Case study: ICAP

ICAP’s skeleton-staffed multimillion dollar office

Above a stamp shop, behind closed office blinds, on the first floor of a terrace building overlooking a park on Boulevard Prince Henri in Luxembourg City, the lights appear to be out.

When the Guardian pressed the buzzer one October afternoon a male voice, with what seems a Dutch accent, sounds over the crackly intercom. The speaker confirmed this was, indeed, the Luxembourg offices of Icap, the London-listed financial trading group.

Polite and good humoured, he chuckled and apologised for having to catch his breath, explaining he has just run down some stairs to answer the buzzer. He said little else about Icap’s Luxembourg lending operations, however, and wouldn’t let the Guardian in the building.

Official filings show two Icap companies at this address. Together they have sucked hundreds of millions of dollars in interest income out of the high-tax US and, with the help of a third Icap unit, and made them all but disappear for tax purposes.

Together they had lent a total of $870m to Icap operations in America by March 2008. Annual accounts since then show these loans remained on the companies’ books unchanged every year. They were still outstanding at the end of March this year.

Last week the Guardian approached Icap with the findings from its investigation into the broker firm’s Luxembourg activities. In response, Icap explained that the loans had just recently been repaid in full by the group’s US operations, and that a process to wind down its Luxembourg unit had begun only last month.

No such information was relayed by the voice on the intercom, though Icap’s local manager has since explained that Luxembourg secrecy laws meant he could not offer explanations.

Company accounts suggest neither of the two Icap lending firms had much commercial activity – other than the holding of large loans to the US.
The companies’ names are as long as they are uninformative — Icap Luxembourg Holdings (No.1) Sarl and Icap Luxembourg (No.2) Sarl. In leaked tax correspondence they are abbreviated to generic terms “LuxCo1” and “LuxCo2”.


A detail from one of the documents shows part of Icap’s corporate structure, as it relates to Luxembourg. Photograph: Guardian

Over the last seven years, the two each had just one employee — paid an annual wage of less than $15,000 — while other costs of operating above the stamp shop have also been consistently small.

It is a far cry from Icap’s busy trading desks in New York and London, scenes from which every year appear in the newspapers as a string of celebrities take over the dealing phones as part of a charity day. Last year the Duchess of Cornwall and Strictly Come Dancing’s Craig Revel Horwood manned the lines.

Offering services in many of the busiest financial markets — foreign exchange, credit, interest rates and equities — the group has a busy role at the heart of the City of London, Wall Street and other financial centres.

The chief executive, Michael Spencer, has the best political connections, serving as treasurer of the Conservative party between 2006 an 2010. His donations to the party have totalled nearly £5m.

But no celebrities or cabinet ministers have ties to Icap’s quiet Luxembourg offices. LuxCo1 and LuxCo2 are not mentioned among the 22 main subsidiaries listed in Icap’s annual report. Yet together the two companies received a total of $247m in interest on their loans to the US in the last seven years.

And thanks to modest overheads – the pedestrian office, the single employee – almost all of the interest income converted into profit, making LuxCo1 and LuxCo2 among the most lucrative subsidiaries within the Icap empire.

The tax position on the Luxembourg lending profits is less than clear from company accounts, which record both LuxCo1 and LuxCo2 as having no income tax to pay at all for the seven years reviewed by the Guardian.

The true position, however, is discoverable with the help of leaked tax approvals given to Icap, in private, by the Luxembourg taxman. These show that LuxCo1 and LuxCo2 were treated in their tax returns as part of a lending chain. Although neither company had any borrowings themselves, another ICAP unit, registered to the same address on Boulevard Prince Henri did.

The Icap borrower company in question has an innocuous sounding name — ICAP US Holdings No2 Ltd, or ICAP US2 for short — but it is a truly exotic corporate creature. Despite having just one employee, paid $12,000 in Luxembourg, this UK tax-resident company has three registered addresses: a law firm in Gibraltar; Icap’s international headquarters on Broadgate in the City of London; and the office above the stamp shop on Boulevard Prince Henri.

A clue as to its importance to Icap’s finance and tax affairs comes from the list of directors at Icap US2. These include Stephen Caplen, deputy financial director for the Icap group, and David Ireland, Icap’s head of tax. In the Luxembourg branch office, meanwhile, the sole “représentant permanent” is the non-board member Paul de Haan. Watch the video to learn more about Mr de Haan’s role.

A leaked Luxembourg tax deal, covering all three Icap financing units, shows these units were treated collectively as a the middle link in a lending chain: a conduit rather than a lender.

As a result, the local tax office agreed, the borrowing activities of Icap US2’s Luxembourg branch was generating tax deductions that could be neatly offset against the tax liabilities on almost all interest income earned at LuxCo1 and LuxCo2.

The resulting near-zero tax bill in Luxembourg could hardly be seen as controversial — so long, of course, as the millions paid out in interest by Icap US2 in the Grand Duchy was taxed when it became income for the lending company. And therein lies the twist.

The lender to ICAP US2 was, in fact, ICAP US 2 itself. More precisely, ICAP US2 was lending hundreds of millions of dollars to its Luxembourg branch. In an exotic arrangement — one seen elsewhere repeatedly in the leaked tax files — the group was effectively paying interest to itself.

Meanwhile, in Britain, tax inspectors scrutinising this arrangement recognised there was something unusual afoot. But there was not much they could do to block it, because the UK does not recognise such internal company lending as taxable.

The result was that Icap’s interest payments – paid by Icap US2’s Luxembourg branch to another part of Icap US2 in a different country – almost disappeared, for tax purposes. The saving ran into many tens of million of dollars.

That said, the UK taxman was not entirely without powers to act. HMRC was able to use its anti-avoidance powers, under the so-called “controlled foreign companies” regime, to winkle out a relatively small amount of tax from Icap US2.

Over the last five years for which there are available accounts, Icap US2 appears to have paid an average corporate income tax of $3m a year to HMRC and $83,500 to Luxembourg.

While the precise effective tax rate achieved on Icap’s interest income is hard to calculate, it is clear that it is a fraction of the headline corporate tax rates in the US and UK over the last seven years.

In a statement to the Guardian, Icap said: “Icap is a British company, which has always paid more tax than the UK corporation tax rate, and we do not engage in aggressive tax avoidance. We pay all taxes due on the profits earned in the countries in which we operate. Our Luxembourg financing operation was created to support a series of acquisitions Icap made in the US in the 2000’s, and is now being wound down to reduce costs. Its profits were taxed in the UK. It is an entirely standard financing method and was agreed by HMRC.”