UK Companies and UK Holding Companies
General Advantages of UK Private Limited Companies:
1. Liability is, in the vast majority of cases, strictly limited to the investments made by the shareholders.
2. Company Officers are not personally liable for their actions unless there is a clear and serious breach of their fiduciary duty.
3. Limited companies often benefit from greater prestige than their sole proprietorship or partnership counterparts. The reason is because such an enterprise normally requires more planning and thus is deemed more credible.
4. Limited companies often benefit from significant tax advantages. In fact, many countries around the world give exclusive tax incentives to this type of entity.
5. The rights of shareholders are normally clearly defined and protected.
6. Corporate taxes only become payable after the end of the financial year. This means money that would otherwise be taxed on a monthly or quarterly basis, is available to earn further interest before the final payment of tax.
7. You need only appoint one Director and one Shareholder.
8. Directors can be corporate bodies or private individuals.
9. A Director can be of any nationality.
10. All companies must appoint a company Secretary who can be of any nationality.
UK Holding Companies
The UK Holding Company is an ordinary company which falls within the scope of general tax law and therefore benefits from the double taxation treaties and the European tax directives.
The UK offers no reduction in the tax payable by the company on its income or on its capital gains. Nevertheless, no tax is levied on outgoing dividends.
For these reasons, the UK International Holding Company has several advantages in cases where there is sufficient credit for foreign taxes to absorb the UK corporation tax charged on incoming dividends.
Legal Form
A UK company can be constituted either as a private limited company (Ltd) or a public limited company (Plc).
Formation
The minimum share capital for incorporation of a UK company is £50.000 for a public limited company of which at least 25% must be paid up, but no minimum is applied to a private limited company.
Taxation
A UK company is fully subject to tax at a normal rate of 30%.
Profits from £1 to £300,000 are taxed at a rate of 19%; profits from £300,000 to £1.5M are taxed at a rate of 19% to 30% and profits exceeding £1.5M are taxed at a rate of 30%.
No capital duty is levied when capital is contributed at the formation of a resident company and on any increase in its capital.
Income
Corporate income tax is charged on worldwide profits of companies resident in the UK and is calculated based on financial statements prepared according to generally accepted accounting principles.
Expenses incurred by the company must be only for the purposes of the trade.
a) Dividends Exemption
The general rule is that all dividends paid by a subsidiary to a UK parent company are subject to corporate income tax.
Nevertheless, the UK grants double tax relief by way of a credit for foreign corporation tax underlying the dividends provided that the UK company holds, directly or indirectly, at least 10% of the share capital of the distributing company. If the foreign company is subject to a corporate tax rate of 30% or more, the credit will usually be a complete relief from UK corporation tax.
Dividends received by a UK company from another UK company are exempt from corporation tax.
b) Capital Gains Exemption
No distinction is made between capital gains and other income. All income is taxed at the corporate tax rate. However, the double tax treaties between the UK and the foreign company country often oust the taxing rights of the subsidiary’s country in favor of the UK taxing rights.
A capital gains tax exemption was introduced in 2002. For a company to benefit from the exemption, the following requirements must be observed:
- the investing or holding company must hold at least 10% of the share capital of the subsidiary for a period of 12 continuous months within the 2 years prior to the disposal ;
- the investing or holding company must be a trading or holding company by itself during the 12
months period ;
- the subsidiary company must be a trading company or a holding company of a trading group for the 12 months period.
c) Interest and Royalties
See income above.
UK Trading Group
To be regarded as a holding company of a trading group, the UK company must effectively own directly or indirectly at least 75% of the share capital of its subsidiaries and provided that the parent company is entitled to at least 52% of their assets for distribution or winding-up.
The UK holding company of overseas subsidiary companies already performs creditably as an international holding company. Consider the following: the United Kingdom has the widest network of double tax treaties in the world, and is also a signatory to the EU Parent / Subsidiary Directive. Given the quality and extent of the UK’s tax treaty network, it is arguably the best performer in the important discipline of extracting overseas dividends at the minimum tax cost. Whilst the United Kingdom offers no exemption from UK corporation tax on foreign income dividends, it grants double tax relief by way of a credit for foreign corporation tax underlying the dividends provided that the company holds, directly or indirectly, at least 10% of the share capital of the company from whom the tax credit is claimed.
