| Scotland LP, EU Tax Free Structure
How is a Scotland LP free of corporate taxes?
A Limited Partnership allows clients to operate a business in the EU free of all corporate taxes since the partnership is a "pass through" entity, and as such there is no income or corporate taxes on it. Thus, unlike corporations and irrevocable trusts, a partnership is not a taxpaying entity.
Limited Partnership Details:
A Scottish partnership is ‘a legal person distinct from the partners of whom it is composed’ (s4(2) Partnership Act 1890). Section 7 of the Limited Partnership Act 1907 provides that (subject to the provisions of the 1907 Act) the Partnership Act 1890 applies to limited partnerships. Therefore a Scottish limited partnership will also have a distinct legal persona.
The wording of the 1890 Act states that ‘in Scotland’ a firm is a legal person. It does not state that a Scottish firm is a legal person everywhere. Whether a Scottish partnership was recognised as a legal person in another jurisdiction would be a matter for the private international law of that other jurisdiction, should the matter come before the courts of that jurisdiction.
A Scottish limited partnership is not an incorporated company registered in Scotland for the purposes of s410(5) of the Companies Act 1985 nor a company incorporated outside Great Britain for the purposes of s424(1) of that Act. Provisions of that Act relating to the registration of charges do not therefore apply to Scottish limited partnerships. A Scottish firm is neither a corporation nor an unincorporated association and may be considered to be an entity sui generis.
Requirement for registration:
Section 8 of the Limited Partnerships Act 1907 states that registration of the limited partnership shall be effected by ‘sending by post or delivering to the Registrar at the Register Office in that part of the UK in which the principal place of business of the limited partnership is situated or proposes to be situated’. This phrase is not defined in the 1907 Act and is open to at least two diverging interpretations.
The first is that ‘principal’ should be construed as meaning the main or dominant place where business is actually carried on. If this interpretation were to be accepted then it is clear that the degree of economic and management activity which requires to be carried on at that particular location would be substantial.
The second interpretation construes ‘principal’ as being the limited partnership equivalent of a registered office of a company. In other words ‘principal’ as ‘main and important’ but more in the sense of ‘official’ or ‘formal’, a place where documents and notices can be served and a place which can be used to design the limited partnership.
It is probably the case that neither of these interpretations is entirely correct. A practice has been established, in relation to limited partnerships used as private equity investment vehicles and for other purposes, which relies on the use of the second interpretation.
The principal details of a limited partnership which require to be registered with the Registrar of Limited Partnerships, and which become public knowledge, are:
* The name of the partnership.
* The general nature of the business of the partnership.
* The principal place of business of the partnership.
* The full name of each of the partners (including the limited partners). If anonymity is desired then a corporate entity could act as a limited partner, the ownership of which could be held in trust for the true limited partner.
* The date of commencement of the partnership and any fixed term for which it is entered into.
* A statement that the partnership is limited.
* The amount of capital subscribed by each of the limited partners.
Who are the contracting parties?
Because a partnership is a separate legal entity, the contract is with the partnership itself. However, as partners in a firm are jointly and severally liable for the debts of the firm, ‘the theory of Scots law views them as being so liable subsidiarie, the partners being in substance guarantors or cautioners for the firm’s obligations’ (Mair v Wood). The liability of partners is therefore not as contracting parties but as guarantors. It is that liability as guarantor which is limited in the case of a limited partner.
How does a partnership own property?
As with a general, a limited partnership as a separate legal entity can hold moveable property, including cash and investments in its own name. However, technical conveyancing reasons and practice mean that heritable property (real property) is not held in the name of the partnership, but instead is conveyed to and held by trustees (usually some of the partners) on behalf of the partnership.
How does the partnership grant charges? What kind of charges can it grant?
As a limited partnership is not an incorporated company, it cannot grant a floating charge over its assets or any part thereof. It would, however, be competent for fixed securities to be constituted by the partnership by way of specific standard security in the case of heritable property (real property) or by way of intimated assignation in security in the case of incorporeal moveables (intangible rights).
So far as the limited partnership owns property in England, it may grant any appropriate charge under English law over that property. Assuming that under English law such security deeds are recognised as valid and are also executed in England, a Scottish court would recognise them as creating a valid and effective security over such assets. However, this recognition can be limited in that such a security would not prevail over a trustee in bankruptcy or judicial factor so far as it attempted to cover Scottish assets unless a real right by way of intimated assignation had been effected.
