UK: The UK as a Location for a Holding Company - Income Aspects

Originally presented to the International Bar Association, Taxes Committee on 10 April at the IBA conference in Dublin for Best Location for Holding Companies.


Corporate groups often set up holding companies to provide a command and control function or clear reporting lines for their organisation in a particular region or, more unusually, a product or service line. Although it would be possible to hold a group's operational branches or subsidiaries directly from the ultimate parent, an intermediate holding company makes it easier to control the relevant business segment. Holding companies are also used to finance group activities or expansions and to hold intellectual property.

An ideal holding company jurisdiction would have:

(a) negligible tax cost, but (perhaps impossibly) would not be regarded as a tax haven; and

(b) a comprehensive network of tax treaties.

Whilst tax can and does influence the location for holding companies, non-tax factors are important and often override any tax planning. The other factors that are often considered include:

(a) good communication systems and ideally in a time zone close to the areas of operation;

(b) a robust commercial law system with an independent impartial judiciary; and

(c) the availability of trained, experienced staff who are financially literate and are able to speak the lingua franca of the organisation, which is usually English.

The UK probably has one of the best combination of non-tax attributes. It has excellent communications and is in a time zone between the US, Europe and the Far East. It prides itself on its legal system and the commerciality of its judiciary and depth of the UK legal system can provide legal certainty on most issues. In terms of the tax attributes, the UK has the world's most comprehensive tax treaty network. The historic disadvantage of the UK as a holding company jurisdiction has been the tax costs of locating a holding company in the UK, but in recent years, these have been addressed by changes in law. This memorandum will examine whether the UK is currently a useful location for a (primarily European) holding company.

Rather than considering the tax regime applying in the case of holding companies, it seems more useful to examine the major activities undertaken by holding companies. These are: setting up; acquiring and selling subsidiaries; receiving and paying dividends; receiving and paying interest; holding and licensing intellectual property; and exiting the structure. This paper will deal primarily with income related aspects of the tax implications of these activities but will touch on some capital related assets for the sake of completeness.


The first question is whether to incorporate the company within the UK or to use a non-UK incorporated company that is resident for tax purposes in the UK. Companies can be incorporated quickly in the UK or, alternatively, off the shelf companies are available almost immediately. UK incorporated companies are cheap to set up, but will be subject to UK corporate law. Often a non-UK incorporated company is used to reduce the compliance burden and effectively elect for the usually lower burden of the company law of the jurisdiction of incorporation. Typically such companies are incorporated in Jersey, Guernsey, the British Virgin Islands or the Cayman Islands, jurisdictions which charge no significant tax where companies can easily be incorporated cheaply and quickly. So long as a company incorporated in one of those jurisdictions has its central management and control in the UK, it will become tax resident in the UK.

In addition, there is no UK stamp duty on the transfer of shares in a non-UK incorporated company, so long as it does not maintain a share register in the UK.

No capital duty is charged in the UK on equity subscriptions, whether a company is UK incorporated or not.


3.1 Acquiring Subsidiaries

The UK does not charge any direct tax or VAT on the acquisition of shares in a subsidiary. If the subsidiary is incorporated in the UK, stamp duty will arise, but as this will arise wherever the acquiror is located or incorporated, the jurisdiction of the holding company is irrelevant.

Under the loan relationships rules, UK companies are generally entitled to a deduction for interest and finance costs on the same basis as debits are recognised in their accounts. The loan relationship rules do not differentiate between capital and income so that loans taken out for capital purposes (including buying shares) will give rise to deductible interest which can reduce the UK company's taxable profit. By contrast, some jurisdictions generally refuse a deduction for interest on a loan used to acquire shares in a subsidiary.

Under the UK group relief scheme, losses in one group company can be surrendered to another 75% group company. It is also possible for a company owned by a consortium (or its 75% group company) to surrender losses to the consortium members (and their groups) and vice versa. Effectively, therefore, finance costs could be surrendered to most joint venture companies as well as group companies. The advantage of the deductibility of interest on acquisition finance can be enhanced where the acquiring group has other operations in the UK which can use the additional deductions. In other jurisdictions, tax consolidation is limited to a 90% group. Anti-avoidance rules can apply in the UK to the deductibility of interest and these are discussed in 5.2 below. In addition, there is the rule requiring interest owned by a non-UK resident to be paid within 12 months of the end of the accounting period in which it accrued in order to obtain a deduction in the period of accrual. The House of Lords in MacNiven1 in a different context held that "paid" meant legally paid, i.e. round tripping the interest is permissible.

3.2 Selling Subsidiaries

In Finance Act 2002, the UK introduced an equivalent to a participation exemption for "substantial shareholdings" (i.e. a 10% or more economic interest has been held for at least 12 months in a trading company or group). Where the substantial shareholdings legislation applies, a complete exemption is provided from UK tax on gains arising on a disposal of the shares. The exemption is subject to certain conditions, the detail of which is beyond the scope of this paper.


