page 1 consulco uk presentation on the uses for uk companies in international tax planning for...

CONSULCO UK

PRESENTATION ON THE USES FOR UK COMPANIES IN INTERNATIONAL TAX PLANNING

FOR NON-RESIDENTS

PRESENTED BY DEBORAH TAYLOR

AGENDA

Overview of the UK UK Non-resident Limited Liability Partnerships UK Agency Companies VAT Other uses of UK companies in International Tax Planning – UK

sub-contracted consultancy companies, Holding Companies, Public Companies, UK Routeing Companies

OVERVIEW

OVERVIEW OF THE UK

•Political and social stability•London – world class centre for financial services•Services contribute largest proportion to GDP – Global financial crisis impact•World Bank ratings for ease of doing business:- UK is 4th overall out of 181 countries - UK placed 1st when ranked by size of population (like for like)•Coalition Government elected 2010 – aim to increase attractiveness of the UK as a place to do business•Example, reduction of Corporation Tax from 28% to 26% in March Budget.

TAXATION

The UK is an internationally competitive location for tax, with one of the lowest main corporate tax rates in the European Union.

The “standard” or “main” rate of corporation tax in the UK is currently 26% and applies to both resident and non-resident companies. Rate Profit (£)•Small companies’ rate 20% 0-300,000•Marginal relief 300,001-1,500,000•Main rate 26%* 1,500,001 or more*Note: The main rate of corporation tax will be reduced by one percentage point each year from April 2012 until April 2014, when it will reach 23 per cent.

TAXATION

Country Tax RateJapan 41%US 39.5%Germany 30% – 33%France 34.43%Spain 30%Luxembourg 28.59%UK 26%Netherlands 25%China 25%

The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.Source: Deloitte 2011*Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes, turnover/sales taxes and other taxes not levied on income.

The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.

TAXATION

• In addition, the UK has concluded over 100 tax treaties for the avoidance of double taxation and has the largest network of treaties globally (Source: HM Revenue & Customs, 2011).

• An important feature of many treaties is a reduced rate for withholding tax on the payment of dividends, interest and royalties.

• The majority of UK-based companies also benefit from an exemption from corporation tax on any foreign dividends that they receive.

• The UK has extensive range of capital allowances that allow the costs of capital assets to be written off against taxable profits.

• Tax credits for research and development

TAXATION

Withholding Taxes in the UK are as follows:•Dividends – 0%•Royalties – 20%•Interest – 20%

General Features

UK Companies – key features•No withholding tax on dividend payments, irrespective of where the shareholder is resident•Capital Gains Tax exemption where a UK resident company disposes its shareholdings, if certain conditions apply.•Access to the benefits of EU Directives.•No restriction on the location of meetings.•Swift incorporation / shelf companies•Company and LLP names may be in any language but must have the suffix “Limited”. “LLP” or in the case of a public company, “PLC”.•Registered office must be in the UK.•Minimum of one director.

General Features

• Corporate Directors – as long as they are appointed alongside an individual director.

• Nominee shareholders Permitted.• A single shareholder is permitted.• Shares without par value are not permitted.• No Capital Duty

UK LIMITED LIABILITY PARTNERSHIPS

UK Limited Liability Partnerships

UK LIMITED LIABILITY PARTNERSHIPS

The Limited Liability Partnership Act was introduced in 2000.

The Limited Liability Partnerships Regulations came into force in 2001.

Legal personality separate from its members.

Able to enter into contracts and own assets, whilst having the internal flexibility of a partnership.

“For a limited liability partnership to be incorporated two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document.” (s.2(1)(a) LLP act)

Members can be individuals or a body corporate.

“Business” includes every trade, profession and occupation.

Limited liability Separate legal personality Private constitutional documents Organisational flexibility UK Tax transparency Members liability limited to capital contributed Duties of members (fiduciary and statutory)

April 18, 2023 Page 13

If….

The members are non UK resident

There is no UK source income of the LLP

There are no gains realised on UK assets

…then no tax is assessed on the LLP, as profits are only taxed in the hands of the members

Illustrative example

Goods/services supplied to the LLP from Goods/services sold to customers EU (or non-EU territory) throughout other EU/non EU

territories (but not in the UK)

Seychelles IBCMember 2

Seychelles IBCMember 1

UK LLP(England and Wales)

Annual Accounts

- Turnover and profit - Movements on members loans - Small LLP audit exemption

Annual Return

- LLP registered office - Details of members

Partnership AgreementPrivate DocumentInternal management of the LLPDesignated members

Disadvantages/issuesCannot apply for tax residencyCertificates Unsuitable for consultancy serviceswhere withholding taxes deducted VAT registration – question of substance

UK Principal Agency Companies

UK PRINCIPAL AGENCY COMPANIES

Historical concept Principal undisclosed Act only with the consent of the Principal Important - trading activity must be outside of the UK Also referred to as UK “nominee” companies Gives the veneer of a UK company but in fact the UK company

does not act as the “beneficial owner” Management and control

Offshore Principal Company

UK Agency Company

5% Agency fee

Ownership

UK Agency Companies – examples of appropriate activity

•Purchase and Sale of goods•Management consulting•Software Consulting•Design Consulting•Professional Services•Commission earning•Off balance sheet asset/investment holding

Agent’s commission – how is this set? Accounting - format, requirements and disclosure Corporation Tax – arm’s length remuneration VAT registration – question of substance Disadvantage - certificates of UK tax residency cannot be

obtained Still very useful for international trading in goods Minimum level of activity in the UK

