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Commercial Property Investment via an Isle of Man Company

The Isle of Man 2006 Act Company (SPV)

Each IOM company (SPV) requires a registered agent which role can only be performed by an entity that is regulated by the Isle of Man's Financial Services Authority.

This type of structure does not require any legal advice, although legal advice may be needed for the property finance aspects of the transaction and/or in relation to the issuing of Isle of Man law legal opinions that may be required by counter-parties. Fees for property finance advice and legal opinions vary from matter to matter.

Unregulated IOM Closed-Ended IOM Company

Isle of Man law does not regulate companies that do not offer their shares to the public and where the shareholders of such companies do not have the right to demand the redemption of their investment (an IOM Closed-Ended Company).

This makes IOM Closed-Ended Companies very attractive to private equity investors as the costs of formation and ongoing operations are very low due to the fact that burdensome fund legislation does not apply.

In jurisdictions where fund legislation does typically apply to equivalent investment companies (e.g. the Channel Islands) the costs of formation and operation of such entities are much higher due to the need for the entity:

- to appoint a licensed and/or regulated fund manager; and/or

- to appoint a licensed and/or regulated asset manager; and/or

- to appoint a licensed and/or regulated fund accountant and/or

- to appoint a licensed and/or regulated fund asset custodian; and/or

- to appoint a licensed and/or regulated fund auditor; and/or

- to report frequently on the net asset value of the fund assets.

None of the above regulatory (and so cost) overhead is required when using an IOM Closed-Ended Company, which is why private equity investors find IOM Closed-Ended Companies very attractive.

Tax Efficient Structuring Options

- Steps can be taken to mitigate and/or avoid UK corporation tax and UK capital gains taxes in relation to the income and sale profit generated from the commercial property held via the structure.

- However, please note that non-resident landlord taxes would be payable by the IOM Property Company on rental income generated by the commercial property.

- Due to the fact that non-residents are not required to pay any IOM taxes, it may be possible to distribute the property sale profits to its syndicated investor group tax-free.

- We will be able to discuss and consider the potential tax structuring options in more detail once you disclose to us the likely composition of your investor group.

- Also, Isle of Man Companies can be fully VAT registered so it is possible to create a VAT group and generally recover any VAT charged as is the case for UK companies.

Privacy vs. Secrecy

- By using corporate directors and/or nominee shareholders of the investment vehicle there will not need to publicly disclose its beneficial owners.

- In accordance with Isle of Man law (and international KYC and regulatory requirements), the actual beneficial ownership of the investment vehicle will be determined by its Isle of Man advisors but not publicly disclosed.

- This means that the identity of the beneficial owners of the investment vehicle can remain private rather than be an unknown secret.

Proposed Isle of Man Law Structuring Documentation

Based on our prior experience of documenting IOM Closed-Ended Companies that have a syndicated, private equity-style investor base, we have found the following documentation to be effective from a legal and commercial perspective:

(a)       Articles of Association for the investment vehicle

Relatively simple Articles of Association should be adopted (which should be a company that is incorporated under the Isle of Man Companies Act 2006 (the "2006 Act")). These Articles of Association should not contain any commercial terms or confidential information as the Articles of Association are filed with the Companies Registry and will be publicly available on a publicly searchable register. This is the only document that is in the public domain.

(b)      Shareholders' Agreement for the investment vehicle

As it is not necessary under the 2006 Act to file shareholders' agreements with the Companies Registry, this agreement will remain private and so can contain detailed commercial terms, such as:

- the profit waterfall which provides the entitlement of the difference share classes to the profits of the investment vehicle;

- shareholder loan repayment terms;

- minority shareholder protections;

- shareholder reserved matters;

- permitted share transfers;

- share transfer pre-emption rights; and

- other details regarding the relative rights of the founder investors and each subsequent investor that the parties would not want to be publicly disclosed.

Initially the Shareholders' Agreement would be entered into by the promoter and the investment vehicle and would be structured to permit new investors to become a party by means of a Deed of Adherence. This approach gives the greatest flexibility and enables the investment vehicle to offer different investment terms to different investors.

This approach would also have the benefit that new investors would not know the identity of the beneficial founder investors or each subsequent investor based on the shareholder documentation that they were executing.

(c)       Share Issue and Share Transfer Deed of Adherence

This deed of adherence enables each subsequent investor to become a party to the Shareholders' Agreement.

(d)      Subscription Agreement

This agreement provides the terms upon which founder investors and subsequent investors are to subscribe for shares in the capital of the investment vehicle and the terms upon which they are to be allotted and issued.

(e)      Interest-free and/or Interest Bearing Shareholder Loan Agreements

These loan agreements provide the terms upon which each investor is to make available loan funds to the investment vehicle as part of their Investment.

This funding method is particularly attractive to investors that may be located in higher tax jurisdictions (including the UK) as the repayment of a loan is not normally viewed as a taxable event.

If each investor makes available the majority of their investment into the investment vehicle by means of interest-free shareholder loans, then the investment vehicle can normally repay this element of the Investment to the investor without the investor incurring tax liabilities.

(f)        Power of Attorney

This deed enables each investor to appoint the directors of the investment vehicle as their attorney with authority to sign each of the above-mentioned subscription agreement, shareholder's loan agreement and deed of adherence. Please note that this document is not obligatory it is offered purely a matter of convenience to each investor.

(g)       Intra-group loan agreements

These agreements document the movement of investor funds from the investment vehicle to each operating company.

Benefits of IOM Structures for UK Commercial Property

- Enables UK Capital Gains Taxes on property sale profits to be reduced or avoided;

- No UK Corporation Taxes are not payable on property sale profits;

- No IOM Capital Gains Taxes exist;

- No IOM Income Taxes or Death Taxes exist;

- 7 day VAT Registration – so no need to fund VAT facility at purchase;

- VAT Grouping possible for VAT structuring purposes;

- Privacy –no searchable ownership registers and nominee directors and shareholders are used; and

- UK Non-resident Landlord Taxes are payable on income

For further information on any of the above services, please contact:

John Bateson

Director – Isle of Man

E-mail:jbateson@dcts-iom.com            

Tel direct: +44 1624 649 735

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