Recent amendments to the UK tax regime have resulted in as many as 60 multinational companies looking to complete global and regional headquarter relocations into the UK in the next 18 months, according to Ernst & Young (November 2013).
This increased interest in relocating to the UK has been primarily driven by: (i) reductions to the UK's corporation tax rate, which is currently at 23% (to be reduced to 21% from April 2014 and to 20% from April 2015) and the benefits of the UK's wide double taxation network, participation exemption, lack of withholding tax on dividends and non-taxation of disposals by non-residents; (ii) reforms to UK Controlled Foreign Companies (CFC) legislation and (iii) implementation of the new "Patent Box" regime.
Tax advantages available to a UK holding company
Competitive corporation tax rate
The UK's main rate of corporation tax is 23% and will fall to 21% as of April 2014 and 20% beginning in April 2015.
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
A full exemption from the UK taxation of foreign dividends applies 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; and
- dividends derived from transactions not designed to reduce tax.
Where these exemption classes do not apply, foreign dividends received by a UK company will be subject to UK corporation tax. However, relief will be given from 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 UK 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 have held these for a continuous period of 12 months during the two years before disposal.
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 resident individuals 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 by UK companies. This is regardless of where in the world the shareholder is resident.
In the UK there is no capital duty on paid up or issued share capital. Stamp duty at 0.5% is generally payable on subsequent transfers of shares in UK companies.
A CFC is a non-UK resident company that is controlled by a UK resident person or persons. As a result of recent reforms to the CFC legislation, profits earned in CFCs will be exempted from UK tax unless those profits have been artificially diverted from the UK and the UK will not tax profits from genuine economic activity outside the UK.
The Patent Box relief reduces the cost of commercially exploiting intellectual property by applying a 10% rate of corporate tax to the majority of profits derived from patented products and processes, phased in over five years from April 1, 2013. This offers a significant saving against the main headline tax rate of 20% (by 2015). The relief applies to worldwide profits from inventions patented by the UK Intellectual Property Office, the European Patent Office and certain other patent offices. A company qualifies for the Patent Box relief if it owns (or licences on exclusive terms) qualifying patents and has either created or developed the patented innovation or a product incorporating it.
The above factors, among others, have resulted in the UK placing third in UHY Hacker Young's 2013 ranking of countries most prepared to capitalise from a boost to international trade, making the UK an attractive location for entities considering expanding their business operations or locations worldwide.
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