Lawyer Issue

Malta & Cyprus Citizenship 

Programmes Compared 

Offshore Roadblocks in 

Investor Claw Back Claims 

Real Estate Tax Exemption 

Issue Muddied Again

Content 

Update On The Recent Developments From The Tipo Regarding 

Examination Practice For Computer Software Related Invention 4 

Contact 

www.lawyerissue.com 

Malta & Cyprus Citizenship Programmes Compared 7 

Offshore Roadblocks in Investor Claw Back Claims 12 

Big Changes to Online Copyright Laws Downunder 16 

Lump-sum taxation and residence permit in Switzerland 20 

Cyprus IP Company: The Breathless Conundrum Solved 24 

Keyword Advertising – a Bloomin’ Nightmare? 28 

Tax planning considerations for Tier 1 (Investor) migrants 31 

Enforcement of Intellectual Property Rights in Sri Lanka 38 

UK Holiday Pay Should Include Overtime Payments 43 

Effects Of The New Federal Spending Package On The Health Sector 48 

Should HMG Take A Market Rent From Its Data Estate? 50 

NI 51-101 Amendments Promote Improved Disclosure 

of Oil & Gas Resources 52 

Real Estate Tax Exemption Issue Muddied Again 56 

Disability Discrimination Under The California Fair Employment and 

Housing Act 58

Intellectual Property 

Update On The Recent Developments From 

The Tipo Regarding Examination Practice 

For Computer Software Related Invention 

By Yu-Li Tsai, Patent Attorney 

Deep & Far Attorneys-at-Law 

In 2014, the Ministry of Economic Affairs issued an amended Patent 

Examination Guide for computer software related inventions, and 

it definitely will substantially affect the examination practices of the 

Taiwan Intellectual Property Office (TIPO). Some of the essential 

amendments are summarized as follows: 

1 

Invention definition 

To judge whether a claimed invention meets the 

definition of an invention, one must consider the 

contents of the claimed invention, rather than the 

recitation form of the claims, so as to identify whether 

the invention as a whole is of a technical nature. If 

only a portion of the claimed invention does not 

utilize the laws of nature, one cannot assert that the 

claimed invention does not meet the definition of 

an invention. 

The judgment of the above is based on the technical 

features recited in the claims, but due to the special 

nature of a computer software related invention, 

one usually needs to refer to the contents of the 

specification in order to understand the essential 

meaning of each feature of the claims. Therefore, 

during examination, one conducts a synthetic 

judgment by examining the invention recited in the 

claims as a whole and referring to the specification, 

drawings, and common knowledge at the time of 

filing to consider as a whole the problems intended 

to be solved by the invention and the technical means 

for solving the problems with reference to common 

knowledge at the time of filing. 

If the claims do not specifically recite essential 

technical features, but after referring to the 

specification, drawings and common knowledge 

at the time of filing, the examiner can find that the 

invention as a whole is of a technical nature but is 

not something simply based on the laws of nature, 

mathematical formulas, business methods, artificial 

rules, information disclosure, or aesthetical creation, 

etc., then the examiner will notify the applicant to 

make a response or amendments on the grounds that 

the claims are unclear. If the examiner finds that the 

computer software or hardware plays a significant 

role in the invention, but the specification does not 

clearly and sufficiently disclose this, for example, or 

how the software and the hardware cooperate, how 

the problems are solved, this raises the issue that the 

skilled person in the art will be unable to implement 

the invention according to the specification. 

2 

Definiteness of claims 

A claim for a computer software related invention 

is usually drafted using the language of generalfunction-defined 

object or means-plus-function. 

Regarding a general-function-defined object claim, 

to be definite, the skilled person in the art of the 

invention must be able to concretely imagine a 

hardware component or software module in view of 

the common knowledge at the time of filing for the 

function. Regarding a means (step)-plus-function 

claim, if the specification fails to recite the structure, 

material, operation corresponding to the function 

or computer program algorithm or hardware 

component achieving the function, then it will render 

the claim indefinite and cannot be supported by the 

specification, and at the same time will fail to meet 

the enablement requirement. 

3 

Features having 

contributions in respect of 

technical nature or not 

An invention under the Patent Act must have a 

technical nature, specifically, the means of solving the 

problems must involve the technical means of the 

technical field. 

An invention protects the 

creation of technical ideas 

which utilize natural laws, 

and the examination of its 

patentability is generally 

based on all the technical 

features recited in the claims. Therefore, when 

examining the novelty of the invention claims, any 

example of the prior art that discloses all of the 

technical features recited in the claims will result in a 

lack of novelty. However, because the applicant may 

recite technical features that do not have a technical 

nature in the claims of a computer software related 

invention, when examining the non-obviousness, one 

shall consider whether the technical features that do 

not make a technical nature have contributions to the 

one having a technical nature. 

In a computer software related invention, if a feature 

recited in a claim has a technical nature, then the 

feature makes a contribution to the technical nature; 

if the technical feature does not have a technical 

nature, then one shall judge whether it contributes 

to the technical nature of the claim after cooperating 

with a technical feature having the technical nature; 

if the technical feature does not have a technical 

nature, and fails to cooperate with a technical feature 

having the technical nature and thus, does not belong 

to a part of the technical means which solves the 

problems, then it shall be deemed as a utilization of 

prior art and can be easily combined with other 

prior art. 

Therefore, as illustrated in the flow charts below, a 

claim partially recites a feature having a technical 

nature (A: image processing device), and at the 

same time partially recites the features having no 

technical nature (B: “mathematical formula” for the 

image processing device; C: business method of 

“distributing as a gift”). In this situation, the claim 

includes feature (A) having a technical nature, so the 

claim as a whole meets the definition of an invention; 

however, when judging whether the claim meets the 

requirement of non-obviousness, the examiner only 

needs to compare “the feature contributing in respect 

of the technical nature” – feature (A) having a technical 

nature, and feature (B) cooperating with a technical 

feature having the technical nature and belonging 

4 | LawyerIssue 5


CHETCUTI CAUCHI 

ADVOCATES 

Malta & Cyprus Citizenship 

Programmes Compared 

by Dr Jean-Philippe Chetcuti 

Figure: The flow chart for judging 

whether a technical feature contributes 

in respect of the technical nature 

to a part of the technical means which solves the 

problems. The remaining technical feature (C) “having 

no contribution in respect of the technical nature” 

shall be deemed as a utilization of the prior art and 

can be easily combined with other prior arts. 

4 

Conclusion 

The recent developments from the TIPO regarding 

examination practice for computer software related 

invention seems to have become more sophisticated 

and systematic when judging whether a computer 

software related invention meets the requirements 

of definition, enablement, definiteness, novelty, and 

non-obviousness. The author believes that readers 

will become more familiar with Taiwan’s current 

computer software patent practices and have a 

clearer direction in pursuing future software patents 

in Taiwan. If you or your clients have any questions 

on patent protection in Taiwan, please contact the 

author at 886-2-25856688 X 8139 or yltsai@deepnfar. 

com.tw. 

Yu-Li Tsai 

Patent Attorney at Deep & Far Attorneys-at-Law 

T: +886 2 25856688 #8139 

Email: email@deepnfar.com.tw 

In this article, I set out to compare the programmes handled by 

our Malta and Cyprus offices. Whilst disclosing my citizenship 

of Malta, I endeavour to offer objective insight from my first 

hand experience of the two. 

Yu-Li Tsai owns electrical engineering bachelor degree and telecommunication master degree 

from NTU, the local top university. He also has an IP master degree from Franklin Pierce Center for 

Intellectual Property. He also passed the U.S. Patent Registration Examination. Currently, Mr. Tsai 

is working for Deep & Far Attorneys-at-Law as a patent attorney. He also can successfully represent 

litigations and achieve favorable consideration for complex cases. 

Investment Levels: 

Malta & Cyprus Compared 

Cyprus’ Investment only routes 

The Cypriot programme requires an 

investment of €5 million held in either one or a 

combination of: 

• bank deposits held by local banks and 

banking subsidiaries, 

• Cypriot Government Bonds (min. maturity 

of 3 years), 


Immigration 


ADVOCATES 

• bonds or debentures issued by Cypriot 

businesses (min. maturity of 3 years), 

• real estate developments in Cyprus or 

• capital in Cypriot businesses (including 

banks) having a physical presence and 

employing at least 4 Cypriots. 

The minimum direct investment is reduced 

to €2.5 million if five investors join to make a 

combined investment in the above direct investment 

methods. 

investment method, Cyprus has recently introduced 

a citizenship route consisting in €2m 

investment in the National Investment Company 

of Cyprus and a donation of €500k to the 

Research &Technology Fund. 

Residency requirements 

Malta’s Genuine Link Test 

The Malta Citizenship programme offers citizenship 

within the European island of Malta after 

one year of sustained connections with Malta, 

EU Compliance 

Malta’s EU Stamp of Approval 

Malta has long pursued a policy of running a 

financial centre that is respected for its rule of 

law and recognised for its marked compliance 

with its European and international treaty obligations. 

It is in this light that Malta can boast 

of the only public approval of any citizenship 

programme by the European Commission after 

thorough scrutiny at domestic and European 

parliamentary levels. 

Cyprus: Cash in advance please 

Evidence of the investments made under the 

requirements of the Cypriot programme need 

to be submitted with the rest of the applications 

documents, at the outset. 

Malta vs. Cyprus Citizenship 

Timeframes 

Malta’s In Principle Approval: 

4 months 

Malta’s Contribution-Investment 

Mix 

concurrently with the maximum of 4 months’ 

processing time. 

Cyprus-EU Relations 

Before the financial meltdown of Cyprus in 

November 2014 saw the first applicants (clients 

of Chetcuti Cauchi) emerge from the first cycle 

of applications as approved applicants. This is 

For eligibility under the Malta Citizenship 

This ‘residency’ requirement is less uncertain 

2013, Cyprus had ignored calls for its corpo- 

when the significant investment needs to be 

programme or the Malta Individual Investor 

than one might think. Malta earned the full 

rate tax system to be reformed in accordance 

made. This further eliminates the perceived risk 

Programme, applicants must make a contribu- 

approval of the European Commission after 

with the EU’s Code of Conduct and the OECD’s 

and allows the applicant to invest with the com- 

tion to the Malta Social & Economic Develop- 

a thorough screening of its Citizenship pro- 

Harmful Tax Competition Report. The terms of 

fort of a final ‘in principle’ approval in hand. 

ment Fund amounting to €650,000 with smaller 

gramme by implementing the ‘genuine link’ 

an international €10bn bailout included painful 

contributions of €25,000 for the spouse and 

test emanating from European Court of Justice 

reforms including the raising of the corporate 

On making the contribution and investment in 

dependent unmarried children under 18 and 

jurisprudence. 

tax rate, of the Value Added Tax rate and other 

Government bonds and renting / buying prop- 

€50,000 for dependent children between the 

taxes. 

erty in Malta, applicants are entitled to receive 

age of 18 and 26 and dependent parents over 

This requires an applicant to show a real con- 

their Maltese passport within their entitlement 

the age of 55. 

nection with the jurisdiction over at least one 

Cyprus’ elimination of any presence require- 

period. 

year without imposing a specific minimum phys- 

ments as a pre-requisite to acquiring Cypriot 

Applicants must also make an investment in 

ical stay requirement. 

citizenship creates a further strain in relations. 

This period is of 6 months from citizenship 

Government bonds in the amount of €150,000. 

Whether the EU will exercise any political clout 

application date for applicants who have been 

They must also rent residential property in 

It is not difficult to genuinely satisfy the normal 

against Cyprus is yet to be seen. 

resident in Malta already a year to date. Others 

Malta for at least €16,000 per year for at least 

5 years OR acquire property in Malta valued at 

€350,000 or higher. 

badges of residence: a small price to pay for the 

EU’s unprecedented nod of approval and for 

new passport holders’ peace of mind. 

Risks 

Malta: Cash on approval 

need to wait for the passing of this one year in 

compliance with their pre-approved residence 

criteria. 

Comparison 

Cyprus’ Minimal Presence 

In my experience handling applications from 

beginning to approval, the Identity Malta Agency 

At time of print, Chetcuti Cauchi represents 

While Malta’s contribution is an outright, non-re- 

Cyprus does not require any presence except 

grants prior approval of proposals submi tted 

clients in the final steps of the process and who 

fundable contribution to the state, Cyprus’ 

for a single visit to make a declaration on oath 

by approved citizenship agents laying down the 

are applying for the first passports ever to be 

€2.5m to €5m investment is significantly higher 

and to collect the passport. 

various connections that the applicant proposes 

issued under this program. 

and ties up significant capital in an uncertain 

economy, not an issue for a discerning investor 

One may worry about Cyprus’ non-conformity 

to put in place to demonstrate his/her genuine 

connection with Malta. 

Cypriot Passport in 3-6 months 

familiar with the Cypriot market or the ultra 

with the European Commission’s stated mini- 

The upside of this is that Cyprus offers econom- 

high net worth investor. 

mum of one year residence. The EC conversely 

This entirely eliminates the risk of an applicant 

ic citizenship in between three to six months. 

The cash outflow required by the Maltese 

endorsed the Malta Citizenship programme for 

upholding a one year minimum connection. 

discovering he has failed to comply after the 

year has passed, losing more time. And this in 

Socio-economics 

programme is significantly lower at €880,000 in 

However, under European law, nationality ulti- 

line with Malta’s tradition of legal certainty and 

Newly minted Maltese passports confirm their 

the case of property rental to €1.1 million if one 

mately falls exclusively within the competence 

reliability. 

holders as citizens of an economically sustain- 

opts to buy property. 

of the member-state and Cyprus may only suf- 

Likewise, the contribution and investments 

able, politically stable Island, that punches be- 

Convergence 

Inspired by Malta’s mixed contribution and 

fer politically from criticism of its lax citizenship 

criteria. 

need only be made one receipt of in principle 

approval of a Citizenship application and only 

€10,000 of this on application. 

yond its weight in economic terms and competitiveness. 

New citizens enjoy the full effects of 

European Union citizenship and the identity of a 


Immigration 


ADVOCATES 

culturally rich and diverse nation. 

In addition to the Turkish occupation that has 

tormented Cyprus for some decades, Cyprus’ 

economy has been going through rough times 

lately. But Cypriots are resilient people and 

through initiatives like this economic citizenship 

program and thanks to new-found oil 

and gas reserves, will hopefully restore their 

economy. 

Visa-free Travel Power 

The Maltese passport is dubbed ‘one of the most powerful 

passports in the world’, enjoying 167 visa-free destinations for 

Maltese nationals, including the UK, US and Canada. 

Since Malta has fully implemented the Schengen 

Treaty in 2007, applicants enjoy access to 

the Schengen area through a residence card 

issued at the outset of the citizenship process. 

Cyprus’ Citizenship by Investment programme, 

or Scheme for Naturalisation of Investors in 

Cyprus by Exception, has proved a valid alternative 

to the Maltese programme. 

True, Cyprus is not part of the Schengen Area 

and the Cypriot passport offers slightly less 

visa-free destinations (157 compared to Malta 

166), with the notable absence of the US from 

the list. 

Success in Numbers 

The Mediterranean islands of Malta and 

Cyprus have received over 400 and 700 applications 

under their respective citizenship by investment 

programmes. It’s clearly not a numbers 

game but the numbers are nonetheless 

telling in their own right. Both programmes 

pitch to the ultra-high net worth individual. 

Cyprus has an entry level of €5m, reduced to 

€2.5m for members of investor groups while 

Malta requires a mixed contribution-investment 

ranging from €880k to €1.1m. 

Citizenship by Investment Race 

Having witnessed both programmes perform 

from application to approval, I remain 

impressed by the seriousness of both governments 

in administering their citizenship 

programmes. Malta’s Identity Malta Agency, its 

one stop expatriates shop, can be commended 

for setting a precedent in VIP investor care. 

Similarly, Cyprus has managed to deliver on its 

promise of a speedy process. 

At the end, the HNW individuals and 

families that we serve continue to enjoy 

the benefit of choice and the fruits of 

their new found identity as Euro-Mediterraneans… 

…as Maltese or Cypriot. 

Malta or Cyprus? 

Comparing the two programmes, colleagues 

have jumped to conclusions and have been 

quick to side with one or the other. I quite 

disagree that there is a straight winner if this 

is a race. My more restrained opinion is that 

no one size fits all and each programme has 

its merits, addressing different aspirations of 

different investor profiles. 

The Author 

Interview of Identity Malta CEO, Justice Minister 

& immigration attorney Dr Jean-Philippe 

Chetcuti by Radio Télévision Suisse 

Dr Jean-Philippe Chetcuti is one of the founding 

partners of Chetcuti Cauchi Advocates. Dr 

Chetcuti heads the firm’s Private Client practice, 

specialising in private client tax planning, 

wealth structuring and citizenship and residency 

planning. 

Dr Chetcuti is a key advisor on the Malta Citizenship 

by Investment, the Cyprus Citizenship 

by Investment, the Malta Global Residence 

Programme and buying property in Malta and, 

holding licence IIP 001, he was the first to be 

licenced by the Identity Malta Agency and to 

directly file citizenship by investment applications 

under the Malta Individual Investor 

Programme. 

