UK: A Closer Look, UK Holding Companies – An Attractive Proposition

I. Introduction

A series of UK corporate tax reforms during recent years have quietly made the UK a more attractive jurisdiction in which to locate a holding company for other companies located worldwide. These tax reforms provide shelters for dividends and gains on certain stock holdings in non-UK companies and also liberalize the UK's controlled foreign corporation ("CFC") regime.

This article provides a brief overview of the highlights of these major features.

II. 2009 Legislation On Taxation Of Dividends

A new UK corporation tax regime, effective from July 1, 2009, exempts from corporation tax most dividends under a number of broad exemptions, which apply to both UK and overseas source dividends paid on or after July 1, 2009 to UK resident companies.

Under the "controlled corporation" exemption, no UK corporate tax applies to dividends received on a greater than 50 percent voting stock interest by a company that is not a "small company" – a "small company" is generally one with less than 50 employees, and annual turnover and net asset value per balance sheet not exceeding EUR10m, tested on a group basis. Under a second exemption, no UK corporate tax applies to dividends paid to a "small company," provided the dividend paying company is located in a qualifying territory with which the UK has an income tax treaty. Companies that are not small companies may also be exempt from UK corporate tax on portfolio dividends – i.e., paid on shares representing less than 10 percent of share capital – as well as distributions in respect of non-redeemable ordinary shares.

These new rules exempting dividends from UK corporation tax – whether arising from UK or non-UK underlying companies – complement the long-standing UK domestic tax law position that no withholding tax is levied on any outbound dividends. Together, the overall corporate tax regime then essentially places no tax "drag" on non-UK profits transferred upstream through the UK holding company and outbound to non-UK shareholders.

III. Substantial Shareholding Exemption ('SSE') Enacted In 2002

Under the UK's decade-old SSE regime, no corporation tax is imposed on gains from the disposition of shares in other companies where the disposing company has a 10 percent or greater interest and the company satisfies a one-year holding period requirement.

To qualify for the SSE, both the disposing company and the company disposed of must be trading companies. Another requirement is that the disposing company must continue to be a trading company immediately after the disposal. The sale of a stock interest will qualify for the SSE only if the sale proceeds are promptly reinvested by the holding company in other trading companies or distributed by the holding company to its shareholders. HMRC has not issued clear guidance on what is an acceptable period for the UK holding company to retain the proceeds of sale without either reinvesting or distributing them.

In this regard, the accumulation of a large cash position from such dispositions at the holding company level might lead to its classification as an investment company, rather than overall a group of trading companies, which may jeopardize eligibility for the SSE. Accordingly, given that the existing SSE legislation needs further clarity on these points, the holding company will need to carefully manage its share dispositions, reinvestments and distributions to shareholders to best insure that the SSE is preserved.

IV. New CFC Tax Regime

The UK's new tax regime governing CFCs took effect on January 1 2013. The new CFC regime, in addition to the benefits discussed above, further makes the UK a more attractive jurisdiction to locate an international holding company for non-UK companies that conduct non-UK trading activities and/or non-UK intellectual property exploitation.

A CFC is a foreign company that meets the following criteria: (i) it is resident outside the UK; (ii) it is controlled by UK persons, and (iii) it is subject to a level of tax that is less than 75 percent of the UK corporate tax on such profits. Profits of a CFC that fall within one of five general "gateways" (discussed below) and not within a prescribed exemption are subject to CFC taxation only if they are considered to be earned through tax avoidance.

Under the new CFC regime, any relevant profits of a CFC not eligible for exemption are attributed to one or more UK companies that have minimum 25 percent participations in a CFC (or that are otherwise regarded as entitled to at least 25 percent of relevant CFC profits) and are then subject to the UK corporation tax (23 percent from April 1, 2013, reducing to 20 percent by April 1, 2015). The tax on CFC activity is limited to the CFC apportioned profits, which, unlike the prior statutory approach, in theory is limited to profits considered to be "artificially" diverted away from the UK. (General OECD principles on attribution of branch profits are adopted on a modified basis to identify activities or assets with a relevant UK connection and CFC taxation is applied as though UK-related business was conducted from a UK-based permanent establishment).

Before CFC profits are attributed to a UK company and subject to UK corporate tax, the CFC's taxable profits must fit within one of five "gateways" – of these, four gateways essentially target finance and insurance activities, while the fifth captures all other types of commercial activity with a UK connection. Active "trading" activities may still be exempt by a "safe harbor" based on criteria that include the following: (1) the existence of a formal business establishment in the CFC's country of residence; (2) not more than 20 percent of trading activity income is generated from a UK connection or dealings (10 percent in certain banking situations); and (3) the trading activity may not be based to any significant extent upon any IP rights which have derived from a UK source – either owned or developed within the UK during the seven preceding years from a "related" party. These safe harbor criteria do not apply to passive or investment income generating activities.

Even if such CFC profits fall within a generally taxable gateway, they may still be exempt on various specific grounds, e.g., on the basis of small amounts of profits or location in certain approved foreign territories. The basic threshold amount for low profits is £50,000, but up to £500,000 of profits may be exempted if no more than £50,000 consists of non-trading profits. A list of approved territories has been issued by HMRC; while the list is long, it is important to note that various conditions may attach to such exemption (in particular, in respect of any exploitation of IP rights previously exported from the UK).

Although, unlike the prior statutory regime, the exploitation of IP rights is not generally considered a prohibited CFC activity that would result in UK taxation of CFC profits, the potential for CFC taxation exists if there are IPrelated profits coupled with material avoidance of UK tax through the transfer away from the UK of UK-source IP rights (whether by overt transfer or through the creation of derivative rights).

Finally, investment income arising from IP exploited outside the UK through licensing and similar agreements will not be subject to CFC taxation if there is no UK connection (determined by OECD economic criteria concerning the location of various risk and reward elements of the venture) and, even if there is a link or connection to the UK, CFC profit taxation generally will not apply where more than 50 percent of the profits are derived from outside the UK.

Originally published in Global Tax Weekly

The content of this article is intended to provide a general guide to the subject matter. Specialist 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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions