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IN158 - Substance Requirements for Subsidiary Companies Operating from Overseas Locations
Activities conducted by overseas companies through low tax jurisdictions have traditionally offered a number of tax optimising opportunities for international groups. Tax and government authorities are, however, demanding increasingly specific criteria to illustrate real presence and activity for various benefits to continue to be enjoyed.
Subsidiaries
For many parent companies it is no longer sufficient to establish a subsidiary in a low tax location to enjoy the tax advantages that this can provide. Care has to be taken that the profits generated from that location are not directly subject to tax in the jurisdiction in which the holding company is based.
With a growing number of international companies establishing subsidiaries in other countries, it has increasingly become a requirement for companies to show that the management, control and day to day decisions concerning the activity are taken in the particular foreign jurisdiction. The company itself would generally need to operate through an establishment which provides a real presence in that location.
Unless this substance and presence is demonstrated, the tax benefits enjoyed by the subsidiary company may be mitigated by a tax imposition in the country in which the parent company itself is based.
Recent European Union Ruling
This issue has recently been addressed within the European Union which defined its position in the preliminary ruling of September 2006 regarding a case of two Cadbury Schweppes companies established outside the United Kingdom. The United Kingdom Inland Revenue had endeavoured to claim United Kingdom taxation on the profits of the overseas operating companies.
The European Court of Justice has ruled that a parent company has the right to establish a subsidiary in a member country of the European Union with a lower rate of taxation. It has no obligation to pay taxes on the profits of that subsidiary in the jurisdiction of the parent if genuine activity can be shown to have taken place in the jurisdiction in which the subsidiary is based.
“Genuine Economic Activity”
The key for subsidiaries to continue to enjoy legitimately available tax efficiencies is the requirement to demonstrate genuine economic activity.
Dixcart recognises the importance of this obligation, which affects enterprises controlled from both within the European Union and outside. A number of Dixcart business centres have therefore been established, through which a real presence and management organisation can be put in place and displayed.
Dixcart operates business centres in the Isle of Man, Madeira, Guernsey and in the UK, with further business centres in additional jurisdictions planned to become available during 2008. Services in the Isle of Man Business Centre have expanded significantly with the acquisition of another building to provide further serviced office facilities from November 2007.
Dixcart Business Centres
In addition to the management, accounting and legal support provided through Dixcart, the Dixcart Business Centres offer serviced office facilities, sophisticated communication systems, and demonstrate in each specific jurisdiction:
- Management, control and decision making processes that are substantially taken in that location by local directors and management
- A company that has local employees and pays personal taxes and social security contributions for them
- A physical office presence
- Separate telephone and email communication arrangements for each company operating from the management centre.
Additional Information
If you would like further information regarding substance requirements and our serviced office facilities, please contact Tony Keating in the Isle of Man or Maria Joao in Madeira. Alternatively Alan Corlett and Angus Rendall can answer questions regarding the Dixcart Business Centres in Guernsey and the UK respectively or contact us.