4.1 Dividends received into the UK

Historic Position

For some time the UK has charged tax on dividends paid by non-UK resident companies to a UK resident company. All dividends within the UK are exempt from tax. Credit is given to the UK resident company against UK tax on the dividend for withholding tax on the dividend. Credit is also available for "underlying tax" i.e. tax on the profits out of which the dividend is paid provided that 10% or more of the voting power in the paying company is held, directly or indirectly, by the recipient's group. In determining the amount of underlying tax, the UK includes tax at all levels from and including the paying company down to its subsidiaries at the bottom of the ownership chain.

Traditionally, the UK permitted "mixing" of underlying tax. For example, suppose a mixer company (i.e. a non-UK resident subsidiary of a UK company) received dividends from its subsidiaries as follows: (1) a net dividend of 85 which had suffered tax of 15 from "Low Tax Sub" with (2) a net dividend 55 which had suffered tax of 45 from "High Tax Sub." blended rate of underlying tax of 30%. When the mixer company paid the aggregated dividends on to the UK, the UK would tax the full amount plus underlying tax (85+15+55+45=200) but would give credit for 60, being the blended amount of tax. This had the result that the UK tax on dividends from overseas companies (on an aggregate basis) would not generally increase the effective tax rate over the rate of UK tax (30%).

Finance Act 2000 Changes

When the 2000 Finance Bill was first published, it effectively abolished mixer companies and had the effect of treating each sub-subsidiary as a separate pool of profit with a separate amount of underlying tax allocated to it. In the above example, the dividend from High Tax Sub paid through the mixer company would not suffer additional tax in the UK due to the presence of underlying tax in excess of the UK effective tax rate. The dividend from Low Tax Sub would suffer additional UK tax of 15 bringing the effective tax rate to 30% on that dividend. The overall effective tax rate would be 37.5%, i.e. in excess of the UK rate of 30%. These proposals caused much debate and opposition from the UK corporate sector which led to their amendment during passage through Parliament. When finally enacted, Finance Act 2000 introduced an "On-Shore Pooling" regime in addition to the effective abolition of mixer companies. Certain highly taxed dividends give rise to Eligible Unrelieved Foreign Tax (EUFT) which can be set against UK tax on lowly taxed dividends. In the above example, the additional unused tax on the dividend from High Tax Sub may be treated as EUFT which could be credited against the additional tax on the dividend from Low Tax Sub resulting in an effective tax rate of 30%.

As the UK rate of corporation tax is of the lower end of the European range, it is still possible to manage dividend flows to eliminate UK tax on dividends from subsidiaries by ensuring that sufficient EUFT is created to credit against dividends from lowly taxed subsidiaries. This is not as simple as the pre-Finance Act 2000 mixer company system or an exemption system operated by some jurisdictions, but may not result in additional UK tax to pay if dividends flows are properly managed. A point in favour of the system is that the holding required to avail of underlying tax is 10% of the voting power which compares favourably with some "exemption" jurisdictions such as Denmark which requires a 25% for the exemption to apply.

US/UK Double Tax Treaty

The UK and US have recently negotiated a tax treaty which will, when it comes into force, permit dividends to be paid from a US subsidiary to its UK parent without US withholding tax. The 0% rate applies to dividends paid by a US corporation if the beneficial owner is a UK resident company holding 80% or more of the voting power in the US corporation and meets certain other requirements. UK pension funds are also entitled to the 0% rate. If the 0% rate does not apply, a 5% rate is available if 10% of the voting power is held by the UK company. Otherwise a 15% rate applies. The treaty is expected to come into force in the next month or so.

EU Law

As noted above, the UK generally exempts from the charge to UK tax any dividend paid by one UK resident company to another but charges to tax dividends received by a UK resident company from a company resident in another member state of the EU, subject to credit for withholding and possibly underlying tax. In the Verkooijen2 case, the European Court of Justice (ECJ) reviewed a Dutch tax provision exempting individuals from Dutch tax where they received dividends paid subject to Dutch corporate withholding tax. The ECJ found that dividends paid subject to Dutch corporate withholding tax were effectively the same as dividends paid by a Dutch resident company. It found that the restriction of the Dutch exemption from tax for dividends paid on shares in a Dutch resident company Dutch was a breach of the free movement of capital. Accordingly, Mr. Verkooijen was entitled to the same exemption from Dutch tax on his Belgian shares.

As the free movement of capital provisions do not distinguish between individuals and companies, there are good arguments that the exemption from UK corporation tax on dividends from UK resident companies should be extended to apply to dividends paid by all EU resident companies. If this view is upheld (and it is understood that it is currently being litigated before the UK courts), the UK will become an even more attractive location for a holding company.

4.2 Dividends paid from the UK

Dividends paid from the UK are, in all circumstances, paid without withholding tax or any economic equivalent of withholding tax. This represents a significant advantage over a jurisdiction such as the Netherlands which, even under the most favourable treaties, charges a minimum of 5% withholding tax or Denmark which charges 25% rate for non-EU and non-treaty countries (unless, in either case, the Parent-Subsidiary Directive applies).

In addition, a recipient of a UK dividend may be treated, depending on its local law and/or a tax treaty, as receiving a "grossed-up" amount of dividend (i.e. grossed-up by the tax credit attaching to UK dividends). The tax credit may then reduce the recipient's liability to tax. As the tax credit is cost free, it can significantly increase the after-tax return to the recipient.


5.1 Withholding Tax

The standard rate of withholding tax from interest paid by a UK company is 20%, subject to treaty relief. Many of the approximately 117 tax treaties to which the UK is a party reduce the rate of withholding tax on incoming and outbound interest to 0%. To obtain the treaty rate of withholding tax for payments from the UK, it is necessary for the UK payer to apply in advance for clearance to pay at the treaty rate.

If no treaty relief is available, it is possible to avoid UK withholding tax by structuring a loan as a discounted bond or by issuing quoted "Eurobonds."

Within the EU, only the UK treaties with Belgium (15%), Italy (10%), Portugal (10%) and Spain (12%) permit withholding tax on interest. The ECJ found in the "open skies" series of cases that EU law overrode bi-lateral treaties entered into by member states. In the joined cases of Hoechst3 and Metallgesellschaft4 that the imposition of UK advance corporation tax (a kind of withholding tax) on dividends from a subsidiary to a non-UK resident parent company where a UK to UK payment would not have suffered advance corporation tax was a breach of the right of establishment. On this basis, it is arguable that all payments of interest to companies resident in Belgium, Italy, Portugal or Spain should be made free of withholding as to single those countries out for special treatment seems to breach both the freedom of establishment and free movement of capital and payments guaranteed by the EU Treaty.

5.2 Interest Deductibility

As mentioned above, under the loan relationships rules, UK companies are generally taxed or relieved for interest and other finance costs on the same basis as credits or debits are recognised in their statutory accounts prepared under UK GAAP.

Both the capitalisation and transfer pricing rules exist to limit deductibility in cases where a UK company pays interest to a recipient that is not subject to UK corporation tax in respect of that interest. The rules only apply where the amount paid exceeds an arm's length amount. The UK Revenue has traditionally been willing to accept quite high levels of debt, provided the UK taxpayer can justify the basis in which interest is charged.

In the Lankhorst case,5 the ECJ found that the German thin capitalisation rules breached the principle of freedom of establishment. The payments of interest in question fell foul of the German thin capitalisation rules. Had the payments been made to a company subject to German corporate income tax (rather than to an EU company not so subject), the German rules would not have applied. The ECJ specifically rejected the argument that the application of the arm's length principle saved the German rules. The UK thin capitalisation and transfer pricing rules apply to interest payments only where the recipient is a person not subject to UK corporation tax and, based on the Lankhorst case should not be applied to payments of interest to EU resident companies.


Companies which hold intellectual property are often located in tax havens so that profits arising from licensing the intellectual property can "roll-up" tax free. High levels of withholding taxes on royalty payments to such jurisdictions can significantly reduce the tax benefit. Many of the UK's tax treaties provide an exemption from withholding tax on royalties.

The UK introduced an intangible asset regime in the Finance Act 2002 which, broadly, gives a tax deduction for the accounting amortisation of intangible assets acquired from third parties or created, in either case, after 1st April 2002. Depending on (1) the royalty payment profile (2) the cost of the intangible asset and (3) the rate of withholding tax in the licensee's jurisdiction it may be more efficient to hold intangible assets in a UK resident holding company rather than in a tax haven company. Outbound UK withholding tax could be eliminated by a treaty or avoided by licensing to the UK for a capital sum.


If the UK resident company is incorporated in a tax haven (and does not have a share register in the UK), no stamp duty will arise on the transfer of its shares, so long as the document effecting the transfer in such companies is executed outside the UK. A UK incorporated company will, however, give rise to a 0.5% stamp duty charge. The UK does not levy capital gains tax on the sale of shares in a UK resident company unless the seller is subject to UK tax.

If the UK holding company sells the shares in its subsidiaries, the substantial shareholdings exemption may eliminate UK tax.


The UK compares well with the ideal holding company jurisdiction, in particular for its non-tax attributes. Groups looking for a complete exemption from taxation will not find it in the UK. With careful structuring, however, the UK can provide a good location for a holding company of a multi-national group, particularly in view of the UK's commercial infrastructure and legal and finance expertise.


1 MacNiven v Westmoreland Investments Ltd 73 TC 1
2 Case C-25/98
3 Case C-410/98
4 Case C-397/98
5 Case C-324/00

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.



To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.