This article appeared on the news platform Daily Business, here.
As everyone in business knows there is no hiding place from regulation, and with each passing year it becomes more important to keep on top of what is required to ensure compliance. Running even the simplest business today is challenging and that is even before difficulties with supply chain, post Brexit hurdles and geopolitical events are thrown into the mix.
If you have a foreign subsidiary or any interest in any organisation outside the UK, another layer of regulation and compliance was added at the beginning of this month, when The Economic Crime (Transparency and Enforcement) Act 2022 came into force.
This legislation, which was fast tracked by the UK Government in response to Russia’s invasion of Ukraine, requires any overseas entity which owns (or want to buy, sell or transfer) property or land in the UK to register itself on a publicly available Register of Overseas Entities (ROE) held at Companies House. The aim is to improve transparency in relation to foreign ownership of UK property and land.
Inevitably, the devil is in the detail, and anyone concerned to find out if the Act applies to them should take advice because the price for getting it wrong is potentially severe. The penalties for non-compliance with the Act include both civil penalties (a fine of up to £2,500 per day) and criminal penalties (up to 5 years in prison), and the Government has insisted it will adopt a hard line on enforcement.
In an article of this sort, it is not possible to deep dive into all parts of the legislation but there are several basic principles or tests which everyone needs to know.
Firstly, what “overseas entities” need we be worried about? The Act applies to any company or limited liability partnership which is not incorporated in the UK (and even if they are UK tax resident). And, of course, any such entities incorporated in Guernsey, Jersey or the Isle of Man are caught because they are not part of the UK. The Act also applies to other types of legal entity which are not UK-incorporated, including non-UK partnerships that have separate legal personality and foreign foundations.
Secondly, what type of transaction is caught? The Act refers to a “qualifying estate” which is: (a) ownership of property, a lease of more than 20 years, or an assignation of a lease for more than 20 years (Scotland); (b) any freehold property or a leasehold interest in land for 7 years or more (England and Wales); or (c) a freehold or a lease of more than 21 years (Northern Ireland).
Lastly, if each of these tests is met what is it that needs to be registered? At this point you need to work out who or what is the “registrable beneficial owner” and that can be a person, Government/public authority or any other legal entity (for example a trust) which satisfies one or more of the following requirements:
• holds, directly or indirectly, more than 25% of the shares in the entity;
• holds, directly or indirectly, more than 25% of the voting rights in the entity;
• holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the entity; or
• has the right to exercise, or actually exercises, significant influence or control over the entity.
These are qualifications which will be very familiar to anyone involved in maintaining a company’s statutory books and ensuring all filings are up to date, but there is still a duty to register even if none of these qualifications apply. In that case details of the managing officers (director, manager, or company secretary) of the entity must be registered instead.
Another date that is important, in relation to new property transactions, is 5 September 2022, because from this date any overseas entity seeking to acquire or sell a qualifying estate must first be registered on the ROE and no application for registration in any UK land register can be made until that has taken place.
And if you thought this would just apply to new transactions then you would be mistaken because the Act has a retrospective element, requiring overseas entities which already owned a qualifying estate in the UK (except Northern Ireland) prior to certain prescribed dates, to register on the ROE.
What this means is that all property acquisitions made on or after 8 December 2014 (in Scotland) and 1 January 1999 (in England and Wales) will trigger the requirement for the legal entity concerned to register, and that must be done by 1 February 2023. Disposals of property or land since 28 February 2022 also trigger the requirement for the overseas entity to register and provide details of that disposal.
There is a lot to consider and there may be more to come, as it has been suggested that transparency may be strengthened even further if directors and persons with significant control were required to pass an identity verification test before a relevant filing can be made.
Nonetheless, the new legislation, and potential future amendments, represent a significant further step as part of broader efforts to increase corporate transparency in the UK, support suspicious wealth investigations and tackle economic criminal activity generally.