Where the underlying foreign corporate tax rate is 30% or more, then the credit will normally be a complete relief from UK corporation tax – and therefore as good as an exemption. It is significant that the UK has lower rates of corporation tax than most other industrial nations. The UK is remarkable in not imposing any withholding tax on dividends distributed by UK companies to UK non-resident shareholders. It therefore outperforms the other leading holding company locations in this regard.
The United Kingdom has always had substantial non-tax attractions as a location for the holding company of an international group. The Headline corporate tax rate is the lowest of the major economies and generous interest relief provisions reduce taxable profits and make the effective tax rate even lower. The UK has an extremely extensive network of double tax agreements. Unlike many of its European counterparts, the UK does not have capital duty on share subscriptions and there is no withholding tax on dividends paid by United Kingdom companies, irrespective of the residence of the shareholder.
Legislation exempting capital gains on the disposal of substantial shareholdings took effect 1 April 2002 in advance of the publication of the 2002 Finance Bill which will enact the legislation retrospectively. This participation exemption is a major development and one which makes the UK even more attractive. For many years the business community has argued for the introduction of a “participation exemption” on capital gains and dividends to bring it in line with a number of other European jurisdictions in particular the Netherlands. The new legislation meets these demands whilst setting out certain conditions and anti-abuse provisions and effectively sets the UK ahead of its competitors in respect of its holding company facility.
For capital gains exemption the investing company must have held a substantial shareholding in the company invested in for a period of twelve months within the two years prior to the disposal. It is not therefore necessary for the investing company to have a substantial shareholding at the time of the disposal to qualify. A substantial shareholding is at least 10% of the ordinary share capital of the company invested in and 10% of the rights to profits available for distribution and assets on a winding up.
The investing company must be either a sole trading company or a member of a trading group throughout the period beginning with the start of the last twelve month period in which the substantial shareholding requirements was met, and ending at the time of disposal and also immediately after the disposal.
“Trading” in this sense extends to preparing to carry out a trade or to acquiring a significant interest in the share capital of another trading company or holding company of a trading group (subject to the proviso that the interest acquired is not already a member of the acquiring company’s group).
The investing company must be a “qualifying trading company” or a “qualifying holding company” throughout the period beginning with the start of the last twelve month period in which the substantial shareholding condition is met and ending at the time of the disposal and also immediately after the disposal. The definition of a “qualifying trading company” is one which does not carry on to any substantial extent non-trading activities such as holding intellectual property and ownership of land or assets as investments. A “qualifying holding company” is one which together with its 51% subsidiaries does not carry on to any substantial extent non-trading activities.
Whilst the legislation marks the UK out further as an attractive jurisdiction for holding company purposes it is important to remember that exemption applies only where the conditions set out in the legislation are met. The investing company must be a trading company immediately after the disposal. If as a consequence of a disposal, a company ceases to be a trading company or the holding company of a trading group because its non-trading activities comprise more than 20% of its activities, the gains will not be exempt.
United Kingdom owned groups have frequently used intermediate holding companies to hold shares in overseas trading companies. This has been done for a variety of reasons including getting the best mix of tax rates. With the advent of the new legislation the need for such intermediate holding companies is now questionable and the cost of establishing and maintaining such companies may no longer be justified in many situations. The withholding tax suffered on distributions via an intermediate holding company is more likely to be more than would be the case if the UK parent owned the company directly.
There may be tax planning opportunities in eliminating the overseas holding companies. In particular, if such companies have retained profits, it may be possible to bring those profits onshore tax-free. In June 2002 the UK government introduced a capital gains tax exemption for UK companies with substantial shareholdings in another company. The new rules have now been clarified and apply to UK registered companies, foreign registered companies resident in the UK for tax purposes, as well as UK branches of companies registered outside the United Kingdom.
The following requirements must be observed: the Investing company (or Holding company) must hold at least 10% of the ordinary share capital of the Subsidiary company for at least 12 continuous months (then 12 months must not begin more than 2 years prior to the disposal of the shares). The Investing company (or Holding company) must be a trading company by itself or a holding company of a trading group during the 12 months period mentioned above. The Subsidiary company must be either a trading company by itself or the Holding company of a trading group for the whole of the 12-month period. Trading activities mean activities in a trade, profession, or vocation carried on, on a commercial basis with a view of generating profits. Similar provisions apply for group companies.
