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Developments In Beneficial Ownership Transparency

Global Incorporation Guide [GIG] Editorial

August 9, 2017

It has been two years since the United Kingdom seemingly went out on a limb by being the first major economy (and probably the first economy anywhere) to insist that company ownership information was recorded and open to public scrutiny. Now, with transparency of beneficial ownership a key battle ground in the fight against tax avoidance in the post-Panama Papers environment, governments all over the world, including in some unexpected places, are coming under pressure to follow suit, as this special feature shows.

Background

A proposal for publicly accessible registries of beneficial ownership was one of the main points agreed by the G8 at the Lough Erne Summit in Northern Ireland in June 2013, at which the issue of tax avoidance by companies and wealthy individuals was placed at the top of the agenda by the United Kingdom. And included in the "Lough Erne Declaration" endorsed by the Summit's participants was a recommendation that "companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily."

Subsequent to Lough Erne, each G8 member published an action plan outlining how they intended to improve transparency of beneficial ownership information. However, until recently, little further progress was made towards an international network of beneficial ownership databases, except in the UK and the EU (outlined below), with many jurisdictions unwilling to be a first-mover towards measures which could deter investors, especially given the lack of a level global playing field on the disclosure of beneficial ownership information. However, as we shall see below, governments have found the issue much harder to ignore since the Panama Papers scandal of April 2016.

Before this scandal jolted governments into action, it was the UK which decided to set an example to the international community. Following the publication of two discussion papers in 2013 and 2014, the framework of the UK's register of "persons with significant control" was included in the Small Business, Enterprise and Employment Act 2015, which received Royal Assent on March 26, 2015. Companies have been required to divulge certain beneficial ownership information since June 30, 2016.

As is so often the case with issues of tax and corporate transparency, the European Union is, alongside the UK, also leading on this issue. Consequently, under the 4th Anti-Money Laundering Directive, endorsed by the European Council in April 2015, EU member states must establish and maintain central registries containing certain information about the beneficial owners of companies registered in their jurisdictions. Member states are required to transpose the new requirements into domestic law by June 26, 2017.

Public Versus Private Beneficial Ownership Registries

While more and more governments have come to accept calls from taxpayers at large, transparency campaigners and plurilateral organizations such as the OECD for easier access to information on who ultimately controls and owns a company, some jurisdictions consider putting such information in the public domain to be a step too far.

The majority of jurisdictions which are considering such measures agree that registries of beneficial ownership should at least be available for inspection by law enforcement authorities in the execution of their duties. However, some baulk at the idea of making such information public. And this is essentially for two reasons: firstly, there is no international agreement on a standard format for public beneficial ownership registries that would be applied globally – the aforementioned level playing field argument; and secondly, it could fatally erode the right of individuals to keep their legitimate business affairs private, and leave companies owners vulnerable to the uglier side of human nature i.e. threats of violence, intimidation, and other nefarious activities.

Skeptics also argue that some corporate ownership structures are so complex and diffuse as to make beneficial ownership registries unworkable. However, others counter that it is precisely because company ownership is so opaque in some cases – and opacity is the best friend of the tax dodger or money launderer, so their argument goes – that measures are needed to help shine a light on it. They also say that safeguards can be put in place to protect certain individuals, for example by exempting people in sensitive areas of business from being named.

With regards to this debate, there is something of a geographical divide here. Unsurprisingly, there is a great deal of support for the publication of beneficial ownership information in the European Union, which is taking a lead in the campaign to combat cross-border tax avoidance in all its forms. But governments in territories we could describe as being "offshore" are less than keen, as we see by the following summary of recent developments in this area.

European Union

In November 2016, the European Council – the body representing the 28 member states – endorsed a proposal to grant tax authorities access to information held by authorities responsible for the prevention of money laundering. The Council said: "Access to that information will ensure that tax authorities are better equipped to fulfill their monitoring obligations. It will thus help prevent tax evasion and tax fraud."

The proposal is one of a number of measures set out by the European Commission in July 2016, in the wake of the Panama Papers leak. It will apply from January 1, 2018.

According to the Commission, the measure "will ensure that tax authorities must be given access to the data provided under the EU's anti-money laundering rules, notably customer due diligence information and the information in their national beneficial ownership registries, in order to perform their tasks and not only in the context of the fight against money laundering and terrorist financing."

The Council adopted the directive on December 6, 2017, following a vote by the European Parliament on November 22.

