve supply chain coordination, providing more control over the production process from raw materials to final sales.
A notable example of vertical diversification, or vertical integration, is Starbucks’ strategic approach to its supply chain.
Traditionally, Starbucks purchased its coffee beans from various global suppliers. However, to gain more control over the quality and supply of its primary raw material, Starbucks began investing in coffee farms directly.
By growing and processing its coffee beans, Starbucks was able to oversee the entire coffee production process—from farming and harvesting to roasting and serving the final product in stores.
This level of control ensures consistent quality across their products. It helps stabilise supply chain costs, which can fluctuate due to market changes or external factors like weather affecting crop yields.
This strategy exemplifies how a company can expand its operational control within its existing industry, aligning closely with its core business while optimising its end-to-end production processes.
As seen in the real-life examples of business diversification, it offers several benefits, including:
While diversification is a good strategy for targeting aggressive growth, it comes with its own set of financial risks that need careful managing, such as:
Businesses must consider various tax implications that can affect their financial health and capital strength when diversifying. Here’s how different aspects of diversification impact a company’s tax situation.
Entering new markets or industries often requires major capital investment, such as purchasing equipment or property, which may be subject to different tax depreciations or credits.
Diversification into new areas can involve substantial market risk, which might lead to initial operating losses. However, these losses can be carried forward to offset future taxable income, which could improve the company’s annual returns in the long term.
Expanding into new business areas or geographical markets might require restructuring the business. This could involve setting up new entities or reorganising existing ones. This restructuring can minimise the tax burden and shield core assets from financial risk.
Many governments offer tax incentives for companies that invest in certain industries or areas, like technology, green energy, or underdeveloped regions. These incentives can include reduced tax rates, credits, or deductions.
If the diversified business sectors have a negative correlation in terms of performance, this can be beneficial from a tax perspective.
For example, if losses in one sector can offset profits in another, this can lead to an overall more efficient tax rate for the entire business, stabilising financial results across various market conditions.
Read our latest guide if you are looking to find ways to reduce corporation tax in the UK.
The complex tax landscapes of new markets or industries can only be challenging with expert guidance. This is where Tax Natives steps in—a global network of tax experts equipped to provide specialised advice tailored to your business needs – learn more about corporate tax advice in the UK.
Whether you’re exploring aggressive growth strategies or seeking to minimise financial risks through diversification, Tax Natives connects you with a global network of professionals who can offer strategic insights to optimise your tax position and improve your company’s capital strength, no matter where your business is located.
Get in touch with Tax Natives today to see how we can help.
Employee Ownership Trusts (EOTs) were popularised in the UK in 2014, inspired by successful models like John Lewis, where employee ownership led to high levels of employee engagement and satisfaction. This structure benefits the employees whilst offering a viable succession plan for business owners and a motivated workforce.
This Tax Natives guide for employees explores how EOTs function and the benefits found from this type of ownership model. Whether you’re a business owner considering this transition or an employee interested in understanding what an EOT means for you, the goal is to clarify the process and highlight the positive impact of employee ownership.
Key Points
An Employee Ownership Trust (EOT) is a company structure that allows business owners to transition ownership to the employees. This type of trust holds the shares on behalf of the employees, making them indirect owners.
EOTs aim to foster a culture where employees are more connected and committed to their company’s success, as they have a stake in the outcome.
One of the most significant incentives for setting up an Employee Ownership Trust (EOT) is its range of tax advantages, which benefit both employees and outgoing business owners.
For business owners, one of the main benefits of transferring their business to an EOT is the relief from Capital Gains Tax (CGT).
This exemption means that when business owners sell their shares to the EOT, they don’t need to pay CGT on the profits from the sale. This can mean substantial financial savings, making EOTs an attractive exit strategy for business owners looking to retire or step back from day-to-day operations.
From an employee perspective, one of the standout features of being part of an EOT is the potential to receive income tax-free bonuses. Each eligible employee can receive up to £3,600 annually without any income tax liability. This boosts employee morale and improves financial well-being, directly linking the company’s success to personal rewards.
The structure of an EOT is designed to ensure that employee benefits are sustained over a period of time. As long as the trust holds a controlling stake in the company, these benefits continue to accrue, aligning long-term employee interests with the ongoing success and stability of the business.
This setup encourages a more engaged and committed workforce, as employees see a direct correlation between their efforts and benefits.
While Employee Ownership Trusts (EOTs) offer a unique form of indirect ownership that benefits employees, they bring certain complexities, especially in private companies.
EOTs manage the shares on behalf of employees who don’t hold the shares directly. This can sometimes lead to challenges in how individual employees perceive their influence and stake in the company’s decision-making processes.
Key employees, especially those used to having direct control or a significant say in business operations, might find the transition to an EOT model challenging. They may feel that indirect ownership does not give them the same level of influence or reward they might expect from direct share ownership.
