HOLDING COMPANY FORMATION IN UK
UK AS A RECOMMENDED
THE UK AS AN INTERNATIONAL
HOLDING COMPANY LOCATION
THE USE OF THE UK HOLDING COMPANY
IN INTERNATIONAL TAX PLANNING
The main purpose of a UK holding company is to help extract dividends from other foreign subsidiary companies in the most tax efficient way. It can take full advantage of the EU parent/subsidiary Directive.
A UK company does not have to deduct any withholding tax from an onward payment of dividends. This results in a tax free pipeline through which to pass on profits to offshore financial centres.
Subject to certain conditions the profits realised on the sale of shares in an overseas subsidiary can also be tax exempt.
Typically The Netherlands and Luxembourg have been the most popular countries in which to establish a holding company, but with the low cost of formation and administration, its simple statutory requirements, and relatively simple set of regulatory requirements the UK holding company should be seriously considered.
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.
A UK company can be constituted either as a private limited company (Ltd) or a public limited company (Plc).
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.
TAX TREATY NETWORK
The UK has the largest network of double tax treaties (over 100) in the world rendering UK companies a very efficient vehicle for minimizing withholding taxes on dividends received.
In some cases, if the UK company owns at least 10% of the share capital of an overseas company, the rate of withholding tax experienced on non-UK dividends can fall to nil or as little as 5% of the gross dividend.
The UK Company can also benefit from the EU Parent/Subsidiary Directive, whereby withholding taxes on intra-EU dividends, is eliminated altogether.
A UK company is fully subject to tax at a normal rate of 26% which has been reduced to 25% from 1st April 2012, 24% from 1st April 2013 and 23% from 1st April 2014. The main rate of Corporation Tax applies when profits (including ring fence profits) exceed £1,500,000, or where there is no claim to another rate or where another rate does not apply.
Profits from £1 to £300,000 are taxed at a rate of 20% marginal relief is available for profits from £300,000 to £1.5M.
No capital duty is levied when capital is contributed at the formation of a resident company and on any increase in its capital.
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.
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 26% 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.
UK TRADING GROUP
To be regarded as a holding company of a trading group for tax purposes, 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.
SOME ADVANTAGES OF THE UK HOLDING COMPANY
Besides the common advantages of a holding company, the UK Company may also enjoy from the following:
EEMPTION FROM WITHHOLDING TAX ON PAYMENT OF DIVIDENDS
The UK does not impose any withholding tax on dividends distributed by resident companies to UK non-resident shareholders, irrespective of their residence.
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 favour 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.
Interest and Royalties
UK KEY ELEMENTS
||Private limited company (Ltd);
Public limited company (Plc)
|Minimum Subscribed Capital:
|Minimum Paid-Up Capital:
|Number of Shareholders:
|Type of Shares:
||Registered or bearer (Plc);
|Net Worth Tax:
|Corporate Income Tax:
|20% on profits up to £300,000
26% on profits thereafter (*)
|Double Tax Treaties:
|Capital Gains Exemption:
|Relief of Losses:
||Carried back 1 year;
Carry forward indefinitely
||EU Parent Co- 0% (**)
Treaty Countries- 0%-20%
||EU Parent Co- 0% (**)
Treaty Countries- 0%-22%
(*) Please check rate change above
(**) If conditions are met.
(***) On case-by-case basis.
EXAMPLE OF THE USE OF A UK HOLDING COMPANY
In the above example:
For trading company A situated in the EU, the UK holding company can benefit from the EC Parent Subsidiary Directive and there are no withholding taxes on payment of dividends to UK company.
For Mauritius trading company M, the effective tax rate is 3% (or 80 % tax credit on 15% income tax).
Withholding tax on payment of dividends to UK Company is 10%, utilizing the Double Tax Treaty between Mauritius and the UK.
Withholding tax on payment of dividends to UK Company by the China Company is Nil. China Company pays 15% of tax on its profits. However, the official rate is 33%. When these dividends are received by the UK Company, they are chargeable to UK tax. However, relief is given for all underlying tax paid in EU on profits, from which dividends are paid and for the official tax payable (in full rate of 15% and 33%) in Mauritius and China respectively The resulting tax credit will leave little or no UK tax liability.
Dividends from the UK Company can be paid to the BVI Company without any withholding tax.
There is no capital gains tax on the disposal by the UK company of shareholdings in any of its subsidiaries, provided that the UK company owns the subsidiaries for over one year and the disposal does not result in the UK company ceasing to be part of a trading group. Even if, on a disposal, the UK Company ceases to be a member of a trading group, with appropriate tax planning the gains can remain tax exempt in the UK.
Dividends received by the BVI Company do not attract any income tax in the BVI.
HOW WE CAN HELP YOU
The directors and management of Eurofinanzza are professionals in the offshore industry having served the European and Asia markets for nearly 20 years. Through our offices in Hong Kong as well as our associates in other international financial centres, we offer a full range of comprehensive value-added services to professional advisors and their clients.
We offer the following services:
Incorporation of UK companies and companies in other onshore and offshore jurisdictions
Full corporate management services
Registered office, business office, mail redirection and business centre (available in selected locations only)
Accounting services and VAT registration
Asset protection and preservation advisory services
Business establishment services
Market exploration services
If you are interested, or engaged in holding company formation, our team stands ready to provide you with expert advice and services. Incorporation of your business may shield you from personal liability. We prepare and file all the necessary documents to form your company.
For further information on the following please contact us.
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