In February 2017, members of the European Parliament agreed to proposed amendments which would allow EU citizens to view information in registers of beneficial ownership without having to demonstrate a "legitimate interest." The proposed amendments to the Anti-Money Laundering Directive were agreed to in a report passed by the European Parliament's Economic Monetary Affairs and Civil Liberties committees.

At present, those seeking to access beneficial ownership registers must demonstrate a "legitimate interest" in the information. According to Parliament, this restricts access to authorities and professionals such as journalists and lobbyists.

Judith Sargentini, a co-rapporteur on the file, said: "Complex company structures and shelf companies make it easy for people to hide money. Through a public register for companies and trusts, the European Parliament wants to shed light on these structures and thereby combat them."

In addition, the amendments would expand the scope of the Directive to cover trusts and "other types of legal arrangements having a structure or functions similar to trusts." Trusts would therefore have to meet the full transparency requirements, including the need to identify beneficial owners.

Ireland

The requirement for corporate and legal entities to hold their own beneficial ownership register was transposed into Irish law by Statutory Instrument No 560 of 2016. Consequently, As of November 15, 2016 corporate and legal entities must hold adequate, accurate and current information on their beneficial owner(s) in their own beneficial ownership register.

In February 2017, the Irish Finance Ministry issued guidance on the regulation on the reporting of beneficial ownership information. The Ministry stated that the regulation applies to every corporate or other legal entity except for those listed on a regulated market that is subject to disclosure requirements consistent with EU law, or subject to equivalent international standards that ensure the adequate transparency of ownership information.

"A shareholding of 25 percent plus one share or an ownership interest of more than 25 percent in the customer held by a natural person shall be an indication of direct ownership. A shareholding of 25 percent plus one share or an ownership interest of more than 25 percent in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership," the Ministry explained.

The Netherlands

Draft legislation for the introduction of a registry of beneficial ownership was published by the Ministry of Finance on March 31, 2017. Under the proposed legislation, which was subject to a four-week public consultation period, certain law enforcement authorities would have full access to the information on the register, including the Public Prosecution Service, the police, and the Tax and Financial Intelligence Unit.

Some information on the register will also be available to view by the public, although the draft law contains privacy safeguards for company owners who feel they may be put at risk of intimidation, violence, and other threats by having their details publicized.

Australia

In February 2017, the Government of Australia launched a consultation on how to improve transparency surrounding the beneficial ownership of companies.

The consultation document asked for input on how to define a beneficial owner with a controlling interest in a company, and on which tests or thresholds should adopted to determine this controlling interest. It also asked how best to identify those exercising indirect control or ownership, and whether the process for identification of beneficial owners should operate in such a way that reporting must occur on all entities through to and including the ultimate beneficial owner.

Likewise, the Government sought feedback as to what details should be collected and reported for those identified as beneficial owners, and, in the case of foreign individuals and corporate bodies, what information would be necessary to enable these persons to be appropriately identified by users of the information. The consultation asked what obligations there should be on companies to ascertain who their beneficial owners are, whether each company should maintain their own registers, and if a central register of beneficial ownership information should also be established.

The consultation closed on March 13, 2017.

Hong Kong

In January 2017, Hong Kong's Financial Services and the Treasury Bureau (FSTB) launched public consultations on legislative proposals to increase the transparency of corporate beneficial ownership in the city.

The proposal will amend Hong Kongs's Companies Ordinance to improve the transparency of beneficial ownership of companies incorporated in Hong Kong. It was said that "there are increasing international concerns over the misuse of companies, particularly those with complex ownership and control structures, as a way to... facilitate money laundering, or serve illicit purposes such as tax evasion, corruption, or terrorist financing."

It was also noted that the current law in Hong Kong "does not require a company to ascertain, keep or file information about [a company's] ultimate beneficial owner, except in the case of a listed corporation, which is required under the Securities and Futures Ordinance to keep a register of those individuals or entities owning five percent or more interests in any class of voting shares (including any beneficial owner of such interests)."

The FSTB therefore intends to amend the Companies Ordinance to require companies incorporated in Hong Kong to obtain and hold up-to-date beneficial ownership information for public inspection upon request. The requirement will apply to all companies incorporated in Hong Kong under the Companies Ordinance, including companies limited by shares, companies limited by guarantee, and unlimited companies.

A beneficial owner in relation to a company will be, for example, an individual who directly or indirectly holds more than 25 percent of its shares; directly or indirectly holds more than 25 percent of its voting rights; directly or indirectly holds the right to appoint or remove a majority of its directors; or otherwise has the right to exercise, or is actually exercising, significant influence or control.

For the purpose of keeping accurate and timely beneficial ownership information in accordance with the FATF recommendation, the FSTB also proposes that a company will be required to identify and keep a "register of people with significant control" over the company.

