Finance and Tax Blog for individuals and companies

Given current uncertainty it is important for investment managers and financial institutions to anticipate the impact of a eurozone event, such as the exit of a country from the euro.

European financial markets have experienced volatility based on concerns regarding rising government debt levels, credit rating downgrades and possible defaults on or restructuring of government debt of various countries, most notably Greece and now possibly Spain where Spanish Bond yields are touching a high watermark of 7%. This turmoil has fed speculation that one or more EU Member States in the euro might choose or be forced to return to a national currency, also raising questions about whether the euro can survive as a single currency following a departure of one or more countries from the currency mechanism.

It potentially affects shareholder behaviour (increase in redemptions) and the valuation of underlying euro denominated assets. In particular where there is an accounting period end: interim or final discussions may need to take place with the Fund’s auditors about contingency provisioning.

Managing this risk includes short and medium term steps to reduce risk or exposure, as well as the action needed on the occurrence of an actual eurozone exit. They should now implement financial strategies to offset potential downside to the underlying portfolio and operational steps needed in response to such an outcome.

The above problems coupled with the implementation of new regulatory initiatives e.g. bank capital adequacy rules in response to the financial crisis of 2007-8 may, however, create opportunities for buyers and sellers of financial enterprises.

Tony Stitt Associates would be happy to advise on these issues including what managers of private funds should do to ensure they can react to a eurozone crisis with maximum flexibility while complying with applicable regulatory requirements.

There is much media speculation about either the end or break up of the eurozone currency. What if this was to happen? Many people may be poised to move away from their country of origin to avoid adverse tax consequences and protect their wealth and assets to a safe harbour environment like the UK or Germany. If one moves to the UK there are many favourable tax breaks for non-UK domiciled but resident individuals. Also, one retains access to a relevant double taxation agreement to avoid any double taxation of income or gains.

From 6 April 1999 such an individual only pays UK tax on income from a UK source such as earnings or other income from savings including gains remitted to the UK. However, there is a so-called elective system here to achieve this outcome. The alternative is that an individual pays tax on worldwide income regardless of such income is brought into a UK bank account.

There is even a more favourable position for individuals who only intend to be here for short term break from their country of origin. One only pays UK tax on the portion of income attributable to duties performed in the UK.

A euro zone taxpayer can buy property in the UK for personal residence and under our rules avoid UK capital gains tax on disposal of such property. Interest rates are low in the UK but the Government to date retains a market “triple A” rating alongside Germany.

The UK has favourable tax rules to encourage a company with many operating subsidiaries in overseas counties to centre their headquarters here. Such a company is entitled to so-called substantial holdings exemption on gains on the disposal of underlying subsidiaries. Needless to say the UK as part of the EU has favourable access and a complementary tax system to European markets. An overseas company can structure its tax affairs in the UK to minimise the impact of overseas tax.

The recent tax court rulings on overseas dividends mean that repatriation to the UK of such income avoids further UK tax.

The European Commission (EC) has published explanatory notes with results of further analysis and clarification on how the FTT would work in practice.

These notes consist of analysis into the tax contribution of the financial sector, residence principle and territoriality, relocation, revenue estimations, macroeconomic impacts, tax collection and pension funds.

The EC believes through the FTT, the financial sector will properly participate in the cost of re-building Europe’s economies and supporting public finances. It says that the tax will generate significant revenues and help to ensure greater stability of financial markets, without posing undue risk to EU competitiveness.

Proposals for a Europe-wide FTT have been rejected by the UK Government who say that the UK would only participate if the FTT was imposed globally.

Additionally, the UK House of Lords EU Committee has roundly criticised EC plans to use the FTT to fund the 2014-2020 EU Budget. The Committee says the EC has failed to make a case for the tax and suggests if it were introduced the UK could account for 71% of the revenue it would raise.

On May 10th the European Court of Justice (ECJ) delivered a favourable ruling in respect of investment funds on French withholding tax. The case against France was brought by German, Spanish Belgian and US investors. They argued that the French rules which taxed dividends paid on French equities to non resident investment funds but exempted when paid to French funds was contrary to EU law. Funds invested in French equities should now consider reclaiming French withholding tax paid from 1 January 2009. This could have implications for other markets in the EU and investors should consider making protective claims

The ECJ ruling confirms:

1. The French rules are a restriction on free movement of capital between EU member states and third countries; and
2. There is no justification for France applying such discrimination in either an EU or third country context;

Informed sources comment that this will be a massive hit to the French economy as claims for refunds of French withholding tax is estimated to be in excess of euros 4 billion.

The European Commission has launched a consultation on problems caused by withholding taxes applied to dividends paid by one country to a shareholder in another country.

On 17 March the European Commission published its proposals for a common European system for calculating the tax base of businesses operating in all 27 member countries of the EU. The EC says that the aim is to significantly reduce the administrative burden, compliance costs and uncertainties facing EU businesses.

The proposed common consolidated corporate tax base (CCCTB) would mean that companies would benefit from a one stop shop system for filing their tax returns and would be able to consolidate all the profits and losses they incur across the EU. Member states would maintain their full sovereign right to set their own tax rates.

HM Treasury and the FSA issued on 22nd December 2010 a consultation on implementing the EU UCITS IV directive on various regulatory, product changes to funds including the introduction of master feeder fund structures. To maintain the competitiveness of the UK Funds industry, the Government have now announced that they will now address some of the tax implications of implementing UCITS IV This includes legislation enabling foreign UCITS funds to be treated as non-UK resident regardless of a UK fund manager’s activities. Further, consultation will begin in June 2011 on the establishment of a new tax transparent fund in the UK by 2012.