TAX ALERT

On Wednesday, December 9, the UK government announced a one-off, 50 percent tax on discretionary bonuses awarded or paid by the financial services industry during the period December 9, 2009, to April 5, 2010. The draft legislative language is potentially subject to change and is unlikely to be voted on by Parliament before the first quarter of 2010. In all events, the UK government intends to have the legislation in place by the due date for the tax’s collection (August 31, 2010).

This tax is on the financial services entity and is not deductible for purposes of UK corporation tax (it would not appear to be an income tax for purposes of the US foreign tax credit); it is not an additional income tax on the recipient. Performance-based remuneration, whether paid in cash, benefits, or most equity-based compensation, in excess of 25,000 sterling generally is subject to the tax. The tax applies to performance-based remuneration awarded or paid to UK-resident employees, independent contractors, and non-UK residents who performs relevant financial service duties in the UK during the period April 6, 2009, to April 5, 2010. The tax does not reach non-variable pay that is not subject to performance conditions.

The tax will apply to UK-resident entities which are licensed by the Financial Services Authority (the FSA) and conduct “relevant regulated activities” including: (a) deposit-taking; (b) dealing in securities as principal or agent; (c) arranging deals in securities; (d) acting as custodian; and (e) retail mortgage lending. It will also reach UK-resident investment companies or financial trading companies which are affiliated with an FSA-regulated entity.

For non-UK resident businesses, the tax will apply to the UK branch of a non-UK bank, provided that the bank is authorized by the FSA and accepts deposits or “wholly or mainly” conducts relevant regulated activities through a UK permanent establishment. Also, the UK branch of a non-UK “relevant foreign financial trading company,” which includes a securities dealer, is subject to the tax. Non-UK entities engaged in insurance, sponsoring venture capital trusts or OEICs and friendly or building society services are exempt.

Complicated rules govern the treatment of a UK permanent establishment which is itself not FSA-licensed, but affiliated with an FSA-licensed person. While the language is not completely clear, it appears that sponsors of private equity and other alternative investment funds operating in the UK are exempt from this tax unless they are affiliated with a bank or other financial institution that is FSA-licensed.

For a non-UK resident financial services business, the questions to ask are:

1. Is your UK permanent establishment, parent entity, or other affiliate licensed by the FSA?

2. If so, do your activities wholly or mainly consist of “relevant regulated activities”?

The draft legislation anticipates many standard approaches to sidestepping its coverage. For example, neither delaying the payment of an award that has arisen contractually during the period, nor shifting the obligation to pay from a UK permanent establishment to the non-UK parent entity, will avoid this tax.