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10 | Investment and Tax Clinic
We proposed a Guernsey fund with a UK how the collection could be transferred in a by his UK employer to their Paris office. In
limited company to act as the investment tax efficient manner to her children who were addition to his employment income and bonus
manager. We could also have used a UK LLP resident in the UK. arrangements he sought clarity on how his
but our client wanted the ability to ‘pool’ profits We proposed that, prior to transferring the carried interest in the business would be taxed
in the UK company. art to her children, the matriarch dispose of her and where. Our client was born in the UK but
The display of art created a significant area of shares in the non-Russian art holding entity by his parents were Swedish and Brazilian and as
concern for the fund. Based on existing way of gift to a common law trust established such he had claim to non-domiciled status.
contractual arrangements, the fund could be on the Isle of Man. The trustees of the trust This case highlighted the difficulty of
exposed to tax in the local high tax jurisdictions would be the matriarch’s children and any international secondments and maintaining a
(principally the UK and US). We proposed future progeny. This transfer of the foreign beneficial tax status where there is a significant
restructuring the contracts and ensuring an shares to the trust could, under the laws of the overlap between competing rules. We focussed
independent third party would take possession foreign holding company, be achieved in a tax on his domicile status and explained the case law
of the art to shelter the fund from any potential free manner. and tax revenue practice found in the new
foreign tax exposure. This restructuring step ensured that any HMR&C 6 publication. The primary difficulty
In addition, we ensured the structure future income and gains would only be liable to for our client was that, despite his insistence that
al
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lowed: Russian tax to the extent the matriarch took a his fact situation was simple, the residency rules
the ability to repatriate profits from the benefit from the trust. In addition, due to the in the UK and France operated such that he was
underlying subsidiaries and fund vehicle with current scope and application of the UK non- considered to be resident for tax purposes in
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minimum tax leakage; and domicile rules, the matriarch’s children could both jurisdictions. This finding was
sufficient flexibility to create tax subsequently benefit from the art (provided compounded by our review of the tie-breaker
enhancements for the individual investors on they have elected to be taxable under the and employment articles of the France/UK
any eventual exit. remittance basis and the art is not brought to double tax treaty (current and proposed).
As with most onshore/offshore arrangements, the UK) without being subject to UK taxation. On balance, and considering our client
we also highlighted the importance of The planning took into account the relevant wanted to maintain his UK tax residency, we
maintaining the established control and Russian anti-avoidance provisions and utilised concluded he had a reasonably arguable position
management mechanisms of the fund. This the often overlooked, but extremely beneficial that he would continue to be considered a UK
element is critical to the success of any tax treatment of common-law trusts for Russian tax resident. On that basis, we then had to
international tax planning arrangement. clients. consider the ‘employment related securities
provisions’ found in the UK tax code that would
A UK family with an extensive property A South African resident engaged us to govern the treatment of his carried interest.
portfolio sought UK inheritance tax advice undertake a detailed review of a historical Given the sums involved, it was imperative that,
after the death of the patriarch in whose name holding and trading structure established prior post exercise, the units would, at worst, attract
the assets were held. The mother had inherited to his immigration from Germany. The 18% capital gains tax. We proposed a structure
the entire portfolio free from tax but, with European holding structure had evolved that would allow the carried interest to be
ailing health, the family were concerned that organically over 40 years and was engaged in maintained offshore with a resulting tax deferral
40% of the value of the estate would be lost on commercial activities in Southern and Western for our client.
her death. We were asked to consider ways in Africa.
which the portfolio could be restructured to Our client was concerned that his $40m A European property developer engaged us
mitigate the tax charge. investment would be exposed to tax, interest and to provide advice on how they should structure
The scope of UK inheritance tax is broad and penalties as no filing position had previously a Spanish property development. Our remit
planning needs to be undertaken with care. been adopted in South Africa. We undertook a was to mitigate Spanish tax on the
However, our client allowed us a large degree of detailed review of each transaction that led to development profits and to allow UK pension
scope to restructure the existing arrangements. the formation of the holding and operating investors to invest without jeopardising the
The first consideration was that on the death of structure and tracked these developments with exempt status of their pension arrangements.
the patriarch, the assets passed to his wife under the various legislative changes in South African Our client wanted a straightforward structure
the spousal exemption. However, this transfer tax law over 40 years. that could be easily explained (and recognisable)
did not allow uplift in base cost of the assets In particular, we had to consider the 2001 to investors. We proposed a UK limited
that normally occurs on death. We proposed introduction of worldwide taxation in South partnership (‘LP’) structure that included an
transferring the property portfolio into a Africa and the potential exposures to estate tax, exempt property unit trust (EPUT) into which
limited liability structure in order to defer a capital gains tax and donations tax. In addition, UK pension investors would enter the
crystallisation of the latent capital gain in the any planning or reporting obligation would transaction. The fund vehicle itself would be a
portfolio. need to account for all relevant exchange control Luxembourg holding company (established by
The portfolio could then be partially provisions and offshore trust reporting rules. the LP) that would hold the shares in the
restructured to take into account the significant We concluded that our client had a South Spanish development company. This structure
rent roll and reduce the impact of the 50% African reporting obligation but that the would allow a sale of the development company
income tax from 2010 through internal debt potential latent tax liabilities could be or distribution of its profits with minimal
funding arrangements. The restructuring successfully mitigated. We proposed Spanish taxation.
utilised the available domestic exemptions restructuring the top holding entity to make the In addition, we proposed the use of a Dutch
and allowed our client sufficient structural ownership (and control) structure clear, removed finance company (as a sister company of the
flexibility to mitigate additional transfers of the a latent estate liability through the use of a non- Spanish company) to provide finance to the
portfolio. South African hybrid entity/quasi-trust and Spanish development company. The Dutch and
restructured the existing financing arrangements. Spanish companies would operate as a silent
A Moscow based matriarch with a partnership arrangement. This created an
substantial art collection (owned by a non- A UK tax resident individual asked us to extremely tax efficient structure that increased
Russian company) engaged us to advise on advise on his tax position after being seconded the internal rate of return for the investors.
June 2009 Investment International www.investmentinternational.com
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