An effective way to mitigate some of the challenges of indirect ownership is by establishing an employee council. This can act as a bridge between the EOT trustees and the workforce at large, so the voices of individual employees are heard and considered. The council can help clarify how benefits are allocated, how decisions are made, and how key employees can still contribute to the company’s strategic direction.
This UK-based electronics retailer transitioned to an EOT in 2019 when its founder, Julian Richer, sold a majority stake to the trust set up for the benefit of the employees. This move was motivated by a desire to ensure the company’s longevity and to reward the employees who had contributed to its success over the years.
Richer Sounds has since reported increased employee motivation and customer satisfaction, attributing these improvements to the sense of ownership among staff.
For EOTs to be effective, they must meet strict tax compliance standards. A good example is the consulting firm Mott MacDonald, which transitioned to an EOT to maintain independence and employee focus. The firm successfully navigated tax clearance and regulatory requirements, setting a benchmark in the engineering consulting industry for how EOTs can lead to a more engaged and invested workforce.
Adopting an EOT structure often spans several years, as seen in the case of Aardman Animations, the studio behind Wallace and Gromit. The founders decided to sell to an EOT to preserve their creative legacy and keep the company independent. This transition was carefully planned to ensure a smooth handover and to maintain the studio’s unique culture and creative freedom.
In technology and creative industries, EOTs are increasingly used to attract top talent and ensure business continuity. For example, the software company Baxendale transitioned to an EOT to harness the innovative potential of its employees by making them stakeholders in its future success. This has led to a more collaborative environment and fostered a more profound commitment to the company’s goals.
As businesses consider transitioning to an EOT, the complexities of setup and compliance cannot be underestimated. Here, the guidance and expertise of a professional network is invaluable.
Tax Natives, a global network of tax experts, is ready to connect companies with specialised corporate tax advisors who can help with this transition.
Whether you’re looking to understand the financial implications, the legal framework or implement an effective EOT strategy, Tax Natives can link you with UK tax advice professionals with the expertise and experience to make your journey towards employee ownership as smooth and successful as possible.
With the support of Tax Natives, your business can explore the potential of EOTs to improve employee engagement and secure a legacy that honours the contributions of every team member.
Whether you’re a tax resident or hold a non-UK domicile, understanding your domicile status in the UK is important for effectively managing your worldwide income for tax purposes.
The UK’s tax rules can be intricate, especially when distinguishing between ‘domicile’ and ‘residence’. This is particularly relevant if you have non-dom status, which offers distinct tax advantages and allows some residents to limit their UK tax exposure to their UK income only.
For non-domiciled individuals, knowing the ins and outs of these rules is also helpful for leveraging potential tax benefits. This Tax Natives guide on understanding domicile status in the UK will clarify all these concepts and help you understand how they apply to your situation.
Key Points
In UK tax law, domicile is the country that a person legally considers their permanent home. It differs from ‘residence’, which relates mainly to the number of days spent in a location during the tax year.
Here’s how it breaks down in more detail:
Your domicile of origin is assigned to you at birth. You typically inherit the domicile status of your parents. This remains in place until actively replaced by a new domicile.
You can choose a new domicile by moving to a new country to live (or ‘reside’) indefinitely. Establishing a new domicile of choice requires you to provide clear evidence that you plan on living there long-term. This could include purchasing a residential property or developing strong personal and professional ties.
A “non-dom” is someone with a non-domiciled status in the UK, meaning they are considered residents for tax purposes but do not regard the UK as their permanent home. This allows them to choose the remittance basis of taxation, where they are only taxed on their UK income and gains and any overseas income and gains brought into the UK.
Non-doms can benefit from various tax advantages, particularly in managing taxation on worldwide income and non-UK assets. This makes it an attractive option for those with financial interests outside the UK.
Understanding your tax status in the UK can affect how you are taxed on worldwide assets and foreign income.
You are taxed on your worldwide income and gains if you are domiciled in the UK. All your income and capital gains, whether in the UK or abroad, are subject to UK taxes according to the standard income tax and capital gains tax rates.
Non-domiciles have access to the remittance basis of taxation, which can alter their tax position. Under the remittance basis, non-doms are only taxed on UK income and gains. Overseas income and gains are only taxed if brought into the UK, providing a potential tax relief on foreign income not remitted.
However, claiming the remittance basis may involve losing specific tax allowances and could require payment of an annual charge if you have been a UK resident for a certain number of years.
Your domicile status affects the extent of your liability for inheritance tax (IHT). UK domiciles are liable for IHT on their worldwide assets, whereas non-domiciles are only liable for IHT on their UK assets.
However, after 15 years of residence in the UK, non-domiciles become deemed UK-domiciled for IHT purposes, subjecting their global estate to UK inheritance tax.
