The UK Government often states its ambition to create the most competitive tax system in the G20. In recent years, it has taken major steps to improve the tax treatment of UK-resident holding companies of multinational groups.
This bulletin outlines the significant features of the UK tax treatment of holding companies and explains how the UK offers a tax regime that, for many multinationals, will be as attractive as that of any tax haven whilst offering the benefit of EU membership and a network of hundreds of international tax treaties.
This paper only considers the tax factors in the choice of jurisdiction for a holding company. The UK’s non-tax advantages for holding companies (London as a leading global financial centre, the rule of law, the English language, an attractive location for listing and raising finance etc) are not discussed.
Whilst the UK retains the principal that a UK-resident company is subject to UK corporation tax on its worldwide profits, there are now exemptions which effectively mean that the UK has a territorial system of taxation for companies.
The UK has adopted the two elements of a participation exemption: an exemption from tax on a company’s gain on a disposal of shares in a subsidiary and an exemption for distributions received from subsidiaries.
(i) Substantial shareholding exemption The substantial shareholding exemption provides an exemption under which a gain arising from a disposal of shares by a company will not be taxable if the holding company disposes of a trading subsidiary in which it has held a greater than 10% equity interest for a year or more.
(ii) Worldwide dividend exemption The UK exempts dividends and other distributions from both UK and non-UK subsidiaries. Different conditions apply depending on the size of the group.
There is also an “opt-in” exemption from tax for UK tax resident companies on the profits attributable to a non-UK branch of the company.
Controlled foreign company rules
The UK has anti-avoidance rules, known as the “controlled foreign company” rules, that can bring non-UK profits within the UK tax net if they have been artificially diverted from the UK. The potential application of these rules remains a key issue for multinational groups in choosing where to locate their holding companies. The UK Government has substantially rewritten the CFC rules so that they are more targeted at tax avoidance.
Tax liabilities of the holding company
A UK holding company will be subject to UK corporation tax on its own profits. It may also be liable to pay other ongoing taxes, such as payroll taxes and VAT.
Corporation tax is payable on the taxable profits of a company. The rate of corporation tax has reduced from 28% in 2010 to 21% (from 1 April 2014). This is competitive when compared with the corporation tax rates of other large developed economies.
Relief for finance costs
Funding costs, in particular, interest payments, are usually tax deductible. This contrasts with dividends, which are not deductible. Anti-avoidance rules apply to cap the amount of deductions that worldwide groups may claim on account of interest payments (a so-called “debt cap”) and prevents groups from setting up intra-group debt finance for tax reasons. The UK also has anti-arbitrage rules that counter tax advantages arising from funding structures involving hybrid entitles or disregarded entities to create double deductions.
The UK’s wide network or double tax treaties and the EU Parent-Subsidiary Directive are likely to provide an exemption for the UK holding company from any non-UK withholding tax on dividends paid by non-UK subsidiaries.
UK Withholding tax
In the UK, there is a requirement for tax to be withheld from interest payments to non-UK companies. This may be reduced or eliminated by a double tax treaty.
There is no UK withholding tax on dividend payments, whether to UK or non-UK shareholders.
Like all EU member states, the UK charges VAT on goods and services supplies made by companies and individuals. The UK standard rate of VAT is 20%. However it is possible for corporate groups to set up a VAT group, in which case no VAT will apply to intra-group supplies.
Employee income tax costs
Any director or employee who is resident, or performs duties, in the UK must pay social security contributions (National Insurance contributions (NICs)) in respect of their salary and benefits. HMRC collects NICs and income tax from the employer through the pay as you earn (PAYE) system. An employer must deduct income tax and NICs from employees’ remuneration. Additionally, an employer must pay employer’s NICs if the employee earns above a certain threshold. The rate of employer’s NICs is currently 13.8% of salary.
The current basic income tax rate is 20%. The higher rate is 40% and the additional rate (for income over £150,000) is 45%.
The UK, in common with many jurisdictions, has transfer pricing legislation that sets out a mechanism for taxing transactions between connected parties, to prevent them from setting prices to minimise the group’s tax liabilities. The legislation gives the UK Revenue the power to tax intragroup transactions by reference to the profit that would have arisen had the transactions been carried out on an “arm’s length” basis.