The International Tax Round Summer 2024

Editor’s message

As summer in the UK makes a feeble attempt to kickstart, it seems appropriate to cast my mind back to the last stream of solid sunshine I had. My trip to Mauritius, with budget announcements hanging fresh in the air, came at a very interesting time.

Mark Twain once wrote that “Mauritius was made first and then heaven, heaven being copied after Mauritius”. I can understand his sentiment and even more so now after admiring the tiny island’s beauty, I felt humbled by the wonderful people. Doing business felt like being with family and putting friendly faces to names I’ve known a long time felt like a real treat. Between meetings and networking, I managed to squeeze in some rum tasting, with pineapple and chilli topping on my list of favourites. The ease of exploring certainly adds to the appeal of a return.

Since being back and connecting with various clients, there remains a mixed feeling around the new non-domicile changes and with the upcoming elections in July, there’s a lot to be seen.

If Labour is your choice, victory may feel tangible but there may not be a great deal to get excited about. Labour have already indicated that some of the proposed changes on the new regime announced in the Spring Budget will not stick – all excluded property status for trusts would be lost, bringing any such trusts within the full scope of UK Inheritance Tax. Whichever party proves victorious is poised to inherit an economy that will demand tough choices – it’s fair to wonder whether things will get a lot worse.

I now gear up for a quick turnaround in travel as I wrap up the XLNC conference in Dusseldorf. As always, it has been energising and informative, catching up with peers and making new connections.

I’ll soon be preparing for my return to Kenya for the first time in 10 years, the place I called home as a child. Much needed quality time with my parents awaits and I am seriously considering following my mother’s advice to divert all calls and emails to her, although she may quickly regret that.

As I prepare to turn on my out of office, I hope you enjoy Summer and the read!

• General Election 2024: A further shake up for UK taxation?
• Locker room tax! German locker considered to be a permanent establishment
• Distributions from Jersey company’s share premium account considered to be dividends
• Dreaming of living in Italy?
• Rules of origin for goods moving to/from the UK
• Flat tax regime for new Italian residents by Abaco

General Election 2024: A further shake up for UK taxation?

With some commentators drawing parallels to the 1993 Canadian federal election as Keir Starmer’s Labour approach a 30-point lead in the polls, one can only wonder what changes Labour will bring should they succeed this July.

One of the recent major shake-ups in UK International Taxation was Chancellor Jeremy Hunt’s Spring budget, which brought NI cuts but most importantly: reform to the treatment of non-domiciled individuals that reside in the UK. The sweeping changes were seen by many as a policy pinched from Labour, but what have Labour said about these changes?

Labour is largely supportive of the changes, but have said they would intend to make the following adjustments:

• Include all foreign assets held in trust with UK IHT regardless of when they were settled.
• Not include the 50% relief in the first year of the new changes.
• Look for a way to incentivise investment during the initial four-year period.

It looks to be a pivotal election in recent UK history with some polls predicting double digits seats for the Conservatives, it will be interesting to see if Labour do implement what they have pledged.

For more information, read our article: Investing and politics – What will the UK General Election mean for investment markets?

Locker room tax! German locker considered to be a permanent establishment

The Bundesfinanzhof (Federal Fiscal Court of Germany) (BFH) has deemed the locker of a British contractor in Germany as a permanent establishment (PE) in Germany, meaning many overseas companies with contractors in Germany will need to review their contracts.

In this case, whilst the engineer kept apartments in both Germany and UK, the engineer was deemed to be treaty resident in the UK due to his centre of vital economic interests being in the UK. The client however gave the contractor the sole use of a locker close to the hangarat to store tools on airport grounds. The view was that a simple right to use to use a room did not per se establish the existence of a fixed base but rather additional circumstances that indicate a connection between the business and the place where the business activity was being carried out is important. The BFH found that the locker met all requirements for a PE in German law as well as Article 5 (Permanent Establishment) of the Germany-UK tax treaty.

