The Luxembourg Tax Loophole: Deadline Friday 16th February 2018!
There is a country that taxes British residents, and British companies, when they make money on selling commercial real estate, but doesn’t tax anyone else. That country is the UK. And as the Paradise Papers showed this loophole is widely exploited, with almost every large building in London held by an offshore holding company. Not only is that unfair to British businesses who have to compete with these companies, it costs us billions in lost tax revenue each year.
Last year we campaigned to close the loophole - and we won! From 2019, The Government has agreed to make sure offshore companies holding UK commercial real estate will be fully taxed. But there is a problem: the “Luxembourg Loophole”. It will be easy to avoid the new rules by using “brass plate” companies in Luxembourg. Despite highlighting this to the Government, they have no plans to change this and so prevent companies continuing to avoid this tax. It could be the difference between raising £5bn and £0.5bn a year for our public services.
We need to keep up the pressure on the Government to do better. Please send the below response to their consultation to ask them to act by Friday 16th February 2018.
Click here NRCG.Consultation@hmrc.gsi.gov.uk to send an email, and then copy and paste the text below into the email with the title 'consultation on tax gains by non residents'.
I am responding to the 22 November 2017 consultation on the tax treatment of gains accruing on disposals of interests in UK immovable property by non-residents.
I welcome this proposal, which closes a longstanding loophole that has been used to avoid many billions of pounds of tax. It also brings the UK into line with the US, Australia, France, Germany and almost every other OECD member. However I am concerned that the proposals contain a significant loophole. Please confirm my response to the following question has been received and will be included in the consultation responses.
Question 8: Do you consider that the rules for indirect transactions are fair and effective?
Unfortunately, in one important area, the rules as proposed are neither fair nor effective.
The consultation document identifies that some tax treaties do not give the UK the right to tax disposals of shares in UK property-rich companies. This includes the Luxembourg-UK double taxation treaty, which is very significant given the number of UK property rich companies that are held through Luxembourg holding structures. Under the current proposal, indirect disposals out of these structures will avoid all UK tax. This seems arbitrary, distortive and unfair.
It is reasonable to assume this loophole will result in the revenues from this measure being considerably less than they would otherwise be - and that this will be exacerbated by increased use of Luxembourg holding companies.
Consideration should be given to potential solutions. These could include one or more of:
The Government announcing that it intends to renegotiate and amend relevant double tax treaties, and that these amendments will not “grandfather” pre-existing structures. Whilst it may take several years for such negotiations to be completed, and amended treaties to be ratified, the mere fact of such an announcement would deter many companies from using such Luxembourg structures.
The indirect disposal rules could include a provision similar to section 5A Corporation Tax Act 2009, permitting adjustments to be made where a tax advantage is being obtained by a tax treaty, but that tax advantage is contrary to the object and purposes of the treaty. Any structure that facilitates double non-taxation of gains is contrary to the objects and purposes of a tax treaty.
Indirect disposals could be taxed under a new tax (e.g. “offshore property gains tax”) - existing UK tax treaties would not provide relief against the new tax.