The United Kingdom (“UK”) comprises England, Scotland, Northern Ireland and Wales and is one of the member states of the European Union. It has an area of some 244,100 square kilometres (94,250 sq. miles) with an estimated population in excess of 63 million. London is one of the world’s leading centres for banking, insurance and other financial services; lying between New York and Tokyo it is the third leg of the world’s capital markets. Not the least of its attractions is that it is a politically stable English speaking country.
The UK is strategically located off the Northwest coast of Continental Europe and has excellent communications; it has three major international airports in Heathrow, Gatwick and Manchester with extensive worldwide connections. The UK is physically joined to mainland Europe by the Channel rail tunnel link which boasts frequent train services for passengers and cars to Paris and Brussels.
The UK has signed double taxation treaties with 100 countries and thus enjoys the most extensive double taxation treaty network in the world.
Despite the fact that the UK is by no means a low tax country, UK companies can be used effectively and advantageously in a tax planning structure. One of the major benefits of utilising UK companies flows from the very fact that the UK is not atax haven so UK based tax planning structures would not generally attract the same level of attention of those based in less regulated jurisdictions.
The UK Company
For the purposes of this information sheet a UK company is incorporated in England or Wales and registered in Cardiff, Wales. Details on incorporating in Scotland or Belfast are available on request.
The UK company has the following characteristics:
The corporation tax rates are already amongst the lowest in the European Union and the small companies’ rate is currently levied at 20% on a UK company which has net profits up to £300,000 with a tax rate of 23% levied on profits above £1,500,000. A Marginal rate of 23.75% applies to taxable profits falling within the £300,000 and £1,500,000 band. Reference is made when calculating these rate bands to any associated companies (broadly companies under common control).
Generally speaking, a UK company is taxable on its worldwide income at the rates indicated above but various possibilities exist to create low tax or no tax UK entities which can be used to great advantage.
UK Holding Company Characteristics
A UK company may be a useful vehicle for the collection or channelling of foreign dividend income received from qualifying overseas companies A UK holding company that holds shares in a foreign company will not usually be subject to UK taxation upon receiving dividends from the foreign company. If the UK company is owned by an offshore company, dividends can be paid to the offshore company free from UK withholding tax (WHT).
As noted, the vast majority of dividends (and other distributions of income or capital) received by a UK company from an overseas company will now escape any further tax in the UK (under the new “distribution of exemption” rules). The overseas company must be registered in a country with which the UK has ratified a double taxation agreement (DTA) and the arrangement cannot be part of a scheme that is designed to produce a tax advantage. This is likely to mean that dividends received from offshore companies will not be exempt unless the shareholding can be justified commercially. This may be easier to demonstrate where the UK company is not a majority shareholder in the overseas company; the underlying company is a trading company rather than a passive investment company; there are non UK resident shareholders of the foreign company and where the underlying company is registered in the EU (e.g. Cyprus) and suffers tax at source.
Even if the above exemption does not apply, a UK company will always receive a tax credit for the corporation tax suffered by the overseas company from which the dividend is paid. This makes the UK company an attractive holding company vehicle particularly for investment in Europe and elsewhere. In most cases it will be more attractive than competitive structures available in Luxembourg, Austria, and Sweden.
If the UK company is a trading company or the holding company of a trading group and holds at least 10% of the shares in another trading company (UK or overseas) for at least 1 year, the UK company will not be taxed on any gain realised on the sale of those shares (under the “substantial shareholding exemption”).
Even if the UK company holds shares in an offshore trading company any gain made on the sale of those offshore company shares will still be exempt from UK tax. The key point is that the company selling the shares must be a trading company (or the holding company of a trading group) and the shares being sold must be shares in a trading company.
UK Company Trading as Fiduciary
A UK company may be incorporated and enter into a written contract with the offshore company under which, the UK company agrees that it will trade on behalf of the offshore company as its nominee. All contracts of purchase and sale, all the invoicing and all the general correspondence should be made in the name of the UK company and the UK company will receive all the revenues from such business as nominee for the offshore principal. The UK agent will receive a fee for providing this service, which may be expressed as a flat fee for all the trading done on an annual basis or, more usually, expressed as a percentage of the gross revenues received, say, a 10% fee.
HMRC may accept, subject to certain conditions that non UK source monies which are first received by the UK company but will ultimately be passed over to the offshore company are received as nominee and are not therefore subject to UK corporation tax. Only the actual fee received by the UK company will be taxed in the UK at its marginal rate which will be 20% provided its total yearly profits are less than £300,000.
A UK company must have a minimum of one shareholder who may be a corporate body or an individual. Details of the shareholders appear on public record but anonymity may be retained by the use of corporate nominee shareholders or holding companies.
A UK company must have at least one director. A sole director cannot also be the secretary. The Director
can be an individual or a company provided that if a corporation has been appointed as a director, a second director must also be appointed and this director must be a natural person. If there is more than one director, one of them can also be the secretary but, as UK company law is complex, it is strongly recommended that a professional secretary with relevant experience is appointed. Details of the directors appear on the public file but anonymity can be retained by the use of third party professionals. As the director is responsible for compliance with legal requirements, in cases where we act as a director, an amount of £1,500 will have to be deposited in order to guarantee such compliance. This amount may be returned when business operations cease and the company has been wound up in the manner required by law.
Generally a UK company must appoint an auditor and audited accounts must be lodged with the authorities within 9 months of the financial year end. However smaller companies having a turnover of not more than £6,500,000 and a balance sheet total of not more than £3,260,000 need only produce an abbreviated set of accounts without the need to be audited. An annual return giving details of directors and shareholders is required for all companies.
Incorporation of a new company may now only take a few days and ready-made companies are also available for immediate use.
Restrictions on Name and Activity
The Registrar has the power to refuse registration of any name which he considers undesirable or too similar to an existing company. A name will not be allowed if it is misleading – for example, if it suggests that a company with small resources is trading on a great scale or over a wide field. Names cannot ordinarily be allowed if they suggest connection with the Crown or Government Departments.
As a matter of local company law the company MUST maintain a registered office address within the UK and would usually also appoint a company secretary who, for practical reasons, should be resident in the UK We would normally provide these services as part of our domiciliary service fee.
There are no specific laws relating to the unauthorised disclosure of information on a UK company, its directors or owners but UK law recognises the common law duty that professionals have towards their clients to keep their affairs confidential.
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