Diverted profits tax (DPT) was first announced in the chancellor’s Autumn Statement on 3 December 2014, hastily becoming law on 26 March this year.
HMRC has provided interim guidance, but there are still many uncertainties.
The legislation was not primarily aimed at real estate transactions, but HMRC now says that DPT does apply to UK property transactions. However, neither the legislation nor the guidance really helps taxpayers understand the full scope of what types of real estate transactions will be caught.
DPT is charged at a rate of 25% on relevant profits from land transactions after 1 April 2015. It applies to existing and new structures. Although not explicit, it is considered that DPT is intended to apply primarily to trading transactions (that is, where UK real estate is bought to be sold at a profit, or when UK real estate is developed to be sold), rather than to investment transactions.
The legislation targets two areas. First, a non-UK person may have an arrangement with another person that is intended to prevent the non-UK person from having a UK permanent establishment (PE). Second, a person that is subject to UK corporation tax may have an arrangement with a connected person outside the UK, with the arrangement having the effect of reducing UK taxable profits. The rules apply where there is insufficient “economic substance” in the arrangements.
Although there are some important exemptions, for example, for SME companies, and where the agent in the UK (in the case of avoided PEs) is unconnected, on the basis of current guidance, there may be a particular risk for several common real estate scenarios.
If a structure is within DPT, it may make sense in certain cases to ensure that the relevant property interest is held by a UK taxpayer. In other cases, it may make sense to boost the substance of the offshore structure or ensure that activities within the UK are carried out by independent agents rather than employees or related parties.
The European Commission is currently considering DPT and its compatibility with EU law, so it is possible some changes may be made. In addition, if the BEPS (Base Erosion Profit Sharing) project results in an agreed international solution whereby each jurisdiction would receive its “fair share of tax”, DPT may be quickly confined to the history books. But until that time it is a real threat to some offshore structures.
Richard Woolich is head of UK tax at DLA Piper
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