The result of this decision meant that the client had to withhold tax at source from the payments made to the contractor. Indeed subordinated activities could give rise to a fixed place of business!

Distributions from Jersey company’s share premium account considered to be dividends

In a case decided in the Upper Tribunal (UT), distributions received by a UK resident shareholder from a Jersey incorporated, and Swiss domiciled company were considered to be dividends despite them being debited from share premium.

Jersey law was amended in 2008 to allow free distribution of share premium. Following a corporate restructuring of Glencore International PLC, the taxpayer received distributions from the company over a number of years which were treated by the taxpayer as capital in nature.

The appeal set out to find if the distributions were dividends and whether the distributions were ‘dividends of a capital nature’. The upper tribunal rejected the appeal and deemed them to be dividends that should be subject to income tax. The correct test of whether there has been a reduction of capital was to determine whether the capital of the company remained intact post distribution. This case highlights the need for proper examination of the differences of similar though different tax laws across jurisdictions.

Dreaming of living in Italy?

Following suit from other countries, Italy has announced a new Visa for digital nomads that will allow foreigners to work remotely from Italy. Since the introduction of remote working worldwide following the pandemic, many workers no longer need to be in the office and businesses can save on overheads. This means workers can work from anywhere in the world and the introduction of Visas such as these allow people to work in different countries whilst the nation’s government collects taxes on the income.

To qualify for the Visa there are several requirements such as personal health insurance, a salary above EUR 28,000, a university degree and several others. This long list of requirements is however countered by generous tax benefits – there are two tax regimes that can apply:

Regime Forfettario – this is a flat 5% rate on a percentage of gross billings for the self-employed for five years, or

Impatriates regime – a 50% exemption on earned income.

With remote work becoming more commonplace and many western countries coming to grips with an aging population, it will be interesting to see which other countries introduce similar Visas to increase their tax revenue.

Rules of origin for goods moving to/from the UK.

Duty is applied to certain goods when being imported from outside of the UK. There are special rules when goods are sent from the UK to the EU and vice versa. Generally, duty will not apply unless the goods originated outside of the EU. It is therefore important that businesses understand these rules and in particular where the goods originated from. This is called Rules of Origin and can help a business to minimise duty being charged.

We have had a number of questions on the Rules of Origin in the last few months. This may be a coincidence or it may be that the UK and EU are applying the rules more strictly.

We have a few tips on duty and Rules of Origin:

• If all the materials used to make their products are from the UK/EU or are ‘sufficiently worked or process’, then it is unlikely there will be any duty to pay on their goods when they enter the EU from the UK or vice versa.
• Goods sent to the UK/EU are required to have a ‘Country of Origin’. A business will need to enter the country of origin on any export documents and, the relevant customs’ authority may request evidence of this.
• Any duty relief on goods form outside the UK/EU can only be had once, in either UK or EU, so it is advisable to give some consideration to the way in which you import your goods from outside the UK/EU if they will then be sold elsewhere in the UK/EU; i.e. only import into the UK for UK markets and the UK for UK markets.

For further information on the rules of origin, contact our VAT team.

VOICES FROM XLNC – OUR INTERNATIONAL ALLIANCE

Flat tax regime for new Italian residents

Italy offers a special tax program for new residents called the Special Tax Regime. If you qualify, you can pay a flat €100,000 annual tax instead of taxes on your foreign income. This applies to things like rent from foreign property, dividends from foreign stocks, and most capital gains. There are some exceptions, like if you sell certain high-value investments within five years of moving to Italy.

To qualify, you must have not lived in Italy for at least nine out of the past 10 years. You can also extend this benefit to your family members for an additional €25,000 per person. This program lasts for 15 years.

There are other benefits besides income tax. You don’t have to report your foreign assets and you are exempt from wealth taxes on things like foreign property and bank accounts. You are also exempt from inheritance tax on foreign assets.

Read more here or contact alessandro.stradi@studio-abaco.com.