Within his tax planning and wealth structuring 

function, he specialises in the use of Malta 

holding companies and Malta’s Participation 

Exemption, Malta royalty companies, Malta 

trusts and Malta foundations and Malta Professional 

Investor Funds. 

• Member, American Immigration Lawyers 

Association (International Chapter) 

• Member, IBA International Bar Association 

(Immigration & Nationality Law 

Committee) 

• Member, Malta Chamber of Advocates, 

International Tax Planning Association, 

International Fiscal Association. 

• Chairman, Society of Trust & Estate Practitioners, 

Malta Branch 

• Executive Committee Member, Institute 

of Financial Services Practitioners 

• Co-founder, Secretary, Malta Association 

of Family Enterprises. 

Chetcuti Cauchi Advocates 

Chetcuti Cauchi is a law firm serving successful 

entrepreneurs, business families and institutions 

using the financial centres of Malta and 

Cyprus, and their advisors around the globe. 

With offices in Malta, Cyprus and London, we 

advise clients seamlessly on their business and 

private legal needs both at home and abroad. 

Our unique multi-disciplinary set-up of over 

Jean-Philippe Chetcuti 

Managing Partner at Chetcuti Cauchi Advocates 

T: +356 22056200 

Email: jpc@ccmalta.com 

seventy lawyers, tax advisors, accountants, 

company administrators and relocation advisors 

allows us to provide the full spectrum of 

legal, tax, company formation, immigration, 

corporate relocation and fiduciary services to 

clients using Malta and Cyprus in international 

tax planning, cross-border business structuring 

and wealth management solutions. 

This cross-functional arrangement appeals to 

discerning clients that range from High Net 

Worth individuals and families, entrepreneurs 

as well as blue chip companies. The firm 

serves as a trusted advisor to international 

law firms, tax advisors, accountants, private 

bankers and family offices worldwide. 

We maintain key strengths in corporate law, 

international tax, intellectual property, immigration 

law, property law and trusts. 

Despite being a top five law firm by size, the 

partners and seniors continue the firm’s 

tradition of providing specialised legal services 

of unrivalled quality, responsively, but 

rendered more valuable through their delivery 

in a personalised environment built around 

our clients’ personal or commercial realities. 

The firm has built a name for serving today’s 

and tomorrow’s industries with significant 

commercial awareness, including the financial 

services, online gambling, pharma, life-sciences, 

digital games, aviation and super-yacht 

industries, combining specialist business law 

and international private wealth advice. 

Dr Jean-Philippe Chetcuti is one of the founding partners of Chetcuti Cauchi Advocates, a leading law 

firm with offices in Valletta, Nicosia and London. Dr Chetcuti heads the firm’s Private Client practice, 

specialising in private client tax planning, wealth structuring and citizenship and residency planning. 


Fraud and White Collar Crime 

Offshore Roadblocks in 

Investor Claw Back Claims 

by Ian Huskisson 

“It is inherent in a Ponzi scheme that those clients who 

withdraw their funds before the scheme collapses escape 

without loss, and the loss falls on clients whose funds are 

still invested when the scheme fails” 

Introduction/Summary 

This statement is taken from the Press Summary 

issued by the Judicial Committee of the 

Privy Council, the highest appellate court for 

several offshore jurisdictions including the 

Cayman and the British Virgin Islands. The 

case was one of several investor claw back 

claims that have emerged following the Madoff 

fraud (Fairfield Sentry Limited (In Liquidation) v 

Alfredo Migani and others [2014] UKPC 9). 

The strong trend emerging in the offshore 

cases is reflected in the quote: investors who 

cash in prior the discovery of the fraud may 

keep their payments even if based on fraudulent 

accounting and will do so at the expense 

of the remaining investors.This approach is 

justified in part on the need for commercial 

certainty in order for mutual funds to operate 

efficiently. As the London based Judges of the 

Privy Council explained in Fairfield Sentry, it 

would be unfortunate if every time an investor 

redeemed its share there was the potential for 

it to be set aside or declared unlawful at some 

later date. 

This approach does contrast with that taken in 

the United States, where courts will generally 

allowclaw back of payments made to investors 

who redeem their investments before 

the fraud is discovered. The approach in the 

United States is to ensure the gain made by 

the early redeemers or “net winners” is fairly 

distributed amongst those that were not so 

fortunate as to redeem out in time, the “net 

losers”. This approach is adopted in some European 

countries, including Italy where there 

were numerous successful claw back claims 

made against the administrators of Parmalat. 

The tension between the different approaches 

shows no sign of easing. This article will 

review the Fairfield Sentry case and a more 

recent Cayman Islands claw back case which 

produced the same result but through a different 

route. 

Fairfield Sentry 

Fairfield Sentry is one of the leading cases arising 

out of the Madoff fraud. It was an appeal 

from the British Virgin Islands, but involves 

fundamental legal principles that should apply 

in England and Wales and offshore jurisdictions 

including the Cayman Islands. The 

Cayman and British Virgin Islands share the 

London based Privy Council as their highest 

appellate court. 

Fairfield involved the liquidators of one of 

MrMadoff’s funds seeking to set aside early 

redemption payments made by the fund 

before the discovery of the fraud. The liquidators 

argued that it should be possible to revisit 

and rectify what has emerged to be a flawed 

redemption process because the valuation 

process was tainted by fraud. 

The early redeemers had been unjustly enriched 

at the expense of the other investors or 

creditors because their redemptions were calculated 

at highly inflated valuations based on 

Madoff’s fraudulent accounting. It was argued 

that at the time of the early redemptions, no 

certificate had been issued by the fund’s directors 

and that accordingly the valuation used 

for the early redemptions was not definitive. 

This argument was rejected. The court pointed 

out that the fund’s constitutional documents 

envisaged the redemption prices being 

definitively ascertained at the time of the 

redemption and not afterwards. The provisions 

for certification were included as part 

of that process and had to be interpreted in a 

commercial and “workable” manner. 

Since there was reliance on the redemption 

price being definitively determined on the 

relevant dealing day, any other interpretation 

would be rejected as unworkable. The judgment 

of the court described the liquidators’ 

argument (that the flawed valuation should be 

revisited) in the following terms: 

“In the Board’s opinion, this is 

an impossible construction. If it 

were correct, an essential term of 

both the subscription for shares 

and their redemption, namely the 

price, would not be definitively 

ascertained at the time when the 

transaction took effect, nor at the 

time when the price fell to be paid. 

Indeed, it would not be definitively 

ascertained for an indefinite 

period after the transaction had 

ostensibly been completed, because 

unless a certificate was issued it 

would always be possible to vary 

the determination of the NAV per 

share made by the Directors at the 

time and substitute a different one 


Fraud and White Collar Crime 

based on information acquired long 

afterwards about the existence or 

value of the assets…” 

In short, the requirement to interpret the 

fund’s constitutional documents in a workable 

commercial manner was paramount. The determination 

by the fund of the price to be paid 

to the early redeemers was accordingly binding 

on all parties notwithstanding the fact that 

it was based on fictitious accounting. The early 

redeemers would be allowed to keep their 

redemption payments even though this was to 

the detriment of the fund’s creditors and other 

investors. 

RMF Market Neutral Strategies v DD 

Growth 

RMF Neutral Strategies v DD Growth [17 November 

2014] is a decision of the Chief Justice 

of the Cayman Islands in a similar claw back 

type claim arising out of a fraud. In contrast to 

Fairlfied Sentry, the argument in RMF was that 

the payments made to the redeeming investor 

represented an unlawful distribution of capital 

to shareholders at a time when the fund was 

insolvent. 

It is a cardinal principle of English and Cayman 

Islands company law that the share capital of 

a limited company belongs to the company 

and not its shareholders. This principle exists 

primarily for the benefit of the company’s 

creditors: while creditors have little or no 

protection against a solvent company incurring 

trading losses, they should be entitled to rely 

on the existence of the share capital to satisfy 

the company’s debts. 

The English Supreme Court revisited the principle 

recently in Progress Property Company Ltd 

v Moorgarth Group Ltd [2010] UKSC 55. In this 

case the court rejected a submission that there 

was an unlawful return of capital whenever 

a company entered into a transaction with a 

shareholder, regardless of the purpose of the 

transaction. 

It considered that a relentlessly objective rule 

of that sort would be oppressive and unworkable, 

and would tend to cast doubt on any 

transaction between a company and a shareholder, 

even if negotiated at arm’s length and 

in perfect good faith, whenever the company 

proved, with hindsight, to have got significantly 

the worse of the transaction.The court’s 

real task in such cases was to inquire into the 

true purpose and substance of the impugned 

transaction. 

In RMF, the Chief Justice was quick to point out 

that process of redeeming investments goes 

to the very heart of the ordinary business of a 

mutual fund. Any restrictions imposed on the 

process of redeeming shares in a mutual fund 

could have serious implications for the fund 

industry. He went on to make a distinction 

between the par value of the fund’s shares 

and the share premium at which they were 

traded or redeemed. As is common, the fund’s 

shares were issued at a nominal par value of 

one thousandth of a dollar, but were traded or 

redeemed at a significant premium over par. 

For the purposes of the capital preservation 

rule, the fund was prevented from distributing 

par, but not premium. He explained: 

“In reality though as I am satisfied 

and as already noted, the treatment 

of share premium as available for 

the redemption of shares in the ordinary 

course of business, was (and 

is) what investors and third party 

creditors would expect in the case 

of a fund like the 2X fund whose ordinary 

course of business would involve 

not only the sale, but also the 

redemption of shares to take place 

at a premium on the ongoing basis” 

The Chief Justice went on to point out that 

funds normally retain the right to suspend redemptions 

where the circumstances demand 

it. This is of course a valuable tool to enable a 

properly managed fund some breathing space 

during turbulent market conditions or to manage 

large redemptions. 

A valid suspension of redemptions will also 

prevent possible injustice to creditors or other 

investors where there are potential early 

redeemers. It is unlikely to be relied on by the 

fraudster though, who will be keen to encourage 

new investment and to project an image 

of “business as usual” so that the fraud is not 

uncovered. 

There was a further argument put forward in 

support of the claw back claim, namely that 

the payment to the redeeming investors was 

an unlawful preference and accordingly should 

be set aside. Preference claims are rare in the 

Cayman Islands, not least because the applicable 

statutory test is based on the English 

Bankruptcy Law of 1914 (which has since been 

relaxed there) which requires a claiming party 

to show that the payment was made with 

the dominant intention to prefer the early 

redeemer over other creditors. In practice, 

this test had proved extremely difficult to 

Ian Huskisson 

Partner at www.traversthorpalberga.com 

overcome. This is especially so in claw back 

cases, since the early redemptions are usually 

motivated by the desire to keep the scheme 

going as long as possible rather than to prefer 

the early redeemer over other creditors. 

CONCLUSION 

There is unlikely to be much consistency of 

approach across different jurisdictions to 

investor claw back claims. The best advice for 

investors and funds alike normally remains 

to act early when there are signs of trouble. 

Although it could be said to be harsh on investors 

that fail to get out in time, the approach 

prevalent in the BVI and Cayman cases attaches 

much importance to the “workability” of 

the structures used in the fund industry. 

At the heart of this is the ability for the investor 

to know and trust that the redemption 

process works and will not be unpicked years 

down the line. 

T: +1 345 949 0699 

Email: ihuskisson@traversthorpalberga.com 

Ian is a partner in Travers Thorp Alberga’s litigation department and is based in the Cayman Islands. 

The firm has been involved in many of the most significant cases to come before the courts in recent 

times and was named alternative dispute resolution of the year for 2014 in the Cayman Islands. 



BIG CHANGES to Online 

Copyright Laws Downunder 

by Michael Williams 

In the last few years Australia has developed something of a reputation as a 

world leader. In online copyright infringement that is. Despite having been 

one of the first countries to implement copyright reforms to provide for online 

protection – particularly through the implementation of the right of communication 

to the public – more recently the country has become a leader in allowing 

users to infringe those laws. And doing nothing about it. 

In June 2014 the Attorney General called for 

an end to what was described as “a golden 

era for online piracy in Australia” describing 

Australia as the “worst offender of any country 

in the world”. 1 This remarkable turnaround 

from leader to laggard has been an 

embarrassment for a country with one of the 

best track records of law and order and has 

become very internationally visible through its 

1 http://www.smh.com.au/digital-life/digital-life-news/ 

worlds-worst-pirates-and-their-parents-face-walking-theplank-20140613-zs5pb.html. 

Chairing of the UN Security Council. 

This level of copyright infringement does not 

benefit anyone. Rightsholders are obviously 

affected. So are ISPs. As new online movie 

and TV streaming services arrive in Australia, 

they provide revenue opportunities for ISPs 

that partner with the services that would be 

seriously eroded by the competitive pressure 

of free infringing content that is readily 

available from pirate websites and services. 

Besides, why should some consumers do the 

right thing while others take without paying? 

After a period of lack of political will to address 

the problem under previous governments, 

the new Attorney General has recognised 

that action is needed. He announced on 30 

July 2014 that the new government would 

take steps to deal with the problem in a 

coordinated way. 2 There was a decided lack 

of opposition to the announcement from 

quarters that have previously resisted change. 

The Attorney General and the Minister for 

Communications jointly issued a Discussion 

Paper that canvassed a number of options 

for copyright reform. 3 These proposals 

included changes to the authorisation liability 

provisions, the introduction of a no-fault site 

blocking regime similar to that operating in the 

UK and Europe and the possible extension of 

safe harbour laws. The Discussion Paper drew 

a wide range of responses from stakeholders. 

And one thing was clear: there was no serious 

debate that there was a problem that needed 

to be addressed and that it could be ignored 

no longer. 

While it is not clear what if anything will 

happen with the safe harbour regime, there is 

more concrete action taking place in relation to 

the site blocking and authorisation proposals. 

It is the developments in these areas that this 

article will consider. 

Site blocking 

The introduction of site blocking legislation 

appears to be in progress. On 10 December 

2014 the Attorney General and the Minister for 

Communications jointly announced that the 

government would be introducing laws for site 

blocking. 

2 http://www.ag.gov.au/consultations/pages/onlinecopyrightinfringementpublicconsultation.aspx 

3 http://www.ag.gov.au/Consultations/Documents/Onlinecopyrightinfringement/FINAL%20-%20Online%20copyright%20infringement%20discussion%20paper%20-%20 

PDF.PDF 

The Government will also amend the 

Copyright Act, to enable rights holders 

to apply for a court order requiring ISPs 

to block access to a website, operated 

outside of Australia, which provides 

access to infringing content. 

Although no details of the site blocking 

proposal have yet been provided, some 

guidance was given in the Discussion Paper. 

The Discussion Paper had proposed that a site 

blocking scheme closely following the form of s 

97A of the Copyright Designs and Patents Act 

UK 1988 could be introduced. That provision 

has become a driver of impressive copyright 

enforcement action taken in the UK to cut 

off the means of access to notorious pirate 

websites. All without having to establish fault 

on the part of ISPs who carry the transmissions 

of their subscribers when accessing the 

pirate sites. Site blocking has an impressive 

record, with almost 40 websites having been 

blocked by the orders of the High Court. Early 

opposition from ISPs have given way to a more 

cooperative approach, with ISPs regularly 

consenting to such orders. 

The jurisprudence has also become 

more sophisticated. Over time it has 

considered a range of issues, such as the 

degree of specificity of the injunctions, the 

proportionality between the orders and the 

identified infringing activity generated by 

the websites, the effectiveness of the orders, 

cost burden and other issues such as the 

interaction, if any, with human rights laws. 

The recent decision in Cartier v Sky [2014] 

suggests that site blocking has a great deal 

more potential than first thought, with Arnold J 

ordering site blocking to protect brand owners 

without relying on the copyright specific s 97A. 

Is Australia ready for site blocking? There is 

a strong case for saying so. The provision 

would be consistent with the intent of the 

original update of copyright laws in 2000 



to address the emergence of the internet. 

The then Attorney General described the 

intent of the laws as putting Australia “at 

the cutting edge of online copyright reform” 

and placing “Australia among the leaders in 

international developments in this area.” Site 

blocking would certainly do this. It would also 

be consistent with the general obligation on 

Australia under Art 41(1) of TRIPS 4 to ensure 

that it provides “effective action” against 

infringement of IPR. 

The legal framework is also ready for site 

blocking legislation. Site blocking has been a 

recognised remedy under Australian Copyright 

law since the introduction of the safe harbour 

regime that was substantially imported from 

the US DMCA (which also provided for site 

blocking as a remedy) through the US Australia 

Free Trade Agreement signed in 2005. 5 The 

power to issue that form of site blocking 

order has never been exercised because no 

ISP has been able to successfully invoke the 

safe harbour defences that would trigger 

the availability of that remedy. The existing 

Copyright Act could accommodate an s 97A 

style provision, thereby carving out of existing 

fault based regime a new statutory basis for 

blocking orders, although it would probably 

be appropriate that the final form omit the 

references to ISP knowledge as the equivalent 

Irish laws have done. 

Acceptance from stakeholders and the public 

is a key consideration, particularly with the 

fragmentation of power in the Senate due to 

minor parties. By this measure, there appears 

to be general acceptance that it is the least 

objectionable strategy for responding to 

online infringement. This is because it seeks 

to address the sources of infringement rather 

than the infringing users or the intermediaries. 

