IN125 - Advantages in Using a UK Tax Resident Company as Principal

Offshore companies can encounter problems when trading internationally due to anti-avoidance legislation. Many offshore companies therefore appoint a UK agent to trade on their behalf. The agent usually concludes trading activities in its own name, on behalf of the offshore company. A fee of approximately 5% is normally paid to the agent for performing this service.

Tax Residence Certificates

Where the agent collects payment from a customer for a service or commission on behalf of the offshore company, the agent is often asked by the paying customer, for a tax residence certificate. This is because the Tax Authority in the customer’s country will sometimes impose a withholding tax. Such a tax is imposed if the recipient of the service or commission is not in a country with which the customer’s country has a tax treaty.

When a UK company requests a tax residence certificate from the HM Revenue and Customs, it has to confirm the reason for the certificate. If the company is acting as agent in the transaction the Revenue will decline to give a tax residence certificate, on the grounds that the relevant tax residence is that of the beneficiary of the transaction (the offshore company) and not that of its UK agent.

A UK Principal

Offshore companies that are to be paid for a service or commission, where tax might be withheld by the country of residence of the customer making the payment, should consider working through a UK principal.

A UK principal company would enter into the transaction on its own behalf and then look to sub-contract the work back to the offshore company.

This is different to an agency position, as the UK company is the “owner” of the transaction and therefore adopts more risk than if acting as agent.

The margin received by the UK company will need to be 10%-15% of the payment made, depending on how much of the risk can be passed back through the sub-contracting agreement.

Independence of the Principal

It is essential that the principal is entirely independent of the company that is sub-contracting work to it, to help ensure that transfer pricing issues do not arise.

In this situation, the UK principal would be able to gain a tax residence certificate as it is conducting the transaction as principal. This should ensure that taxes are not withheld when payments are made by customers for services and commissions from countries with which the UK has a tax treaty. Each individual situation needs to be examined carefully.

Payment for services and commissions to a UK company, sub-contracting work to an offshore company, are not subject to withholding tax. As stated above, if the parties are connected the UK Revenue will be interested in querying the transfer price and it is therefore important to work through an independent principal.

Conclusion

Where a tax residence certificate is required to avoid imposition of a withholding tax, operating through a UK agent is not an efficient answer.

In such a situation, a more tax-efficient solution would be for the offshore trading company to act as a sub-contractor to a UK tax resident company who will undertake the transaction as principal.

Two examples are attached, the first illustrating the situation with no UK Principal and the second with the use of a UK tax resident company as Principal.

Additional Information

If you would like additional information on this subject please speak to Laurence Binge at Dixcart International Limited in the UK, or your usual Dixcart contact.