There are many questions , which a foreign company asks, when considering the UK market entry.
Is it better to have a Branch or a Limited Company for our business in the UK?
What is the legal difference between a Branch, which is often called a Permanent Establishment or PE, and a Limited company (Ltd) usually formed as a daughter to the mother company?
In simple terms a branch is an extension of the “Home” company and is not a separate legal entity, whereas a Ltd has a separate legal identity . In this article “Home company” means the company which owns the Branch.
First, the UK registration process.
For a Branch, the whole process of registration must be done on paper and all the Directors of the Home company must be identified and sign the registration form.
The accounts for the Home company, translated into English and with live signatures of the Directors and auditors, must be filed in the UK at Companies House with the registration form. In addition, the constitution of the Home company, plus a certified translation into English, must be included in the registration application.
It is also possible to find oneself in the situation where, whilst you have not registered a Branch, the tax authorities will consider that you have in fact done so by your actions, and force you to register. This can create a lot of difficulty for the business.
Forming a Ltd can be done online and requires only the identity of the Director(s) and any person ultimately controlling 25% or more of the mother company. Only one Director is required, who can live anywhere and be of any nationality. There is no requirement to visit the UK.
The minimum share capital is one share, usually of GBP 1.00.
Next there is the ongoing compliance to consider.
Both the Branch and the Ltd must keep accounting records and pay their taxes.
For a Branch, the full accounts of the Home company, with the live signatures of the Directors and auditor must be filed at Companies House, together with a certified translation if not already in English.
The trading accounts of the Branch must be produced and filed with the tax calculations.
It is simpler for a Ltd. Just the accounts for the Ltd and its tax calculation are needed.
Both the Branch and the Ltd need to make an annual declaration to the company registry also.
Finally, we must consider the tax requirements.
The calculation of the profits for a Branch can be complicated. The country where the Branch is located has the right to tax all the economic activity of the Branch in that country, and the economic activity included the profits from sales. The UK has Double Tax Treaties with almost every country in the world, meaning that the tax authorities in the Home country must allow a deduction of the tax paid in the country of the Branch.
This might at first seem easy, but most countries have included in the Double Tax Treaties a “minimum foreign tax” rule, which means that they can challenge everything from the very existence of the Branch to has the Home company tried hard enough to reduce the tax payable in the country where the Branch is situated.
Remember, both the country of the Branch and the Home country will want to maximise the profits tax they can take, so reaching agreement between these conflicting interests can be difficult, and sometimes even require the use of expensive external experts.
The tax requirements for a Ltd are more straightforward. The accounts and tax calculation cover only the transactions in the Ltd, and so there are no complications with Double Tax Relief. Almost all EBS clients are not subject to Transfer Pricing rules.
Taking all the above into consideration, it is usually more efficient to use a Limited Company for your UK Market Entry, but each situation is different and it is important to take specific advice before committing to any particular route to the UK market.