The UK is considered to be an extremely attractive ‘holding’ Company location, the benefits of which include:-
- Favourable tax treatment of dividend income;
- No Withholding Tax on dividends to its shareholders with no requirement that the shareholder(s) be situated in an EU/tax treaty country;
- No Capital Gains Tax on disposal of shareholdings in subsidiaries, subject to satisfaction of certain criteria;
- Extensive Double Tax Treaty network;
- No Capital Gains Tax on profits from disposal of UK Holding Company shares by non-resident shareholders.
Tax Exemption On Foreign Dividends
With effect from 1st July, 2009, dividend distributions received by a UK Company are exempt from UK taxation, subject to satisfaction of certain conditions. There are differing conditions for small, medium and large sized companies and where none of the exemptions apply, foreign dividends received will be subject to UK taxation at the prevailing rates.
Zero Dividend Withholding Taxes
The UK does not impose withholding tax on outward bound dividends to anywhere in the world.
Double Tax Treaties (DTT)
The UK has the largest number of DTTs worldwide, with over 125 in force. Many of these provide for a zero, or low rate, of dividend withholding tax on dividend payments to the UK.
Capital Gains Tax Exemption (CGT)
Under the Substantial Shareholding Exemption regime, gains made by a UK trading Company or member of a qualifying group on the disposal of a “substantial shareholding” will not be subject to CGT, nor will any loss on such a disposal be allowable for tax purposes.
Deduction For Interest
Interest payable for trade related purposes is allowed as a trading expense. Interest on borrowings for non-trading purposes can qualify as tax deductible, subject to certain conditions being met and the loan on which interest is charged being used for specific purposes including:
- Investment in subsidiaries; or
- Loans to subsidiaries for investment purposes.
Sale Of Shares In A UK Company
Non-UK resident shareholders are not subject to capital gains tax on their own disposals of the shares they hold in a UK Company.
Controlled Foreign Companies (CFCs)
Under current CFC rules, an overseas subsidiary may be subject to UK taxation where the overseas tax paid on the subsidiary’s profits is less than 75% of the amount which would otherwise be charged in the UK on those profits.
However, CFCs with genuine economic activity overseas, where the main purpose of the CFC is not to reduce UK taxation, may be excluded from charges arising under the CFC rules.
The UK CFC rules are also currently undergoing a major review and a number of improvements are being introduced. The full reform of the CFC legislation is expected to be completed in spring 2012.
In accordance with UK legislation, where a UK Company is under common control with a non-resident Company, transactions between those entities must be carried out on an “arms length basis”. This effectively means, that pricing policy between the companies must be the same as would be expected if the companies were independent of each other.
However, small and medium-sized enterprises (SMEs) are generally exempt from UK transfer pricing legislation where they enter into transactions with a related Company located in a country with which the UK has a double tax treaty containing a non-discrimination clause.
Close Companies And Loans To Participators
A UK resident Company that is controlled by five or fewer persons is called a close Company under current UK tax legislation. Normally, the participators of a close Company will be its shareholders, but the definition also includes loan creditors.
If a UK Company makes a loan to a participator who is an individual and the loan is outstanding for more than 9 months after the end of the accounting period in which it was made, then a tax liability of 25% of the outstanding amount of the loan arises to the UK Company. However, once the loan is repaid, the above referenced charge may be refunded to the Company subject to the appropriate application for same being made.
Worldwide Debt Cap Rules
Worldwide debt cap rules apply under UK legislation to finance expenses payable in relation to accounting periods beginning on or after 1 January 2010. These rules ensure that there is no UK corporation tax relief for financing costs, which exceed the worldwide group’s external financing costs.
The scope of the worldwide debt cap rule is limited to large groups (ie. with at least 250 employees, an annual turnover of over €50m or a balance sheet total exceeding €43m) which are not financial services businesses. Groups that are small to medium in size are exempt from these rules.
All of the above, coupled with the strong commercial image of the UK jurisdiction generally, make this jurisdiction one of the premier locations for holding purposes.
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