It is difficult to raise any sensible argument 

that Court supervised targeted site blocking 

4 The Agreement on Trade-Related Aspects of Intellectual 

Property Rights 

5 s116AG(4). 

limits the legitimate rights of internet users. 

Authorisation liability 

This leaves the issue of authorisation liability. 

This area of liability has been left in a state of 

paralysis following the decision of the High 

Court of Australia in the Roadshow Films v 

iiNet case in 2012. 6 Despite strong indications 

of an expectation that ISPs would take action 

when aware of internet infringements by 

users (in the explanatory documents of the 

government when the current regime was 

implemented in 2000), the Court found that 

an ISP with such knowledge was not obliged to 

act. 

Attempts before and since the iiNet decision 

by rightsholders and ISPs to agree on an 

industry code of action to respond to copyright 

infringement (even with the involvement of 

government) have been unsuccessful. Without 

stronger government direction it looked as 

though there would be no movement on 

an industry code. A change of government 

provided the basis for a renewed push for the 

development of a code between rightsholders 

and ISPs. 

The Discussion Paper identified both the need 

for change and suggested some amendments 

to the Copyright Act. Unfortunately the 

suggested amendments were widely criticised 

and the Minister for Communications 

acknowledged the universal criticism of 

the proposed form of amendments to the 

authorisation liability provisions. 

This appears to have caused the government 

to step back from any legislative changes 

despite the need for legislative changes to 

tackle online copyright infringement being 

identified by judges of the High Court in the 

iiNet case in 2012. 7 

6 Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42. 

7 Roadshow Films Pty Ltd v iiNet Ltd (2012) 248 CLR 42 at 

[79 (majority), [120] (minority). 

Nevertheless, the Attorney General and the 

Minister for Communications have sought 

to make changes through the introduction 

of an industry code to which ISPs and 

rightsholders would be parties. Such a code 

was provided for in Australia’s copyright law (s 

101(1A)(c)) but has never been implemented. 

This alternative course is now the focus of 

copyright developments in Australia. 

The two Ministers have issued the 

rightsholders and ISPs with a strong direction 

to negotiate a code or face the prospect of 

the government making regulatory changes 

on its own initiative. 8 Precisely what those 

regulatory changes would be has yet to be 

announced. However they could take the form 

of a code that is capable of applying under the 

Copyright Act or the Telecommunications Act, 

or, conceivably, both. The advantage of the 

latter is that it would provide a level playing 

field for all ISPs, because it would be built into 

the existing regulatory scheme for ISPs with its 

regulator the Australian Communications and 

Media Authority (ACMA). 

Although there is some way to go before 

either a site blocking regime is enacted or an 

industry code is agreed, the signs are there 

8 http://www.attorneygeneral.gov.au/Mediareleases/ 

Pages/2014/FourthQuarter/10December2014-Collaborationtotackleonlinecopyrightinfringement.aspx. 

Michael Williams 

Partner at Gilbert + Tobin 

T: +61 2 9263 4000 

Email: MWilliams@gtlaw.com.au 

CONCLUSION 

that they will be a part of a significant update 

of the Australian laws in relation toonline 

infringement. There is certainly a strong 

impetus for change amongst stakeholders. 

There is also a greater alignment of business 

interests in view of the revenue opportunities 

that would be secured by cutting of the lure 

of infringing content on pirate websites 

and services. But more importantly the 

international reputation of Australian IP 

laws is at stake. It is unlikely that the current 

Australian government will allow Australia 

to fall further behind its trading partners 

in Europe and Asia that either have or are 

looking to introduce similar reforms. 

Michael Williams is a partner of Gilbert + 

Tobin and the head of its IP Group. 

He has been at the forefront of copyright 

cases in Australia for over a decade, 

including running the iiNet case referred 

to in this article. 

Michael Williams is the head of Gilbert + Tobin’s intellectual property group. He practices across the 

spectrum of complex IP issues, including copyright, patents and trade marks, and acts for a wide 

range of Australian and international clients. 


Immigration 

LUMP-SUM TAXATION and 

residence permit in Switzerland 

by Jean Donnet, 

Mattia Deberti 

Foreigners who take up residence in Switzerland for the first time or 

after an absence of more than ten years may opt for a special tax regime 

provided that they will not carry out any gainful activity in the 

country. In doing so, they will benefit from the application of a special 

method for the assessment of their income and wealth, which is an expenditure–based 

taxation. 

This special regime is more generally known as 

“lump-sum taxation”. It is applied at Federal level 

and in some cantons, more particularly in the West 

part (French speaking part) of Switzerland. Opting for 

lump-sum taxation regime will generally be a decisive 

criterion for the grant of a residence permit to applicants 

from non EU countries who are under the age 

of 55 and have no specific personal relation to Switzerland. 

Lump-sum taxation has raised a rather intensive controversy 

in Switzerland during the year 2014 and even 

earlier. Until very recently the system was under the 

attack of certain political parties and organizations 

that launched popular initiatives (typical democratic 

rights provided by Swiss constitution), in several 

cantons and at Federal level, calling for lump-sum 

taxation to be abolished. The canton of Zürich, for 

instance, had to abolish lump-sum taxation in 2009 

as a result of a cantonal popular initiative that collected 

a majority of votes against this tax regime. The 

reasoning of the opponents to lump-sum taxation 

is that the system would not be consistent with the 

constitutional guarantee of equal treatment. In other 

words, tax payers benefitting from lump-sum taxation 

– who cannot be Swiss citizens – are considered 

to be taxed on a more favourable way than other tax 

payers – mainly Swiss citizens - who are taxed under 

the ordinary regime. 

This is not the place to enter into the controversy 

even though there are many reasons to consider that 

foreigners taxed on a lump-sum basis in Switzerland 

are not actually in the same situation as Swiss nationals 

and other foreigners who are taxed under the 

ordinary regime. Therefore different situations allow 

different treatments, in particular when it relates 

to taxation. Furthermore, economic considerations 

surrounding lump-sum taxation show that this system 

brings a lot of benefits to the local economy which 

recovers most of the expenses, quite actual and 

significant, incurred by lump-sum taxpayers for their 

living at their place of residence. This explains why the 

business community strongly opposed the abolition 

of lump-sum taxation. 

Finally, on November 30 th , 2014, the initiatives to 

abolish lump-sum taxation at Federal level and in 

the canton of Geneva were strongly rejected by the 

population at both levels. So far there are no other 

cantonal initiatives against lump-sum taxation pending 

in other cantons. 

It is now very clear that lump-sum taxation will remain 

in force in Switzerland, at Federal level and in some 

cantons, more particularly in the French speaking part 

of the country (for instance in the cantons of Geneva, 

Vaud and Valais). However, following the abolition of 

this special regime in some cantons of the German 

speaking part of Switzerland, Confederation had 

already taken the lead in tightening the conditions for 

the application of lump-sum taxation at Federal and 

Cantonal levels. In this respect amendments, effective 

as at January 1, 2016, have been made to the Federal 

Direct Taxation Act (DFTA) and to the Federal Act on 

the Harmonization of Direct Taxation at Cantonal and 

Communal levels (DTHA). 

For the sake of clarification, it is worthwhile noting 

that Swiss tax system provides for tax jurisdiction at 

three levels, Federal, Cantonal and Communal. Taxation 

is however made by Cantonal authorities who act 

for themselves and, by delegation, for the Confederation 

and the home municipality of the tax payer. Confederation 

levies tax on income only, while cantons 

and municipalities levy tax on income and wealth. 

Principles applicable to lump-sum 

taxation at Federal level (art. 14 

DFTA) and at Cantonal and Communal 

levels (art. 6 DTHA) 

• Expenditure-based taxation (lump-sum taxation) 

replaces ordinary taxes on income and 

wealth. 

• The system is available only for foreigners who 

set up domicile in Switzerland for the first time 

or after an absence of ten years. Swiss nationals 

cannot benefit from this tax regime. 

• Spouses living in the same household must 

both meet the requirement for lump-sum taxation. 

• The portion of expenditure–based taxation 

replacing the ordinary income tax is calculated 

on the basis of the annual expenditure / 

living costs of the tax payer, in Switzerland or 

abroad, for himself and for his family members 

or other people dependant from him and living 

with him. Taxes are levied on the highest of the 

following amounts: 

• he minimum amount set by the law, which 

may not be less than CHF 400’000.- for 

Federal direct taxation. (Cantons have to set 

in their legislation, at their discretion, the 

amount of the minimum assessment basis); 

• Seven times the annual rent or annual 

deemed rental value of the home of the 

main tax payer; 

• For other tax payers living for example in a 

hotel or in a pension: three times the price 

of the annual pension for food and housing 

at the place of residence of the tax payer. 

• Tax is levied at ordinary tax rate. 

• Cantons are free to determine how cantonal 

wealth tax is covered by lump-sum taxation. 

• The amount of taxes due on the basis of the 

lump-sum assessment must be at least equal 

to the total of income and wealth taxes that 

would be charged to the tax payer if he would 

be taxed on following items, under the ordinary 

regime: 

• Real estates in Switzerland and the income 


Immigration 

generated by such assets; 

• Movable assets located in Switzerland and 

the income generated by such assets; 

• Financial assets invested in Switzerland, 

including debts secured by real estate and 

the income generated by such assets; 

• Copyright, patents and similar rights exploited 

in Switzerland and the income generated 

by such rights; 

• Retirement pensions, annuities and other 

pensions from Swiss sources; 

• Foreign income for which the tax payer 

requires partial or full exemption of foreign 

taxes based on any double taxation treaty 

entered into by Switzerland with the country 

where taxes are levied. 

• If the income from a foreign state is exempted 

provided that Switzerland levies taxes on such 

income, applying the rate for global income, 

Swiss taxes are calculated not only on the basis 

of the income mentioned above but on the 

basis of all items of income from the state at 

source or attributed to Switzerland based on 

the relevant double taxation treaty. 

Specific conditions at Cantonal 

level (limited to the Cantons of 

Geneva, Vaud and Valais): 

Minimum annual assessment basis, i.e. lump-sum 

amount, set forth by law: 

• Geneva: CHF 300’000.- 

• Vaud: CHF 300’000.- 

• Valais: CHF 220’00.- 

However, in practice lump-sum taxation is granted 

based on higher minimal amounts, as follows, by 

approximation: 

• Geneva: CHF 350’000.- 

• Vaud: CHF 350’000.- 

• Valais: CHF 280’00.- 

So far, the above cantons have not set forth any specific 

condition in order to assess wealth separately, in 

addition to tax assessment based on expenditures. 

Comments 

As explained above, renouncing to any gainful activity 

is a key condition in order to benefit from lump-sum 

taxation. Therefore, foreigners who become new 

Swiss taxpayers under this special regime are not 

allowed to take up any employment in Switzerland, 

should it be with a third person/entity or with a legal 

entity under their control, for instance as shareholder 

or beneficial owner of such entity. The same applies 

to any independent gainful activity. For the time being 

carrying out gainful activity outside Switzerland is still 

allowed. The conditions in this respect might become 

more tightened in the future, at least at Cantonal 

level. 

According to existing practice, lump-sum tax payers 

are still authorised to be a member of a Board of 

directors of a company in which they have interests 

(equity and/or loan), in the capacity as “observer” for 

the purpose of monitoring their investment. However 

they may neither participate to corporate decisions 

nor receive any remuneration for their position within 

the company. In any way one must remain careful in 

this respect. The practice, more particularly at Cantonal 

level, could develop new and stricter requirements. 

Lump-sum taxation and residence 

permit 

Any foreigner who decides to take up domicile in 

Switzerland with or without any gainful activity must 

obtain a residence permit. 

Residence permit for gainful activity must be obtained 

from the first day of activity. Residence permit without 

any gainful activity is necessary after a continuous 

stay of 90 days in the country. 

For European citizens, obtaining a residence permit 

with or without gainful activity is a simple and swift 

process based on the agreement between Switzerland 

and the European community supporting the 

free movement of persons. 

For citizens from non EU countries, the process is less 

straightforward. Residence permit with gainful activity 

requires a labour market survey to verify that there 

is no one available on local market and in the EU 

countries to take up the position. Authorizations are 

reserved for people at executive level for positions 

that will help develop the local labour market. For residence 

permit without gainful activity, the applicant 

must be over 55 and justify good ties with Switzerland. 

If none of these two prerequisites are met, the 

applicant may still show that he will be of a significant 

interest to his home canton in terms of taxation. 

In this context, lump-sum taxation is frequently 

combined with the application for residence permit 

without gainful activity. Indeed, for non EU applicants 

who are not 55 of age or older and who have no ties 

to Switzerland, opting for lump-sum taxation is generally 

the only route to the grant of a residence permit 

without gainful activity. One must however be aware 

that the lump-sum amount must be of some significance 

in order to create a tax interest for the canton. 

Currently, the minimum amount of the lump-sum 

taxation basis is in the order of CHF 800’000.- to CHF 

1’000’000.- depending on the Canton of residence. 

Jean Donnet 

One can note therefore that the minimum assessment 

amounts (CHF 400’000.- at federal level) or seven 

times the housing expenses as lump-sum amount 

might not be sufficient when applying for a residence 

permit. 

For practical reasons, it is advised therefore to obtain 

first a lump-sum taxation agreement with relevant 

Cantonal tax administration in order to be able to apply 

then for a residence permit in front of the population 

office of the Canton of residence. 

The recent confirmation of the lump-sum taxation 

system in Switzerland will quite certainly result in a 

renewed interest for foreigners who see the country 

as a possible place for immigration. In addition the 

political and economic stability in the country combined 

with a high quality of life will continue to make 

Switzerland a first choice for immigration. 

Partner at NOMEA Avocats, Notter Mégevand & partners, Geneva 

T: +41 (0)22 703 47 50 

Email: j.donnet@nomea.ch 

Mattia Deberti 

Associate at NOMEA Avocats, Notter Mégevand & partners, Geneva 

T: +41 (0)22 703 47 50 

Email: m.deberti@nomea.ch 

Conclusion 

Jean is an attorney specialized in commercial, tax and corporate law. He provides expert advices to 

international clients more particularly in relation to the launching of new business in Switzerland 

with all related matters such as immigration process. He is member of the Geneva and Swiss Bar 

Association. 

Mattia is an attorney specialized in litigation, commercial and immigration law. He advises individual 

and corporate clients on various commercial, civil and criminal law matters. He is member of the 

Geneva and Swiss bar Association. 



Cyprus IP Company: The Breathless 

Conundrum Solved 

by Maria Makridou, 

Marios Palesis 

Cyprus has 

over 50 Double 

Tax Treaties 

currently in 

effect and 

many more in 

the pipeline. 

a Qualifying IP Right for the purposes of 

the favourable tax regime. It is noted that 

an IP right registered outside Cyprus, on 

a European or International level is still 

protected by the IP laws of Cyprus. 

The ownership of the qualifying IP may 

come either through acquisition of an 

deemed expense on the resulting income. 

Additionally there are provisions in the 

law, for allowing capital expenditures to 

be deducted from the income as will be 

explained below. 

R & D, Acquisition costs and 

Capital Allowances 

existing IP Right or through the actual 

The maximum effective rate of 2.5% can 

development of the IP Right by the Cyprus 

be further reduced by deducting capital 

Company. It must be noted that the 

allowances within the first five years of the 

acquisition of an already existing IP right 

company’s acquisition or development of 

can be done not only with cash but it can 

each IP right. The company will be able to 

also be acquired as a contribution in the 

use capital allowances of 20% straight line, 

share capital of the Cyprus Company. 

starting from the first year of usage of the 

asset, as well as the subsequent four years 

Further, the Cyprus IP Holding Company 

thereof. 

should use the Qualifying IP Right for the 

production of taxable income. This means 

that the IP Holding Company must be an 

operating company and that the IP Right 

Ability to extract royalties from 

multiple jurisdictions with low or 

no withholding tax 

should be licensed to other parties in 

Another important consideration for setting 

exchange for royalty income. 

up an IP holding company is whether the 

Tax treatment of Royalty profits 

jurisdiction chosen is sufficiently networked 

in order to give such holder the ability to 

The maximum effective tax rate for royalties 

extract incoming royalties from various 

The breathless conundrum for IP companies is four-fold: not only should royalties be taxed at a low 

rate in order to maximise profits; but also research and development (R&D) or acquisition costs 

should be considered as allowable expenses to the maximum possible effect, whilst also the jurisdiction 

where the IP holding is situated should have a considerable treaty network in order to allow for 

global exploitation of the IP rights, not forgetting that an exit route should always be available and 

beneficial. Or is it fifth-fold? Developments with regards to BEPS, transparency, tests on beneficial 

ownership and anti-treaty shopping provisions add another factor to the puzzle. 

received by the Cyprus IP Holding company 

is limited to 2.5%, as follows:- According to 

the law 80% of “Royalty Profit” generated 

from Qualifying IP Rights will be considered 

as a deemed expense for corporation tax 

purposes. 

The remaining 20% will be subject to the 

normal corporation tax rate of 12.5% 

jurisdictions with as low as possible 

withholding tax. 

