Are there any Benefits to Overseas Residents owning UK Companies? Turner Little believes that Yes there are.
What the overwhelming majority of people, particularly residents of the UK, do not realize is that to the rest of the world the UK is an offshore tax haven. There are numerous benefits to be had from someone living overseas setting a company up in the UK.
Whilst a UK Company must have a UK registered office address, it is perfectly acceptable for it to have overseas resident shareholders as well as directors who are resident overseas; therefore control can be outside the UK. This becomes very important and whilst much depends upon the circumstances of each particular client, Turner Little are able to assist and advise overseas clients in minimizing, quite legitimately, their exposure to UK tax when using UK Companies and where the beneficial ownership is vested outside the UK and also where the trade or business is conducted outside the UK.
Using UK Companies for Overseas Trade
The following examples give an indication of the attraction of UK Companies in relation to International Trade and Investment and in particular deal with Trading Income.
In example 1, a UK Limited Liability Partnership (“UK LLP”) owned and operated by overseas residents is able to receive non-UK trading income direct into the UK LLP and by making certain that the members of the UK LLP are non-UK resident, it is possible for the UK LLP to receive non-UK trading income entirely free of UK taxation.
In example 2, a UK Company set up to act as Agent for an Offshore Company can, with appropriate UK and International tax planning, receive foreign trading income without liability to UK taxation. Whilst the income is received in the UK by the UK Agent Company, it can be paid in full to the offshore company without any form of tax liability, either for the offshore or the UK Company. To achieve this the UK Company should be paid an arm’s length commission for its services as Agent; this element of income will be liable to UK taxation. Turner Little can advise both on appropriate commission arrangements and the drawing up of an appropriate Agency agreement between the two companies.
In example 3, A UK company with its place of effective management (“POEM”) in an appropriate overseas jurisdiction (say Cyprus for the purposes of this explanation), is in effect a dual resident, in the UK by virtue of incorporation and in Cyprus by virtue of management and control. The UK/Cyprus, or UK/Offshore Jurisdiction (where a similar treaty exists) double tax treaty addresses this dual residence problem by awarding sole tax residence to the jurisdiction where POEM exists and therefore, under the UK/Cyprus double taxation agreement, the UK Company is non UK resident and is instead resident in Cyprus. The result of this is that the Cyprus resident company is no longer within the scope of UK taxation on the non UK source of income into the UK Company.
Dividend Exemption
There are of course other types of income than from trading. In particular and possibly of great benefit is UK Dividend Exemption. Since 2009, the vast majority of dividends received in the UK by UK Companies from a foreign registered subsidiary company are exempt from UK Corporation Tax. The statutory presumption is that dividend received by UK companies is charged to UK corporation tax. However this applies only if the distribution is not exempt. The fact is that the Tax Exemption provisions are so wide that they apply to most dividends received by UK Companies from foreign subsidiaries. Important to note is that small UK companies (employing less than 50 people and with an annual turnover of less than €50m) can receive overseas dividends free from UK Corporation Tax but only from companies registered or resident in a country with an appropriate double taxation agreement with the UK. There are no such territorial restrictions on UK Tax Exemption for foreign dividends received by medium sized or large UK companies.
UK Holding Companies
A further use of a UK Company may be to receive overseas interest tax efficiently. UK companies are often used as International Holding Companies within International Groups. The UK holding company may need to provide financial support to an overseas subsidiary company; this leads one to consider the tax treatment of interest received in the UK on any loan. In a three company arrangement, where the UK company borrows funds from a Non UK company and that Non UK company conforms with the arm’s length principle, interest paid by the UK company to the offshore company can be deducted for UK tax purposes from the interest received by the UK company from the interest paid by the overseas subsidiary to the UK company. In simple terms the UK Company is taxed only on the margin left after the tax deduction.
If the UK Company is UK resident, it can also claim relief from foreign withholding tax on its interest receipts under either a UK double tax treaty or under the Interest and Royalties Directive if the Non UK subsidiary is located in an EU member state such as Cyprus.
