Here, International Tax partner Sonal Shah, shares five key tips on UK tax issues for companies that are overseas.
The first, and arguably the most important decision that business owners need to decide before starting up a business or a project is which company structure to implement. There are various tax efficient vehicles available for UK and international trading purposes. We work with our clients to understand their trade and their business goals to then suggest tax efficient ownership structures.
Whilst businesses may initially seem as operating from a foreign country, from a tax perspective their trade could be assessed as being carried out in other jurisdictions. Hence it is imperative to understand the tax implications associated with each structure.
For example, a UK LLP can be an excellent vehicle for structuring a business that conducts international trade as they combine the benefits of corporate status and limited liability protection for members with the ability to operate and to be taxed as a traditional partnership. Provided these are carefully structured, it is possible to set up tax efficiently creating a scenario where the UK LLP is not subject to UK taxation.
2. Consideration of UK subsidiaries of overseas companies, foreign branches and permanent establishment (“PE”):
When a business decides to establish a UK presence, they can choose to trade through a UK permanent establishment (“PE”), a branch or a UK subsidiary company. Each of these options have their benefits and drawbacks; yet creating tax efficiencies is key. When making such assessment we ensure that both business and personal tax liabilities are understood and minimised where possible.
Each option has different reporting and statutory obligations and tax effects. There could be instances where a business has inadvertently created a PE in the UK, therefore being subject to unforeseen tax implications due to activities being undertaken in a country where it is not otherwise established.
We can, therefore, assist in reviewing the options available, assess the underlying risk areas and provide solutions to create the most efficient set up. Ultimately the choice will depend on the company’s particular circumstances as well as non-tax factors.
Having now fully exited from the EU, the UK continues to be an attractive location to side an international holding company. Not only does it offer a relatively stable legal, political and economic system, it also has an attractive tax regime and extensive tax treaty with the rest of the world.
The location of a holding company is an important consideration in any international structure where there is a desire to operate in a secure and well-regulated environment.
The participation exemption from chargeable gains (“substantial shareholdings exemption”) on the disposal of trading subsidiaries, no withholding tax on dividends from the holding company to its shareholders are some of the key highlights. But like any structuring decision, several factors should be assessed including the location of the subsidiaries as well as any plans for exit to benefit from minimal taxes.
4. OECD initiatives in line with Base Erosion and Profit Shifting (“BEPS”) – managing the impact on your business
The OECD Base Erosion and Profit Shifting (BEPS) project has recently created the need to ensure that a company must have both economic and commercial substance in a jurisdiction in order to avoid negative tax and regulatory consequences.
It is imperative for entities not to fall foul of the substance requirements by streamlining their operations in line with the statutory and OECD’s requirements. We can, therefore, assess whether the current structure of a company is viable and in agreement with the OECD’s requirements and local jurisdiction and ensure that it is compliant with the necessary reporting requirements. We also aim to deliver recommendations and support where needed to ensure that the tax structure is optimised.
From careful consideration in respect of transfer pricing when dealing with inter-company transactions to assessing withholding tax on interest and royalty payments and whether reliefs can apply under a double tax treaty, expert advice should always be taken.
A UK tax-resident company is generally subject to corporation tax on its worldwide profits. A company will generally be UK tax-resident if it is incorporated in the UK, or in the case of a non-UK incorporated company, the central management and control of its business is in the UK.
Non-UK tax resident companies are liable to corporation tax if they trade in the UK through a permanent establishment (“PE”) as explained in our second day of international tax tips: UK tax issues for overseas companies.
Other rules can affect when a company is or is not subject to UK tax, for example, diverted profits tax can apply where a non UK company avoids a UK taxable presence, non-resident may be taxed on gains made from direct or indirect disposals of UK land or other transactions involving UK land or a non-UK company may need to register for VAT in certain cases. All of these cases and more can be easily missed. Our team provides the necessary advice to companies and their shareholders ensuring the right decisions are made at the right time.
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