The UK - Tax haven for group holding companies?

A few years ago it was normal for UK-based groups to hold their overseas subsidiaries through a holding company located in a territory (for example the Netherlands) which operates a participation exemption for foreign dividends and capital gains whilst also having a good network of double tax treaties that reduces or eliminates withholding taxes.  However, recent reforms of UK taxation, brought about partly by the Government’s desire to make the UK more competitive as well as a result of EU tax rules, now mean that the UK is in a competitive position as the choice of location for a group holding company.

• The first of the reforms was the introduction of a corporate tax exemption for most types of incoming foreign dividends effective from 1 July 2009 (with differing rules and conditions applying to small and non-small enterprises) regardless of the size of the shareholding.

• For UK companies doing business abroad through foreign branches rather than foreign subsidiaries, an election can now be made for the company’s overseas permanent establishments (PEs) to be exempted from corporation tax.  Such an election, once made, is irrevocable and must apply to all the company’s foreign PEs wherever located.  (The quid pro quo of such an election is that it disallows foreign PE tax losses, so this and other factors need to be carefully considered before any election is made.)

• The reforms also include substantial changes to the controlled foreign company (CFC) rules, which generally apply to company accounting periods beginning on or after 1 January 2013.  Whilst the thrust of the new rules remains to counteract corporate tax avoidance through diverting profits to low-tax territories, the way in which this is achieved is more prescriptive under the new rules.  For example the new rules do not include a formal clearance procedure or motive test, the principle being that all non-resident companies with a 25% relevant interest held by a UK-resident company are CFCs.  However there are various “entity-level” exemptions (such as for companies in excluded territories or with low profits and companies not taxed at less than 75% of the equivalent UK tax) and “gateway tests”, which in many cases will avoid a CFC apportionment.  (i.e. foreign profits becoming subject to UK tax) There are also favourable provisions that can apply to reduce the effective UK tax rate on the non-trading finance profits of a CFC to 6.5% or less subject to various conditions being satisfied.

• A less recent reform (from March 2002) was the introduction of a capital gains exemption, such that where UK holding companies which trade or are part of a trading group make a gain on sale of a substantial shareholding in another company, (which can be as small as a 10% shareholding), the gain is exempt from tax provided certain other conditions are met.

• Financing arrangements for groups may need to be considered separately from the shareholding structure.  The UK tax rules for loan relationships are generous compared with many other countries and can provide advantages for UK group finance companies.  (However, worldwide debt cap rules were introduced for large groups for accounting periods beginning on or after 1 January 2011, which can restrict the deductibility of finance costs in UK companies where the net UK debt is excessive compared with worldwide group debt.)

Summary

When you consider the above points, combined with the benefits of the UK’s ever-expanding network of double tax treaties, and the absence of any UK withholding tax on outbound dividend payments; the UK scores well as a holding company location compared with many other counties, from the perspective of both UK and overseas investors.

For further information or advice on this subject please contact Sarah Brock – Corporate Tax Manager at Ward Williams on 01932 830664 or email: sarah.brock@wardwilliams.co.uk