Be aware of UK tax laws when inviting in overseas investors


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This article was first published in Caterer and Hotelkeeper.

Any UK hotel operator who wishes to attract overseas investment into their business has two options. They can seek to have the investment by way of straight equity, or a mixture of equity and debt.

If the overseas investment is by way of equity, the overseas investor should not be subject to UK taxes in relation to the dividends arising from his equity holding or any capital gains on disposal of the investment. Though they will need to consider carefully the tax consequences of the jurisdiction in which they are resident.

If the investment is by way of debt, the UK hotel operator must provide satisfactory security to the overseas lender. This can throw up considerable problems if the hotel operator’s business consists, as is often the case, of leasehold properties. In addition, the investor may, subject to double tax treaty relief (see below), be liable to UK income tax on interest paid.

The law

Generally, non-residents are not liable for UK taxation on dividend income; or capital gains made on the disposal of their shares. Hence, investing by way of an equity investment appears attractive.

However, the investor will need to take into account the taxation of dividends and gains in his home jurisdiction; that a purchase of shares may result in a capital gains tax liability for the existing shareholder and a liability to stamp duty for the investor; and that interest (but not dividends) should be deductible in computing the profits of the UK hotel business and so a debt investment may result in the hotel business being taxed more efficiently.

As mentioned above, interest paid on a loan may be subject to UK income tax at 20%, although the investor may be exempt from UK tax under a double tax treaty concluded between the UK and the jurisdiction in which the investor is tax resident.

Investors may also be liable to tax on the income in their home jurisdiction although they may receive a credit against that taxation for any UK taxation payable on the interest.

Expert advice

The key issues to be considered in connection with overseas investments are:

  • Tax structuring. The structure of the overseas investment will need to be carefully designed, taking into account the taxation consequences of both equity and debt for the investor, the existing shareholders and the hotel business in determining the most favourable taxation result.
  • If the overseas investment is by way of a loan, thorough due diligence must be effected on the lender to ensure that the status, jurisdiction and worth of the overseas lender will be satisfactory if security is to be provided to the overseas lender by way of charge over leasehold properties.
  • A thorough review of the hotel operator’s leases is required to ascertain whether changing the leases is permitted or if the landlord’s consent is required.

With regard to an investment by way of loan, a landlord will want to know that the lender has the financial ability to perform the terms of the lease and will therefore need to see up-to-date financial information.

A landlord will need to know how it would be able to enforce any action in the future against the lender were the lender to take over the lease pursuant to the security. This may involve a legal opinion from lawyers within the overseas investor’s jurisdiction to satisfy the landlord’s solicitors.

Checklist

Think carefully as to whether an equity investment is appropriate for an overseas investor. An investor that operates out of a so called “tax haven” may not wish to invest in a UK company, thus bringing them within the UK tax net. In addition, an overseas investor wishing to lend by way of security should:

  • Read through the lease if it is to be provided by way of security to check that the lease can be charged and if not, obtain the prior consent of the landlord
  • Take steps to undertake due diligence on the lender to ensure that the lender will be financially capable of supporting the lease but, more importantly, to ascertain whether the landlord would be able to enforce any rights against the lender in the lender’s jurisdiction.

Beware

Providing security may be difficult or even impossible in the case of overseas lenders.

Overseas lenders may be unaware and/or ignorant of the tax implications of an investment in the UK.

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