In its Consultation Conclusions report, released in April 2017, the FTSB confirmed that it would proceed with proposals to introduce a "people with significant control" register, although it decided that the information contained therein would be available to competent authorities, but not the public.

British Virgin Islands

In July 2017, the British Virgin Islands launched a beneficial ownership database which provides the territory's law enforcement authorities with direct and immediate access to verified beneficial ownership information on the ownership of companies in the territory.

Known as the "Beneficial Ownership Secure Search system" (BOSSs) the searchable platform meets the international standards of the Financial Action Task Force, the global body tasked with combatting money laundering and countering the financing of terrorism, according to the BVI Government.

BOSSs has so far seen significant activity, with information for tens of thousands of companies already uploaded to the platform.

The British Virgin Islands' Ministry of Finance said it is working closely with industry to get the remaining companies onto the system as soon as possible, with a six-month grace period in place before penalties will be imposed.

Commenting on the BOSSs platform, Executive Director of the territory's Office of International Business (Regulations), Neil Smith said: "BOSSs is an innovative technology-enabled searchable portal that marks a step change in the way beneficial ownership information on any British Virgin Islands' company is held, accessed, and, where appropriate, shared with competent authorities in the British Virgin Islands and the UK. It was developed following an Exchange of Notes with the UK in April 2016."

Isle of Man

The Isle of Man's financial services regulator, the Isle of Man Financial Services Authority, published guidance on the Beneficial Ownership Act 2017 in July 2017. The Act, and a central database of beneficial ownership that went live on July 1, 2017, were developed following the island's commitment to the UK last year to enhance the sharing of information about the ownership of Isle of Man-based entities.

Information held on the central database will not be public and will only be accessible by a small number of designated officials in a limited number of Isle of Man authorities and, on request to the island's Financial Intelligence Unit, by the intelligence and law enforcement agencies of countries with which the Isle of Man has a beneficial ownership sharing agreement (currently only the UK).

A "beneficial owner" is a natural person who ultimately owns or controls more than 25 percent of a legal entity, in whole or in part, through direct or indirect ownership or control of shares, voting rights, or other ownership interests in that entity, or who exercises control via other means.

The Act requires details of any registrable beneficial owner to be submitted electronically to the Isle of Man's central database of beneficial ownership by an entity's nominated officer or relevant corporate service provider. Access to the database is restricted. All nominated officers and corporate service providers have until August 1, 2017, to enroll.

Jersey

In May 2017, Jersey's corporate regulator, the Jersey Financial Services Commission, issued guidance explaining how beneficial ownership information relating to companies should be reported.

Between January 1 and June 30, 2017, all corporate and legal entities (apart from foundations) were required to complete a C17S form (confirmation statement) including details concerning current beneficial ownership and control. This obligation applied even if there had been no change to beneficial ownership and controller information since incorporation.

The reporting of this information will allow the Companies Registry to update and verify information relating to beneficial owners and controllers of each and every corporate and legal entity on the beneficial owner and controller register.

In addition to the obligation to file a confirmation statement before June 30, 2017, the Commission has reminded entities of their ongoing obligation to notify the Companies Registry within 21 days of becoming aware of a change to beneficial ownership and control information.

In Summary

As can be seen from the above, a wide variety of jurisdictions are proceeding with plans to record beneficial ownership information in a more systematic way, and in some cases, make that information available to the public, from the European Union and Australia on the one hand, to low-tax and offshore financial centers like Hong Kong and the BVI on the other.

It is noteworthy, however, that there still appears to be some lack of enthusiasm for beneficial ownership registries in the major economies outside of the EU, including key members of the G20. This may change as the OECD and the EU in particular continue to push for ever more stringent standards of legal and tax transparency around the world, although some countries, fearful of the economic consequences of such measures, may take some convincing.

For investors, this is an additional consideration to be aware of, besides the usual range of factors that help to determine where best to establish a new company. And if privacy is a key concern, then potential company owners might want to avoid those jurisdictions which insist on certain information being placed in the public domain. Such jurisdictions are relatively few and far between at present, and are largely restricted to the EU. But the landscape in terms of international tax and transparency standards is a fast-changing one, and the number of jurisdictions recording, and possibly publicizing, company ownership information is only likely to increase.

 

Tags: tax | Europe | law | interest | Hong Kong | Isle of Man | Panama | Virgin Islands | individuals | British Virgin Islands | enforcement | standards | Jersey | Australia | trusts | Finance | tax avoidance | Tax | business | regulation | United Kingdom

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