The taxation of companies in the UK, and particularly their foreign profits, has changed beyond recognition in the last 10 years. The UK Government recognised the need for an overhaul of the corporate tax regime in order to attract inward investment. As a result of the changes introduced, the UK has become one of the most competitive regimes for the location of holding companies.
The UK Government has committed to lowering the overall corporation tax rate and ensuring that the UK becomes the most competitive nation in the G20. As such, we have seen a steady reduction in UK corporation tax rates in recent years. The rate currently stands at 20% and will be lowered to 19% from April 2017, and then further reduced to 17% from April 2020.
a) Inward Dividends
Since July 2009, almost all UK and non-UK dividends received by a UK company are exempt from tax in the UK. There is no minimum ownership period and in general no minimum holding of shares.
There is a requirement that the dividend does not form part of a tax-avoidance structure but most trading and investment structures will pass this test. For smaller companies, the dividend must be paid from a country with which the UK has a tax treaty. The UK has an extensive network of over 100 treaties.
b) Capital Gains
Since 2002, the UK has had a favourable exemption in respect of the disposal of shareholdings held as investments.
Exemption applies where there is a holding of at least 10%, held for a period of at least 12 months. There is a requirement that the subsidiary or group must be predominately trading in nature rather than holding passive investments.
The UK is one of the only prominent members of the OECD which does not levy withholding tax on outward dividends as a matter of domestic law, regardless of the residence of the recipient.
Due to the large number of tax treaties the UK has signed, withholding tax on inbound dividends, royalties and interest can often be reduced or eliminated.
The UK also currently benefits from the EU Directives on dividends, royalties and interest which eliminate withholding tax on flows of investment income between EU parent and subsidiary companies. The use of such Directives is extended to Swiss companies by virtue of the EU-Swiss Agreement.
Stamp and Capital Duties
There is no capital duty on the issue of or subscription for shares in a UK company.
The sale of shares in a UK company for consideration is subject to stamp duty at a rate of only 0.5%.
The UK tax law enables companies to be viewed at a group level which can be beneficial to the tax position of the overall group.
Where there is a 75% ownership relationship, losses from UK-resident group members can be relieved against profits of other UK-resident group members. Losses incurred in other EU countries are also relievable against UK group profits, to the extent that those losses cannot be used overseas.
Assets can pass between group members without triggering a chargeable gain.
There are group stamp duty exemptions where a reorganisation occurs within a group.
Taxation of Foreign Profits
The UK has been moving rapidly towards becoming a territorial tax regime for corporations. The tax rules now operate broadly to exempt genuine trading profits arising overseas, in particular:
- The exemption of most foreign dividends from tax.
- An exemption for certain profits arising in overseas branches.
- Newly relaxed CFC rules which no longer operate to tax genuine overseas profits but only income streams which have been artificially diverted from the UK.
The UK has made significant changes to its corporate tax system to make the UK a major competitor as a holding company jurisdiction.
The most important elements of this approach are the overall lowering of tax rates and the participation exemptions available for dividends and the disposal of participating investments. Together with zero withholding tax on outgoing dividends, the UK has become an attractive jurisdiction for inward investment.