Borrowings
Borrowings of a Scottish limited partnership fall to be regarded as borrowings of the firm, as it is the firm which enters into the loan agreement. As regards the individual limited partners, such borrowings would not be deemed to be their borrowings for the purposes of any borrowing limits they may have. However, as regards the general partner, all partnership borrowings would be likely to be treated as borrowings of that general partner. This would still appear to be the case even if there were more than one general partner, as each such partner would be jointly and severally liable with the other partners (liability of the limited partners, however, being limited) for the whole debts (including loans) of the firm.
Change in composition
Legal theory dictates that if there is a change in the composition of a Scottish partnership (whether it be a general or a limited partnership) by reason of a partner ceasing to be a partner upon transfer or forfeiture of their/its partnership interest, the partnership ceases to exist and a new partnership comes into existence. The separate legal personality accorded to a Scottish partnership does not carry with it the attribute of perpetual succession. Basically, a change in the membership of a partnership creates a new partnership.
In such a situation, the partnership as previously constituted ceases to exist but its business may be carried on by the new partnership with the remaining/ new partners under the same name and it will in practice assume the rights and obligations of the old partnership.
Where the change in composition occurs in a limited partnership it should be registered with the Registrar of Limited Partnerships by completing a Form LP6 with details of the change and lodging it with the Registrar. The newly constituted partnership will be bound by the agreement governing the old partnership so long as this is provided for in the original agreement.
Termination of Scottish limited partnership
The bringing to an end of a Scottish limited partnership may be achieved:
1. by the agreement of all the partners (general and limited) from time to time; or
2. in accordance with any agreement set out in the partnership agreement.
Dissolution (akin to winding-up) may be achieved without excessive formality.
Tax treatment
In order to analyse the precise tax treatment of a partnership’s profits, it will be necessary to establish whether the partnership is a trading or investment entity. Most limited partnerships are investment vehicles whose limited partners are subject to tax as holders of investments, not traders. The tax treatment of the general partner in such an investment partnership will depend on its tax status and what it and the partnership are doing. Guidance has been issued on the tax treatment of investment limited partnerships by the British Venture Capital Association, in consultation with what is now HM Revenue & Customs (HMRC).
Whether a partnership is trading or investing is a question of fact depending on all the circumstances of the case. Trading is not defined by legislation and guidance on its meaning comes from HMRC statements and practice and the body of case law which has developed over the years. Relevant factors in deciding whether an activity is a trade or investment include the following:
the frequency with which business assets are bought and sold;
the nature of the assets;
the length of time for which assets are held;
the intention of the parties; and
the size of the transactions compared with the total assets of the partnership.
Treatment of partnership income
The tax treatment of the income of a partnership is governed generally by the Income and Corporation Taxes Act 1988 and the Income Tax (Trading and Other Income) Act 2005 (which in principle apply in the same way to general and limited partnerships). Under the Acts, no tax is assessable on a partnership itself in respect of partnership income, but instead each partner is liable to tax on their/its share of the partnership income and in line with the status of that partner for UK tax purposes.
Partnership capital gains
Under s59 Taxation of Chargeable Gains Act 1992, where two or more partners carry on a trade or business in partnership, it is the partners and not the partnership who are liable to tax on any capital gains realised by the partnership on the disposal of partnership assets.
Accordingly, normal capital gains rules determine whether the partners are liable to tax on any gains realised on the sale of the partnership’s capital assets. This means, for example, that non-UK resident partners without a tax presence in the UK will not be liable to UK tax on the disposal of a partnership’s capital assets unless the partnership is trading in the UK, or is treated as so doing through a UK branch or agent.
Deduction of tax on interest etc
A partnership that has a company as a partner is treated as a company for the purposes of the provision that allows payments (that would otherwise be subject to deduction of income tax) of certain interest and other expenses to be made gross between UK companies.
Taxes There are no corporate taxes on foreign earned profits.
Fees
Scotland LP with corporate account in Cyprus, UK or Belize: €1099 plus courier of €50
Nominee partners: €400 per year
Registered office and corporate secretary - included
Agent certified copy of corporate documents for bank opening - Free, a $150 value
Courier via DHL Delivery in 10-14 business days.
Annual Fees
The annual fees of the LP are €350 for govt fees & registered office and corporate secretary,€400 per year for nominee partners. All fees are payable commencing the anniversary of the corporation.
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