Similarly, if the Offshore parent of the UK company is located within the EU, example Cyprus, relief from UK withholding tax on the UK Company’s interest payments to its Non UK resident parent company may be obtained under the EU Interest and Royalties Directive.
Even if the offshore parent is not registered or resident in an EU member state, relief from UK withholding tax on interest paid from the UK Company to its Non UK resident parent company may still be available under an appropriate UK double tax treaty.
If the offshore parent is not neither registered or resident within the EU nor in a country having a double taxation treaty with the UK providing relief from withholding tax, then specific tax planning techniques can in some cases eliminate or mitigate UK withholding tax liabilities on interest paid by a UK company to an offshore company.
Intellectual Property
There are other benefits to be had from overseas residents having UK companies which can be used to receive overseas royalties’ tax efficiently. This is normally in connection with Intellectual Property (“IP”). By way of example a UK Company which is fully liable to UK corporation tax on receipt of Non UK Royalties may claim the license fee which it must pay to an offshore company which owns and licenses the IP to the UK Company; the Licensor Company is a separate legal entity to the Licensee to which the UK sub-licenses. The UK Company’s own license fee must conform to the arm’s length principle particularly if the UK and Offshore Company are related parties. Again the UK double tax treaty or the EU Interest and Royalties Directive can be used to mitigate or eliminate foreign withholding taxes on its receipts of royalty payments where the payer of the Royalty is registered or resident in a country with a double taxation treaty with the UK or in an EU member state. Whilst the UK Company’s license fee is UK tax deductible, consideration must be given to whether withholding tax applies to the royalty payments. Even if UK withholding tax is applicable this liability can be mitigated or eliminated through the use of offshore companies located within the EU or another country having a double tax treaty with the UK.
Capital Gains
Finally, Capital Gains on which UK Companies are taxed at the mainstream UK corporation tax rate except in the case of a gain made from UK residential property in which case a higher rate applies. Where the UK Company is a Nominee or Bare Trustee for a Non UK person or company, UK tax charges will not normally apply although this may not be the case where the asset giving rise to the gain is a UK residential property. A couple of examples illustrating the possibilities are as follows:
In Example 1, a third party who is non UK resident is the beneficial owner of an asset which is held by a UK Nominee Company as Bare Trustee or Nominee for the Beneficial Owner; the UK Nominee or Bare Trustee disposes of the legal title to the asset and receives the capital gain. There must be an appropriate agreement prepared between the UK Nominee Company and the third party beneficial owner of the asset. Incidentally, the beneficial owner of the asset may also be the beneficial owner of the UK Company but this has no effect. Under UK tax law, the gain is treated as belonging to the beneficial owner and not to the UK Nominee Company. If the beneficial owner is a non-resident offshore company or a non-resident individual then in this example, no UK Tax can apply to the capital gain received by the Nominee Company on behalf of the non UK resident beneficial owner.
In Example 2, a UK Holding Company having a 51% or greater shareholding in a Foreign subsidiary company and which itself is owned 100% by an Offshore company and where a capital gain accrues to the UK company by virtue of it disposing of its holding in the offshore subsidiary, will have no liability to UK tax on its gain provided the conditions of the statutory tax exemption known as the substantial shareholder exemption are met. The main conditions applicable are that the UK Company must have held the shares in the overseas subsidiary for at least 12 months and that the UK Company is a member of a trading group. This rule applies equally to disposal of UK subsidiaries. In the example given, the UK Holding Company may need to be wound up or dissolved as soon as reasonably practicable after the gain has been realized so as to present its tax exemption immediately after disposal. After that it will no longer be a member of a trading group which is a requirement of the tax exemption rules.
Turner Little
Clearly, every individual and company within a structure differs and arrangements which maximize the benefits to optimum extent need to be considered very carefully and on a case by case basis. You can obtain free guidance from Turner Little applicable to your specific circumstances if you are a Non-UK Resident and want to benefit from a UK/Offshore structure.
