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Shining A Light On Beneficial Ownership

Global Incorporation Guide [GIG] Editorial

April 15, 2016

"We need to know who really owns and controls our companies, not just who owns them legally, but who really benefits financially from their existence. For too long a small minority have hidden their business dealings behind a complicated web of shell companies, and this cloak of secrecy has fueled all manners of questionable practice and downright illegality."

These words were spoken by British Prime Minister David Cameron at a conference in October 2013 as the UK Government took a lead on the issue of corporate transparency. In a rather predictable turn of events, since the Panama papers scandal broke on April 3, 2016 (sadly, too late to be an April Fool's joke for many political leaders) Cameron has been under fire his family benefited from offshore tax planning arrangements. Not that we're implying here that the Prime Minister was involved in any "questionable practices."  As Cameron himself has said in his defense, tax planning of the variety he has been accused of benefiting from is standard practice for wealthy families and international investors the world over and is entirely legal as long as the appropriate amount of tax is paid at home.

Nevertheless, the UK remains at the forefront of efforts to pierce the corporate veil in the hope of catching tax evaders, money launders and financiers of terrorism. And it has gone a step further than any other country involved in this campaign by legislating for a centrally-organized registry which will contain information on the beneficial owners of companies registered in the UK. This feature describes how the UK's incoming register of persons with significant control (PSC) came about, summarizes the main aspects of the new requirements, and considers if the PSC registry could catch on elsewhere in the world in the wake of the Panama leaks.


Background To The PSC Registry

The UK Government confirmed its commitment to new standards formulated by the Financial Action Task Force in June 2013, shortly after the G8 Summit in Northern Ireland, at which the UK chose to make tax and corporate transparency the main point of discussion.

In the following month, the Government published a the first of two discussion papers on the proposals. Entitled 'Transparency and Trust: Enhancing the Transparency of UK Company Ownership and Increasing trust in UK Business' the first paper outlined a range of proposals that would set up the register and meet other G8 UK Action plan commitments. This was followed by a second discussion paper in October 2014 which proposed some of the detail that was needed to create the register. Further details about the register were announced in January 2015, after which the framework of a register of "persons with significant control" was included in the Small Business, Enterprise and Employment Act 2015 (SBEE Act), which received Royal Assent on March 26, 2015.


Introduction To The Rules

The requirements to keep a PSC register are set out in Part 21A of the Companies Act 2006 and associated regulations.

Under the legislation, as from April 6, 2016, most companies, limited liability partnerships (LLPs) and Societas Europaea (SEs) are required to hold a register of people with significant control. From June 30, 2016, companies, SEs and LLPs will have to deliver this information annually to the central public register at Companies House when making a Confirmation Statement, which replaces the existing annual return. Furthermore, those seeking to incorporate a new company, SE or LLP will have to send a statement of initial significant control to Companies House, alongside the other documents required for an application to incorporate.


Persons With Significant Control

A PSC is an individual who meets one or more of the following conditions:

  • Directly or indirectly holding more than 25 percent of the shares,
  • Directly or indirectly holding more than 25 percent of the voting rights,
  • Directly or indirectly holding the right to appoint or remove a majority of directors,
  • Otherwise having the right to exercise, or actually exercising, significant influence or control,
  • Having the right to exercise, or actually exercising, significant influence or control over the activities of a trust or firm which is not a legal entity, but would itself satisfy any of the first four conditions if it were an individual.

A company which has identified that it does not have any PSCs will still need to keep a register.


Listed Companies

Some companies in the UK already have to report a great deal of information about their ownership. Typically, these are companies listed on an authorized market in the UK of the European Economic Area. Rather than requiring these companies to provide information about their controlling owners in different formats to different authorities, the SBEE Act allows some companies to be exempted from the new requirements. Companies who are required to comply with Chapter 5 of the Financial Conduct Authority's Disclosure Rules and Transparency Rules (DTR5 issuers) are exempted from having to keep a register of people with significant control.


When Owners Are Legal Entities

In many cases, companies are not owned by individuals, but by other companies. Under such circumstances, the legislation says that a legal entity's details must be put on the PSC register if it is both "relevant and registrable" in relation to the company in question.

A legal entity is relevant in relation to a company if it meets any one or more of the five aforementioned conditions which define a person with significant control, and:

  • It keeps its own PSC register;
  • It is subject to Chapter 5 of the Financial Conduct Authority's Disclosure and Transparency Rules (DTRs); or
  • It has voting shares admitted to trading on a regulated market in the UK or European Economic Area (other than the UK) or on specified markets in Switzerland, the USA, Japan and Israel.

A relevant legal entity (RLE) is registrable in relation to a company if it is the first relevant legal entity in a company's ownership chain.

The Government provided the following example in the consultation document to illustrate how this system might work in practice:

"Company A is fully owned by B and B is fully owned by C. B and C are both relevant legal entities (they both keep a PSC register) who own more than 25 percent of the share capital of A (B directly and C indirectly). To avoid the duplication of information on the register, in this example, company A would include only the first relevant legal entity (entity B) in its PSC register, and should not include entity C. Observers who wish to delve further may look at the PSC register of entity B and through that would identify C. In this case the first entity in the chain (entity B) is a registrable relevant legal entity. The other entity (entity C) is a non-registrable relevant legal entity and should not be included in the register of company A."


Information To Be Held On The Register

The details of people or entities that must be recorded include their name, residential address (which does not appear on any version of the register that the public see), a service address, date of birth (in the case of individuals), and information about how they have significant control.


