Last month, in the case of AA -v- Persons Unknown and Others, Re Bitcoin, the English High Court granted an interim proprietary injunction over Bitcoin. In doing so, it gave detailed consideration to the legal status of the cryptocurrency, confirming in clear terms that “cryptoassets such as Bitcoin are property”.
The decision in Re Bitcoin follows hot on the heels of the “Legal Statement on cryptoassets and smart contracts” published in November 2019 by the LawTech Delivery Panel’s UK Jurisdiction Taskforce. The Legal Statement is the result of a collaboration by the UK Government, the English Judiciary and the Law Society, whose stated aim was to provide the “best possible answers” to key legal questions about smart contracts and cryptoassets.
It is significant that, within the space of two months, both the LawTech Delivery Panel and the High Court have concluded that cryptoassets are capable of fulfilling the definition of “property”, and if so, subject to English property law. The removal of the previously perceived uncertainty around the legal status of cryptoassets is expected to bring market confidence to the use of, investment in, and creation of new cryptoassets, particularly by institutional and regulated market participants. It is also likely to be followed by a spike in contentious cases and disputes involving cryptoassets relating to securitisation, insolvency, taxation, and succession as the legal community tests and refines the boundaries of this developing area of law.
The Legal Statement will have continued significance in both commercial and legal contexts. The analysis and Q&As set out within it will continue to be essential reading for commercial parties seeking to understand the legal framework applicable to investments and dealings in cryptoassets (particularly Bitcoin); and to the courts and legal representatives in resolving cryptoasset-related disputes.
In their first article reporting on the Legal Statement Kate Allass (Farrer & Co) and Hazem Danny Al-Nakib (Sentinel Capital Group) summarise the answers reached by the LawTech Delivery Panel to the critical legal questions in this developing area.
This will be of particular concern for those who are managing their residence across multiple jurisdictions. For example, you may have planned your year to ensure that you are treated as UK tax resident and not tax resident in another jurisdiction.
You can find more information on the Statutory Residence Test here.
We recommend that you get in touch with your advisers as soon as possible to discuss your options. As we set out in our first coronavirus briefing (Can't leave? How coronavirus is affecting UK tax and immigration) when considering UK tax residence you can disregard days spent in the UK where you have not been able to leave because of the pandemic. We anticipate that other jurisdictions may take a similar approach.
The Organisation for Economic Co-operation and Development (OECD) released guidance last week which expressed the same view and mentioned that Australia has already done so and that Ireland has provision for exceptional circumstances in its legislation.
Further, some jurisdictions have residency rules which rely in part on the individual intending to stay for a certain amount of time. Others have limited taxation for foreigners for a period of time after their arrival. The consequences of being stranded in a country with either type of rule are therefore unlikely to be too adverse. It is also worth taking into account that many countries have the calendar year as their tax year so 5 April is not a deadline as it is for the UK. It will therefore be important to get local law advice, in conjunction with UK advice, and to consider if any travel is possible eg to a third country which may have more favourable rules.
We mentioned in our briefing last week that you are likely to maintain your residency outside the UK for the purpose of a double tax treaty if you cannot leave the UK due to coronavirus. The same principle applies if you are temporarily stranded outside the UK (ie you would maintain your treaty residence in the UK). This is because most double tax treaties have tie breaker rules which decide where you are deemed to be resident for the treaty if you are resident in both countries. If you have a home in both countries, this typically comes down to where your life is based (your centre of vital interests). This will not change, in most cases, because you are unable to travel. The OCED guidance released last week confirms this view and also that if you have lost your residency in one country (for example the UK) temporarily due to the Coronavirus restrictions, this should essentially be ignored and your residency before and after the emergency taken into account.
It may also be necessary to update your bank and investment managers if they are filing returns under the Common Reporting Standard (CRS).
