The U.K. has long been a much overlooked competitor to other international holding company locations: that is to say, as a substantial shareholder of foreign companies. The U.K. enjoys unique advantages as an international holding company location, it has:
- The most comprehensive double tax treaty network in the world (with some very good treaties for tax planning purposes) reducing or eliminating withholding tax on dividends received;
- No withholding tax on dividends paid to non‐resident shareholders;
- No capital gains tax for non‐residents disposing of shares;
- An exemption from corporation tax on dividends received;
- An exemption from corporation tax on the profits of a foreign branch; and
- An exemption from tax on capital gains realized on the disposal of subsidiary company shares In addition establishing companies in the U.K. is quick and uncomplicated.
One of the key tax issues when considering holding company jurisdictions is the extent to which a jurisdiction adopts a territorial system of taxation, namely, whether it restricts its taxation to local income and does not seek to bring into the charge to tax profits that arise outside its jurisdiction. As a general rule, a U.K. resident company is subject to U.K. corporation tax on its worldwide profits. However, by introducing the exemptions referred to above, and described in more detail below, the U.K. has significantly moved towards a territorial system of taxation for international holding companies.
Substantial Shareholding Exemption
In 2002, the U.K. introduced an exemption regime under which a gain arising from a disposal of shares by a company may not be a chargeable gain if a number of conditions are met. Broadly, the exemption applies if a trading group disposes of a trading company in which it has held a greater than 10% equity interest for more than 12 months.
An exemption from tax for dividends and other distributions received by a U.K. company was introduced in 2009. It introduces an exemption from corporation tax in certain circumstances for distributions received from both U.K. and non‐U.K. companies. Corporation tax will only be charged if distributions are not exempt and the legislation is broad to ensure that many payments will be exempt.
In 2011 the U.K. introduced legislation exempting U.K. resident companies from taxation on the profits that are attributable to a non‐U.K. permanent establishment. Companies wishing to benefit from this exemption must choose to "opt in." The decision for a company to opt in is irrevocable and any losses that a branch within the regime makes will not be tax deductible.
Other Uses in International Tax Planning
Whilst the U.K. is now conducive to international holding company operations, there are many other potential offshore applications. Examples of these are the U.K. nominee company and the U.K. royalty company.
Through the use of U.K. nominee companies a U.K. company can be used as a quasi‐off‐shore company in relation to non‐U.K. trades conducted on behalf of non‐U.K. resident beneficial owners. Given the potential prejudice facing off‐shore companies, U.K. companies can with appropriate planning be used to provide an acceptable corporate image for the offshore company. The important point is that the offshore company carries on the business activities. The U.K. nominee company merely agrees to allow the offshore company to use its name when the offshore company undertakes its trade or business. The U.K. company receives a commission liable to U.K. corporation tax (soon to be reduced to 20%) and the offshore company does not pay U.K. tax on its profits.
U.K. companies are tax efficient vehicles for the receipt of royalties from overseas. Withholding taxes on royalties received by a U.K. company can be reduced in one of two ways. The first is under the terms of a double taxation treaty, the second is under the terms of the EU Interest and Royalties Directive. Under the second route the withholding tax is reduced to zero. Typically the intellectual property rights from which a U.K. company derives foreign royalty income are owned and granted to it by an offshore company which is non‐U.K. resident for U.K. tax purposes. The U.K. is therefore the licensee of the intellectual property rights, and it sub‐licenses the rights to non‐U.K. sub‐licensees. In order to avoid the application of U.K. withholding tax to outbound royalty payments it is important to structure the initial grant of the license either from a location that has a suitable double tax treaty or in such a way that ensures that the royalties are not treated as having a U.K. source.
For an “onshore” jurisdiction the U.K. has more to offer than many may have first thought.
The exemptions apply equally to a U.K. incorporated and resident company and foreign incorporated company resident for tax purposes in the U.K.