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.


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.


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.


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.


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.


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).


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.


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.


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.


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

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.