It was back in the 1950s that the original double tax arrangements (‘DTAs’) between the UK and the Crown Dependencies came into force, and they have largely remained the same ever since.
On Monday of this week, government representatives from Jersey, Guernsey and the Isle of Man signed the new agreements which significantly upgrade and modernise the Crown Dependencies’ DTAs with the UK. These DTAs comply with new international tax standards, being broadly in line with the OECD’s Model Tax Convention, and include various of the Base Erosion and Profit Shifting (’BEPS’) measures.
Deputy St Pier said: "While the previous Double Taxation Agreement with the UK has served both sides well for more than 60 years, it was important that a new agreement was negotiated which reflected the changes in international taxation that have occurred since the 1950s, and the island’s commitment to meeting international tax standards including the most recent BEPS standards, set by the OECD.”
"Given how close our trading relationship with the UK is, ensuring that individuals and companies understand the way that they will be taxed by each government is hugely important."
Each of the three new DTAs contains broadly the same provisions, having been concluded through extensive negotiations with the UK government in a collaborative effort with representatives from each of the Crown Dependencies and consultation with tax professionals and industry bodies.
Some of the most notable and significant changes to the DTAs are:
- A residence tie breaker for individuals which is clear and straightforward to apply.
- A residence tie breaker for companies to be determined by the mutual agreement of the two tax authorities having regard to where the company is effectively managed, incorporated and other factors, almost certainly around where the senior decisions are made.
- The inclusion of a non-discrimination clause. This clause is already present in the majority of the UK’s DTAs, and will prevent the application of a range of restrictive measures within the UK tax legislation, such as the late paid interest rules and the application of transfer pricing for Small or Medium-Sized Enterprises (SMEs), whilst affording the benefits of measures such as withholding tax exemptions for qualifying private placements and the dividend exemption for SMEs. This aspect of the new DTAs will undoubtedly put the Crown Dependencies on a much fairer and equal footing with competitor jurisdictions including other international finance centres.
- The inclusion of interest and royalty withholding tax reliefs, broadly in line with the reliefs the UK has incorporated into some of its other recently concluded DTAs. Full relief will apply in a broad range of situations, including for individuals and pension schemes, banks and other lenders, and companies 75% or more beneficially owned (directly or indirectly) by residents of the same jurisdiction, as well as listed entities meeting certain requirements. The interest withholding tax reliefs may significantly increase the attractiveness of the Crown Dependencies as a place to lend into the UK, including by way of qualifying private placements. The Double Tax Treaty Passport Scheme will also be available to Crown Dependency lenders to make the process of claiming withholding tax relief administratively easier.
- Capital gains tax relief from the sale of shares in ‘land rich’ entities, where there is substantial and regular trading of the shares on a recognised stock exchange (such as The International Stock Exchange). This may go some way to alleviate the impact felt by the Crown Dependencies of the UK’s ongoing reform of the taxation of UK property. In March 2016 the DTAs were updated with immediate effect to close the perceived abuse of relieving provisions within those DTAs for trading structures. HMRC is now seeking to bring all UK property owning companies into the charge to capital gains tax on all types of UK property gains from April 2019, including where such gain arises from the sale of shares rather than on a direct asset sale. While the latter has been preserved, it would seem that the new DTAs will afford certain exemptions for the former which are not currently envisaged within the ongoing consultation into the introduction of the UK domestic rules, although the impact is likely to be limited in practice.
Whilst certain treaty benefits will become available within the terms of the new DTAs, the Crown Dependencies will also now be required to assist in the collection of tax for the UK Exchequer. This has been a contentious point over the years with the Crown Dependencies being some of the few jurisdictions not to include this clause in their DTAs or other arrangements with the UK.
The DTAs include the ‘principal purpose test’ taken from the BEPS treaty measures, meaning that benefits under each DTA may be denied in the case where it is determined that the purpose or one of the main purposes of an arrangement or transaction was to secure those benefits. This test is generally being adopted by the UK and Crown Dependencies across their treaty networks, in line with the majority of other jurisdictions and is intended to counter so-called “treaty shopping”.
There are also Mutual Agreement Procedures where a taxpayer considers that the actions of one or both Territories gives rise to a taxation outcome which is not in accordance with the DTA. The tax authorities will try to resolve the matter through mutual agreement and consultation. Where such agreement is not reached, the taxpayer may request that the matter is submitted for arbitration, the outcome of which would be binding on both Territories.
The new DTAs will come into force once both territories have notified the other in writing of the completion of the procedures required under their local law. It is anticipated that they will become effective as follows:
- In Guernsey and the UK, in respect of withholding taxes, for amounts paid or credited, on or after the first day of the second month next following the date on which the Agreement enters into force.
- In Guernsey, in respect of income tax, for any year of charge beginning on or after 1 January next following the entry into force date.
- In the UK, in respect of income tax and capital gains, for any year of assessment beginning on or after 6 April next following the entry into force date. In respect of corporation tax, for any financial year beginning on or after 1 April next following the entry into force date.
These DTAs have been long anticipated and represent a further example of how the Crown Dependencies are complying with international standards. They contain significant anti-abuse provisions as would be expected but there are some welcome provisions around areas such as withholding tax, in particular for locally owned companies.
If you would like to discuss any aspect of the above, please do not hesitate to contact one of the Deloitte team below.