New opportunities to invest in the UK and San Marino: the UK's newest Double Tax Treaty

The UK and San Marino entered into a double tax treaty on 17 May 2023. It came into with effect in San Marino from 1 January 2024. In the UK it will came into force from 1 January 2024 for taxes withheld at source and will come into effect from 1 April 2024 for corporation tax and from 6 April 2024 for income tax and capital gains tax (the Treaty).

The Treaty closely follows the OCED model tax convention (the OECD Model) with some variations which include BEPS recommendations. The Treaty provides a similar position to that of other recently agreed UK double tax treaties (such as the Luxembourg-UK double tax treaty (the Lux Treaty)).

Key provisions include:

• Capital Gains: Article 13 includes the allocation of taxing rights to the UK or San Marino (as applicable) where gains arising from the sale of shares (or comparable interests, such as interests in a partnership or trust) deriving more than 50% of their value directly or indirectly from immovable property located in that jurisdiction. As was the case for the Luxembourg-UK Double Tax Treaty, Article 13 departs from the OECD Model by removing the requirement for the test on gains arising from the sale of shares (or comparable interests) being met during the 365 days before the sale of shares (or comparable interests) by a taxpayer.

Therefore, where a Sammarinese tax resident disposes of an interest in a UK property rich company (being a company which derives more than 75% of its value from UK real estate), the Sammarinese tax resident investor will be subject to the UK Non-Resident Capital Gains Rules ('NRCGT') as the taxing rights will be allocated to the UK in accordance with Article 13 (and as a result such Sammarinese tax resident will not be subject to further taxation in San Marino). In the same way as the Luxembourg-UK Double Tax Treaty, Article 13 does not provide any grandfathering provisions which means that NRCGT will apply to existing investment structures and investments where gains have accrued prior to 1 January 2024.

• Dividends: Article 10 provides an exemption from the taxation of dividends paid by a company resident in the UK (or San Marino as applicable) where such company is beneficially owned in San Marino (or in the UK as applicable). However, where such dividends are paid by an investment vehicle out of income or gains derived from immovable property (other than where the beneficial owner of such income or gains is a recognised pension fund) and most of such income and gains are distributed annually by the investment vehicle and are exempted from tax, a dividend withholding tax rate of 15% may apply.

The 15% withholding tax on dividends paid by an investment vehicle which is distributing income and gains that are tax exempt ensures that UK REIT property income distributions (PIDs) continue to be subject to withholding tax, albeit the withholding tax rate is 20% under UK domestic law, and therefore as a result of the Treaty, the withholding tax rate applied to UK REIT PIDs will be reduced to 15% where the beneficial owner of such UK REIT PIDs is resident in San Marino. Article 10 therefore provides a more favourable outcome than that offered under the OECD Model.

• Interest: Article 11 exempts interest from withholding tax where the interest is paid to a resident of the UK or San Marino (as applicable). This exemption does not apply to interest which is treated as a dividend under Article 10. Article 11 offers a more generous withholding tax position than that offered under the OECD Model, however the exclusion with respect to income treated as a dividend is not expressly included in the OECD Model.
• Royalties: Article 12 provides an exemption from withholding tax on royalties. Article 12 is nearly identical to the OECD Model.
• Residency: Article 4 aims to ensure that a person does not suffer double taxation in both San Marino and the UK as a result of being dual tax resident in both jurisdictions. Where the Treaty considers a person to be a 'resident of a Contracting State', the taxing rights of such person as a result of tax residency will be allocated to that Contracting State. However, where the Treaty considers a person to be a 'resident of a Contracting State' in both San Marino and the UK, the tie-breaker provisions will apply to allocate taxing rights to either the UK or San Marino. Article 4 is substantively identical to the OECD Model but for (a) a specific reference to 'resident of a Contracting State' including a pension scheme established in that State and (b) including 'place of incorporation' as a criteria to determine residence when considering treaty residence.

The Treaty will not take full effect until April 2024 (for income tax/corporation tax/capital gains tax purposes) and therefore there is an opportunity for San Marino and UK taxpayers to consider their investment structures and the provisions of the UK-San Marino Double Tax Treaty to ensure they do not suffer double taxation in both jurisdictions. It is important to note that the treaty includes the OECD multilateral instrument principal purpose test, to prevent treaty abuse. As a result, treaty benefits will be denied if it is reasonable to conclude that obtaining the benefit of the treaty was one of the principal purposes of the person seeking to rely on the benefit (unless obtaining the benefit in those circumstances is in line with the object and purpose of the treaty provision). As a result we do not anticipate an influx of UK/San Marino tax planning on the back of the Treaty, but it does offer potential opportunities for those who may have interests in the two jurisdictions and may be of interest, for example, to Italian residents who might consider whether the Treaty may offer an advantageous route to investing or doing business in the UK, provided they structure carefully and in a legitimate manner.