Principal Agency agreement

Undisclosed Trading activities Consideration clause Sliding scale of remuneration for significant trading activity Minimum fee Execution of the agreement – outside of the UK

UKco - Commercial Simulation of an Agency Company•Sales of machinery etc. per annum via UKco as agent estimated at €8,000,000•Estimated average gross margin 10% = Gross Profit € 800,000Assuming:Seychelles co: principal's entitlement @ 95% = € 760,000 (zero tax)UKco: agents remuneration @ 5% = € 40,000 (UK tax @ 26% - net assessable income Accordingly:- € •UKco Income........................... 40,000• Less: UKco expenses................ 15,000 *estimated• Operating Profit...................... 25,000• Less: UK corporation tax 26%.. 6,500• Net Profit............................. 18,500 is available for dividend up to Seyco free of UK tax

Therefore,

•Accordingly, the "effective" rate of corporation tax approximates to 0.81% and the cost of the UK company management and administration approximates to 1.88%.

(The cost of any banking/documentary credits has been ignored for this illustration)

UK VAT

TYPES OF SUPPLY:

Standard Rated - 20% Reduce rate Zero rate Exempt Outside of the Scope

• Non-business• Place of Supply Abroad

UK VAT

UK VAT Numbers can be obtained for any entity engaged in trading/provision of (most) services

Exceptions include “exempt” services (e.g. provision of finance/insurance, etc/some land transactions/holding companies

Can be cosmetically desirable

Essential for intra-EU trade

VAT Administration

Problems with UK VAT registrationUK Non-resident LLP and UK Agency CompanyAccommodation Lists – boilerplate address, additional security checks on each application.

Solutions:Virtual office – dedicated telephone/fax and emailLimit the number of companies/LLPs at an addressBank account set up before registration Create supplies in the UK i.e. Stationery (approx €500 +)Preassemble all information required such as invoices, proof of intent to trade - to be filed electronically with applicationWork carried out in the UK – invoicing, bookkeeping, banking etc.

VAT Administration

ADMINISTRATION POINTS:

VAT REGISTRATION - issues, timing, HMRC queriesQUARTERLY VAT RETURNS EC SALES LISTS (quarterly/ monthly) Intrastat’s (monthly) Inspection of records by HMCE

UK Companies in International Tax Planning

Other uses of UK companies in International Tax Planning

UK SUBCONTRACTING COMPANY

RAK Company

UK CompanyIndependently owned

Customer Company

€950

€1,000

Services

UK Sub-Contracting Companies

UK CO BENEFICIALLY Receives 100% of the income.

Therefore Treaty benefits can usually be obtained Certificates of UK tax residency can be obtained Accounts show 100% of turnover

95% cost of sales5% gross profit

PRICING ISSUES:

Is the 95% paid to the BVI service company a justifiable deduction?

Justifications for the 95% deduction:

BVI service provider introduces the customerBVI service provider performs all of the services requiredBVI service provider as director of the UK sub-contracting company?

Consequences of the Indofood Decision? Is the UK company truly the beneficial owner?

THE IMPORTANCE OF SUBSTANCE CANNOT BE UNDERSTATED

UK Routeing Companies

Used to obtain reduced treaty withholding tax rates Can route

Consultancy feesRoyaltiesInterest

Can obtain certificates of UK tax residency Transfer pricing traps and solutions

UK Royalty/ Interest Routeing Companies

Cyprus Co

licence $950 royalty

Trademark/

Patent

UK Co Independent ownership

Sub-licence

$1,000 royalty

Foreign Trading Co

BVI Co

Beneficial Ownership

Cyprus/ UK DTT has 0% on royalties

Cyprus company

Loan $950 interest

UK Company Independent Ownership

loan $1,000 interest

Foreign Trading Co

BVI Company

$900 interestLoan

Cyprus/ UK DTA provides for 10% WHT on interest but could use the EU Directive

UK Company BENEFICIALLY receives the interest from the Foreign Trading CoSO:

Reduced treaty rate of withholding tax can usually be applied by the Foreign Trading Co

UK company accounts show 100% of income

Treaty Protection?• UK/ Cyprus DTA – 10% interest/ 0% royalties• EU Directive – Royalties & Interest

Watch for Treaty anti-abuse clauses

TRANSFER PRICING (AGAIN)• No magic percentage figure• Independent ownership of UK company

BENEFICIAL OWNERSHIP?

UK Holding Companies

CLIENTOwns

BVI COMPANY

Hold shares with dividend

rights

Independently owned Company

Voting sharesUK HOLDING

COMPANYOwns

FOREIGN TRADING CO

Dividends

UK Holding Companies - CGT

Exemption available for disposals of “substantial shareholdings”by a trading company

the holding company of a trading group

“Substantial” = 10%

Normally in practice = 51% due to requirement to be a “holding company of a trading group”

Must be “trading company or holding company of trading group” before and immediately after the disposal

If winding up the UK holding company, different rules can apply

Certificates of UK Tax Residency

IR manuals IR “Tax Bulletin” Beneficial ownership of income Genuine UK control and management

IR Arguments:

Foreign “shadow directors” Avoidance/evasion of foreign tax Automatic exchange of information

What can you do?

UK directors UK board membersSubstance of the UK Company is important No general POA’s

UK PLC

UK Public Limited Company

Not necessarily listed on the stock exchange

More onerous corporate duties

Substance and presentation. Better?

Conclusion

In conclusion:

• Increasingly technical solutions required• Foreign tax structures must be sound• Provided those requirements are met, the UK remains a useful

jurisdiction

page 1 consulco uk presentation on the uses for uk companies in international tax planning for...

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uk routeing companies

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