For CRS purposes, it is your country of tax residence that is reported. If this is no longer the UK, you will need to let them know to update the report. However, if you are not tax resident somewhere else, your bank may be comfortable with continuing to use the UK particularly if you have an address here and did not intend to lose your tax residency.
Under UK law, the residence status of a trust for income tax and capital gains tax purposes is determined by a combination of (i) the residence of its trustees and (ii) the residence and domicile position of the settlor.
If you are the trustee of a trust that has previously been treated as UK tax resident because:
- the settlor was either UK resident or domiciled at the time of settling the assets; and
- you were the sole UK resident trustee,
an issue may arise if you lose your UK residency. This is because if you become non-UK resident and you are the only trustee, the trust will be “exported” for UK tax purposes. The consequence of exporting the trust is that the trustee is deemed to have disposed of all the trust assets. This would mean a charge to capital gains tax on any increase in value in the trust assets at that time.
If you think this scenario may arise, we suggest you appoint another UK resident trustee. This would stop the exportation of the trust as even if you are not UK resident, there is a second trustee who is UK resident. A practical option may be to appoint a UK corporate trustee which could either be run by professionals or you could be a director. The trustee would then remain UK resident even if you are not. Either of these options would avoid the capital gains tax charge mentioned above.
It is worth noting that there are other trust scenarios where the change of residency of a trustee will not make any difference to the residence status of the trust. These include where a majority of the trustees are already non-UK resident and where the individual whose residency has changed is a director of a professional trust company – see below on management and control of companies. For example, if a director of a non-UK trust company became UK resident, the trust company would stay resident outside the UK unless the company’s management and control moved to the UK.
If you are the settlor and/or beneficiary of a trust, it is important to update the trustees as soon as possible as to your circumstances. Some jurisdictions impose onerous reporting obligations on the trustees of a trust with a settlor or beneficiary resident in the jurisdiction. For example, in France the trustees must declare the trust within thirty days where there is a French tax resident settlor or beneficiary.
If a company director leaves the UK for an extended period during the pandemic their re-location could cause a change to the tax residency of their company if they continue to work for the company from abroad.
A UK incorporated company will automatically remain resident for tax purposes in the UK. However, if a sole director, or director with significant authority remains abroad during the period of the pandemic, foreign tax filing and payment obligations could arise where:
- the company creates a ‘permanent establishment’ abroad, under the terms of an international double tax treaty;
- the company acquires a second tax residency under the domestic laws of the foreign jurisdiction.
A non-UK incorporated company would be affected by the change of location of a key director if this causes a change in the ‘place of management’ of the company.
These issues, together with related employment taxation consequences are discussed below.
A permanent establishment will usually include a ‘place of management’. Broadly speaking, if a director who acts on behalf of the company has authority to conclude contracts in the name of the enterprise and habitually exercises this authority in another country, then a place of management and hence a permanent establishment can be created there. Typically, the relevant double tax treaty will provide that the profits attributable to the foreign permanent establishment are taxable in that jurisdiction.
The OECD has recently produced guidance which deals with the interpretation of double tax treaties in the light of the coronavirus crisis. The guidance confirms that it is unlikely that the director will create a permanent establishment in these circumstances. Their view is that in most cases there will not be the requisite degree of permanency to the director’s activities because the director will be working abroad on “an exceptional and temporary basis”. Nonetheless, two caveats should be borne in mind:
- If the director was concluding contracts on behalf of the company in the foreign country before the pandemic began, a different approach may be appropriate.
- If the director’s home working arrangement was to “become the new norm over time” then the situation would need to be reconsidered.
Place of management
For non-UK incorporated companies, the director’s move abroad could cause the company to cease to be ‘managed and controlled’ in the UK and to leave the UK tax net altogether. The concept of ‘management and control’ is complex but essentially, it is the power to make the strategic decisions of the company. This could have the following consequences:
- The company could become liable to tax in the foreign jurisdiction (either of the country of its incorporation or where management is being exercised).
