The revised Israel-UK Protocol is now in force in the UK for taxes withheld at source and Corporation Tax. The protocol will take effect in the UK from 6 April 2020 for Income Tax and Capital Gains Tax. In Israel, the protocol is currently in force for taxes withheld at source and Income Tax.
The agreed protocol to the Israel-UK double taxation treaty was signed on 17 January 2019. It was warmly welcomed as an update to the original treaty which was signed in 1962 and last amended in 1970.
More favorable tax treatments
The protocol provides more favorable tax treatments for Israeli investors into the UK and UK investors into Israel. For example, Article VI of the protocol confirms that the maximum rate of withholding tax on dividends will be reduced from 15% to 5% of the gross dividend paid to a shareholder in the other country. This is subject to the shareholder directly owning at least 10% of the share capital and the beneficial owner of the dividend being a company. The UK currently does not withhold tax from dividends paid by domestic companies and so this change rewards UK residents investing in Israeli companies.
Article XI addresses the issue of pension and other similar remuneration being ‘paid to an individual who is resident of one of the territories, shall be taxable only in that territory’. We note that the protocol does not include a ‘subject to tax’ clause. This change will be beneficial to ‘olim’ (new immigrants to Israel) and ‘returning residents’ who enjoy the 10-year tax exemptions and receive a UK pension. As always, we recommend that professional advice is sought - in particular by ‘olim’ or ‘returning residents’ and non-UK domiciled individuals paying tax on the remittance basis.
These favorable tax treatments are in high demand given the ever-strengthening trade and business relationship between the UK and Israel. Amid all the confusion of Brexit, Israel strategically was the first country to sign a bilateral trade agreement with the UK. Investment into Israel continues to soar as Israel continues to be among the global leaders in hi-tech. Bank Leumi recently published a report stating that the bilateral trade between the UK hit a record-breaking £8 billion in 2018.
UK beneficial ownership register
Despite the recent political and economic uncertainties in the UK, the UK property market is an attractive market for foreign investors. In particular, Israelis are investing in the UK property market and enjoying the benefits of the weak sterling, the strong shekel and the lower market values of properties.
The UK tax rules for UK properties held by foreign owners have changed in recent years. There are also potential UK inheritance tax issues of which foreign owners need to be aware. The new UK tax rules also impact on UK properties held by UK or foreign structures.
In addition to the UK tax rules themselves, overseas entities holding UK properties ought to be aware of the new beneficial ownership register coming into force in 2021. This is similar to the existing register of people with significant control ("PSC register") which identifies the beneficial ownership of UK companies. This has been in place since June 2016 and the information is readily available at Companies House. Foreign entities were outside the scope of this and so the beneficial owners of UK properties held by foreign companies benefited from the confidentiality. This will change post 2021 and the beneficial owners of the foreign companies holding UK properties will become public information.
Existing owners will have a limited time to comply so that the scope to transfer ownership before the reporting regime is in place will be limited. Any new purchases or sales of UK property by foreign entities will require the beneficial ownership to be registered with Companies House. Non-compliance will result in monetary penalties and potential criminal sanctions.
This initiative was supported by Sadiq Khan, the Mayor of London. Interestingly, research suggests that 44% of all UK properties owned by foreign entities are located in London. HMRC is also pursuing non-UK resident landlords who are not registered under the UK’s Non-Resident Landlord Scheme ("NRL"). Curiously, HMRC is writing letters to the tenants themselves and querying the tax status of their landlord and requesting information in relation to the property and its ownership.
Strengthening trade relationship
The purpose of the beneficial ownership register is to promote transparency of ownership and to combat tax evasion. The Financial Action Task Force (FATF) is an intergovernmental body which sets standards for tackling money laundering and terrorist financing. The FATF promotes public databases of beneficial ownerships to identify the ultimate owners of entities (i.e. companies, foundations) to boost transparency. The FATF is primarily targeting ‘shell companies’ and specifically those formed with no real substance or purpose. Shell companies are often used for the purposes of concealment or money laundering and so transparency is key to combat this. That being said, of course there are legitimate reasons for assets to be held via companies or other structures.
The protocol in force is another positive development which will strengthen the business and trade relationship between Israel and the UK. We expect to see further Israeli investment into the UK (for example, property investment) and UK investment into Israel (for example, in hi-tech) in 2020.
Claire Shelemay, BFP FCA, is the founder and CEO of CrownStone Consulting Ltd., a UK tax boutique in Tel Aviv.
Published by Globes, Israel business news - en.globes.co.il - on January 16, 2020
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