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A Quiet UK Budget for Asset Managers, But Other Recent Tax Changes Shouldn’t Be Forgotten

After numerous UK tax changes affecting asset managers over the past few years – not least the wholesale re-vamping of the tax treatment of carried interest and other fund participations for investment fund managers – the UK government’s budget last week (8 March 2017) was a relatively uneventful affair for those in the investment management sphere.

There were only a few new tax announcements affecting the sector. But this is against the backdrop of a number of new and complicated tax changes coming into force very soon or having just done so (e.g. restrictions on interest deductibility for corporation tax purposes, rules on hybrid mismatches, corporation tax carry forward loss relief changes and new rules on deemed domicile status for individuals who are long term UK residents or who were born in the UK) which UK companies and their owners will need to consider carefully (and probably take advice on).

The new announcements included:

  • Withholding tax on interest – treaty passport extension: The Double Tax Treaty Passport (“DTTP”) scheme is to be extended to “all types of overseas lenders and UK borrowers”. Previously this was restricted to overseas corporate lenders and UK corporate borrowers. We will need to see the detail of the proposal (to be published on 6 April 2017) to assess how useful these extensions will be, e.g. will the revised regime apply where there is a partnership borrower or even (as many have lobbied for) where there is a partnership lender? Hopefully they will extend the scheme to most UK borrowers.
  • Partnership tax consultation – proposals deferred: The response to HMRC’s consultation last year on the taxation of partnership profits was not published as promised in January 2017.  The budget documents confirm that this paper will be published in due course, together with “draft legislation to clarify and improve aspects of partnership taxation”. Although no specific timing is set out, there is a stated intention that any legislation would form part of next year’s Finance Bill. It is to be hoped that the proposals will enhance rather than detract from using UK partnerships as investment fund vehicles.
  • National insurance contributions (NICs) changes for the self-employed, including LLP members:  The proposed increase in Class 4 NICs for self-employed persons generated a lot of headlines in the mainstream press and has now reportedly been scrapped by the government. In any event, for high earning self-employed persons it would have only have had a marginal effect.

A quiet budget it may have been, but all the other recent and upcoming changes will make for a busy year from a tax perspective for asset managers.

IRS Issues Final Regulations on REIT and RIC Conversion Transactions

The U.S. Treasury Department and the Internal Revenue Service published on January 18, 2017 final regulations (the “Final Regulations”)[1] reducing from ten years to five years the recognition period for the corporate-level tax imposed on certain property dispositions by a real estate investment trust (“REIT”) or a regulated investment company (“RIC”) under Section 337(d), and otherwise generally adopting the approach set forth in prior temporary and proposed regulations.[2] The need to have a recognition period for corporate-level tax in this circumstance is related to General Utilities repeal[3] as applied for RICs and REITs, and the five-year recognition period established in the Final Regulations was indirectly mandated by the provisions of the PATH Act[4] addressing General Utilities repeal and which we have previously discussed. The Preamble to the Final Regulations states that the intention of the change is to conform the Final Regulations to the PATH Act. Continue reading the discussion for further background and context for the Final Regulations.

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BEPS: Update on Action 6 on Treaty Benefits

In our previous post published on 6 December 2016 we described the OECD’s BEPS Project in the context of the publishing of the draft Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”).

One area that the OECD has itself acknowledged requires further consideration is in relation to BEPS Action 6, the final report on which was published in October 2015, which seeks to prevent access to treaty benefits in inappropriate circumstances (“treaty shopping”).

The final report on Action 6 included various proposals designed to prevent treaty shopping, including the proposed introduction into double tax treaties of:

  • a limitation on benefits (LOB) rule that limits the availability of treaty benefits to entities that meet certain conditions
  • a general anti-abuse rule which looks at the principal purpose of the transactions or arrangements in question (the principal purpose test, or PPT),

with the OECD recommending that as a minimum standard either (i) a PPT, or (ii) a PPT with either a “simplified” or “detailed” LOB provision should be adopted.

