Avoiding CGT with a offshore company in a treaty country

In general terms a non resident company is effective as it is exempt from CGT.

Therefore you could use an non resident company to own UK or overseas assets and sell them free of UK tax.

The anti avoidance rules mean that there are a number of hurdles you’d need to overcome though. The two key problems are:

1) Avoiding having capital gains attributed to you as a UK resident and domiciled shareholder.

2) Establishing the company as non resident,

Establishing your offshore company in a country that has a suitable tax treaty with the UK, can be a very attractive way of avoiding these rules

Attribution of capital gains

If you are UK resident and domiciled and own more than 10% of the shares in a non resident company a proportion of the capital gains that the company realises when it sells any assets will be apportioned to you.

So if you owned 30% of the shares in a BVI company and the BVI company sold an asset which would result in a gain (calculated by the UK tax rules) of £100,000, you’d be assessed on a capital gain of £30,000.

As such if you owned all of the shares in the BVI company the full £100,000 of the gain would be apportioned to you.

This is a pretty comprehensive rule. It didn’t previously apply to non domiciliaries, but after 6 April 2008 it does (albeit in an amended form if they’re claiming the remittance basis).

There is though an exception to this rule. If instead of having a BVI company we have a company that is resident in an country with an appropriate double tax treaty with the UK the attribution rule can be disapplied.

This is confirmed in the Revenue manuals which state that:

‘You should always check whether there is a double taxation agreement between the UK and the country in which the company making the gain is resident… If the agreement does not refer to capital gains or Capital Gains Tax the (UK) charge …is unaffected. But, if the agreement provides that gains of the type realised by the non-resident company are only taxable in that company’s country of residence …the UK charge…cannot apply… ‘

Therefore if you used a company in a country with a treaty with the UK that specified the gains could just be taxed in the overseas country the UK attribution rules shouldn’t apply. There’s no point in going to a country which has a capital gains tax of its own. Two of the favourite candidates are Mauritius and Singapore. Neither of these would look to levy CGT on overseas assets.

The CGT article in the treaty with Mauritius states that immovable property in the UK (eg land & property) and assets used in a permanent establishment (eg assets used in a UK trade) could be taxed in the UK as well in Mauritius.

Therefore if the Mauritian company owned UK property which was sold at a gain, that gain could be attributed to UK resident shareholders.

However the treaty also states that ‘capital gains from the alienation of any…other property… shall be taxable only in the Contracting State of which the alienator is a resident.’

Therefore for example any gain on shares owned by the Mauritian company should be exempt from the attribution rules.

Company Residence

Note that it is important that the company is resident in Singapore or Mauritius.

In this respect the company would need to be a resident of Singapore or a resident of Mauritius for the purpose of the respective treaty. Therefore it’s essential that there is no suggestion that its place of effective management is in the UK.

We have looked at the central management and control issue in more detail in the following articles:-

Establishing the central management and control overseas

Central management and control – QC’s view

Questions HMRC ask to assess company residence  

You would usually need to ensure that there was a local board of directors and fully minuted directors’ meetings. If the company was a trading company this should be enough. If though the company was an investment company, rather than an active trading company, the door is open to the argument that it is not really the board of directors but the controlling shareholder who effectively controls the business.

If the controlling shareholder was in the UK this would then mean that the company was UK resident, and therefore taxable on the gain.

A good option here may be to give the UK shareholder shares with a majority of the value but a minority of the votes, and to give a local company, as a trustee, shares with a minority of the value but a majority of the votes. The trust in this case should not have any UK resident beneficiaries.

This may allow gains on certain assets in the Mauritian/Singapore company to be sold free of CGT without the gain being attributed to UK resident shareholders.