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.

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.