Richard Brooks on Luxembourg and tax dodging

Someone with a better knowledge of ta law might want to have a look at this report.

Using a couple of Luxembourg companies to do internal financing basically. And that most certainly reduces current tax bills.

This is fun:

Many large private equity investments are also the subject of Luxembourg ATAs. Well known buyout firms such as Blackstone and Carlyle appear in the leaked documents, and Luxembourg investment vehicles are commonplace in such investment firms.

A 2008 joint venture between private equity group Apax Partners and Guardian Media Group, which owns the Guardian, also used a Luxembourg structure after it invested in magazine and events group Emap, now called Top Right.

A spokesman for GMG said: “We partnered with a private equity company which regularly used such structures. A Luxembourg entity was used because Apax already had that structure in place. The fact that the parent company is a Luxembourg company does not give rise to any UK corporation tax savings for GMG.”

And correct me if I’m wrong here. But what all of this does is delay tax bills, not actually reduce them. So the financing company racks up the interest on the loans it’s made to other subsidiaries, Luxembourg doesn’t tax that interest much. Great. But to get it out of the corporate structure it’s still necessary to repatriate it to wherever the domicile of the top company is. At which point it’s taxable at that domicile’s normal corporation tax rate. Or at least that was true until Osborne (for the UK) started to change matters.

That’s correct, isn’t it?

15 thoughts on “Richard Brooks on Luxembourg and tax dodging”

  1. As the Guardian report says “These arrangements, signed off by the Grand Duchy, are perfectly legal.”
    As, of course, is tax avoidance in general. So why the fuss? Those who don’t like it should campaign to change the law rather than complaining about firms acting lawfully.

  2. What happens if things go tits up? Can the delayed tax be wiped out by future losses and never actually paid? I can see that being attractive to PE, it’s interest-free borrowing from HMT which you only have to pay back if you’ve won on the deal anyway… and even if it does get paid, one presumes that the savings on borrowing costs vastly outweigh the costs of the structuring.. so, rightly or wrongly, it’s a nice cheap source of finance that’s only realistically available to a select few.

    Then again, I’ve worked in a PE investment which had some euro-structure in place to take advantage of some wheeze back in the day. The whole thing went south, the wheeze became irrelevant, and the structure (which couldn’t be unwound) ended up costing a fortune to maintain, relative to a plain old UK structure. So you pays your money etc..

  3. Is there any link between the company that owns the Guardian and tax-shelter countries? I think we should be told.

  4. TTG,
    Yes, that’s broadly the whole point of the exercise. You save profits during your seven years of plenty, then use them up during your seven years of hardship.

    There are plenty of other reasons too though. Look at Apple – they’re hoarding billions of cash offshore. I suspect they’re largely doing this because they hope that either tax rates will be lowered, or there’ll be a one-off amnesty, or there’ll be a change in the law such that overseas profits aren’t taxed. In short, they’re gambling on a political decision; and also lobbying hard to make that decision happen. (At least lobbying isn’t tax-deductible in the US. Although Google neatly gets around that by funding various charitable groups which indirectly lobby on its behalf.)

  5. “Although Google neatly gets around that by funding various charitable groups which indirectly lobby on its behalf”: well, thank God we don’t have front groups doing lobbying in Britain, eh?

  6. If the company receiving interest is in a low-tax jurisdiction that has a double-taxation treaty with the parent company then there are significant advantages. One rolls up the interest at a low tax rate so when the money is finally remitted there is a lot more of it.
    [Glen Dorran – please translate if this is incomprehensible]
    Say tax in country A is 40% and in country I is 10%. Then if interest rates are 5% gross in both cases after ten years the after-tax interest receipts amount to 1.045^10 = 1.553 for year 1 and 12.288 in total while the after-tax interest cost is 1.344 for year 1 and 11.464 in total. Not a vast difference on $1 or €1 but when you multiply it by a few billion it is enough to be worth hiring pair lawyers in San Francisco and Dublin or Manchester and Luxembourg.

  7. @john77:

    Indeed. The government already actively encourages such financial planning through investment in pensions. Get your investment growth tax free and take the income at a potentially lower tax rate on retirement.

    A similar approach was also available through investing in an “offshore” bond in Ireland or Isle of Man, although other tax changes have reduced the attractiveness of this.

  8. “A similar approach was also available through investing in an “offshore” bond in Ireland or Isle of Man”: feel free to elaborate.

  9. There is simply a deferral of tax but who says that can’t be a deferral forever? Given that most company directors have a very short time horizon any effective interest free borrowing looks much like a free gift.

    Equally, the dividend route is simply the default/worst case way to get the cash back to shareholders. There may be now or in future ways of getting the cash back without a tax cost: who knows what the law will look like ten years from now? The saved cash could be lent back to the parent, or used to make further investments out of Luxembourg, or conceivably used to buy shares held elsewhere in the group creating capital gains that can be sheltered by capital losses (which could not be used to reduce the profits arising from dividends). Investment companies usually have capital losses knocking around.

  10. @dearieme:

    A UK taxpayer could take out an approved investment bond from an Irish/IoM insurer. Depending on the fund choice it was possible to get “gross roll-up” on the investment growth and then only pay UK tax on withdrawal. Withdrawals could be staggered and timed to optimise the tax position.

    (I’m a bit rusty on precise details as it’s been some time since I was involved in this directly).

  11. @ dearieme
    Tax was only paid when the money was remitted (came back into the UK). So you earned compound interest on the deferred tax.

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