The UK Company: A New Alternative For International Investors?
This article is the first of a series of articles that looks at tax aspects of the UK company which make it an attractive international business company, or "IBC". This generic label, and its acronym, are normally associated with the BVI company, and its international competitors.
An essential feature of BVI, Bahamian, Cayman and other "offshore" companies is that they pay no corporation tax in their domicile of incorporation. As will be shown, UK companies substantially replicate this characteristic for various income streams, whilst providing the additional benefit of access to over 100 UK double tax treaties, the European Treaty (for the time being) and the high status in which the UK company is perceived.
UK COMPANY RESIDENCE
All UK companies are UK resident for tax purposes under the "incorporation rule". This prima facie results in liability to UK corporation tax on worldwide income and gains, subject to double taxation relief. The current rate of UK corporation tax is 19% (the rate will fall to 17% in 2020), however there are important qualifications to liability to UK corporation tax as will be shown below. In this first article, the UK taxation of foreign dividends received by UK companies will be considered.
FOREIGN DIVIDENDS: THE UK CORPORATION TAX EXEMPTION
The statutory presumption since July 1 2009 is that foreign dividends received by a UK company are exempt from UK corporation tax. This presumption places the UK tax treatment of foreign dividends on the same footing as UK dividends.
There are two sets of exemption rules, one for "small" UK companies, and the other for medium-sized and large UK companies. The data thresholds that categorise UK companies by size are set out below:
For UK companies that are small the main qualification for the UK corporation tax exemption is that the dividend must be paid by a company resident in a "qualifying territory" - that is a country with which the UK has ratified a double taxation convention that includes a non-discrimination article. The UK Revenue (Her Majesty's Revenue and Customs or "HMRC") provides a list of approved double taxation conventions with appropriate non-discrimination articles in their International Manual. Included on the list are all the UK double taxation conventions with the EU and EEA countries. These conventions will continue to be in force after Brexit.
SMALL UK COMPANIES: PLANNING POINT
It follows from the above that UK companies that are small should, where possible, not receive dividends from companies in non-qualifying territories. Where this is unavoidable, one planning option might be to defer the payment of the dividend until the UK company is not small. On the other hand, UK companies that are assumed to be small, may not in fact be small. This possibility arises because of the consolidation rules contained in the annex to the European Commission Recommendation 2003/361/EC, which defines the categories of small, medium and large enterprises referred to in the table above. In assessing employee headcount and the financial thresholds, the data of "linked" enterprises and "partner" enterprises may be added to the UK company's own data, for the purposes of...
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