Cyprus has many tools available that will 

enable the investor to achieve this and in 

particular:- 

a. Extensive Network of Double Tax 

treaties, 

rendering the maximum effective tax rate 

b. Applicability of EU Royalty Directives, 

to 2.5%. For the purpose of determining 

as well as 

The recent changes effected in the IP 

The IP right should be a Qualifying IP; it 

the “Royalty Profit” the law allows the 

c. Unilateral Tax Credit Relief. 

holding taxation in Cyprus solve the 

must be owned by a Cyprus Company and 

deduction from the resulting royalty income 

problem. It is interesting to examine how. 

it should be used for the production of 

of all direct expenses incurred wholly and 

1. The Double Tax Treaties 

Who qualifies under the law? 

taxable income. 

exclusively for the production of royalty 

income. 

Cyprus has over 50 Double Tax Treaties 

In order for an IP holder to benefit from 

According to the tax legislation, any 

currently in effect and many more in the 

the law all the following conditions must be 

intangible asset that is protected by the 

Following the deduction of these direct 

pipeline. This gives the ability to extract 

met:- 

IP laws of Cyprus will be considered as 

expenses there is the application of 80% 

royalties from these jurisdictions at reduced 



or even zero withholding tax rates. 

2. Relief under the EU Interest 

and Royalty Directive 

The EU Interest and Royalty Directive 

eliminates withholding taxes on Interest 

and Royalties paid by a licensee who is 

resident in one EU Member State to a 

licensor company being resident in another 

EU Member State. 

With careful tax planning, a Cyprus IP 

Holding Company can enjoy the benefits of 

this EU directive, which grants the ability to 

receive royalties from all other EU member 

states with no withholding tax. It therefore 

opens the European Market to the investor, 

it reduces the tax leakage and hence, 

gives flexibility and significant competitive 

advantage in relation to pricing. 

3. Unilateral Tax Credit Relief 

In cases were the Double Tax Treaty 

network or the Interest and Royalty 

Directive relief are not providing sufficient 

protection, it is possible for a Cyprus IP 

Holding Company, under the provisions of 

the Cyprus Tax Law, to claim a Unilateral 

Tax Credit Relief. 

In effect, any tax paid abroad will be 

credited against any tax that might be 

payable for the particular income in Cyprus 

avoiding therefore the double taxation of 

the specific income. In order to obtain this 

tax credit, the company must prove the 

payment of such overseas taxation. 

All of the above tools allow the investor to 

minimise its tax exposure on withholding 

taxes paid abroad on the incoming royalties 

and therefore enhance its overall tax 

exposure. 

It is worth mentioning that any profits 

generated by the Cyprus IP Holding 

Company can be distributed to its 

shareholder in the form of dividends. 

According to the Cyprus Tax Law any 

dividends payable by a company resident 

in Cyprus to its foreign shareholders 

(natural or legal persons) are not subject 

to any withholding tax in Cyprus. This is 

very important as it allows for funds to 

be moved to the investor without any 

additional tax leakage in Cyprus. 

Exit Route 

The favourable tax treatment of a 

maximum effective tax rate of 2.5%, covers 

also potential profits from any future sale 

of the IP Right. 

Investing through a Cyprus IP Holding 

Company will provide the investor with 

a tax efficient exit route since, 80% of 

the profits from the sale of the IP right 

will be considered as deemed expenses. 

The remaining 20% will be subject to 

corporation tax at 12.5% as in the case of 

Royalty profit. 

BEPS/Transparency/Beneficial 

ownership/Anti Treaty shopping 

concerns addressed 

In addition to the above benefits of the 

IP tax regime, Cyprus can further be 

differentiated from the traditional IP 

jurisdictions since it can provide an efficient 

and cost-effective way for companies, to 

create actual substance in Cyprus. 

This way companies can avoid concerns 

arising from the attacks on aggressive 

tax planning and most importantly the 

attack on the so called “conduit” or passive 

entities. 

In other words, structures that are mere 

vehicles for rerouting profits or are only 

established for the sole reason of taking 

into advantage a low tax jurisdiction or 

double tax treaty without a corresponding 

real physical presence in the country of its 

tax residence. 

With its infrastructure, provision of services, 

supply of highly qualified personnel and low 

cost of living, Cyprus provides the economic 

ability to a wide range of companies, 

whether small, medium or large, to 

establish themselves in Cyprus and enjoy 

the whole spectrum of benefits to its fullest. 

Maria Makridou 

Associate Lawyer at Kinanis LLC 

T: +357 22558873 

Email: corporate1@kinanis.com 

Ms Makridou’s main areas of practice is Corporate Law, Company Incorporations and Management. 

Marios Palesis 

Assistant Manager at Kinanis LLC 

T: +357 22558873 

Email: tax@kinanis.com 

Conclusion 

As a final note the trend of large IP 

companies relocating to Cyprus is becoming 

apparent, examples being renowned 

gaming and IT companies. 

Through careful structuring and tax 

planning there is light at the end of the 

tunnel and Cyprus demonstrates all the 

qualities of becoming the way forward in 

the IP world. 

Mr Palesis deals with international tax planning, provision of tax consultancy on various income 

tax issues faced by the clients of the firm as well as the audit administration of clients companies. 

Mr Palesis has considerable experience in advising on all matters involving international tax 

planning and the setting up and management of tax efficient structures. 



Keyword Advertising 

– a Bloomin’ Nightmare? 

by Robert Lye, 

Jill Tomasin 

One of the legal problems with keyword advertising is that keywords 

are often identical or similar to registered trade marks and, if you don’t 

get it right, you can be dragged into costly trade mark infringement 

proceedings. 

The Interflora v M&S case 

Some guidance on how to avoid this was given in 

last year’s High Court ruling that M&S (Marks & 

Spencer plc) had infringed Interflora’s trade marks 

in its keyword advertising campaign by bidding on 

keywords identical to the Interflora trade marks, 

even though none of them featured in the triggered 

adverts. 

However, in a rare move the Court of Appeal has 

ordered a re-trial of the dispute and in doing so 

has altered the way internet advertisers and brand 

owners should think about online campaigns. 

M&S bid on a keyword that was an Interflora 

registered trade mark to trigger an M&S advert that 

ran like this: 

M&S Flowers Online 

Beautiful Fresh Flowers & Plants. 

Order by 5.00 p.m. 

for Next Day Delivery. 

www.marksandspencer.com/flowers 

INTERFLORA 

SUED M&S FOR 

TRADE MARK 

INFRINGEMENT. 

The decision 

The High Court originally held that this 

infringed Interflora’s trade marks because 

M&S had not proved that the advert 

enabled a reasonably well-informed 

and reasonably observant internet user 

searching “Interflora” to tell that M&S’s 

flower delivery service was not part of the 

Interflora network. 

In reaching this decision the judge had 

proceeded on the basis that, to escape 

infringement, M&S had the burden of 

proving that its adverts were sufficiently 

clear so that there was no real risk of 

confusion on the part of the average 

internet user and it had failed to discharge 

that burden. 

In deciding that there was a likelihood 

of confusion on the part of the average 

internet user, the judge had also relied on 

instances of “initial interest confusion”. 

This is where the consumer has initially 

been attracted or diverted to the advert, 

or initially confused but at the point 

of purchase the internet user’s initial 

confusion has been dispelled and he/she 

knows that the goods or services he/she is 

buying are not the brand owner’s goods or 

services. 

The Court of Appeal has ruled that this 

initial interest confusion may not be relied 

upon to establish that there is a likelihood 

of confusion in relation to the advert. The 

test is whether the advert enables the 

average consumer to ascertain the origin 

of the goods or services being advertised, 

in order to make an informed decision at 

the point of sale. 

The Court of Appeal was “far from 

confident” that the judge would have 

come to the same conclusion had he 

correctly analysed the legal test for 

infringement and correctly assessed the 

evidence. 

The judge’s (incorrect) approach to the 

burden of proof had likely influenced his 

assessment of all of the evidence – and so 

affected all of his findings. 

The Court of Appeal concluded that it 

was not in a position to determine the 

question of infringement itself because it 

had not heard the witnesses or seen the 

evidence placed before the High Court. So 

it had no alternative but to order a re-trial 

(to be heard by a different judge). 

Useful points 

Application of the legal rules is still 

evolving and we wait to see if the case 

reaches a second trial for more insight 

into how the Court will apply the rules, but 

internet advertisers and brand owners can 

take the following useful points from the 

Court of Appeal decision: 

1 

The correct test for infringement 

in keyword advertising cases 

is whether or not the advert enables 

normally informed and reasonably 

observant internet users, or enables them 

only with difficulty, to ascertain whether 

the goods or services referred to in the 

advert originate from the trade mark 

owner (or someone connected with it) or, 

on the contrary, from someone entirely 

unconnected with the trade mark owner. 

2 

Failure on the part of the advertiser 

to “negatively match” against 

another’s trade mark (when bidding on a 



generic keyword, such as “florist”) might 

constitute use of that trade mark for the 

purposes of trade mark infringement 

law, but this will depend on all the 

circumstances (including the length of 

time involved and whether the advertiser’s 

bidding had been done with the intention 

and effect of using the rival brand to 

trigger the display of its own advert). 

Even if it does, however, this will still not 

lead to a finding of infringement unless 

it can be shown that the advert does not 

satisfy the test described above. 

3 

The burden is on the brand owner 

to prove that the third party advert 

does not satisfy that test (and not the 

other way round). 

4 

“Initial interest confusion” does 

not play any role in the test for 

infringement. An advertiser does not have 

any duty to avoid confusion as such, it 

just needs to take care to ensure that its 

adverts do enable average internet users 

to establish whether the goods or services 

originate from the advertiser as opposed 

to the brand owner (as otherwise it may 

be held liable for infringement). 

5 

When assessing the advert for 

confusion, the Court may have 

regard to its effect on a significant section 

of the relevant class of consumers and 

even if many consumers are not actually 

confused, the advert may still infringe. 

Tax planning considerations 

for Tier 1 (Investor) migrants 

by Dmitry Zapol 

Robert Lye 

Senior Associate at Gateley 

T: +44 (0) 161 836 7929 

Email: RLye@gateleyuk.com 

Robert is a Senior Associate in the Commerce, Technology & Media team and specialises in both 

contentious and non-contentious aspects of intellectual property. He has assisted clients in numerous 

IP/IT related disputes, having considerable experience of conducting High Court actions for copyright, 

design right and trade mark infringement and passing off. 

Jill Tomasin 

The UK encourages foreign direct investments by granting high net 

worth individual investors and their families the right to reside temporarily 

in its territory, with the associated tax benefits of the resident 

‘non-dom’ regime. And after a qualifying period, whose length depends 

on the amount invested in the British economy, the individual and 

their kin can obtain indefinite leave to remain (ILR) in the UK. Later, 

they can even apply for British citizenship. 

Partner at Gateley 

T: +44 (0) 1159 838 224 

Email: JTomasin@gateleyuk.com 

Jill assists clients with identifying, protecting and exploiting intellectual property rights by buying, 

selling and licensing them as well as enforcing and defending them in litigation. 

The Immigration Rules that regulate 

the process are extremely complex and 

subject to frequent and unexpected 

changes. The most significant 

amendments became effective on 6th 

November 2014 following an extended 

period of scaremongering and rumours, 

which mostly turned out to be true. 

The new rules doubled the investment 

threshold and only gave panicked HNW 

migrants 20 days to apply under the old 

rules or face an expensive revision of their 

investment plans. 


Tax 

The Home Office’s explanatory notes are 

comprehensive; however, clients rarely 

submit visa applications themselves. 

Usually they engage a triad of advisors 

who are experts in the fields of UK 

immigration law, financial and tax 

planning. It is not a coincidence that the 

tax consultants are right at the end of the 

the largest number of investor visas, 

followed by the Russians; the rest of the 

nationalities trailing behind. Anecdotal 

evidence suggests a significant number 

of the investors being wives of wealthy 

foreigners; the latter, together with the 

couple’s children being her dependants, 

who are free to visit the UK as they 

Taxation 

in the UK 

primarily 

depends on 

a person’s 

residence 

status. 

Interestingly, the Rules only allow the main 

applicant to reduce the length of time 

before he applies for the ILR and exclude 

his dependants, who need to wait the 

whole five year period before submitting 

the application. There are also strict 

requirements regarding the number of 

days that the migrant can spend outside 

tax advice should take into account two 

considerations that pertain to the granting 

of the Tier 1 (Investor) status. 

Firstly, assume that the end goal of most 

investors and their families is to settle in 

the UK. To achieve this they must spend 

at least 185 days in every 12-month 

list — experience has shown that despite 

please without any commitments as 

the UK in any 12-month period (http:// 

period in the UK starting from the day of 

moving to a high-tax country, seeking 

to the duration of visits or making the 

bit.ly/1ndkzW5). Failing to meet them will 

arrival in the UK under the newly issued 

comprehensive tax advice often comes as 

investments. 

result in the inability to apply for the ILR 

leave to enter. This immediately denies 

an after-thought, when the investments 

and settlement. 

the benefit of the UK-residence planning 

are made and the arrival dates are set. 

This article highlights the primary tax planning 

considerations relevant to non-domiciled investors 

at different stages of the UK immigration process 

for high-value migrants. 

Immigration 

For the sake of completeness, Tier 1 

(Entrepreneur) is for non-European 

migrants who want to invest in the UK 

by setting up or taking over, and being 

actively involved in the running of, a UK 

business or businesses. Broadly, the 

applicant needs to invest £200,000 in a 

UK company and comply with a host of 

Statutory Residence Test 

Taxation in the UK primarily depends on 

a person’s residence status. Since April 

2013, residence has been determined 

under the statutory residence test (SRT). 

The SRT is explained in brochure RDR3 

techniques based on the extended periods 

of absences from the UK. As a result, 

most tax planning measures should be 

undertaken before the investor’s arrival 

in the UK during Stage one as explained 

below. 

Secondly, the Rules require the investors 

There are two pathways that such high- 

other requirements, including speaking 

(http://tinyurl.com/SRTRDR3), which also 

to physically bring the investment funds 

value migrants can take — Tier 1 (Investor) 

English to a certain standard and having 

contains useful practical examples, which 

into the UK. Unless these are derived from 

and Tier 1 (Entrepreneur), although 

enough money to support himself in the 

are worth reviewing by anyone attempting 

clean capital, accumulated during the 

this article focuses on the planning 

UK. This route is attractive to younger 

to ascertain their residence situation. 

period of non-UK residence, the investor 

opportunities for the former. These differ 

entrepreneurs who might have sufficient 

will suffer the consequences of making 

in the size of the investments and the 

savings and are prepared to actively 

The SRT establishes residence status 

a remittance of foreign income or gains, 

commitments on behalf of the migrant. 

manage the business and create jobs in 

according to the number of days that an 

which will be taxed at the appropriate 

The Home Office’s website (http://tinyurl. 

the UK. 

individual spends in the UK during the tax 

rates. Further remittances might occur 

com/ldtl8cw) explains the regimes in detail 

year that runs between 6 April and 5 April 

where the investor pays for the services 

and contains policy guidance documents 

In fact, certain graduate entrepreneurs 

of the following calendar year. Residents 

rendered to him in the UK, such as 

(http://bit.ly/1yIoFKt), extracts from which 

are allowed to apply with only £50,000. 

generally pay tax on their worldwide 

immigration advisors’ and solicitors’ fees. 

the author used in writing this article. 

With the recent tightening of the rules 

income and gains, whilst non-residents 

Taxation of remittances can be avoided 

allowing foreign students to seek work 

are generally only taxed on income from 

under the business investment relief as 

The Tier 1 (Investor) category is for high- 

in the UK after finishing their studies, the 

sources in the UK. However, individuals 

described below; however, the expense 

net-worth individuals who can afford 

Entrepreneur visa has become especially 

resident but not domiciled in the UK can 

of planning for the minimisation of the 

to invest at least £2 million in the UK. 

popular with parents willing to help their 

elect to be taxed on the remittance basis 

tax burden might nullify the tax benefits it 

The investor does not need a job offer 

children to stay in the UK. 

where non-UK income and gains are only 

aims to achieve. 

in the UK nor is he required to prove a 

good command of the English language 

although the latter will be required when 

applications for ILR and settlement are 

made. Broadly, the funds must be his 

own savings or belong to his spouse 

or a partner — the Rules no longer 

permit borrowing the funds. According 

to Home Office’s statistics (http://bit. 

ly/1GvfGTu) in 2013, the Chinese received 

Both routes allow the migrant to apply 

for the ILR after a continuous residence 

period in the UK of five years. This 

can be reduced to three years for the 

investor who invests £5 million or the 

entrepreneur who makes extraordinary 

progress with developing his business. A 

further reduction to two years is available 

to the investor who invests £10 million. 

liable to tax when directly or indirectly 

remitted (brought) into the UK. 

On its own, an individual’s immigration 

status or current nationality has no 

bearing on his UK tax liability whatsoever. 

The investor should be treated as a regular 

typically non-domiciled taxpayer who 

requires the usual pre- and post-arrival 

tax planning measures. Nevertheless, 

The Tier 1 (Investor) 

process 

It is possible to split the Tier 1 (Investor) 

immigration process in three stages. 

Stage one is preparatory during which 

the migrant collects documents and 

submits the visa application. As Stage 

two, the investor arrives in the UK after 


Tax 

receiving leave to enter the country. 

