European Holding Companies: UK

United Kingdom is increasingly gaining in popularity as an attractive location for multinational business for many reasons including tax and non-tax ones. A wide range of international treaties, flexible domestic legislation, as well as tax exemption of certain dividends in force from 1 July 2009, let the United Kingdom successfully compete with other well-known holding company jurisdictions.

EU member and reputable first world jurisdiction with a very good business infrastructure, UK offers simple and quick formation procedure, reasonable set-up expenses. There are no restrictions on the movement of capital, no capital duty, no minimum paid-up capital requirements for private limited companies.

Tax Benefits – UK Corporation Tax

UK domestic law gives unilateral relief for underlying tax to a company which controls directly or indirectly not less than 10 percent of the voting power in the foreign company paying the dividend. It means that both foreign withholding tax on dividends and foreign taxes borne by the foreign subsidiary on the profits out of which dividends have been paid can be set off against UK corporation tax on the same dividends.

In practice, however, application of this foreign tax credit regime often appears to be complicated and burdensome. New provisions, in effect from 1 July 2009, radically improve the situation by exempting certain classes of dividends from UK corporation tax.

Rules for small groups (having less than 50 employees, and either turnover below €10m or a balance sheet total below €10m, except for certain investment funds) exempt dividends from subsidiaries if:

  • the payer is a resident in the UK or a qualifying territory (the one having a DTT with UK containing a non-discrimination article),
  • it’s not payment of interest (treated as dividends for tax purposes),
  • these dividends are not tax deductible by the payer, and
  • it’s not a part of a scheme created solely for a tax advantage (motive test).

Rules for exempted dividends for large groups require that:

  • it’s not payment of interest (treated as dividends for tax purposes),
  • these dividends are not tax deductible by the payer,
  • dividends fall within one of the “exempt classes”:
    • dividends from controlled companies (broadly, 51% subsidiaries and 40% joint-venture companies);
    • dividends paid in respect of non-redeemable ordinary shares;
    • portfolio dividends (with shareholdings less than 10%);
    • dividends, not a part of a scheme created solely for a tax advantage (motive test);
    • dividends in respect of shares treated as loans (in this case they will be taxed as interest).

Exempt classes cover dividends from low-taxed and passive subsidiaries. However, they can fall under other anti-avoidance provisions, for example, UK “controlled foreign company” (CFC) regime.

Herewith, foreign tax credit regime remains in place, being applied by default. In certain situations it can be more beneficial than exemption provision (for example, when it is needed to fall under protection of a DTT). The company may choose in between two regimes.

Other Benefits

Reduced withholding tax on dividends at source. Incoming dividends from the EU and other UK companies under EU Parent-Subsidiary Directive are subject to zero withholding tax. The qualifying shareholding requirement is 25%. Besides, UK has in place over 100 of double taxation treaties providing for lower withholding tax rates at source.

No withholding tax on outbound dividends. Further declaring of the dividends to a foreign parent company is again free of withholding tax. The rule makes no exception for parent companies from low-tax jurisdictions.

No UK tax on sale of shares in a UK company by non-resident shareholders. Capital gains realized on a sale of shares in a UK holding companies by its non-resident shareholders are free of UK tax.

No UK tax of capital gains from sale of an operating subsidiary. Legislation that took effect in 2002 provides for substantial shareholdings exemption of capital gains from disposal of shares in foreign subsidiaries upon certain conditions. Qualifying substantial shareholdings requirements are 10% and a twelve months period. An important condition is that the investing and investee companies are to be either “a trading company” or “a holding company of a trading group”. Generally, a company is considered to be a trading one if non-trading activities constitute no more than 20% of its total activities. There exist also additional measures that might be taken into account in reviewing a particular company’s status not to be further discussed in this article. Definition of what is considered to be a trade is quite broad and includes nearly any activity conducted with a view of profits. Financial companies cannot qualify under these regulations.