IN208 - UK International Holding Companies

Ideal Characteristics for the Location of an International Holding Company

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
• exempts dividend income from taxation
• 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.

Advantages Available to UK Holding Companies

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%.

As the UK is part of the EU, it can also benefit from the EU Parent/Subsidiary Directive, thereby reducing withholding tax to zero on dividends from many EU countries.

Tax Exemption for Foreign Income Dividends

Small Companies

Small companies are companies with less than 50 employees that meet one or both of the financial criteria below:

• turnover less than €10 million
• balance sheet total of less than €10 million

Small companies receive a full exemption from the taxation of foreign income dividends if these are received from a territory which has a double taxation agreement with the UK that contains a non-discrimination article. See the attached list of treaties.

Medium and Large Companies

A full exemption from taxation of foreign dividends will apply if the dividend falls into one of several classes of exempt dividend. The most relevant classes are:

• dividends paid by a company that is controlled by the UK recipient company
• dividends paid in respect of ordinary share capital that is non redeemable
• most portfolio dividends
• dividends derived from transactions not designed to reduce tax

Where these exemption regimes do not apply, foreign dividends received by a UK company will be subject to UK corporation tax.  However, relief will be given for foreign taxation, including underlying taxation, where the UK company controls at least 10% of the voting power of the overseas company.

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 the company and to have held these 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, in order to qualify for the exemption.

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.

UK residents pay capital gains tax at a rate of 18% or 28% depending on whether they are basic or higher rate taxpayers.

No Withholding Taxes

The UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies. This is the situation regardless of where in the world the shareholder is resident.

Capital Duty

In the UK, there is no capital duty on paid up or issued share capital. Stamp duty at 0.5% is however payable 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 a leading contender for trading groups due to:

• the UK’s extensive double tax treaty network
• exemption of dividends from taxation in the UK
• 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

How Can Dixcart Help?

• Formation of holding companies
• Registered office facilities
• Tax compliance services
• Accountancy services
• Director services
• Dealing with all aspects of acquisitions and disposals

Additional Information

An effective way in which to demonstrate the benefits of UK Holding Companies is through the consideration of specific examples. Two examples are shown below detailing the use of UK Holding Companies, together with a list of UK tax treaties that contain a non-discrimination article.

Contact

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

EXAMPLES OF THE USES OF A UK HOLDING COMPANY

The classic structure for the use of a UK holding company is as follows:

EXAMPLE 1



In the above example, where the trading company is situated in the EU, the UK company would benefit from the EU Parent Subsidiary Directive resulting in no withholding taxes on payment of dividends to the UK company.

When these dividends are received by the UK company they will be exempt if the holding company is small and in a jurisdiction in a territory with a double taxation agreement containing a non-discrimination article. If the holding company is medium or large the dividend will be exempt from tax in the UK because the dividend is being paid from a company controlled by the UK recipient company.

As the UK company is wholly owned by non residents of the UK, it would be difficult to argue that there is a UK tax avoidance motive and therefore anti-avoidance provisions are unlikely to be applicable.

Dividends can therefore be paid to the Nevis company without any deduction of tax.

EXAMPLE 2

Considering the previous case study, if the EU company is, for example, a French company, in order to avoid French withholding taxes it is necessary for the directors to certify that:

• the UK company is the beneficial owner of the dividends
• the UK company has held 25% of the voting shares of the French company for two years prior to the dividend being paid
• the company is controlled from within the EU

The structure would therefore need to be set up as follows:



In this scenario the UK company is controlled by the EU resident who holds voting cumulative Preference shares, redeemable at par. The directors would therefore be able to provide the declaration as detailed in the three points itemised above. Dividends will only be declared on the non-voting Ordinary shares.

In the two examples detailed above:

• There is no UK withholding tax on the payment of dividends by the UK company.
• If the subsidiaries are sold there will be no capital gains tax on this disposal by the UK holding company, provided that:
  • the holding company is a trading company or member of a trading group
  • the holding company has held a substantial shareholding, i.e. at least 10% of the Ordinary shares in the investee company for a continuous period of 12 months during the two years before disposal
  • the holding company is still a trading company or a member of a trading group immediately after disposal

If the UK company was not a member of a trading group after disposal it could still escape a tax on the capital gain provided that it was wound up or dissolved a soon as reasonably practical following the disposal.

List of UK Tax Treaties with a Non-Discrimination Article