Stage three involves the migrant making 

the investment, which will permit him 

to remain in the UK and to apply for the 

extension of his stay until he can apply 

for the ILR and later for citizenship. There 

might be a period of several months 

between Stages one and two during which 

the investor stays in his home country 

waiting for the outcome of the application. 

The migrant typically has up to three months 

from the day of his arrival in the UK to fulfil the 

requirements of Stage three. The investor should 

plan to remain non-UK resident at Stage one and 

even partly through Stage two; and during this 

period of non-residence he should aim to perform 

the larger share of his tax planning strategy. 

tax liability, determined by his current 

tax residence and the source of funds, 

although this might be reduced under 

double tax agreements or domestic tax 

exemptions. However, any non-UK gain 

that is crystallised and non-UK income that 

the investor receives after he becomes 

UK resident will be liable to UK’s fairly 

high taxes unless the taxpayer claims the 

remittance basis of taxation and does not 

bring the funds to the UK. As a result, the 

migrant might face the situation where he 

cannot pay for his life in the UK without 

incurring a significant tax cost. 

‘Clean capital’ 

Conversely, income and gains received 

before becoming resident form so-called 

There is no 

requirement 

or in fact 

possibility 

to declare 

clean capital 

to the UK tax 

authorities 

(HMRC) upon 

becoming UK 

resident. 

are taxed differently in the UK, they should 

also be kept in separate bank accounts. 

Moreover, if clean capital generates 

income — say it has been loaned and the 

investor receives interest — this should 

be paid to the income bank account and 

not into the clean capital account to avoid 

tainting it. Counterintuitively, the same 

cannot be done with gains generated with 

the use of clean capital. For example, if 

clean capital is used to buy shares, any 

gain realised on their future disposal will 

always form part of the proceeds and it 

cannot be segregated from clean capital 

by being paid to a separate bank account. 

There are methods that allow for such 

separation of gains involving the use of 

resident and thus form his clean capital. 

Such documents include bank statements, 

sale and purchase agreements, loan 

agreements. They might be necessary in 

case of a future dispute with HMRC. 

The Rules also allow the investor to rely 

on money that is owned either jointly with 

or solely by his close relative (spouse or 

partner). If the close relative is a lower rate 

taxpayer then, subject to the rules of their 

residence jurisdiction, the investor can gift 

the assets to the relative, which she can 

dispose of subject to the payment of a 

smaller amount of tax. 

Provided the requirements of stage one 

are satisfied, the investor will receive 

the leave to enter the UK as a Tier 1 

During Stage one the applicant prepares 

“clean capital”. If the investor loans clean 

several connected trading entities or 

(Investor). The arrival to the UK should 

and submits documentary evidence of his 

capital to someone, the loan principal will 

loaning clean capital to a bank to secure 

be timed with regards to the residence 

ability to invest at least £2 million in the 

always remain clean capital when repaid 

a bank loan, which will later be used to 

planning considerations as discussed 

British economy. This amount must be 

to the investor (but note the position 

acquire capital assets. 

next. At the same time the investor should 

in cash and kept in a regulated financial 

with regard to loan interest below). Gifts 

not delay his arrival in order to satisfy 

institution (typically a bank) in the UK or 

received from related and third parties are 

If the investor runs out of clean capital 

the continuous residence requirement 

overseas. Sometimes instead of clear 

also clean capital provided they are not 

he might have no choice but to bring 

required to apply for the ILR at the end of 

funds the future migrant has an asset 

considered to be a form of hidden income 

foreign income and gains to the UK and 

his stay. 

portfolio that includes capital assets and 

undistributed income, but the Home Office 

will not take these into consideration. 

or gains distribution. 

In practice, some UK-resident investors live 

off the gifts made to them from their non- 

face the prospect of the maximum 45% 

taxation. He can borrow from an overseas 

lender provided that the loan is made 

on commercial terms and the interest is 

‘Connecting factors’ of tax 

residence 

Funds held by companies or trusts are 

UK resident spouses, who earn income 

serviced from UK-source income or gains. 

Under the SRT UK residence may be 

equally excluded. The investor should 

and gains not liable to UK tax. Clean 

It had been possible to borrow under 

acquired automatically if the individual 

convert these assets into cash: any gains 

capital will not be taxed in the UK, whether 

security of non-UK income and gains; 

spends over 182 days in the UK, has a 

accumulated in securities and properties 

brought in its territory or not. However, 

however, in August 2014 this possibility 

home in the UK or works in the UK on 

should be crystallised by selling them; 

in the case of an investor’s death, clean 

was revoked. 

a full-time basis. If the investor is not 

where there is a right to receive income 

capital kept in a UK bank account will form 

UK-resident automatically, he might be 

— dividends, interest, salary, royalties, 

his UK-situs asset liable to 40% inheritance 

There is no requirement or in fact 

resident under the sufficient ties test, 

business profits — this right should be 

tax. Therefore, it might be prudent to bring 

possibility to declare clean capital to 

which looks at the connection ties that the 

exercised and the proceeds received into a 

to the UK only the amounts necessary to 

the UK tax authorities (HMRC) upon 

individual has with the UK. The relevant 

bank account. 

fund current expenses. 

becoming UK resident. Equally, there is 

factors include having a family resident in 

no requirement to report the use of clean 

the UK, presence of UK accommodation, 

It might seem reasonable only to create 

Clean capital should be credited to a 

capital on UK’s tax returns. However, the 

working in the UK and length of visits to 

sufficient cash to fund the £2 million 

separate bank account and never mixed 

taxpayer should keep documents that 

the UK in the preceding tax years. The 

investment. In fact, when converting 

with non-UK income and gains that might 

reflect dates and methods of creation of 

more UK ties the investor has — the less 

assets into cash or receiving income, the 

be derived after assuming UK residence. 

non-UK income and gains to prove that 

number of days he can spend in the UK 

investor might be subject to a double 

In fact, considering that income and gains 

they were received while he was non-UK 

during the tax year without becoming a 


Tax 

UK tax resident. It is also possible to be 

automatically non-UK resident under a 

separate set of circumstances. Residence 

is determined for the entire tax year 

starting from 6th April regardless of the 

taxpayer’s relocation date. However, there 

is a possibility to split the tax year and only 

begin UK tax residence from the day of 

arrival in the UK. 

Experience shows that in the tax year 

of arrival in the UK, most investors have 

two connection ties: they acquire a home 

in the UK and their families become UK 

resident. 

The SRT allows them to stay in the UK for up to 

120 days without becoming resident here provided 

they are not UK resident automatically. 

However, there are plenty of pitfalls 

and before determining his residence 

situation, the investor should avoid buying 

accommodation in the UK or entering 

into long-term leases, moving family and 

sending children to school and spending 

over 90 days in the UK in any tax period. 

Additional planning opportunities might 

be offered by the tie-breaker clause 

in the residence article of the double 

taxation treaty that the UK might have 

with investor’s residence State, although 

complications might arise stemming 

from the mismatch between the tax 

years’ periods. HMRC provides an 

interesting explanation of this rule in part 

INTM154040 of its International Manual 

(http://tinyurl.com/INTM154040). 

Under Stage three the investor 

must invest £2 million by way of UK 

Government gilt-edged securities, share 

capital or loan capital in active and trading 

companies that are registered in the UK. 

The minimum investment threshold must 

be met only when the investments are 

made and there is no need for a top-up 

if their value falls during the continuous 

ownership period. 

It is also possible to rely on the existing 

investments, however, the Home Office 

will only count those that have been made 

in the UK in the 12 months immediately 

before the date of the application. 

Otherwise, the investor will have to make 

“fresh” investments, which might trigger 

tax consequences in the UK or in his 

residence State if to do so he would have 

to realise assets pregnant with gains. 

Remittance rules and 

Business Investment relief 

Provided that the investment comprises 

clean capital accumulated during Stage 

one, there will be no UK tax consequences 

on bringing the funds in the UK. In the 

opposite scenario, where the investments 

consist of foreign untaxed income 

and gains made after the date of first 

becoming UK tax resident, these will 

constitute remittances, on which the 

investor will be taxed at his applicable 

income tax rate. HMRC explain the 

meaning of remittance in part RDRM33140 

of its Residence, Domicile and Remittance 

Basis Manual (http://tinyurl.com/ 

RDRM33140). 

Individuals who choose security 

over higher returns might prefer UK 

Government gilts, which can also be tax 

advantageous — there is no UK capital 

gains tax on their disposal and the coupon 

can be structured in a way that does 

not attract interest taxation when paid 

to non-UK tax residents. Also some gilts 

are exempt assets for UK inheritance tax 

purposes. 

Others invest through international banks 

that form a balanced portfolio of low risk 

quoted securities. UK-resident taxpayers as remittances and shall not be liable to 

are taxed on dividends they receive and UK tax. 

gains derived from disposals. These 

methods are preferable for individuals There are additional income tax and 

with large amounts of clean capital capital gains tax reliefs such as EIS, 

that they can bring and invest in the UK SEIS and VCT intended to encourage 

without any tax consequences. 

investment in the shares of unquoted 

trading companies. 

Investors with non-UK income and 

gains that will be taxed on remittance to Finally, if the investor is appointed 

the UK and who are not averse to risk director or taken on as an employee of 

might instead buy shares of UK trading the company in which he has invested, 

unquoted companies or provide the funds he might be able to receive a substantial 

to such companies as loans. 

reduction on futuredisposal of its shares 

under the terms of the ‘Entrepreneurs’ 

The only limitation is that the companies Relief’ where the personal tax rate may be 

cannot be mainly engaged in property 10% on gains made. 

investment, property management or 

property development, although it does Thus pre-arrival tax planning for a Tier 1 

not prevent investment in, for example, investor is a complex matter that should 

construction firms, manufacturers or be done prior to finalising immigration 

retailers who own their own premises. plans. Future migrants should consider 

their medium to long-term planning 

If they satisfy terms of the business strategy, which includes residence 

investment relief (http://bit.ly/1wq9Wj6) planning, creation of clean capital and 

the invested amounts shall not be treated acquisition of assets in the UK. 

Dmitry Zapol 

Partner at International Fiscal Services Ltd 

T: +44 203 368 6968 

Email: dmitry@interfis.com 

Dmitry specialised in advising foreign investors exploring opportunities in Russia on corporate tax 

implications together with Russian and cross-border tax planning. 



Enforcement of Intellectual 

Property Rights in Sri Lanka 

by Anomi Wanigasekera 

In Sri Lanka Intellectual Property is protected by the provisions of the Intellectual Property Act No 

36 of 2003 which replaced the Code of Intellectual Property Act No. 52 of 1979. The 1979 Statute 

was based on the WIPO Model Law. Prior to the 1979 Statute the Sri Lankan law was governed by 

the Trademarks Ordinance No. 15 of 1925 which was based on the pre 1938 English Law. Prior to 

the Code of Intellectual Property Act No. 52 of 1979 there were several Statutes relating to Patents, 

Designs, such as the Trademark Ordinance, Merchandise Ordinance, and Designs Ordinance. 

One of the earliest Statutes was the Invention 

Ordinance No. 6 of 1859 which was replaced 

by the Inventions Ordinance No. 16 of 1892 

which in turn was replaced by the Patents 

Ordinance No. 15 of 1906. The first Ordinance 

relating to the trademarks was Trademarks 

Ordinance No. 14 of 1888 which was replaced 

by the Trademark Ordinance No. 15 of 1925. 

The first law relating to Industrial Designs 

was the Designs Ordinance no. 7 of 1904. 

The first Copyright Law of Sri lanka was the 

Copyrights Ordinance of 1908. The Copyrights 

Ordinance No. 20 of 1912 supplemented the 

English Copyright Act of 1911. The Ceylon 

Independence Act 1947 made the English 

Copyright Act 1911 applicable in Sri Lanka after 

independence. 

Sri Lanka is also a party to several international 

treaties such as the Madrid Agreement for 

Repression of false or deceptive indication of 

source on goods, Nirobi Treaty for protection 

of Olympic symbol, the Patent Co-operation 

Treaty the Berne Convention for the Protection 

of Literary and Artistic Works, Universal 

Copyright Convention, The Convention 

establishing the World Intellectual Property 

Organisation, The Agreement on Trade related 

aspects of Intellectual Property Rights (the 

TRIPS Agreement) and the Trademark Law 

Treaty. 

There is provision under the Statute for 

registrations of Patents, Industrial Designs and 

Trademarks. There is no provision relating to 

registration of Copyrights in Sri Lanka and the 

copyright holder would have to establish his 

rights. There is also no separate provision for 

registration of Geographical Indications in Sri 

Lanka although Geographical Indications are 

protected under the Intellectual Property No. 

36 of 2003. 

Article 41 of the TRIPS requires every WTO 

member contracting state to provide effective 

means of enforcing intellectual property rights. 

In compliance with this provision the Statute 

makes a provision for effective enforcement 

of Intellectual Property rights. , the foundation 

for a stringent enforcement mechanism is 

created by the Intellectual Property Act to 

provide effective protection to all categories of 

Intellectual Property Right holders. 

The current system for enforcement entails 

a combination of judicial remedies both civil 

and criminal, administrative remedies and 

remedies at common law. 

Judicial Remedies 

The statutory mechanism for enforcement is 

mainly based on the Intellectual Property Act 

No 36 of 2003.Civil action can be instituted 

before the Commercial High Court 1 of Sri 

Lanka to combat infringement or imminent 

infringement of Intellectual Property Rights 

under s 170, and to protect acts against Unfair 

Competition in relation to Intellectual Property 

under s 160 (7) of the Act. 

The Act makes provision to obtain injunctive 

relief and claim damages for loss resulting 

1 High Court of the Provinces (Special Provisions) Act No 10 

of 1996, Section 2; Intellectual Property Act No 36 of 2003, 

Section 205 

from acts of infringement or unfair 

competition. In addition, court is vested with 

power to order the impounding 2 , and disposal 

of infringing goods outside the channels of 

commerce 3 and grant such other relief the 

court deems just and equitable. 

Provisional protection in the form of Enjoining 

Orders and Interim Injunctions exist to 

maintain the status quo and prevent further 

violations until conclusion of the main judicial 

proceedings 4 . 

Infringement of copyright and other registered 

intellectual property rights, willfully or 

knowingly, also constitute a criminal offence 

liable for conviction before the Magistrate 

Court under Chapter XXXVIII of the Intellectual 

Property Act. Sanctions if found guilty are 

in the form of imprisonment and fine, with 

a maximum penalty of rupees five hundred 

thousand or imprisonment for period of 

six months or both. Second or subsequent 

convictions will give rise to a penalty double 

the amount of such fine or period of 

imprisonment. Criminal sanctions are further 

imposed under s 475 of the Penal Code for 

misappropriation of property-marks. 

To strongly deter illegal acts of counterfeiting 

s 186 (2) of the Act creates the sale, 

possession for sale or any purpose of trade 

or manufacture, goods or things to which 

any forged Mark or false trade description is 

applied, or any Mark so nearly resembling a 

registered Mark so as to be likely to mislead, is 

falsely applied, as an offence. Once convicted 

will be liable to a fine not exceeding rupees 

five hundred thousand or imprisonment for 

a term of two years or both, with double the 

sentence for each subsequent conviction. 

Criminal proceedings can be instituted on 

these grounds before the Magistrate Court by 

2 Intellectual Property Act No 36 of 2003, Section 22(2) (a) (ii) 

3 Ibid., Section 22 (2) (c) (d) and 170 (3) 

4 Ibid., Section 170 (6); Judicature Act No 2 of 1978 (as 

amended), Section 54; Civil Procedure Code 12 of 1895 (as 

amended), Section 662-667 



the right holder, assignee or licensee, directly 

guilty to the charges and were imposed with 

Enterprises Inc. A warehouse and two other 

from publication of the contested mark). Once 

by way of a Private Plaint 5 or by a Plaint filed 

a fine. A large sum of money was paid to 

retail shops were raided by the CID for selling 

received, the Director General shall issue 

by the Police. A complaint can be lodged by 

Perkins as compensation under the Intellectual 

and distributing pirated Disney Products in 

notice to the Applicant of the contested mark 

the Intellectual Property Right holder with the 

Property Act by the accused. A second 

Colombo and several counterfeit stationery 

to file Observations and thereafter fix an inter- 

Commercial Criminal Division of the CID who 

phase of raids was conducted by the CID, in 

items with Disney characters including stickers, 

parte inquiry before the Director General. This 

upon investigation may institute proceedings 

Kurunegala, Matara and Hambantota and a 

pencil cases, bags amounting to nearly 45,000 

decision will be final and binding. An appeal 

before the Magistrate Court. 

quantity of 496 counterfeits were seized. 

articles were seized 9 . 

can be preferred to the Commercial High 

Court. 

A special Anti-Piracy and Counterfeit unit 

In 2012 the CID took action to minimize the 

While stringent enforcement of Intellectual 

attached to the Criminal Investigation 

circulation of counterfeit merchandise during 

Property Rights is clearly visible under the 

This mechanism is beneficial to international 

Department (CID) of the Sri Lanka Police 

the ICC World Twenty20 held in Sri Lanka. 

criminal law, a strong desire to increase public 

brand owners in protection of their rights. 

was set up in 2010 for investigation and 

Series of raids were conducted on retailers 

awareness as to infringement of Intellectual 

Several opposition proceedings are instituted 

curtailment of piracy and counterfeiting. 

in the Pettah and Boralesamuwa areas who 

Property Rights has come to the fore. 

before the National IP Office each year, some 

were producing large quantities of fake team 

Publication of cautionary notices in the print 

of them proceed to the inquiry stage. 

