Direct distributionOwnership structures
May a foreign supplier establish its own entity to import and distribute its products in your jurisdiction?
A foreign company can conduct business in the United Kingdom without setting up a legal entity, thus avoiding most UK company law requirements. If setting up a permanent place of business in the UK to directly carry out business, it must register as a branch office of an overseas company and register its constitution together with a statement of the power of its directors to bind the company.
Another option is to incorporate a subsidiary company in the United Kingdom. The principal advantage over a branch office is that, because UK courts assiduously enforce the doctrine of corporate personality, the main overseas business can, in most cases, be shielded from the risks incurred by the UK business.
May a foreign supplier be a partial owner with a local company of the importer of its products?
Yes, there are currently few restrictions on foreign ownership of UK companies. After Brexit, freedom of establishment for EU companies may fall away, so companies should review the impact on their structure. In certain limited situations in regulated industries such as financial services, the controllers of a company must be approved by the regulator. The UK government may also seek to intervene if a business is in a sensitive defence sector. However, there are new regulations which have increased the level of scrutiny of certain types of foreign investments (see question 4).
What types of business entities are best suited for an importer owned by a foreign supplier? How are they formed? What laws govern them?
Several forms of corporate vehicle can be registered in the UK that are suitable for an importer owned by a foreign supplier. Which is most suitable will depend on a range of factors largely to do with the requirements of the markets the entity serves, as well as the tax treatment of the entity in the UK and foreign jurisdiction. These include a UK limited company, a UK branch and partnerships (limited liability partnerships, limited partnerships and general partnerships).
The method of formation will depend on the type of entity. See above for branches and UK establishments (see question 1). Limited liability companies and limited liability partnerships must be incorporated and registered with Companies House. Limited partnerships are generally set up by contract and must be registered at Companies House. General partnerships are created by agreement or simply by entering into a relationship in common with a view to profit (there need not be an underlying written contract for a partnership to be created). The primary statutory legislation that applies is the Companies Act 2006, the Limited Liability Partnership Act 2000, the Limited Partnership Act 1907 and the Partnership Act 1890 respectively.Restrictions
Does your jurisdiction restrict foreign businesses from operating in the jurisdiction, or limit foreign investment in or ownership of domestic business entities?
No single piece of legislation regulates foreign investment in the United Kingdom. There is no general requirement for foreign investment in the UK to be registered. The Industry Act 1975, section 13, allows the government to intervene in relation to a change of control of ‘an important manufacturing undertaking’ contrary to the interests of the UK. This does not appear to have been acted upon to date. As a result of the Enterprise Act 2002 (Turnover Test) (Amendment) Order 2018 (Turnover Test Order 2018), which came into effect from 11 June 2018, the UK’s merger control system has been tightened to allow increased scrutiny of the national security implications of particular investments. This Order applies to investments in the defence, dual use, quantum tech and CPU sectors, and reduces the threshold for triggering a relevant merger situation (and may result in an investigation by the UK Competition and Markets Authority) in respect of smaller companies than usual. Additionally, the Enterprise Act 2002 (Share of Supply Test) (Amendment) Order 2018 (Supply Test Order 2018), which also came into effect from 11 June 2018, provides that the acquisition of a company in one of the above sectors (with a 25 per cent share of supply of goods or services in the UK pre-merger) will also trigger a relevant merger situation. The European Union is also consulting on proposals on foreign investment screening but these are unlikely to be in force before the UK exits the EU, likely to be after March 2019, subject to a transitional period likely to last until the end of 2020. The UK government is also intending to introduce a further national security vetting arrangement to protect the security of certain infrastructure where there are certain triggering events.Equity interests
May the foreign supplier own an equity interest in the local entity that distributes its products?
Yes, subject to the usual competition law concerns.Tax considerations
What are the tax considerations for foreign suppliers and for the formation of an importer owned by a foreign supplier? What taxes are applicable to foreign businesses and individuals that operate in your jurisdiction or own interests in local businesses?
The UK tax system broadly applies equally to foreign suppliers and UK suppliers operating in the United Kingdom. Profits from a UK limited company and a UK branch of a foreign supplier forming a UK permanent establishment are taxed similarly, and will generally be liable to UK corporation tax. Partnerships (including LLPs) carrying on business in the UK will generally be tax transparent, meaning that the partners will be taxed on their own share of the profits. Often the tax treatment of the UK entity in the relevant foreign jurisdiction, and whether tax transparency is desirable, will influence the more suitable entity in each case.
The UK tax considerations depend on the activities carried on in the UK. If the entity employs individuals then it is likely that it will be obliged to deduct income tax and employees’ national insurance contributions from payments made under the UK’s pay-as-you-earn system, and remit the tax deducted together with employer’s national insurance contributions (another form of tax) to HM Revenue & Customs. Furthermore, the business should consider whether it is obliged, or whether it may be desirable, to register (and account) for value added tax, and whether it is required to account for customs duties.
The UK tax system typically requires resident companies to withhold tax in relation to the payment of interest or royalties to non-resident recipients (corporate or individuals) at a rate of 20 per cent. However, the UK is party to a large number of double tax treaties with other countries which remove or reduce the withholding tax rate for payments to recipients in the relevant jurisdiction.