UK: The UK Company: A Tax Shelter For International Investors?

Last Updated: 4 July 2017
Article by Martin Palmer

This article is the second of a series of articles that looks at tax aspects of the UK company which make it an attractive international business company, or "IBC".

This generic label, and its acronym, are normally associated with the BVI company, and its international competitors. An essential feature of BVI, Bahamian, Cayman and other "offshore" companies is that they pay no corporation tax in their domicile of incorporation. UK companies substantially replicate this characteristic for various types of income, whilst providing the additional benefit of access to over 100 UK double tax treaties, the European Treaty (for the time being) and the high status in which the UK company is perceived.

UK COMPANY RESIDENCE

All UK companies are UK resident for tax purposes under the "incorporation rule". This prima facie results in liability to UK corporation tax on worldwide income and gains, subject to double taxation relief. The current rate of UK corporation tax is 19% (the rate is scheduled to fall to 17% in 2020), however there are important qualifications to liability to UK corporation tax as was shown in the first article dealing with non-UK source dividends received by UK companies, which are generally exempt from UK corporation tax. In this second article, the UK taxation of capital gains realised by UK companies from the sale of "substantial shareholdings" will be considered.

SUBSTANTIAL SHAREHOLDINGS: THE UK CORPORATION TAX EXEMPTION

Since 2002 the UK has had a statutory corporation tax exemption regime for UK companies that realise capital gains from the sale of substantial shareholdings. This will be referred to as the SSE throughout this article.

WHAT IS A SUBSTANTIAL SHAREHOLDING?

For a UK company to hold a substantial shareholding, it must hold not less than 10% of the ordinary share capital of another company for a continuous period of at least 12 months.

In the case of part-disposals that leave the UK company with a sub-10% holding, the remaining shares will need to be sold within a year – under the current legislation. However , draft reforming legislation is in existence which, if enacted , will extend the period in which sub-10% holdings (remaining after a part-disposal) can be sold to a much more generous 5 years.

One of the requirements of the SSE tests that is sometimes overlooked, is the requirement that the shares held by the UK company amount to ordinary share capital. Therefore, when UK holding companies are being set up to own non-UK registered companies, it should not be assumed that what the UK company will be holding is actually ordinary share capital. The concept of ordinary share capital requires the UK company to be entitled to receive from the shares:

  1. not less than 10% of the profits of the investee company (i.e. the company invested in) available for distribution; and
  2. not less than 10% of the assets of the investee company available for distribution.

It is therefore always important to ask the question whether the foreign subsidiary of a UK company has a share capital for the purposes of the SSE.

HMRC have issued guidance on this point in the past. Two common foreign entities that have been analysed by HMRC are the Delaware LLC, and the German GmbH. According to HMRC, both may issue "shares" for the purposes of UK taxation, and the SSE in particular, but in the case of any US LLCs, each case needs to be examined on its particular facts, especially by studying closely the terms of the relevant State law, and the LLCs operating agreement.

THE UK HOLDING COMPANY: STATUS CONDITIONS FOR THE SUBSTANTIAL SHAREHOLDER EXEMPTION

A feature of the SSE is that the UK company, in order to qualify for the SSE, must either be:

  1. a sole trading company; or
  2. a member of a trading group

The draft reforming legislation referred to earlier in this article will, if enacted, abolish these requirements so that the UK investing company may have any kind of status, whether that is trading or non-trading. This will make the SSE regime much more attractive for UK and international groups.

INVESTEE COMPANY OR COMPANIES: STATUS CONDITIONS FOR THE SUBSTANTIAL SHAREHOLDER EXEMPTION

For a UK company to benefit from the SSE, the investee company must have trading status. Specifically, the investee company must either be a trading company or a holding company of a trading group or trading sub-group. The draft reforming legislation, already referred to in this article, will abolish this requirement if enacted, but only if the UK holding company is itself owned directly or indirectly by sufficient "Qualifying Institutional Investors" (QIIs).

DETERMINING THE TRADING STATUS OF AN INVESTEE COMPANY

Experience shows that the requirement that the investee company demonstrates trading status as a holding company of a trading group or sub-group is relatively easy to determine for small groups, but a much more demanding exercise for larger international groups that own a variety of substantial assets in different jurisdictions using different accounting standards.

EXAMPLE OF THE SSE IN RELATION TO A SMALL INTERNATIONAL GROUP

This is the simplest corporate group possible, but it is nevertheless a group, and commonly encountered.

