A high profile UK tax lawyer has expressed surprise at the news that the Welsh government has joined Poland, Denmark and France in stopping ‘tax haven’ based companies from receiving COVID-19 related bailouts.
The Welsh government has decided to deny any government relief to Covid19 affected businesses if they are owned by a person in a “100% tax haven”, and, according to Stephenson Harwood ‘s James Quarmby, “the wording tells you all you need to know, leaving aside the fact that there is no standard definition of a tax haven, I’m left wondering what 90% haven could like!”
Mr Quarmby added that the policy seems “ignorant of the economics of companies”, where distributions to shareholders are always net of local taxes.
In Wales, like the rest of the UK, there is no withholding tax on dividends, meaning that after the payment of corporation tax any company is free to distribute profits to the shareholders.
“As such,” Mr Quarmby explained, “every shareholder is in the same boat – whether in the UK, China, USA or Bahamas. If the objection is that the ultimate shareholder in, say, Bahamas isn’t paying any further tax then they really ought to think again about their policy.”
Mr Quarmby explained that any distribution to any one of the remaining 27 EU member states will still enjoy the benefits of the Parent Subsidiary Directive. Most of the rest of the EU also operates a participation exemption on dividends from subsidiaries, meaning no further tax. This means that, for example, a dividend payment from a Welsh company to a Swedish company will not be taxed in Sweden.
“Of course, the EU would not countenance action against its own members, as that is not allowed under the free movement of capital rules, but it seems to be encouraging action against other low tax states,” Mr Quarmby said.
Mr Quarmby added that the concept of a participation exemption has been adopted by dozens of countries outside the EU, mostly in what are deemed “high tax jurisdictions”.
“Why hasn’t Wales denied relief to companies with US or Singaporean shareholders? The answer is that it would look totally silly, whereas bashing ‘tax havens’ always looks good, regardless of the complete lack of logic behind the policy,” Mr Quarmby argued.
“In fact,” he went on, “the only people this policy is likely to harm is the local people who work for businesses in Wales which happen to be owned by the wrong people. Those businesses will be denied relief, so I guess they will have to close their doors and make staff redundant.
“I’m not sure the poor people affected will be happy that their jobs have been sacrificed to satisfy the virtue signalling urges of the Welsh government. So much for ‘we are all in this together’.”