Investing and expanding within the UK: The tax implications of setting up in the UK

This is the second article in a four-part series on investing and expanding within the UK. In the first article in this series, we explored the main routes an overseas business can take when establishing a presence in the UK, from incorporating a subsidiary to operating through a branch or adopting a lighter-touch arrangement.

Once the commercial structure has been chosen, the next question is: what are the tax implications?

For an international business, this goes beyond simply understanding the UK Corporation Tax rate. Where decisions are made, how the UK operation is funded, where employees work and how the UK business interacts with the wider international group can all affect the tax outcome.

Considering these issues before trading begins can help avoid unexpected liabilities and create a more efficient platform for growth.

How will the UK operation be taxed?

A UK subsidiary will generally be UK tax resident and subject to UK Corporation Tax on its profits and chargeable gains. The main Corporation Tax rate is currently 25%, with a lower rate potentially applying to smaller profits.

A branch is different. It is not a separate legal entity from the overseas company, and the UK will generally tax the profits attributable to the UK permanent establishment.

The choice between the two should therefore be considered from both a UK and an international perspective. Businesses should think about how profits and losses will be treated in the parent company’s home jurisdiction, whether double tax relief will be available and how profits will ultimately be returned to the wider group.

Could you create a UK taxable presence without intending to?

A formal UK company or registered branch is not always required before UK tax obligations can arise.

An overseas business may create a permanent establishment through a fixed place of business in the UK or through the activities of people operating here. The UK dependent-agent rules were also broadened from January 2026, increasing the importance of understanding what individuals working in the UK are actually doing.

Where are employees based? What authority do they have? Who negotiates with customers? Where are contracts effectively agreed?

These questions can be particularly important for businesses testing the UK market before committing to a more permanent presence.

Transactions with the wider international group

A UK subsidiary will often buy goods, receive services, use intellectual property or borrow money from other group companies.

These transactions will generally need to reflect arm’s length terms, broadly meaning the terms that would have been agreed between independent businesses.

Transfer pricing should therefore form part of the operating model from the outset rather than being considered after transactions have already begun.

Clear intercompany agreements and appropriate evidence of the functions performed, assets used and risks assumed by each entity can be important in supporting the group’s tax position.

For the largest multinational groups, wider international tax regimes, including Pillar Two, may also need to be considered.

Funding the UK operation

A UK business can be funded through equity, debt or a combination of the two.

The chosen approach can affect cash flow, tax deductions and the ability to return funds to the overseas parent.

Interest on intra-group borrowing may potentially be deductible, although transfer pricing, the Corporate Interest Restriction and other rules can limit relief.

Cross-border payments also require consideration. Certain interest and royalty payments made from the UK may be subject to withholding tax, although domestic exemptions or an applicable double tax treaty may reduce or eliminate the charge.

By contrast, dividends paid by UK companies are not generally subject to UK withholding tax.

The tax treatment in the recipient jurisdiction should also be considered when deciding how the UK operation will be funded and how profits will ultimately be extracted.

Employing people in the UK

People are often one of the first steps in an overseas expansion and one of the areas most likely to create unexpected tax obligations.

A UK employer will normally need to operate PAYE and account for National Insurance contributions.

However, obligations can also arise where employees remain employed and paid overseas but spend time working in the UK.

The position will depend on factors including the individual’s tax residence, the pattern of UK duties, the relevant double tax treaty and any applicable social security agreement.

There is also a wider corporate tax consideration: the activities of employees in the UK can contribute to the creation of a permanent establishment for the overseas business.

VAT and other indirect taxes

Direct taxes are only part of the picture.

An overseas business supplying goods or services in the UK should establish whether it has a UK VAT registration requirement and how VAT applies to its particular supply chain.

Businesses importing goods may also need to consider customs duties, import VAT, EORI requirements and who will act as importer of record.

For international businesses, these issues can have an immediate impact on both compliance and cash flow.

We will look at VAT and customs in more detail in the next article in this series.

Making use of UK tax incentives

The UK offers a number of tax reliefs that may support overseas businesses investing and growing here.

Depending on the nature of the business, these may include capital allowances, R&D tax relief and the Patent Box regime. Tax losses arising during the early stages of an expansion may also have value.

The availability of these incentives should ideally be considered when the business model is being developed, particularly where intellectual property, people and costs are spread across several jurisdictions.

Taking a joined-up approach

There is no single tax model that works for every overseas business entering the UK.

The right approach will depend on the nature of the business, its international structure, workforce, funding requirements and longer-term plans.

Importantly, the tax considerations will continue to evolve as the UK operation grows. VAT and customs, acquisitions and group reorganisations, and ultimately the way value is realised on a future sale or succession can all affect the wider international structure. We will explore these areas in later articles in this series.

At Gerald Edelman, our International Tax team works with overseas businesses throughout their UK journey, from establishing the most appropriate route into the UK and assessing permanent establishment risks, through to transfer pricing, cross-border funding, employment taxes and ongoing compliance.

Taking advice before the structure and operating model are fixed can provide considerably more flexibility than trying to correct them later.

If you are considering establishing or expanding your business in the UK, speak to our International Tax team about how your UK plans fit within your wider international strategy.

Stay tuned for part three in the series, where we look at VAT and customs considerations for overseas businesses operating in the UK.