Exemptions

Although a PSC's residential address will not be on a public register, individuals will be able to apply to Companies House to prevent their residential address from being disclosed to CRAs if they believe that they or somebody they live with would be at serious risk of violence or intimidation due to the activities of a company they are involved with. Company directors are currently able to apply for this level of protection also.


Penalties

If a company identifies a person or entity who should be on its PSC register, or who might have knowledge of such a person or entity, they may be required to contact them in order to obtain the details needed for the register. To ensure compliance, companies are able to freeze the interest of any individual or entity in that company if they do not respond to a notice.

If people or entities do not respond to the initial notice within one month the company may send them a warning notice. This will tell them that the company is proposing to issue them with a restrictions notice. The company may issue the restrictions notice if the initial notice has not been not complied with within one month of sending the warning notice, and if it has not received a valid reason for not complying.

The restrictions notice will freeze the person or entity's interest in the company until the company obtains the information it needs and lifts the restrictions. While the shares or rights are frozen in this way, the holder of the interest will not be able to sell, transfer or receive any benefit from the rights, or exercise the rights attached to them.


European Union

While the UK has taken what many people consider to be a brave lead on the issue of transparency of beneficial ownership, the remainder of the European Union will soon have to follow suit under the 4th Anti-Money Laundering Directive, approved in 2015.

Under the directive, endorsed by the Council of the European Union on April 20, 2015, member states will be required to maintain a central register of information on the beneficial ownership of corporate and other legal entities. It would be at the discretion of member states as to whether such information would be publicized.

Under the proposals, beneficial ownership information would be accessible to competent authorities and financial intelligence units and, in the framework of the conduct of customer due diligence, to obliged entities.

The plan was endorsed as part of a package of measures aimed at preventing money laundering and terrorist financing. The following information on beneficial owners would be retained:

  • Name;
  • Month and year of birth;
  • Nationality;
  • Country of residence; and
  • The nature and approximate extent of the beneficial interest held.

As for trusts, the central registration of beneficial ownership information will be used where the ownership of a trust has tax consequences.

Member states have until mid-2017 to transpose the directive into national legislation.


Other International Developments

The call for countries to maintain central registries of beneficial ownership has suddenly increased in volume since the Panama papers affair broke on April 3, 2016.

Now leading the charge is Germany, where Finance Minister Wolfgang Schäuble has called for a "network" of national company ownership registries to combat the use of "letterbox and shell companies." He also confirmed that Germany is working "rapidly" towards the implementation of a register of beneficial ownership information.

It also appears that the United States Government is moving on the issue of knowing how owns and benefits from companies registered in the US.

Just a few days before the Panama papers reports hit the headlines, the Treasury Department announced that it would soon issue proposed regulations requiring foreign-owned single member limited liability companies to disclose the identity of beneficial owners to the Internal Revenue Service.

Deputy Assistant Secretary of the Treasury Jennifer Fowler, also raised the subject at the SIFMA Anti-Money Laundering & Financial Crimes Conference in New York on April 4, when she stressed that "we must ensure that companies know and disclose their ultimate, or beneficial, owners to the government at the time of company formation."

"With reliable beneficial ownership information in hand, financial institutions—including broker-dealers and mutual funds—will all benefit from knowing who the ultimate owners of companies holding accounts with them are, and our financial system will be safer for it," Fowler continued. "Beneficial ownership information not only will help protect your firms against the risk of involvement in illicit finance, it will also provide more useful information to law enforcement to pursue those who are engaged in money laundering, sanctions and tax evasion, proliferation finance, and terrorist financing."

In addition, the Treasury Department has written to Senate Finance Committee Ranking Member Ron Wyden (D – Oregon) agreeing to his proposal for regulations that require the identification and verification of a US company's beneficial owners, to complement existing efforts to combat cross-border tax evasion and money laundering.

As far as the United States goes however, the creation of a centralized registry of beneficial ownership is complicated by the fact that company law is a state, rather than federal, affair. And currently, no state requires the recording of company beneficial ownership legislation.

In February 2016, the Incorporation Transparency and Law Enforcement Assistance Act was introduced into the House of Representatives and the Senate. This would amend federal law to "ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies."

However, this is likely to prove a very contentious issue in an already highly partisan Congress, and similar proposals have fallen by the wayside in previous congressional sessions.

We have also seen developments on this matter in certain offshore financial centers, principally those with constitutional links to the UK, in the wake of the Panama papers revelations.

Bermuda, the British Virgin Islands, and the Cayman Islands have separately announced that they will enter into deals with the UK to improve how they exchange information on the beneficial ownership of companies.

The Crown Dependencies of Guernsey, Jersey and the Isle of Man have also agreed to reinforce existing arrangements for the exchange    of information on the beneficial ownership of companies.

Britain's offshore territories have, however, steadfastly refused to maintain centralized and publicly-accessible registries of beneficial ownership, arguing that such information is already recorded and available to national law enforcement bodies on request. They claim that this already puts them well ahead of many other countries in terms of transparency. To go further by publishing beneficial ownership information in the public domain while most of the rest of the world lagged behind in this area would put them at a serious competitive disadvantage, they warn.

However, the way recent events have unfolded, don't be surprised to see other nations follow in the UK's and EU's footsteps. And it won't matter that the privacy of the law-abiding majority will be compromised to get at the law-breaking minority.

 

Tags: tax | Panama | law | Europe | legislation | interest | Germany | Tax | individuals | regulation | offshore | United States | Finance | Offshore | tax planning | Other | enforcement | Japan | Jersey | trusts | Switzerland

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