United Kingdom: Navigating the tax issues for a multi-jurisdiction crypto-business

Background

Ecovis Wingrave Yeats (London) has recently engaged with a company which is raising capital through an initial coin offering (ICO) which it will then invest in a basket of established and emerging cryptocurrencies with masternode infrastructure. The shareholders and founders are all UK residents.

Advice has been sought on the tax and commercial structuring aspects of the entity’s operations, which involve a UK company as well as an operating entity in Malta. Ecovis Wingrave Yeats have partnered with a specialist cryptocurrency boutique which has provided accounting, commercial, banking and regulatory advice to the client including cases where the non-UK entity should be incorporated.

Tax issues arising

Tax structure

• Analysis of the proposed structure which involves a double tier Maltese trading company under a Maltese holding company, both of which fall under a UK operating entity (all of them limited companies).
• We have been looking into the basis on which tax would be paid by the companies in Malta, the headline rates of tax involved and how the Maltese tax refund system works so that our client can achieve a low rate of tax at corporate level (effective 5% corporate tax).
• How funds can be repatriated from Malta to the UK by dividend payments factoring in withholding tax implications and whether such receipts should be tax free in the UK (and the basis for exemption).
• Explaining the importance and impact of transfer pricing between the UK and Malta.
• Advising on issues surrounding central management and control and the practical steps that should be taken to ensure that each entity is a tax resident only in its jurisdiction of incorporation.
• Assessing the potential application of the controlled foreign companies (“CFC”) regime to the profits generated and taxed in Malta to determine the overall tax position of the proposed group.
• Looking into the UK tax implications of the banking arrangements that the group enters into.

Considerations for Investors

We have been asked to look into the trading status of the UK company and the wider group by seeking agreement with HMRC (the British revenue and customs authority) via a non-statutory clearance. This would give the shareholders of the UK company assurance that they will be able to take advantage of beneficial rates of tax on a future exit from the business by relying on entrepreneurs’ relief (currently 10% tax on capital gains).

The taxation of cryptocurrencies is still being thought through by HMRC which has issued a Revenue & Customs Brief 9/2014 outlining their approach. However, through several more referrals via the boutique we have partnered with, we have found that much of the advice sought after is in the planning and tax structuring involved in the initial stages, especially when many crypto-businesses have or intend to have a tax presence in jurisdictions with low corporate tax rates (Gibraltar and the Cayman Islands, for example). This, intertwined with often complicated banking needs means that tax structures are complex. Our approach is to provide sound tax advice in the areas where we can do so confidently. Our approach is always to involve other members of the Ecovis network wherever appropriate on advising with international aspects of the transaction.

Author:

Chris Sparkes, tax partner, ECOVIS Wingrave Yeats, London, UK
chris.sparkes@ecovis.co.uk