The intricacies of domicile and its impact on personal taxation are key for anyone managing income from UK and non-UK sources.
Non-domiciled individuals can choose the remittance basis of taxation, which means you pay tax only on the income you bring into the UK. This can impact the tax on income originating from non-UK assets.
However, by choosing the remittance basis, non-domiciles might also lose entitlement to specific tax-free allowances typically available to UK residents. Different types of income—such as rental income, dividends from overseas companies, or earnings from foreign employment—are eligible for remittance.
But there’s a catch: non-doms who have been UK residents for at least seven of the last nine tax years must pay an annual charge to access the remittance basis.
Your domicile status affects UK inheritance tax. Non-domiciled status only restricts your UK inheritance tax liability to your UK assets for a period.
However, if you are deemed domiciled in the UK—typically after 15 consecutive years of tax residence—you could be liable for UK inheritance tax on your worldwide assets.
Double Taxation Agreements (DTAs) are important for non-domiciled UK residents, as they help to prevent the same income from being taxed by both the UK and a foreign country. These agreements typically offer tax relief through credits or exemptions and vary depending on the type of income, such as dividends or employment earnings.
Tax Natives is your go-to network for connecting with tax experts specialising in any area of UK tax, including domicile tax. Whether you aim to protect your assets, streamline your operations, or maximise your tax situation, our worldwide network of tax advisors can guide you through the process.
Don’t let unnecessary complexity hold you back; join the savvy business leaders who are already benefiting from the expertise of our Tax Natives network.
Contact Tax Natives today, and let’s unlock your full tax potential together.
Cyprus has long been recognized as a strategic location for businesses looking to optimize their intellectual property (IP) management.
In 2016, Cyprus further enhanced its appeal by aligning its IP Box Regime with EU regulations and the OECD’s Base Erosion and Profit Shifting (BEPS) Action 5 rules.
Recent amendments in 2020 to Section 9(1)(l) of the Income Tax Law have introduced significant tax advantages for intangible assets, reaffirming Cyprus as a prime destination for IP-centric companies.
The 2020 amendments came at a crucial time, offering tax exemptions on incomes derived from the disposal of intangible assets, effectively exempting them from capital gains tax since January 1, 2020.
This move aims to boost innovation by making it more financially viable for companies to invest in IP development.
Cyprus stands out in the EU for its competitive IP tax regime. As a member of the EU and a signatory to all major IP treaties, Cyprus ensures robust protection for IP owners.
The IP Box Regime in Cyprus offers one of the most advantageous programs in the EU, characterized by low effective tax rates, a broad range of qualifying IP assets, and generous deductions on gains from disposals.
The regime’s hallmark is the substantial tax exemption provided for IP income.
Specifically, 80% of worldwide qualifying profits generated from qualifying assets is deemed a tax-deductible expense, and the same percentage of profits from the disposal of IP is exempt from income tax.
This arrangement results in a maximum effective tax rate of just 2.5%.
Qualifying Assets (QAs) include patents, certain software and computer programs, and other legally protected intangible assets that meet specific criteria, such as utility models and orphan drug designations.
These assets must be the result of the business’s research and development (R&D) activities. Notably, marketing-related IP such as trademarks and brand names does not qualify.
The regime employs a nexus approach to determine the portion of income eligible for tax benefits, relating it to the company’s actual R&D expenditure.
The formula for Qualifying Profits (QP) considers the ratio of qualifying R&D expenditure and total expenditure on the QA, fostering a direct link between tax benefits and genuine innovation efforts.
Qualifying Expenditure includes all R&D costs directly associated with the development of a QA, such as salaries, direct costs, and certain outsourced expenses.
However, acquisition costs of intangible assets and expenditures not directly linked to a QA do not qualify.
Entities eligible for the Cyprus IP Regime’s benefits include Cyprus tax resident companies, tax resident Permanent Establishments (PEs) of non-resident entities, and foreign PEs subjected to Cyprus taxation, provided they meet certain criteria.
The Income Tax Law amendments also introduced capital allowances for all intangible assets, allowing for the spread of these costs over the asset’s useful life (up to 20 years).
This provision supports businesses in managing the financial impact of large IP investments over time.
Moreover, the regime permits taxpayers to opt out of claiming these allowances in a given tax year, offering flexibility in tax planning.
Upon the disposal of an IP asset, a taxpayer must provide a detailed balance statement to determine any taxable gains or deductible amounts.
With its favorable IP Box Regime and recent legislative enhancements, Cyprus continues to cement its status as an attractive location for IP-rich companies seeking tax efficiency within the European Union.
Companies operating in high-tech and innovative industries should consider Cyprus for their IP management and development activities, benefiting from substantial tax incentives and robust legal protections.
If you have any queries about this article on Cyprus and Intellectual Property, or tax matters in Cyprus more generally, then please get in touch.