The UK company is a holding company with no trading activity. The French company is a trading company, providing consulting services in the telecommunications sector in France. Therefore, the group is a trading group, so that both companies meet the necessary trading status requirements of the SSE. The UK company qualifies as a member of a trading group.

The UK company sells the shares of the French company, realises a gain and treats the gain as exempt from UK corporation tax in its accounts filed with HMRC. The UK company will be entitled to SSE relief, provided that:

  1. It has held the shares throughout a 12-month period beginning not more than 2 years prior to the disposal
  2. The French company is a trading company. HMRC may require to see copies of the French company's management and statutory accounts for the last 2 or 3 years prior to disposal. It would be very unlikely that such a trading company would have significant non-trading assets to disqualify the UK company from the tax exemption.
  3. Immediately after the disposal, both the UK company and the French subsidiary company (investee company) maintain their trading status as a member of a trading group and a trading company respectively.

Concerning the SSE condition in 3 above, the following points may be made:

  1. Immediately after the disposal of the French trading company, the UK company is no longer a member of a trading group. As already mentioned, the trading status condition will fall away if, as is expected, the draft reforming legislation is enacted, with retrospective effect from 1 April 2017. Pending this development, the UK company can rely on a subsidiary exemption rule that enables the UK company to claim SSE relief provided it winds up or dissolves as soon as reasonably practicable (para 3(3)(b)(ii) Schedule 7AC, TCGA 1992).
  2. Concerning the French trading company, the draft reforming legislation will also not require it to be a trading company immediately after the disposal, provided that the disposal is not to a related party of the UK holding company.

From the above it can be seen the SSE is quite effective for small international groups. However, as the next simplified example shows, for larger multi-national groups, the rules require more careful consideration.

EXAMPLE OF THE APPLICATION OF SSE TO A LARGE MULTI-NATIONAL GROUP

This example shows an international group with trading activity in leather production. The group structure has been considerably simplified, but a large group of this nature might have dozens of group companies in a large number of different countries. This adds complexity to determining the group's overall trading status. HMRC's view is that if more than 20% of the group's assets or liabilities or expenses are of a non-trading nature, this would indicate that the application of SSE relief would not be certain. Whilst HMRC's 80/20 test has been criticised by commentators, the legislation itself is not clear in its definition of trading status. A trading company or group is one that carries on trading activities, whose activities do not include "to a substantial extent activities other than trading activities". What if the Property Company in Uruguay owns large tracts of farmland in that country in order to raise cattle as part of the supply of the traded product? Is the land a trading asset? If the company receives a rental income from tenant farmers that varies according to production levels, would that counter an argument that the land is investment property (a "bad" asset for SSE purposes), and would that question perhaps depend on the degree of management and supervision undertaken by the property company over the tenant farmers? These are not black or white issues. Even if the types of assets are clear, the costs of an accounting analysis that categorises trading and non-trading assets, liabilities and expenses will be significant for a large international group, which makes the SSE more difficult legislation in its current form for large groups of an international nature.

As for the "80/20" rule of thumb published by HMRC, it should be stressed that this is not the law, but HMRC's interpretation of it. It is not a hard and fast rule, and HMRC have stated that they will look at groups in the context of their history of activity, and not take a "snapshot" approach at any particular point in time.

CONCLUSION

In its present form, the substantial shareholder exemption is particularly helpful for small international groups with a clear trading status, although less clear-cut for larger international groups. Two points may be made in conclusion:

  1. The current SSE regime is attractive for small business such as may be run by an international entrepreneur with a group of 2 or 3 trading companies located in two or more countries. Use of a UK holding company may both consolidate ownership in a tax efficient holding company, and provide a strong international corporate image for customers and suppliers. At the same times, the UK holding company can be very tax-efficient in this sort of scenario when receiving dividends, and capital gains from the sale of substantial shareholdings.
  2. The current SSE regime produces difficulties for larger international groups, however, it is widely expected that draft legislation in the UK's Finance Bill 2017, which was dropped with a lot of other complex legislation to make way for the General Election, will be re-laid before Parliament for retrospective enactment from 1 April 2017. This would have the effect of relaxing the SSE regime, and attracting larger international corporate groups to the UK.

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 Mondaq.com.

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
Jordans, A Vistra Company
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Jordans, A Vistra Company
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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