Over the years the CID has taken active 

initiative to raid and prosecute considerable 

number of traders engaged in illegal 

“event” shirts. The raids followed a complaint 

to the police filed by the ICC relating to the 

protection of registered trademarks and logos 

media and reporting of raids in the media are 

some of the means adopted by the Sri Lanka 

Police to deter acts of infringement. 

Customs Ordinance 

reproduction of songs of popular local music 

groups and singers before Magistrate’s Courts 

for selling, possessing and displaying for sale 

counterfeit CD’s and DVD’s. 

associated with the ICC World Twenty20 Sri 

Lanka 2012 6 . 

In 2013 a large scale computer retailer situated 

at a leading IT mall in Colombo was raided for 

Administrative Remedies 

Intellectual Property Act 

The cross border protection of Intellectual 

Property Rights is predominantly governed by 

the Customs Ordinance No 83 of 1988. 

To comply with the international obligations 

To curb software piracy the CID has conducted 

selling branded laptop computers installed 

In the realm of Copyright Infringement, s 22 

created by ratification of the Madrid 

successful raids across the country. Notably in 

with suspected pirated software. A number 

(3) of the Intellectual Property Act entitles the 

Agreement for the Repression of False or 

2010 the CID raided a limited liability company 

of devices installed with suspected pirated 

right owner aggrieved by any infringement 

Deceptive Indications of Source on Goods and 

suspected of infringing the intellectual 

software were taken into custody and were 

of his rights to make an application to the 

the TRIPs Agreement new provisions were 

property rights of the Business Software 

produced before court. 

Director General of Intellectual Property. An 

introduced by the Intellectual Property Act. 

Alliance members, Adobe, Autodesk and 

inquiry will be conducted and the decision 

Microsoft by using pirated and unlicensed 

Up to 2013 a total of 102 cases on Intellectual 

of the Director General shall be binding on 

S 125 A of the Customs Ordinance prohibits 

software in the course of running its business. 

Property Rights were filed before courts citing 

all parties. An appeal can be preferred to the 

importation and exportation of counterfeit 

software piracy 7 . 

Commercial High Court against such decision. 

trademark goods, pirated copyright goods 

The joint raid which took place in Ratmalana 

and any other goods which contravene the 

and Horana involved the seizure and 

More recently the Police successfully 

In Trademark matters, s 111 (10) entitles 

provisions of the Intellectual Property Act. 

examination of over seventy computers 

conducted several raids against distributors, 

any person to contest the registration of a 

Violation shall entitle the customs authorities 

installed with an estimate of over 120 copies 

re-sellers and importers of counterfeit 

Trademark by filing a Notice of Opposition 

to forfeit the goods and dispose outside the 

of pirated software valued at an alleged 

Microsoft certificates of authenticity (‘COA’). 

based on s 103 (objective grounds) and s 104 

channels of commerce. 

amount of Sri Lanka Rupees Ten Million (Rs 

10,000,000). 

Similarly the same year a successful raid was 

conducted by the CID with the assistance of 

Perkins who has the largest population of 

diesel engines in Sri Lanka. A large quantity 

of 1,698 counterfeit Perkins oil filters, 

crank shafts etc were seized. The offenders 

appeared in court and thereafter pleaded 

The raids led to the seizure of over 500 copies 

of counterfeit Microsoft Windows 7 COAs 8 . 

The largest ever raid carried out in Sri Lanka 

was upon a complaint made by Disney 

6 http://www.icc-cricket.com/world-t20/news/2012/media-releases/74350/icc-move-against-counterfeit-merchandise 

7 http://www.sundaytimes.lk/130224/business-times/ 

wipo-pledges-to-assist-sri-lankas-ipr-protection-initiatives-33793.html 

(prior rights) of the Intellectual Property Act. 

Under s 104 any registered owner of a 

Trademark with prior rights or owner of 

an unregistered mark having prior use or 

mark known in Sri Lanka can contest such 

registration. 

A Notice of Opposition must be filed within the 

statutory period of opposition (three months 

Under s 125 B of the Ordinance 10 the owner 

of any registered trade mark or holder of 

copy right or any other Intellectual Property 

rights may make an application to the Director 

General of Customs requesting the Customs to 

suspend clearance of imported/exportation of 

goods that are suspected of being counterfeit 

or pirated. A prima facie case of infringement 

must be established to the satisfaction of the 

5 Code of Criminal Procedure Act No 15 of 1979 (as amended), 

Section 136 (1) (a) 

8 http://www.sundaytimes.lk/140406/business-times/police-seize-fake-microsoft-goods-in-raids-91205.html 

9 http://www.thesundayleader.lk/2013/09/29/largest-everfake-disney-raid-in-sri-lanka/ 

10 Regulations published in Gazette Extraordinary No 

1523/22 15th November 2007 



Director General of Customs. 

If the Application for suspension is accepted the 

customs shall suspend the release of goods. 

The detention shall remain in force initially for 

a period of fourteen (14) days and extended at 

the option of the Director General of Customs 11 . 

If within a period of fourteen working days after 

the applicant has been served notice of the 

suspension, the Director General of Customs 

is not informed of the institution of court 

proceedings in respect of the release of any 

goods suspended the goods shall be released 12 . 

The Customs may on its own initiative suspend 

the clearance of importation or exportation of 

goods in respect of which it has acquired prima 

facie evidence, that an intellectual property right 

has been, or may be infringed. 

11 Ibid., Article 4 and 5 

12 Ibid., Article 6 

To facilitate performance of this ex-officio action 

in enforcement of Intellectual Property Rights, 

the Customs Department has established an 

Intellectual Property Rights Enforcement Unit. 

Intellectual Property Right holders who are 

desirous of safeguarding their rights could 

register with the aforesaid Unit of the Sri Lanka 

Customs Department by furnishing information 

and documentary evidence to establish 

Intellectual Property Right ownership. 

This registration process was introduced in 

2010, 42 trademark owners have registered 

with the Customs from 2010 to 2012 13 . 

Remedies at Common Law 

In recent times cease and desist letters have 

proved to be an effective and expedient means 

of combating minor Copyright and Trademark 

infringements. 

13 http://www.sundaytimes.lk/130224/business-times/ 

wipo-pledges-to-assist-sri-lankas-ipr-protection-initiatives-33793.html 

UK Holiday Pay Should Include 

Overtime Payments 

by Jane Biddlecombe 

The landscape has changed in relation to the calculation of holiday pay 

in the UK with the November 2014 Employment Appeal Tribunal 

(“EAT”) decision in Bear Scotland Ltd v Fulton, Hertel (UK) Ltd v 

Wood and Amec Group Ltd v Law. 

Anomi Wanigasekera 

Partner at Julius & Creasy 

T: +94 11 2422601 

Email: anomi@juliusandcreasy.lk 

Anomi heads our Intellectual Property Group. She has extensive experience in the full range 

of enforcement, management and transactional matters pertaining to intellectual property 

law, including representing clients before the National Intellectual Property Office, acting for 

multinationals as well as Sri Lankan conglomerates in respect of infringement actions, applying 

for injunctions and search and/or seizure orders. She also overlooks the drafting and reviewing of 

contracts and advises on regulatory compliance matters. 

The history of the claims 

In the UK for many years employers 

have paid employees with normal 

working hours their basic pay only in 

respect of holiday pay and no other 

payments have been included. 

However, in the case of Williams v 

British Airways Plc, the European Court 

of Justice (‘ECJ’) held that payments 

‘intrinsically linked’ to the tasks 

that an employee carries out under 

his employment contract must be 

taken into account in calculating the 

appropriate rate of holiday pay. The 

ECJ then held in the case of Lock v 

British Gas Trading Ltd that commission 

should be included in holiday pay. 

Subsequently, various UK Tribunals 

held at first instance that nonguaranteed 

overtime (i.e. overtime 

which the employer does not have to 

offer but the employee must work if 

offered) should be included in holiday 

pay. 

The employers in these cases appealed 

to the EAT. 



How should holiday pay 

be calculated in the UK? 

Grey areas remain 

There are still some grey areas where the 

EAT did not give a definitive ruling. For 

relation to EU Leave. 

To comply with the decisions in Lock and 

cases at first instance, the Judge held 

that it is for the employee to choose 

which type of leave they are taking at any 

It is a matter of principle enshrined in 

instance:- 

Williams the reference period must be a 

time (i.e. EU Leave or additional leave). 

European case law that employees must 

not suffer a financial disadvantage when 

• The decision did not deal with purely 

‘representative’ period, in other words, it 

must reflect normal working. 

However, the EAT disagreed. It stated that 

the employer is entitled (within reasonable 

they take holiday because, if they do, this 

voluntary overtime (i.e. overtime 

bounds following the procedure set out in 

will act as a disincentive to taking such 

offered by the employer which 

In the absence of further guidance from 

the WTRs) to direct when holiday is taken 

holiday. 

the employee can refuse to carry 

the ECJ, UK Employment Tribunals will 

and the employer therefore has the power 

out). It remains to be considered at 

have to approach this question on a case- 

to direct when, within the holiday year, EU 

The EAT in the Bear Scotland case held 

an appellate level whether purely 

by-case basis and may choose a different 

Leave should be taken. 

that employees must be paid their ‘normal 

voluntary overtime should be 

reference period depending on the 

remuneration’ during the four weeks of 

included in the calculation of holiday 

circumstances. 

In addition, the WTRs describe the 

annual leave granted by the European 

pay but it is my view that all overtime 

additional 1.6 weeks’ leave granted to UK 

Directive (“EU leave”). 

is likely to be treated in a similar 

It is arguable that if commission or 

employees as ‘additional leave’ which, the 

manner irrespective of how it comes 

overtime payments fluctuate widely 

EAT held, suggests that such leave should 

This is employees’ typical average pay not 

about, and so voluntary overtime is 

during the year, a 12 week period may not 

be the last taken during the holiday year. 

just their basic pay. It therefore includes 

also likely to have to be included in 

be representative. 

commission, non-guaranteed overtime 

the calculation of holiday pay. 

It is therefore arguable that in each 

and other payments which are intrinsically 

linked to the tasks which the employee 

• No judgment or guidance was 

The Advocate General in Lock suggested 

averaging pay over a reference period 

holiday year, an employee will take their 

four weeks of EU Leave first and then 

is required to carry out and which are 

given as to how holiday pay 

of 12 months in relation to commission 

later in the holiday year they will take any 

‘normally’ paid to the employee. 

should be calculated, except that 

payments but this was not confirmed by 

additional leave to which they are entitled. 

However, this EAT ruling does not apply to 

the additional 1.6 weeks of annual leave 

it must correspond to the normal 

remuneration received by an 

employee during the appropriate 

the ECJ. 

In many businesses there will be peaks 

Time limit for claims 

granted to employees in the UK under the 

reference period. 

and troughs in the levels of overtime 

Claims generally have to be brought within 

Working Time Regulations 1998 (“WTR”) 

or any additional contractual leave that 

• The EAT did not specifically rule on 

worked by employees and therefore 

averaging overtime over previous weeks 

3 months of the non-payment of holiday 

pay, which is also a deduction from wages. 

employees are entitled to (“additional 

the issue of when EU Leave is taken in 

or months (as opposed to a 12 month 

The deduction happens on the payment 

leave”). 

a holiday year. 

period for example) could result in an 

date, not the date of the holiday. 

Employers in the UK therefore need to 

decide if they will pay holiday pay including 

overtime (and other relevant payments) 

What is the correct 

reference period? 

obligation to pay sums that are not 

representative. 

Employees may also be incentivised to 

Employers should check whether any 

claims which may be brought are out of 

time. If an employee cannot bring a claim 

for just EU Leave or for all holiday that the 

take holiday after periods of high levels 

for a recent deduction (i.e. in the previous 

employee is entitled to take. 

The saving employers will achieve by 

paying less holiday pay for this additional 

leave may not be worth the administrative 

burden of operating two different holiday 

pay rates. 

This will depend on how regular overtime 

is and how many overtime hours an 

employee typically works. 

In the UK, in cases where employees 

do not have normal working hours (or 

have normal working hours but their pay 

varies according to the amount of work 

done or the time of work), average pay is 

calculated by using the formula set out in 

the Employment Rights Act 1996 (“ERA”). 

The ERA uses a reference period of the 

last 12 working weeks to calculate pay. It is 

now not clear if this 12 week period is the 

appropriate reference period to apply in 

of overtime in order to maximise their 

holiday pay. It is therefore important that 

an employer uses a reference period that 

is representative and ensures that the 

employee receives average remuneration 

whilst on holiday. 

When is EU Leave taken? 

Another area of uncertainty relates to 

EU Leave and when it is taken during the 

holiday year. In the Hertel and Amec 

3 months) then he or she will not be able 

to start counting back many months or 

years. 

Backdated holiday pay 

claims 

The UK Government has recently 

announced that it is intending to limit 

holiday pay claims to two years before 

the claim is lodged and make it explicit 



that the right to paid holiday is not 

incorporated as a term in all employment 

contracts. This is intended to limit long 

term claims for holiday pay both in the UK 

Employment Tribunal and in the UK civil 

courts. 

However, this change will only apply 

to claims made on or after 1 July 2015. 

This means that any claims made by 

employees before then will be subject to 

the normal limitation rules. 

In order for employees to claim unpaid holiday 

pay going back over a number of years, they will 

need to prove that there has been a ‘series of deductions’ 

and bring their claim within three months 

of the last deduction. 

The EAT held that in order for there to be 

a ‘series of deductions’, there must not 

be a significant time gap between the 

deductions. 

It therefore held that employees cannot 

make an unlawful deduction from wages 

claim where, in any case, a period of more 

than three months has elapsed between 

the deductions. 

The EAT ruled that any gap of more than 

three months has the effect of breaking 

the series, and therefore limiting the 

claim to any losses incurred before the 

series was broken. Unite (the trade union 

involved in this case) has confirmed that it 

will not be proceeding with an appeal on 

behalf of the employees on this point. 

It is now the law in the UK, subject to 

any appeal in a subsequent case, that 

EU Leave should be paid at a higher rate 

(including commission, overtime payments 

etc.) 

It follows that in the past employers will 

have made a series of deductions (where 

the higher rate of holiday pay was not 

paid) followed by a series of correct 

holiday payments (i.e. for additional leave 

where the basic rate was, and still is, 

appropriate). 

This period in which holiday pay was paid 

at the appropriate rate breaks the series 

of deductions, if it is for a period of more 

than three months. 

In practice, it may be the case that there 

will have been a substantial gap at the end 

of any given holiday year when employees 

were taking their additional leave and so 

no unlawful deductions from wages were 

made, breaking the ‘series’. 

Many historic holiday pay claims may 

therefore be limited to the most recent 

holiday year. 

UK employers should ACT 

NOW 

My view is that the basic principle from 

this EAT case will not be overturned and 

that employers will be stuck with paying 

holiday pay for EU Leave to include, for 

example, overtime. 

The prudent employer in my view will 

therefore begin paying holiday pay that 

includes overtime and other relevant 

payments when calculating holiday pay (in 

respect of EU Leave). 

The following actions should be 

considered: 

• Employers will need to choose an 

appropriate reference period in order 

to calculate the holiday pay due going 

forward. They will also need to decide 

whether they are going to pay the 

increased rate for EU Leave only or 

for all holiday entitlement. 

• Any change needs to be communicated 

clearly to employees and employers 

should reserve the right to vary or 

withdraw any additional payments 

made now if the law changes in the 

future. 

• Employers should also consider 

amending the wording of their 

contracts of employment, staff 

handbook and relevant policies. 

• Employers should carry out an audit 

to assess their financial exposure 

in terms of back pay claims (which 

will involve individual analysis of all 

employees and their holiday in recent 

years to determine if they can find a 

three month gap in deductions). 

• Employers will then need to assess 

whether they will address historic 

liabilities or simply change their 

practice going forward. 

Jane Biddlecombe 

Solicitor at Paris Smith LLP 

T: +44 (0) 2380 482 374 

Email: jane.biddlecombe@parissmith.co.uk 

Faced with the prospect of increased 

wage bills and the administrative burden 

of calculating how much should be paid 

in respect of each employee’s holiday, 

many employers may look to limit pay 

rises, reduce the availability of overtime 

where feasible or take on agency staff to 

cover periods of increased demand rather 

than offer overtime to their permanent 

employees. 

Since approximately 5 million 

people in the UK regularly work 

paid overtime, this decision could 

have far-reaching consequences 

for many years to come. 

Jane has over 10 years of experience at Paris Smith working on both contentious and noncontentious 

matters. She works for a broad range of clients in all sectors from small owner 

managed businesses to large national companies. 

She provides day-to-day advice in all areas of employment law, including disciplinary issues, 

performance and absence management and handling grievances. In addition, she advises on the 

employment implications of business re-organisations and large scale redundancies as well as 

acting on a range of Employment Tribunal claims. 

