The Economic Crime (Transparency and Enforcement) Act 2022 (“Act”), which was introduced last month, created the “Register of Overseas Entities,” as Daniel Abrahams mentioned in his opinion post. The Register of Overseas Entities is intended to promote openness regarding foreign entities’ ownership of UK real estate.
The Act’s origins may be traced to 2016. The then-Prime Minister, David Cameron, warned foreign businesses at a meeting against corruption that they would have to reveal the beneficial owners of UK properties. However, it was Russia’s invasion of Ukraine that accelerated the Act’s passage into law. Nowadays, transparency is essential.
The Act is not without its detractors. The UK government is still under pressure to take additional action against money laundering involving UK assets (such as the “London Laundromat”). Future targeted changes are certainly in sight.
Why is this important?
Overseas entities must abide by the new registration process to legally purchase, sell, or finance UK properties. It might also be essential for internal group restructurings, such as future transfers of UK property by or to an overseas group entity or granting a legal charge over UK property in connection with any group financing arrangements.
Failure to comply will stop transactions from being recorded with the Land Registry. These transactions could result in fines or the committing of crimes.
Unless exempt, foreign companies that own qualifying estates in land, whether for commercial or residential use, must register with Companies House. Such foreign entities must take reasonable measures to locate and provide information about their registrable beneficial owners.
An individual, a company, a government agency, or another legal entity can all be a “beneficial owner.” According to the Act, a person (X) is considered to be the beneficial owner of a foreign entity or other legal entity (Y) if one or more of the following conditions are satisfied:
- Condition 1: X directly or indirectly owns more than 25% of the shares of Y.
- Condition 2: X owns more than 25% of the voting rights in Y, whether directly or indirectly.
- Condition 3: A majority of the board of directors of Y may be appointed or dismissed by X, directly or indirectly.
- Condition 4: X is entitled to, or actually does, have significant influence or control over Y.
After registration, Companies House will issue overseas firms a “overseas entity ID.”
Every year, the data entered into Companies House must be updated.
What exactly is a foreign entity?
An “overseas entity” is defined as any legal entity that is subject to the laws of a nation or territory other than the United Kingdom. This definition includes the United States and EU as well as the more obvious “offshore jurisdictions” such the BVI, Cayman Islands, and Channel Islands.
It includes corporations, partnerships, and any other type of entity that is recognised as having a legal personality under the legislation that governs it.
Any overseas entity that has acquired a property in England and Wales since 1999 and holds a qualified estate in land is subject to the new regulations, which are retroactive in nature. A freehold or lease issued for more than seven years is referred to as a “qualifying estate.” After a six-month transition period, foreign entities must be listed on the register or be the subject of an active application.
In addition, if an overseas entity sells property between February 28, 2022, and the end of the transitional period, it must, if it is not exempt, have registered as an overseas entity by the end of the transitional period or applied to be registered as one. It must also have made the necessary declarations regarding its beneficial ownership and the sale.
As a result of new land registration regulations, titles owned by foreign entities will be subject to restrictions that will prevent transactions involving foreign entities that are in violation of the Act from being registered.
What will happen in the case of non-compliance?
An overseas entity will effectively be barred from transacting in the land, whether by purchasing, selling, or financing, if it does not abide by the new regulations.
Additional potential criminal offences under the Act include:
- failure to register
- failure to take reasonable steps to identify beneficial owners
- giving false information
- failure to update the register for the overseas corporation and its officers (such as directors).
Potential penalties include fines and up to five years in jail (for individuals).
Foreign companies with property in the UK should:
- Audit their assets.
- Analyse the data they might need to collect to submit a registration request to Companies House. It would be prudent to apply for registration as soon as the register is open. Do not hold off until the six-month transitional period is through.
- Take steps to determine its beneficial owners, to the degree it hasn’t already. In intricate constructions, this could take some time.
- Be aware that beneficial ownership and registrations will likely receive more attention during transactions. This is likely due to increase because of:
- due diligence around these transactions
- contractual safeguards that respective parties may seek.
This is not legal advice; it is intended to provide information of general interest about current legal issues.