The liability to tax in another jurisdiction will depend on the tax laws of that jurisdiction, and companies should seek local tax advice. In this regard, the OECD is encouraging tax administrations to provide guidance on how they will apply their domestic rules and urges them to eliminate “unduly burdensome requirements” for taxpayers.
- A UK corporation tax charge (known as an ‘exit charge’) might be triggered.
An exit charge will be imposed where there is an intention to migrate the company abroad. A company is obliged to give notice to HMRC of such a decision. Where the director fully intends to return to the UK, there should be no immediate danger of incurring corporate exit charges, however if the length of absence is extended it may become a risk.
Where a UK ‘exit charge’ is triggered, a company is deemed to have disposed of and reacquired all its assets at market value immediately before ceasing to be resident. There is, however, a specific exception for UK property: any gain is only taxed when the UK property is actually sold.
In theory, the company could become tax resident in both the UK and in the jurisdiction where the director is residing. The recent OECD guidance is that it is unlikely that the COVID-19 circumstances will change an entity’s residence under the terms of a tax treaty. This is because, in the opinion of the OECD, the treaty “tie-breaker” rule can be interpreted to allow for the pre-COVID-19 residency position. If necessary, the relevant tax administrations will settle the matter using Mutual Agreement Procedure.
If the relevant treaty does not include a “tie-breaker” clause, the place of effective management of the company will be the sole decisive criterion. Here, the OECD’s guidance is that all the relevant facts and circumstances should be examined to determine the ‘usual’ and ‘ordinary’ place of management, rather than only those that pertain to an exceptional and temporary period such as the COVID-19 crisis, so again, there should be no change.
If there is no double tax treaty between the UK and the foreign country involved, the situation is less clear and actions to protect the company’s position should be considered.
Whilst the OECD guidance provides a certain degree of comfort where the jurisdictions involved have a double tax treaty in place, it will still be prudent to take protective action. The company in question could consider doing the following:
- appoint a new/ additional UK board director(s)
- have the director temporarily resign from the board
- defer making major strategic decisions during that director’s absence (where practicable).
Cross-border employment income
It is possible, that a director working in the UK remains resident in their home country, and vice versa. In this case, the double tax treaty will usually provide that salaries, and other similar remuneration can be taxed in the country where the ‘employment is exercised’ (provided the director is in that country for more than 183 days or the employer is a resident of the source country or has a permanent establishment there that pays the salary).
In this situation, the OECD has offered the following guidance:
- Stimulus packages adopted by Governments, which are designed to keep workers on the payroll during the Coronavirus crisis, resemble termination payments. As a consequence, this employment income should be attributable to the place where the employee would otherwise have worked, which will normally be the location where they worked before the Coronavirus crisis.
- For regular employment income, the employer company may be exposed to new withholding obligations abroad and employees could have new or enhanced tax liabilities in that country. In these situations, the OECD has called for ‘an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employers and employees associated with involuntary and temporary change of the place where employment is performed’.
There remain some areas of uncertainty in this quickly developing area of law – not least in relation to establishing the governing law and jurisdiction applicable to dealings in cryptoassets.
However, the resounding message from both the Law Tech Delivery Panel and the High Court is that cryptoassets will be recognised as “property” and the courts will do their best to grapple constructively with the complexities presented by this novel type of property. In adopting such a positive stance, they have reinforced the rights of those investing in, using, dealing with and creating cryptoassets and encouraged a consistent approach to legal dealings in them.
Growth in the development and use of these assets – which was already rapid – is likely to gather even more pace. The malleability of the English common law to expand and contract in response to the changing contours of new technologies and scenarios is a crucial characteristic to its position as both a financial and technology centre and a technology-friendly jurisdiction. And although the Legal Statement, when analysed, assesses primarily the case of Bitcoin, it is a positive step for other types of cryptoasset such as those assets with real-world connections, or new forms of asset classes that exist only digitally.
If you require further information about anything covered in this briefing, please contact Kate Allass, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, February 2020