Jane has an excellent reputation in partnering with her clients to achieve practical solutions to 

their employee issues. 


Healthcare 

Effects Of The New Federal Spending 

Package On The Health Sector 

by Eric A. Klein 

guidance issued earlier in 2014 set forth that the 

program would be implemented “in a budget neutral 

manner.” While HHS anticipated that collections 

would be sufficient to cover expenditures, the 

department also stated that payments would be 

reduced pro rata to the extent of any shortfall. 2 

A second insurance-related provision amends section 

833 of the Internal Revenue Code, which grants tax 

benefits to Blue Cross and Blue Shield plans, as well 

as certain other qualifying health care organizations. 

Section 833 benefits apply only to an organization 

with a medical loss ratio (MLR) of at least 85 percent. 

compliance initiatives, and investments in health 

information technology to support such initiatives. 

The provision is retroactively applied to taxable years 

beginning after December 31, 2009. 

The Act does not address other controversial aspects 

of section 833, such as the scope of the benefits 

provided to nonprofit health plans, and whether 

there are possible means for an otherwise eligible 

organization to mitigate the consequences of having 

an insufficient MLR. 

Medicare 

In mid-December, President Obama signed into law a 

$1.1 trillion spending bill known as the “Consolidated 

and Further Continuing Appropriations Act, 2015″ 

or “Cromnibus.”1 This post explores provisions that 

relate to the health sector and Affordable Care Act 

(ACA) implementation. 

Health IT 

The spending package allocates just over $60 million 

to the Office of the National Coordinator for Health 

Information Technology for the ongoing development 

and advancement of interoperable health IT. An 

emphasis on interoperability resounds as another 

provision limits aspects of Department of Defense 

and Department of Veterans Affairs spending 

until the department’s report on a plan to achieve 

electronic health record interoperability between 

them. 

The Act allocates just over $14.9 million for health IT 

adoption (and other quality improvement measures) 

1 The full text of the Act is available here. 

in rural hospitals. An additional $1 million is available 

to fund telehealth initiatives in rural areas. 

Health Insurance 

Among other provisions affecting insurance, the Act 

mandates that the ACA’s risk corridor program be 

budget neutral. The program seeks to incentivize 

insurers to offer qualified health plans in the face 

of significant uncertainty by transferring funds from 

plans with lower than projected costs to those with 

allowable costs that are higher than anticipated. 

According to the spending package, the Centers for 

Medicare & Medicaid Services (CMS) may not apply 

resources from accounts funded by the Act towards 

risk corridor payments. This limits the agency to 

funding the program through collections. 

While insurers may have depended on risk corridor 

payments in setting rates for 2014 and 2015, 

budget constraints should not come as a surprise. 

Department of Health & Human Services (HHS) 

The IRS published final regulations in January 2014 

providing that the MLR numerator—defined as the 

organization’s total premium revenue expended 

on reimbursement for clinical services provided 

to enrollees—does not include amounts spent on 

activities to improve health care quality. (The MLR 

denominator is an organization’s total premium 

revenue for a taxable year.) 

The Act’s amendment aligns section 833’s MLR 

definition with that provided by section 2718 of 

the ACA, pursuant to which costs associated with 

activities to improve health care quality may be 

counted in the numerator alongside medical claims. 

Examples of activities affected by the change include 

case management, care coordination, and care 

2 Department of Health & Human Services. Risk Corridors and Budget 

Neutrality. Apr. 11, 2014. 

Eric A. Klein 

The spending package cuts appropriations for the 

Independent Payment Advisory Board (IPAB) by $10 

million. While it has not yet been operationalized, 

IPAB is a 15-member panel created and empowered 

by the ACA to achieve cost savings in the Medicare 

system. The ACA appropriated $15 million a year 

for the entity. In addition, CMS is prohibited from 

using Medicare program funds for non-Medicare ACA 

activities. 

Prevention and Public Health 

Partner at Sheppard Mullin Richter & Hampton 

T: +1 310 228 3728 

Email: eklein@sheppardmullin.com 

Finally, the Act places some restrictions and 

requirements on spending under the ACA’s 

Prevention and Public Health Fund. These provisions 

generally appear to address concerns over 

transparency. For example, HHS must establish a 

publicly accessible website to provide information 

regarding the use of available funding. 

Eric Klein leads the 90+ attorney national healthcare practice, and is a partner in the Century City 

office, of Sheppard Mullin Richter & Hampton LLP. With over twenty-six years of practical legal and 

business experience, his practice focuses on the healthcare, technology and related industries. 



Should HMG Take A Market 

Rent From Its Data Estate? 

by Richard Kemp 

As we move into the era of Big Data – vast exploitable datasets of computerised information – it’s 

worth noting that HMG’s database about UK citizens is the largest in the country and of enormous 

and increasing value. Mr Francis Maude the Cabinet Office Minister is a keen enthusiast for open 

data, but should the Government be doing more to monetise its data estate? 

Even leaving aside Snowden and surveillance, 

government departments like Health, Home Office, 

Education, HMRC and BIS have huge and growing 

digital databases. Were it not for the seemingly 

endless run of high profile public sector IT fiascos in 

the first decade of the century, the hue and cry from 

civil liberties groups about the risks to individual 

freedoms of ‘citizen on a stick’ – everything the State 

knows about any citizen on a memory stick – would 

doubtless have been much louder by now. 

As it is, as individual government departments 

start to master their own data estates and central 

government as a whole starts to join up the dots on 

what each department knows about any particular 

individual, HMG’s data estate – a term we will become 

much more familiar with in years to come – will 

become one of the UK’s most valuable national assets 

(perhaps comparable with its real property estate, 

whose book value is estimated at around £400bn). 

If you look at the UK data estate as an asset, it’s not 

as simple as property – which has a capital value as 

an asset you can sell, income value from rentals and 

expense associated with upkeep and maintenance. 

With data, what should be the right policy drivers to 

protection, growth, maintenance and monetisation of 

the asset? And how do you reconcile all the conflicting 

interests – individual liberties, commercial interests, 

safeguards against overreaching by the State and 

maximising the benefits for citizens of technological 

progress? 

Just as property law defines rights and obligations 

about real estate, a worthwhile start point in the 

policy debate about data is also its legal framework. 

Data is pretty weird stuff in legal terms – as 

expression and communication, English law holds 

that you can’t steal it and, after a judgment earlier 

this year, you can’t have a lien (a right to retain 

possession) over a database either. But as digital 

information becomes more valuable, legal rights in 

relation to data are developing fast as enforceable 

sources and stores of value, based on contract law, 

regulatory law and intellectual property (copyright, 

database right and confidentiality) law. 

Legal rights in data provide the framework and the 

mechanism to mediate all the competing interests 

about data use. One of the most important areas of 

conflict is between individual rights to privacy and 

the commercial value of the databases concerned to 

service providers to the public sector, increasingly 

dominated by IT businesses with deep pockets. 

IT companies can now develop sophisticated 

predictive products and services using large 

aggregated, anonymised public databases. In 

healthcare, where NHS databases of clinical outcomes 

can improve preventive medicine and patient care, 

the combination of recent breakthroughs in cancer 

treatment drugs and national oncology databases is a 

case in point. 

The NHS databases are of enormous value to the 

commercial sector, who will in turn charge the NHS a 

commercial rate for the drugs, treatments, medicines 

and services they will develop as a result. 

Richard Kemp 

Partner at Kemp IT Law 

T: +44 (0)20 3011 1670 

Email: richard.kemp@kempitlaw.com 

Mr Maude is a noted advocate of open government. 

In a recent speech in Paris at the end of April he 

outlined five principles for public sector reform, all 

of which apply to HMG’s data estate: tight central 

control of IT, property and procurement as common 

activities; looser operational control; fostering an 

innovative culture; ‘digital by default’; and ‘being 

transparent and publishing open data’. 

Talking about accountability and transparency, 

he said that ‘ultimately, public data belongs to the 

citizen, not the state’. I’m not sure that’s right – the 

data that the State holds about me as an identifiable 

individual, sure; but that data as collated, structured 

and searchable and as the product of all those public 

sector IT projects? 

I have an interest, protected by law, that the 

information that relates to me is not misused. Yet, as 

a taxpayer, when those vast datasets are aggregated, 

anonymised and packaged up, I want to make sure 

that HMG isn’t missing a trick in licensing them on 

commercial terms to the IT and healthcare providers 

who will use them to develop the products and 

services that enhance our quality of life and that they 

will then sell back to us on equally commercial terms. 

At a time of pressure on public finances, and when 

everyone – citizens and business – stands to benefit 

from services Big Data makes possible, shouldn’t 

HMG be developing a comprehensive governmentwide 

approach to commercial licensing of its data 

estate that balances all the competing interests? 

With over thirty years’ experience at the leading edge of technology law practice, Richard is widely 

recognised as one of the world’s top IT lawyers. He has built an outstanding reputation for advice 

that combines commerciality and client service with innovative legal solutions to the business 

challenges of technology development, deployment and regulation. 


Oil & Gas 

NI 51-101 Amendments Promote 

Improved Disclosure of 

Oil & Gas Resources 

by Steve Pearson, 

Perry Feldman 

The Canadian Securities Administrators (the “CSA”) have published amendments (the 

“Amendments”) to National Instrument 51-101 – Standards of Disclosure for Oil and 

GasActivities (“NI 51-101”) and the related companion policy to NI 51-101 (the 

“Companion Policy”). In its announcement, the CSA indicated that the Amendments 

will promote improved disclosure of resources other than reserves and associated metrics 

while simultaneously providing increased flexibility for oil and gas issuers that operate 

and report in different jurisdictions and recover product types not previously recognized. 

While the effective date of the Amendments is 

July 1, 2015, reporting issuers are required to 

immediately follow the latest requirements of 

the Canadian Oil and Gas Evaluation Handbook 

(the “COGE Handbook”) including ROTR 

Guidelines and Bitumen Guidelines. The CSA 

expects the Amendments to be adopted in each 

jurisdiction of Canada, following the satisfaction 

of applicable ministerial approval requirements. 

Access a complete copy of 

the Amendments or the 

amended Companion Policy. 

Summary Of The Amendments 

Set forth below is a summary of the key changes 

resulting from the Amendments. 

Alternative Resources 

Evaluation Standard 

Under the current rules, issuers are prohibited 

from making public disclosure of reserves other 

than estimates that have been prepared in 

accordance with the COGE Handbook. 

This has been problematic for certain reporting 

issuers who are also subject to, or wish to comply 

with, the reserves disclosure requirements of 

other regulatory regimes, including the Securities 

and Exchange Commission of the United States 

(the “SEC”). In the past, certain issuers have 

obtained exemptive relief allowing them to 

disclose reserves prepared in accordance with 

U.S. requirements in addition to their reserves 

prepared under NI 51-101. 

The Amendments will allow for supplementary 

disclosure of resources using evaluation 

standards other than the COGE Handbook 

(referred to in the Amendments as an 

“alternative resource evaluation standard”). 

The disclosure under the alternative standard 

must be accompanied by the disclosure required 

by NI 51-101 and, among other things, be made 

in respect of a regime which is comparable to the 

COGE Handbook. In addition, the estimates must 

be prepared by a qualified reserves evaluator or 

auditor. 

In the revisions to the Companion Policy, the 

CSA has indicated that alternative resource 

evaluation standards that the CSA would 

consider acceptable include the SEC’s oil and 

gas disclosure framework and the Petroleum 

Resource Management System prepared by the 

Society of Petroleum Engineers. 

Product Types andProduction 

Group 

The Amendments have imported the product 

type definitions from the COGE Handbook 

including “bitumen”, “coal bed methane”, 

“conventional natural gas”, “shale gas”, 

“synthetic crude oil” and “synthetic gas” and 

have refined those definitions for securities 

disclosure purposes. 

In addition, the concept of “production 

group” has been deleted from NI 51-101 and 

accordingly, the requirement to disclose a 

reporting issuer’s reserves by production 

group will no longer be required in the annual 

statement of reserves data prepared in 

accordance with Form 51-101F1 – Statement of 

Reserves Data and Other Oil and Gas Information 

(“Form 51-101F1″). 

Contingent and Prospective 

Resources 

Under the Amendments, if a reporting issuer 

chooses to include contingent or prospective 

resources in an appendix to its annual statement 

of reserves data (prepared in accordance with 

Form 51-101F1) the reporting issuer will be 

required to include a summary of the future net 

revenue associated with such resources based 

on forecast prices and costs (comparable to the 

summary provided for reserves data) and the 

estimates of the resources and related future 

net revenue must be evaluated or audited by 

an independent qualified reserves evaluator or 

auditor. 

In addition, Section 5.9 (Disclosure of Resources 

Other than Reserves) of NI 51-101 has been 

amended to require issuers to include a 

description of resources recovery projects 

including estimated total cost to achieve (and 


Oil & Gas 

estimated date of) commercial production, 

recovery technology and whether a project is a 

conceptual or pre-development study. 

Oil and Gas Metrics 

“Oil and gas metric” means a numerical measure 

of a reporting issuer’s oil and gas activities and 

includes finding and development costs, BOEs, 

reserves replacement and netbacks. Under the 

Amendments, Sections 5.11 (Net Asset Value 

and Net Asset Value perShare ), 5.12 (Reserve 

Replacement ), 5.13 (Netbacks ), 5.14 (BOEs and 

McfGEs ) and 5.15 (Finding and Development 

Costs ) of NI 51-101 will be deleted in their 

entirety and replaced with a “principle-based” 

approach to disclosure. 

Pursuant to the Amendments, if a reporting 

issuer discloses an oil and gas metric, the 

reporting issuer must identify the standard 

and source of the oil and gas metric, provide a 

description of the method used to determine the 

oil and gas metric, provide an explanation of the 

meaning of the oil and gas metric and caution 

readers as to the reliability of the oil and gas 

metric. 

If there is no identifiable standard for an oil and 

gas metric, the reporting issuer must also include 

a brief description of the parameters used in the 

calculation of the oil and gas metric and provide 

a cautionary statement that the oil and gas 

metric does not have any standardized meaning 

and should not be used to make comparisons. 

Marketability of Production 

and Reserves 

The Amendments will require disclosure of 

resources or of sales of product types or 

associated byproducts at the “first point of sale” 

provided that a reporting issuer may disclose 

resources or sales of product types or associated 

byproducts with respect to an “alternate 

reference point” if, to a reasonable person, 

the resources, product types or associated 

byproducts would be marketable at the alternate 

reference point. 

If a reporting issuer chooses to disclose 

resources or sales of product types or associated 

byproducts with respect to an alternate 

reference point, the reporting issuer must state 

that fact, disclose the location of the alternate 

reference point and explain why disclosure is not 

being made with respect to the first point of sale. 

Abandonment and 

Reclamation Costs 

The CSA noted in its request for comments that 

there is inconsistency in the determination of 

what constitutes abandonment and reclamation 

costs for the purposes of oil and gas disclosure. 

In order to provide clarity, the Amendments 

define “abandonment and reclamation costs” in 

NI 51-101. 

In addition, Item 6.4 (Additional Information 

Concerning Abandonmentand Reclamation 

Costs ) of the current Form 51-101F1 has been 

repealed in its entirety and reporting issuers will 

instead be required to include a discussion of 

any significant abandonment and reclamation 

costs in the significant factors and uncertainties 

disclosure in the annual statement of reserves 

data prepared in accordance with Form 51- 

101F1. 

Other Amendments 

With the introduction of IFRS 11, the 

Amendments refer to the COGE Handbook for 

the purpose of determining ownership and 

allow for flexibility in the manner of presenting 

resources for which a reporting issuer does not 

have control. In connection with the foregoing, 

Items 2.3 (Reserves Disclosure Varies with 

Accounting) and 2.4 (Future Net Revenue 

Disclosure Varies withAccounting ) of Form 51- 

101F1 have been repealed. 

Under the Amendments, the requirement to 

obtain the consent of the independent qualified 

reserves evaluator before disclosing results from 

the annual evaluation outside of the required 

annual filings has been removed. 

The Amendments will require reporting issuers 

that cease to be engaged in oil and gas activities 

to file a notice in the form of Form 51-101F5 

– Notice of Ceasing to Engage in Oil and Gas 

Activities not later than 10 days after ceasing to 

be engaged in oil and gas activities. 

The revised Companion Policy clarifies that a 

qualified reserves evaluator or auditor should 

not revise an evaluation using information in 

respect of events occurring after the effective 

date of that evaluation for disclosure purposes. 

The revised Companion Policy also clarifies that 

reporting issuers that have no reserves do not 

need to retain an evaluator or auditor, and that 

the reporting issuer should make clear that it 

has no reserves and is therefore not reporting 

related future net revenue. 

The revised Companion Policy also includes new 

guidance with respect to the disclosure of aftertax 

net present value. In the revised guidance 

the CSA has stated that, if a reporting issuer 

Steve Pearson 

discloses aftertax net present value, it should 

generally include, as appropriate, one or more of 

the following: 

• a general explanation of the method and 

assumptions used in the calculation of aftertax 

net present value, worded to reflect the 

reporting issuer’s specific circumstances and 

the approach taken. The revised Companion 

Policy states that major aspects should be 

addressed, such as whether tax pools have 

been included in the evaluation; and 

• an explanatory statement to the effect 

that the after-tax net present value of the 

entity’s oil and gas properties reflects the 

tax burden on the properties on a standalone 

basis, does not consider the business 

entity-level tax situation or tax planning, 

does not provide an estimate of the value 

at the business entity and that the financial 

statements and related MD&A of the entity 

should be consulted. 