The European Commission has expressed a general preference for the PPT rather than the LOB provisions. HMRC have indicated that the UK will not adopt the LOB.

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Proskauer Bolsters International Tax Practice with Addition of Stephen Pevsner in London

The Proskauer Tax Department is pleased to announce that Stephen Pevsner has joined as a partner in our London office.

Stephen’s practice focuses on UK and international M&A and private equity transactions, corporate reorganizations, and new business formations. Offering a broad range of corporate tax strategy experience, his clients include global corporations, investment banks, and private equity sponsors and investors. In addition to his wealth of transactional knowledge he also has substantive experience advising on the formation of private investment funds and the establishment of investment management and advisory limited partnerships.

According to Chambers UK, Stephen is a notable practitioner in the corporate tax field, praised for “his ability to master the intricacies of tax law and understand the commercial aspects of the deal”.

Please click here for Stephen’s complete biography and contact information.

Extension of FBAR Filing Deadline for Certain Filers

As noted in our January 5, 2017 client alert, FinCEN issued Notice 2016-1, which extends the filing deadline for the Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (FBAR), for certain individuals with signature or other authority over (but no financial interest in) employer-owned foreign financial accounts to April 15, 2018. Please click here for our full client alert.

BEPS: OECD Releases Multilateral Tax Treaty Convention

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Convention”) was released by the Organisation for Economic Co-operation and Development (“OECD”) on November 24, 2016. The Convention is the latest in an ongoing series of releases related to the OECD/G20 Project addressing Base Erosion and Profit Shifting (the “BEPS Project”), which is a major and continuing effort described as “aiming to realign taxation with economic substance and value creation, while preventing double taxation.”[1]  The Convention is the result of multilateral negotiation by over 100 member states (including the United States and the United Kingdom) and observers. While the Convention will not come into force at all until five countries have formally ratified the Convention, once in force the Convention will come into effect for an existing income tax treaty after both contracting parties to that treaty have signed the Convention and any other required home-country ratification processes are completed. The Convention is accompanied by a detailed explanatory statement describing its provisions. The OECD announced that a signing ceremony for the Convention will be held in June of 2017, although a list of expected signatories has not yet been released.

Continue reading for further background on the Convention and a discussion of issues relating to the Convention’s interaction with existing tax treaties, substantive highlights and timetable for implementation. A complete version of the Convention, and the explanatory statement, are linked here and also can be found on the OECD website, http://www.oecd.org. If you would like to discuss any details of the Convention or its impact on multinational enterprises, please contact any of the authors listed here or any member of the Proskauer Tax Department whom you usually consult on these matters.

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Potential for Tax Reform in 2017: Insight from Proposals of the President-Elect and Congressional Republicans

In the U.S. general election held on November 8, 2016, Donald J. Trump was elected to become the 45th President of the United States. Republicans also retained their majorities in both the U.S. House of Representatives and the U.S. Senate for the new Congress convening in January, meaning that Rep. Paul Ryan (R-WI) is likely to remain the Speaker of the House and Sen. Mitch McConnell (R-KY) is likely to remain the Majority Leader of the Senate. For the benefit of non-U.S. readers, this result means that Republicans will control of all three lawmaking bodies of the U.S. federal government, although the current rules of the Senate give Senate Democrats some limited ability to block proposals and legislation in that body.

During 2016, the President-Elect and Congressional Republicans have issued white papers outlining their respective proposals for U.S. tax reform, both of which would affect the U.S. federal taxation of individuals and businesses both domestically and internationally. It is obviously too soon to say whether, when or in what form any tax reform legislation will be advanced in the next Congress. In the ordinary course the Treasury Department would release in early 2017 the new administration’s tax proposals (the “Green Book”); the Congress could introduce a bill embodying either a partial or comprehensive tax reform proposal at any time. Below is a summary of the most important elements of both tax reform proposals.

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