During the past few months, the Scottish Limited Partnerships (LPs) have made headlines for all the wrong reasons.
As recent as two weeks ago, reports claimed that Scottish LPs were involved in the transfer of thousands of pounds to pay for luxury items belonging to the London-based daughter of a Moldovan judge allegedly involved in the Russian Laundromat, one of the largest money laundering schemes ever devised.
Furthermore, according to The Herald in reports back in March of this year, Scottish LPs “were used to move at least £4 billion out of the former Soviet Union as part of what is thought to be the world’s biggest and most elaborate money-laundering scheme.”
Despite their negative reputation, there are some legitimate advantages to using a Scottish LP.
Here, with the help of a few Taxlinked members, we lay out some of those alongside this structure’s main disadvantages.
What is a Scottish Limited Partnership?
As explained by Sheperd and Wedderburn, a UK law firm primarily based out of Scotland, there are five main characteristics to a Scottish LP as designed in accordance with the Limited Partnership Act of 1907.
First, a Scottish LP “must have at least one general partner, responsible for the management of the Scottish LP and liable for the debts and other obligations of the Scottish LP.”
Second, this structure “will have one or more limited partners, who take no role in the management or decision making of the Scottish LP and whose liability is limited to the value of their capital contribution.”
Third, the limited partnership “will be registered at Companies House and the partnership agreement governing the relationship between the partnership and its partners will be governed by Scots law.”
Fourth, the company “will have its principal place of business and its domicile in Scotland although it may carry on activities in other jurisdictions.”
Finally, it “will be subject to the jurisdiction of the Scottish courts which will determine disputes in relation to the activities and/or assets of the Scottish LP.”
Advantages of the Scottish Limited Partnership
Luca Cerioni, a Lecturer in Tax Law at the University of Edinburgh, believes there are many advantages to using a Scottish LP.
Cerioni says that the Scottish LP stands alone as a legal personality, unlike other LPs set up elsewhere in the UK.
This allows this particular type of structure to “own assets in its own name, borrow money and grant security over those assets and enter into contracts on its own behalf.”
Furthermore, says Cerioni, “despite its separate legal personality, a Scottish LP is transparent for tax purposes.”
He explains that the relevant ”tax authorities look through the Scottish LP and only tax the profits arising from the Scottish LP’s activities in the hands of its partners. This tax transparency regime has been contributing to make the Scottish LP an attractive vehicle for legitimate investment activity, enabling a more tax efficient structure to generate benefits to investors.”
Alexandros Papantoniou, Director at Alpha P Consulting Ltd in the UK, also thinks “a Scottish LP can be used for genuine business purposes.”
For instance, he says, “Scottish LPs are especially useful for multi-party investor and private fund structures,” and this has been facilitated by the UK’s recent launch of “a new type of legal entity called the Private Fund Limited Partnership to help to encourage” these types of activities.
Disadvantages of the Scottish Limited Partnership
Steven Landes of S H Landes LLP in the UK thinks there are better options to the Scottish LPs.
“Scottish LP's have had a bad name for a number of years due to their very light reporting requirements and their use in a number of money laundering scandals,” Landes says.
Complicating matters, Landes mentions that “many UK banks will not open bank accounts for non UK owners of Scottish LPs and the UK Revenue & Customs will often not register them for UK VAT.”
Instead, he suggests to clients to “use a UK Limited Liability Partnership, which is similar but has the reporting requirements of a UK company and does not have such a bad name.”
Luca Cerioni agrees when it comes to the Scottish LPs’ lax reporting requirements.
Cerioni notes that Scottish LPs have very limited reporting requirements as only minimal details have to be filed and kept up-to-date with the UK’s Companies House. For example, all that is necessary is the Scottish LP’s name, nature and place of business, and basic information on the general and limited partners including the amounts contributed by each.
Furthermore, Cerioni says, “the general and limited partners may themselves be companies instead of individuals and, if those companies are incorporated in a jurisdiction where ownership and governance structures are opaque, there is the possibility of masking the identity of those who ultimately own and control the Scottish LP,” which might make them good vehicles to get away with fraud, tax evasion and money laundering.
What are your thoughts on the Scottish Limited Partnership and its pros and cons?