Some Advantages of the UK Holding Company
Besides the common advantages of a holding company, the UK company may also enjoy from the
following:
a) Exemption from Withholding Tax on Payment of Dividends
The UK does not impose any withholding tax on dividends distributed by resident companies to UK nonresident shareholders, irrespective of their residence.
b) Capital Gains Exemption
Capital gains is not levied on non-residents, therefore no tax is levied on the sale of shares of a UK subsidiary of a non-resident parent company.
The UK-incorporated holding company must have owned the shareholding for a certain period of time before the disposal in order to qualify for the exemption. In short, in the two years prior to disposal, the UK-registered holding company must be able to show a continuous period of ownership of at least twelve months. Finally, the UK-incorporated holding company, in addition to having owned a substantial shareholding throughout the requisite continuous twelve-month period, must be either a sole trading company (and obviously where it is a pure holding company it will not be) or a member of a trading group, both throughout the requisite period of pre-disposal ownership and – crucially – immediately after the time of disposal. In terms of the investee company, it must have been a trading company, a holding company of a trading group or a holding company of a trading sub-group throughout the period beginning with the start of the UK-registered holding company’s requisite continuous twelve-month ownership period and ending with the time of disposal, and immediately after the time of disposal. It is also worth remembering that any non-UK resident subsidiary company of a UK-incorporated holding company will be a controlled foreign company and, therefore, the controlled foreign company regime will need to be considered.
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Formation | ||
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Legal Form: | |
Private limited company (Ltd); Public limited company (Plc) |
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Minimum Subscribed Capital: | |
£50.000 (Plc) £1 (Ltd) |
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Minimum Paid-Up Capital: | |
£12.500 (Plc) £0 (Ltd) |
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Number of Shareholders: | |
2 (Plc) 1 (Ltd) |
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Type of Shares: | |
Registered or bearer (Plc); Registered (Ltd) |
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Substance Requirements: | |
Nil |
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Taxation | ||
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Capital Duty: | |
0% |
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Net Worth Tax: | |
0% |
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Corporate Income Tax: | |
19% on profits up to £300,000 30% on profits thereafter |
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Double Tax Treaties: | |
110 |
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Dividends Exemption: | |
Tax credit |
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Holding Requirements: | |
10% |
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Capital Gains Exemption: | |
Yes |
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Holding Requirements: | |
10% |
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Tax Credit: | |
Yes23 |
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Relief of Losses: | |
Carried back 1 year; Carry forward indefinitely |
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CFC Rules: | |
yes |
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Debt-to-Equity Ratio: | |
2:124 |
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Withholding Taxes | ||
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Dividends: | |
0% |
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Interest: | |
EU Parent Co- 0%2 Treaty Countries- 0%-20% Others- 20% |
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Royalties: | |
EU Parent Co- 0%2 Treaty Countries- 0%-22% Others- 22% |
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Liquidation: | |
Nil |
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Can a foreign-resident and domiciled person use the services of a UK trustee tax efficiently? There are three taxes to consider here: income tax, capital gains tax and inheritance tax. For income tax purposes, a foreign resident and domiciled settlor may retain the services of a UK-resident trustee without creating any adverse income tax consequences so long as there is at least one non-UK resident co-trustee.
For capital gains tax purposes, the basic rule is that if all or a majority of the trustees of a trust are resident outside the United Kingdom, and the general administration of the trust is carried on outside the United Kingdom, the trustees will not be within the charge to capital gains tax. However, a UK-resident professional trustee of a trust which only contains settled property from a foreign resident and domiciled person will be treated as non-UK resident for the purposes of that trust. In such a case, where the trustees or a majority of them are or are treated – in relation to that trust – as not resident in the United Kingdom, the general administration of the trust will also be treated as not carried on in the United Kingdom.
So, accordingly, a foreign resident and domiciled settlor may retain the services of a UK-resident trustee, so long as there is at least one other trustee who is non-UK resident (the income tax requirement) and the UK-resident trustee is a professional trustee (the capital gains tax requirement), without creating any adverse income tax or capital gains tax consequences. For inheritance tax, the residence of trustees is not a relevant factor.