IN074 - UK International Holding Companies

Location

The location of a holding company is an important consideration in any international structure where there is a desire to minimise the tax charged on the income flow. Ideally the company should be resident in a jurisdiction which:

• has a good double tax treaty network, thereby minimising withholding taxes on dividends received


• has tax relief on foreign dividend income


• does not charge capital gains tax on the disposal of subsidiaries


• does not impose withholding taxes on distributions from the holding company to its parent or shareholders


• does not impose capital gains tax on profits arising from the sale of shares in the holding company by non-resident shareholders


• does not impose capital duties on share capital


• does not have a minimum paid up share capital.


UK holding companies can benefit from all of the above.

Tax Treaty Network

The UK has the largest network of double tax treaties in the world. In most situations where a UK company owns more than 10% of the issued share capital of an overseas subsidiary, the rate of withholding tax is reduced to 5%.

It should also be appreciated that as the UK is part of the EU, it can benefit from the EU Parent/Subsidiary Directive, thereby reducing withholding tax to zero on dividends from many EU countries.

Tax Relief on Underlying Foreign Dividend Income

Tax relief on dividends from foreign companies is given by providing credit for foreign corporation tax paid in respect of profits, from which the dividends are derived.

In order to qualify for this relief, the parent must hold 10% or more of the share capital of a subsidiary in another contracting state.

The highest rate of corporation tax in the UK is 30%, which is low compared to most other countries. This results, in most cases, in no UK tax being paid on foreign dividends.

Capital Gains Tax

There is no capital gains tax on disposals by a trading company or by a member of a trading group. This relates to the disposal of all or part of a substantial shareholding in another trading company, or the disposal of the holding company of a trading group or sub-group.

To have a substantial shareholding, a company must have owned at least 10% of the ordinary shares in another company for a continuous period of 12 months during the two years before disposal.

To qualify for this exemption, the investing company must still be a trading company or a member of a trading group immediately after the disposal. If it is no longer a trading company or member of a trading group, dissolution of the holding company should proceed immediately.

Sale of Shares in the Holding Company

The UK does not charge capital gains tax on the sale of assets situated in the UK by non-residents.

Where an individual is resident in the UK or subsequently leaves the UK, but is subject to capital gains tax because of rules covering departure from the UK, taper relief may apply to any gain. For UK residents taper relief can reduce capital gains tax on business assets held for more than two years, to an effective rate of 10%.

No Withholding Taxes

The UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies. This is an important factor in making the UK an extremely attractive jurisdiction for holding companies.

Other holding company jurisdictions currently reduce their withholding taxes by paying dividends to other treaty protected partners. In the Netherlands the Dutch Antilles is used, increasing costs and resulting in a tax of 8.3%.

Dividends from UK companies can be paid to shareholders resident anywhere in the world without withholding tax.

Capital Duty

In the UK, there is no capital duty on paid up or issued share capital, although there is stamp duty at ½ percent on subsequent transfers.

No Minimum Paid up Share Capital

There is no minimum paid up share capital for normal limited companies in the UK.

In the event that a client wishes to use a public company, the minimum issued share capital is £50,000, of which 25% must be paid up. Public companies are normally only used for substantial activities.

Conclusion

The UK international holding company is now a leading contender for trading groups due to:

• the UK’s extensive double tax treaty network


• capital gains tax exemption for trading companies


• the absence of withholding taxes


• the absence of capital gains tax on the sale of shares in the holding company by foreign shareholders.

Additional Information

An effective way in which to consider the benefits of UK Holding Companies is through the consideration of specific examples. Attached are two examples demonstrating the use of UK Holding Companies.

Contact

If you would like any further information on this subject, please call Laurence Binge at the UK Dixcart office, or your normal Dixcart contact.