The UK is an attractive holding company jurisdiction for multi-national groups looking to establish both interim UK holding companies within their existing groups, and holding companies for the group as a whole.
While there is no specific UK tax code for holding companies, the attractiveness of the United Kingdom as a holding company regime is largely attributable to the recent overhaul of the country’s approach to the taxation of foreign profits and a low headline rate of corporate income tax.
The specific aspects of the UK tax code that make the United Kingdom an attractive regime for a holding company include:
- A low headline rate of corporate income tax (20 percent) that is projected to fall to 19 percent in 2017 and to 18 percent in 2020;
- A territorial system of corporate taxation that involves an exemption for profits of foreign permanent establishments. In addition, a disposal of shares in a UK holding company by an offshore shareholder will not generally be subject to UK tax;
- A common system for the taxation of domestic and foreign-source dividends. Most dividends received by a UK holding company will not be subject to corporation tax, regardless of their source;
- A domestic participation exemption for capital gains realised on the disposal of substantial shareholdings in trading companies (or holding companies of trading groups) that have been held for at least 12 months;
- The absence of UK withholding tax on outbound dividends, which applies regardless of the jurisdiction of residence of the recipient. There is no requirement for the recipient to be the beneficial owner in order for the withholding tax exemption to apply;
- The availability of an extensive network of double taxation treaties to reduce UK withholding tax on interest and royalties;
- A generous regime for tax relief on interest payments. In general, the United Kingdom gives relief for tax purposes in line with the accounting treatment of the interest, for example, on an accruals basis over the life of the loan;
- Membership in the European Union, which brings the benefit of access to legislation such as the Parent-Subsidiary Directive and the Interest and Royalties Directive;
- A new controlled foreign company code that supports the general approach to territoriality (by focusing only on profits that have been artificially diverted from the United Kingdom) and enables a UK holding company to locate a group finance subsidiary offshore and be taxed at an effective rate of only 5 percent on interest income notionally attributed to the United Kingdom;
- A relatively extensive system for obtaining non-statutory and statutory clearances, as well as the facility to negotiate advance pricing agreements and advance thin capitalisation agreements for transfer pricing purposes; and
The existence of a wide range of targeted incentives aimed at encouraging and supporting growth in certain sectors, including the UK patent box regime and regimes that support research and development.
The UK tax authorities are also generally oriented to be helpful, with customer relationship managers for large businesses, a generally good understanding of multinational business and support for inward investment into the United Kingdom.
The potential downsides of locating a holding company in the United Kingdom include:
- The potential for exit charges on certain assets and shares leaving the UK tax net. In practice, however, this can often be addressed by relying on a relief, such as the domestic participation exemption for share sales;
- The sale of shares in a UK company still attracts a charge to transfer taxes (stamp duty and stamp duty reserve tax) at the rate of 0.5 percent of the consideration given by the purchaser of the shares;
- The United Kingdom is currently consulting on the implementation of the Organization for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) recommendations on restricting interest deductibility in line with a fixed earnings before interest, taxes, depreciation, and amortization ratio (or a fixed group ratio). There are also several existing domestic rules that can restrict interest deductibility such as transfer pricing, “purpose” rules, the worldwide debt cap, the anti-arbitrage rules and the distributions regime;
- UK tax legislation is long and complex, and contains a number of anti-avoidance rules (including a domestic General Anti-Abuse Rule) that always have to be considered even in relation to entirely commercial arrangements; and
- The United Kingdom has recently introduced a new “diverted profits tax” under Action 7 of the OECD’s BEPS Project, which is intended to counter diversion of profits from the United Kingdom through aggressive tax planning techniques.
Overall however, the United Kingdom is a very attractive holding company jurisdiction and has a highly competitive tax package to offer as an “onshore” prospect.