About BLG 

Partner at Borden Ladner Gervais LLP 

T: +1 403 232 9711 

Email: SPearson@blg.com 

Steven Pearson is a partner in our Securities and Capital Markets Group in our Calgary office. 

Steven focuses his practice primarily in the areas of corporate, commercial and securities law. He 

advises public corporations (including corporations listed on the Toronto Stock Exchange and the 

TSX Venture Exchange), private corporations, trusts and partnerships with respect to corporate, 

commercial and securities matters 

Perry Feldman 

Associate at Borden Ladner Gervais LLP 

T: +1 403 232 9496 

Email: PFeldman@blg.com 

Perry Feldman is an associate in our Securities and Capital Markets Group in Calgary. His focus is 

on securities matters, particularly in the areas of mergers and acquisitions, corporate finance and 

continuous disclosure compliance. 


Real Estate 

Real Estate Tax Exemption 

Issue Muddied Again 

by Richard Kemp 

On December 23, 2014, the Commonwealth Court of Pennsylvania logged another 

frustrating mile down the confused and confusing road of property tax exemption for 

purely public charities. In Fayette Resources, Inc. v. Fayette County Board of Assessment 

Appeals, the Court overturned a lower court finding that an operator of group homes for 

intellectually disabled adults satisfied the requirements for tax exemption as a “purely 

public charity.” The Commonwealth Court held that Fayette Resources failed to show 

that it satisfied the second requirement of the so-called HUP test (declared in Hospital 

Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985)) — that it donate 

or render gratuitously a substantial portion of its services. 

When the Charity Act was passed in 

1997, however, the legislature filled that 

void, and created what should be the 

standard against which such questions 

are evaluated, unless the statute itself is 

declared unconstitutional either on its face 

or as applied. Instead, in Mesivtah, the 

Supreme Court required that entities meet 

both tests, which can lead to inconsistent 

results, as occurred here. 

The Commonwealth Court recognized 

that Fayette Resources 

“satisfies all of the statutory 

requirements imposed by the 

Charity Act”; 

nevertheless, it overturned the exemption 

because it found that an element of the 

HUP test was not met. 

Even apart from the dual standard itself, 

it is troubling that Fayette Resources, 

which provides staffed homes for the 

intellectually disabled (who are legitimate 

subjects of charity), is exempt from 

federal taxation, relieves the government 

of the duty and burden to care for the 

intellectually disabled and has no private 

profit motive, was found not to have 

established its entitlement to a real estate 

tax exemption because it did not show 

that its costs exceeded its revenues. 

This rationale appears to conflict with 

the evidence that Fayette Resources is 

compensated by Medicaid payments, 

that any surplus revenues are directed 

back into acquisition or fixing up of group 

homes and that distribution of any funds 

for a private purpose is prohibited by the 

organization’s by-laws. 

Is the Court saying that an entity must lose 

money on a consistent basis to be entitled 

to a real estate tax exemption? Must it 

solicit charitable contributions to establish 

its claim? These are the types of questions 

the legislature answered in the Public 

Charity Act. 

The Supreme Court’s, and here the 

Commonwealth Court’s, insistence 

on applying the less detailed, courtestablished 

standard of the HUP test 

in addition to the Public Charity Act 

standards only creates confusion and 

additional costs to charities who must 

repeatedly litigate the vagaries of the 

HUP test — the very result the legislature 

attempted to avoid. 

While this opinion may be viewed simply 

as Fayette Resources failing to make an 

adequate record below, the case also 

illustrates the confusion created by the 

Pennsylvania Supreme Court’s decision 

in the 2012 Mesivtah case, Mesivtah Eitz 

Chaim of Bobov, Inc. v. Pike County Board of 

Assessment Appeals, 44 A.3d 3 (Pa. 2012), 

which held that non-profit entities must 

satisfy both the statutory requirements of 

the Purely Public Charity Act (“Charity Act”), 

codified at 10 P.S. 371-385, and the courtestablished 

HUP test. 

When the HUP test was developed by 

the Supreme Court in 1985, there was 

no statute implementing the charitable 

exemption for “purely public charities” 

under Article VIII, Section 2(a)(v) of the 

Pennsylvania Constitution. 

Philip H. Lebowitz 

Partner at Duane Morris LLP 

T: +1 215 979 1819 

Email: Lebowitz@duanemorris.com 

Philip H. Lebowitz practices primarily in the area of healthcare law and litigation. Mr. Lebowitz 

provides regulatory and general counseling to healthcare providers, including hospitals, 

pharmaceutical and medical device companies, health care consultants, and physicians. 


Employment and HR 

DISABILITY DISCRIMINATION Under The 

California Fair Employment and Housing Act 

by Kristine E. Kwong 

tections of FEHA are very broad and one 

could qualify as a protected individual 

even based on the employer’s perception 

that the employee is disabled and thus, 

the Act would cover an employee who 

is “erroneously or mistakenly believed” 

to have or have had a physical or mental 

condition that limits a major life activity. 

Government Code Section 12926.1(d)(3); 

2 California Code of Regulations Section 

11065(d)(5), (6). The question arises as to 

what types of disabilities would constitute 

a physical disability, mental disability or 

medical condition. 

stitute “physical disabilities” under the 

particular facts of the case. 

As such, each situation must be analyzed 

on a case-by-case basis. In practical effect, 

California employers may not ask the 

employee for a diagnosis to determine 

whether or not the employee is disabled 

within the meaning of the Fair Employment 

and Housing Act because this would 

invade the employee’s constitutional rights 

of privacy. The employer, however, may 

ask the employee for information regarding 

the employee’s functional limitations. 

Under the Act, a medical condition can 

In addition to having a physiological con- 

mean cancer, genetic characteristics, phys- 

dition or impairment, an individual is not a 

iological and anatomical conditions and 

qualified individual with a disability unless 

conditions that would limit an individual’s 

the condition “limits a major life activity.” 

ability to participate in major life activities. 

This means that the limitation makes the 

Government Code Section 12926(m)(1); 

achievement of a major life activity diffi- 


cult. 

11065(d)(2)(A), (B). The following are examples 

of “physical disabilities”: 

Government Code Section 12926(m)(1)(B) 

(ii); 2 California Code of Regulations Sec- 

Chronic or episodic conditions such as 

tion 11065(l)(3). The key issue is that the 

Introduction 

there is a federal statute that prohibits dis- 

• HIV/AIDS; 

employee’s impairment “limits” a major 

life activity when compared to a “normal” 

California employers with five or more employees 

must comply with the California 

crimination, known as the Americans With 

Disabilities Act, California’s version gives 

• Hepatitis; 

or “average” person that does not have 

the impairment. 

Fair Employment and Housing Act which 

prohibits discrimination on a multitude 

broader protection to employees. 

• Epilepsy; 

In addition to the above, the Fair Employ- 

of protected categories such as race, sex, 

gender, religion, age, national origin and 

For example, FEHA applies to employers 

with five or more employees while the 

• Seizure disorder; 

ment and Housing Act also defines “a 

physical disability” to also cover individu- 

disability. This article focuses on disability 

discrimination, and when an employer is 

Americans With Disabilities Act applies to 

employers with 15 or more employees (42 

• Diabetes; 

als that have a record or a history of physical 

disability or the employer regards the 

required to accommodate a qualified individual 

with a disability. 

USC Section 12112(a); Government Code 

Section 12926(d)). 

• Multiple sclerosis; and 

employee with having a physical disability. 

Government Code Section 12926(m)(4). 

The California Fair Employment and Housing 

Act (FEHA) (Government Code Section 

12900 et seq.) prohibits employment 

discrimination on the basis of physical 

disability, mental disability and medical 

conditions. The purpose of FEHA is to 

provide remedies to eliminate any type 

of discrimination on this basis. Although 

What Disabilities Are 

Covered? 

A person with a disability may be considered 

a qualified individual if the disability 

limits a major life activity. Government 

Code Section 12926.1(c), (d)(2). The pro- 

• Heart disease. 

(Government Code Section 12926.1(c); 


11065(d)(2)(C). 

This is not an exclusive list and the Courts 

have found other impairments to con- 

Mental Disabilities 

In addition to physical disabilities, FEHA 

also protects individuals with “mental disabilities.” 

This term includes any mental 

or psychological disorder, such as an intellectual 

disability, organic brain syndrome, 

emotional or mental illness, or specific 



learning disabilities. 

11065(d)(9)(B). Of particular note, al- 

accommodate an employee exists even 

• Providing additional training; 

As with physical disabilities, the mental 

though sexual behavior identity disorders 

are not disabilities under FEHA, the Cali- 

when the employer regards the employee 

as disabled when in fact the employee is 

• Permitting an employee to work from 

disability must limit a major life activity. 

Government Code Section 12926(j)(1). 

The regulations to the Fair Employment 

and Housing Act identify the following as 

mental disabilities: 

fornia employer must allow transsexual 

and transvestite employees to appear or 

dress in a manner consistent with their 

chosen gender identity, whether or not it 

is their gender identity of birth. Government 

Code Section 12949. 

not actually disabled. 

Types of Accommodations 

Once it is determined that an individual is 

a qualified individual under the Act and is 

home; 

• Providing paid or unpaid leave for 

treatment or recovery; 

• Other similar accommodations for 

• Emotional or mental illness; 

• Intellectual or cognitive disability; 

Accommodating 

employees with disabilities 

unable to perform the essential functions 

of the job, the employer has an obligation 

to accommodate the employee through a 

variety of accommodations. 

individuals with disabilities. 

• Government Code Section 12926(p); 2 

California Code of Regulations Section 

11065(p)(2). 

• Organic brain syndrome; 

• Specific learning disabilities; 

• Autism spectrum disorders; 

Once an employee is a qualified individual 

with a disability and is unable to perform 

the essential functions of the position, the 

Act requires the employer to make good 

faith reasonable efforts to accommo- 

Selecting the right accommodation is 

determined on a case-by-case basis 

depending on the employee’s functional 

limitations. The Act and its promulgated 

regulations provide a nonexhaustive list of 

Assistive Animals as an 

Accommodation 

Recently, an issue that has surfaced is 

• Schizophrenia; 

date the employee in order to afford the 

employee the opportunity to perform the 

essential functions of the job. 

possible accommodations as follows: 

• Making facilities rarely accessible to 

whether or not employees have the right 

under the Act to bring assistive animals to 

work as a form of an accommodation. 

Chronic or episodic conditions such as 

and usable by disabled individuals; 

post-traumatic stress disorder and obsessive 

compulsive disorder. 

This obligation requires employers to 

reasonably accommodate for the known 

• Job restructuring; 

The regulations to the Act provide for 

assistance animals in the work place as a 


disabilities unless doing so would produce 

an undue hardship to the employer’s 

• Offering part-time or modified work 

reasonable accommodation. 2 California 

Code of Regulations Section 11065(p)(2)(B). 

11065(d)(1). As with physical disabilities, 

operations. Government Code Section 

schedules; 

Assistive animals include guide or signal or 

FEHA also extends “mental disability” to 

individuals that have a record or history of 

12940(m); 2 California Code of Regulations 

Section 11068. Under this requirement, 

• Reassigning to a vacant position; 

service dogs or support dogs or animals 

that provide emotional or other support 

a condition that is known to the employer 

and being regarded as having a mental 

employers have an affirmative duty to 

accommodate employees. The issue that 

• Acquiring or modifying equipment or 

to the disabled person including those 

suffering from traumatic brain injuries and 

disability. Government Code Section 

always presents itself is how the employer 

devices; 

mental disabilities such as major depres- 

12926(j)(3), (5); 2 California Code of Regulations 

Section 11065(d), (5), (6). 

is to have notice that there is a need for an 

accommodation. 

• Adjusting or modifying examinations, 

sion. 2 California Code of Regulations 

Section 11065(a)(1). 

training materials or policies; 

Conditions excluded from the definition of 

disability are “mild” conditions that do not 

The most obvious is through the employee’s 

direct supervisor. If the supervisor 

• Providing qualified readers or 

In order to allow employees to bring assistive 

animals to the work place as a form of 

limit a major life activity and this is deter- 

has knowledge of the employee’s disabili- 

interpreters; 

a reasonable accommodation, the employ- 

mined and analyzed on a case-by-case 

basis. For example, these are conditions 

ty, the employer would have an affirmative 

duty to make reasonable accommodations 

• Allowing assistive animals on the 

er may require the employee to produce 

a letter from a health care provider indi- 

with little or no residual effect such as 

for the disability. 

work site; 

cating that the employee has a disability 

common colds, minor cuts, bruises, abrasions, 

non-migraine headaches and minor 

This obligation exists even if the employ- 

• Altering when and/or how an 

and to explain why the assistive animal is 

needed in the work place. 

and nonchronic gastrointestinal disorders. 

ee did not ask for an accommodation. 2 

essential function is performed; 



11068(a). This obligation to reasonably 

• Modifying supervisory methods; 

In addition, the employer may require the 

employee to provide confirmation that 



the animal is free from offensive odors 

and displays habits appropriate to the 

work environment, does not engage in 

behavior that endangers the health and 

safety of the disabled individual or others 

in the work place and is trained to provide 

assistance for the employee’s disability. 2 

California Code of Regulations Sections 

11065(a)(2), 11069(e). 

Leaves of Absences as an 

Accommodation 

Another difficult form of an accommodation 

to process is granting an employee 

a paid or unpaid leave of absence for 

purposes of treatment and/or recovery. 

Generally speaking, a finite leave of 

absence may be considered a reasonable 

accommodation if, after the exhaustion of 

the leave, the employee can resume his 

or her duties. 2 California Code of Regulations 

Section 11065(c). 

On the other hand, it is not reasonable to 

require the employer to hold the position 

indefinitely for the employee’s medication 

to be corrected or allowing the employee 

to fully recover. However, there is no 

minimum under the leave as to the fixed 

duration of the leave of absence. 

As such, employers are cautioned to 

analyze any request for a leave on a caseby-case 

basis to determine whether or 

not the requested duration would impose 

undue hardship to the employer’s operations. 

By contrast, even though granting a short 

term leave of absence may be a form 

of a reasonable accommodation, if the 

employee can work with a reasonable 

accommodation other than a leave of 

absence, the employer may not require 

that the employee take a leave of absence. 


11068(c). 

Reassignment as an 

Accommodation 

Reassignment to a vacant position may 

also be a reasonable accommodation even 

if the position pays less than what the employee 

is currently earning if the employee 

can no longer perform the current job 

duties. 

Government Code Section 12926(p); 2 


11065(p)(2)(N). On the other hand, the 

employer is not mandated under the Act 

to promote or to create a new position 

to accommodate a disabled employee. 2 


11068(d)(4). 

The Good Faith Interactive 

Process 

As part of the accommodation requirements, 

the employer is required to engage 

in a “timely, good faith interactive process” 

in responding to a request for a reasonable 

accommodation by an employee 

with a known physical or mental disability 

or known medical condition. 

Government Code Section 12940(n); 2 


11069(a). 

Under the FEHA regulations, the employer 

must initiate this process if the employee 

with a known physical or mental condition 

asks for reasonable accommodation, the 

employer becomes aware of the need 

for the accommodation, the employer 

becomes aware of the possible need for 

accommodation because the employee 

has exhausted their leave of absence under 

law or under the employer’s leave policy 

and the employee or employee’s health 

care provider states that a further accommodation 

is necessary for recuperation 

or to allow the employee to perform the 

essential job functions. 

The employee also has obligations in participating 

in this accommodation process. 

The employee is responsible to initiate the 

process by asking for reasonable accommodation. 

The employee must cooperate in 

good faith with the employer by providing 

medical documentation when the disability 

or need for accommodation is not obvious. 


11069. This interactive process contemplates 

that both parties, the employer and 

employee, will talk directly with each other 

Kristine E. Kwong 

Partner at Musick, Peeler & Garrett LLP 

T: +1 213 629 7977 

Email: K.Kwong@MPGLAW.com 

to exchange information about what is necessary 

to accommodate the employee. 

However, even though direct communication 

is the preferred method, it is not 

absolutely required. 2 California Code of 

Regulations Section 11069(d)(4). As part of 

the accommodation process, the employer 

is required to give consideration to the 

employee’s preference. 

Conclusion 

The California Fair Employment and Housing 

Act has evolved to require employers 

to take proactive steps in identifying and 

initiating the good faith interactive profess. 

Failure to do so may result in a violation of 

the Act. 

Ms. Kwong advises and counsels clients on a wide range of business and employment issues, 

including wage and hour matters, non-compete and restrictive covenant agreements, executive 

compensation packages, the full range of disciplinary matters, discrimination, harassment and 

leaves of absences, including the Family and Medical Leave Act (FMLA), the California Family Rights 

Act (CFRA), Pregnancy Disability Leave (PDL), the Americans With Disabilities Act of 1990 (ADA), and 

the California Fair Employment and Housing Act (FEHA). 

She has defended class action lawsuits in wage and hour matters, discrimination, harassment and 

retaliation claims. 


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