The UK has undoubtedly been one of the main leading destinations for the foreign direct investment into Europe. Many businesses are now considering setting up their holding companies in the UK rather than other European jurisdictions.
The most important features when setting up in the UK are:
- Directors and shareholders of the company don’t have to reside in the UK.
- There is no requirement to have any physical meetings.
- The UK company must have a Registered Office but no need for a physical location.
- The company doesn’t have to have any employees.
It is also relevant that a UK company can trade from the day it is formed, and no other registration are required before it can start operations. The tax registration number is issued automatically after about 10 days. There are no requirements for a director to be a UK citizen or to be UK tax resident. The is no legal position of Managing Director and no director has personal responsibility for obligations of the company, such as tax debts (except in the case of fraud of course)
There are some significant advantages of having a holding company in the UK. These are:
Tax losses
Tax losses can be carried forward for ever and all used at the first opportunity. Losses can also be carried back to the previous year and a refund of company tax already paid can be claimed.
Taxation of Holding companies
Holding companies do not pay tax on dividends received from subsidiary (daughter) companies. For this purpose, the minimum shareholding required is 10%
Group taxation
Groups of companies in the UK can elect to transfer profits and losses between themselves so that the final amount of tax paid is based on the accumulated net total profit of the group.
Withholding taxes
The UK does not charge withholding taxes on dividends paid to any shareholder in any country. It also has more Double Tax Treaties than any other country.
Sale of subsidiaries by a UK Holding company
The UK holding company may wish to sell its shares in a subsidiary and either retain the funds or pass the money onto the owners through a dividend. Normally the sale of the shares would create a profit (in tax speak a capital gain) on which corporation tax will be payable.
However, the UK holding company may benefit from a relief called the substantial shareholding exemption (SSE), which would have the effect of making the entire gain exempt from capital gains tax.
In order to benefit from this exemption various conditions need to be satisfied. These conditions are fairly complex but they include that the company has to have held at least 10% of the shares of the company being sold continuously for at least one year. The UK holding company and the subsidiary it is selling must both be trading companies, or the holding company of a trading group, and their activities cannot include to a substantial extent activities other than trading activities. These conditions must be satisfied both before and after the disposal of the shares. There are a number of other requirements which must also be satisfied, meaning that each transaction needs to be carefully checked to see whether the SSE would be available.
Where the SSE is available, the gains will not be taxed in the hands of the holding company and consequently, there should be more funds available to return to investors.
Sale of UK Holding company by investors
Where the investors decide to sell their shares in the UK holding company, any profit will not be subject to capital gains tax if the person selling the shares is not resident in the UK.
What is the tax if the owner of shares in a UK company dies
The value of any property owned by a UK tax resident when they die is subject to Inheritance tax. People who are not tax resident at the time of death do not pay UK Inheritance tax. However, even if the owner is UK tax resident there is available a reduction in the Inheritance Tax rate and it is called Business Relief.
There is 100% Business Relief on shares in a company which is not listed on a recognised stock exchange and 50% Business Relief on shares controlling more than 50% of the voting rights in a listed company
The person who died must have owned the shares for at least 2 years before the date of death.
Why set up in UK rather than a tax haven
We are asked sometimes about the difference between setting up a Holding company in the UK and an offshore jurisdiction such as Cayman or BVI.
The following sets out the background to the Economic Substance Test, and that it does not apply to UK registered companies.
Further to commitments made to the EU Council of Ministers during 2017, several offshore jurisdictions have introduced new rules regarding “economic substance”, which came into effect during 2019. Jurisdictions introducing such rules include Jersey, Guernsey, Isle of Man, BVI, Cayman, Bermuda and Bahamas (the EU substance jurisdictions), plus UAE.
All companies’ tax resident in the UK Crown Dependencies (generally considered to be tax havens) that are undertaking certain activities will be required to comply with these new rules for their first accounting period commencing on or after 1 January 2019.
The UK Crown Dependencies’, together with other offshore jurisdictions including the British Virgin Islands and the Cayman Islands, have introduced a legal substance requirement for entities doing business in, or through, their jurisdictions. The legal requirement is in the form of an Economic Substance Test that will help entities demonstrate that the profits they register in the UK Crown Dependencies are commensurate with their economic activities and substantial economic presence there.
There are subtle differences between the legislation in each jurisdiction, but the common principle is that any entity which is tax resident in these jurisdictions must demonstrate compliance with certain substance tests where the entity undertakes an activity in a “relevant sector”, as defined in each jurisdiction.
The substance tests to be met for entities undertaking activities in a relevant sector include demonstrating that the entity:
- is “directed and managed” in the jurisdiction of tax residence (including consideration of board meeting attendance and associated documentation);
- undertakes “core income generating activities” in the jurisdiction of tax residence;
- has “adequate” people, premises and expenditure in the jurisdiction of tax residence.
Failure to meet this test will result in the company being denied the benefits of any Double Tax treaties and tax benefits arising from being part of a group.
There is not a similar Economic Substance Test applied to the United Kingdom as it is not considered to be a tax haven.
EBS works exclusively with foreign owned businesses setting up and operating in the UK. Our holding company package covers everything that is typically needed in the first year of operation, from company incorporation and legal compliance to accounting and bank account.
As always, careful planning is essential to achieve the best outcomes, and we are very pleased to have a discussion with you to provide any further information so that you can make the right decisions.
