CONSULCO UK
PRESENTATION ON THE USES FOR UK
COMPANIES IN INTERNATIONAL TAX PLANNING
FOR NON-RESIDENTS
PRESENTED BY DEBORAH TAYLOR
Page 1
AGENDA
 Overview of the UK
 UK Non-resident Limited Liability Partnerships
 UK Agency Companies
 VAT
 Other uses of UK companies in International Tax Planning – UK
sub-contracted consultancy companies, Holding Companies,
Public Companies, UK Routeing Companies
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OVERVIEW
OVERVIEW OF THE UK
• Political and social stability
• London – world class centre for financial services
• Services contribute largest proportion to GDP – Global financial
crisis impact
• World Bank ratings for ease of doing business:
UK is 4th overall out of 181 countries
UK placed 1st when ranked by size of population (like for like)
• Coalition Government elected 2010 – aim to increase
attractiveness of the UK as a place to do business
• Example, reduction of Corporation Tax from 28% to 26% in March
Budget.
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TAXATION
The UK is an internationally competitive location for tax, with one
of the lowest main corporate tax rates in the European Union.
The “standard” or “main” rate of corporation tax in the UK is
currently 26% and applies to both resident and non-resident
companies.
Rate
Profit (£)
• Small companies’ rate 20%
0-300,000
• Marginal relief
300,001-1,500,000
• Main rate 26%*
1,500,001 or more
*Note: The main rate of corporation tax will be reduced by one percentage point
each year from April 2012 until April 2014, when it will reach 23 per cent.
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TAXATION
The UK’s main corporate tax rate is competitive, not only in Europe, but also
worldwide.
Country
Tax Rate
Japan
US
Germany
41%
39.5%
30% – 33%
France
34.43%
Spain
30%
Luxembourg
28.59%
UK
26%
Netherlands
25%
China
25%
The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.
Source: Deloitte 2011
*Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes,
turnover/sales taxes and other taxes not levied on income.
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TAXATION
• In addition, the UK has concluded over 100 tax treaties for the
avoidance of double taxation and has the largest network of
treaties globally (Source: HM Revenue & Customs, 2011).
• An important feature of many treaties is a reduced rate for
withholding tax on the payment of dividends, interest and
royalties.
• The majority of UK-based companies also benefit from an
exemption from corporation tax on any foreign dividends that
they receive.
• The UK has extensive range of capital allowances that allow the
costs of capital assets to be written off against taxable profits.
• Tax credits for research and development
Page 6
TAXATION
Withholding Taxes in the UK are as follows:
• Dividends – 0%
• Royalties – 20%
• Interest – 20%
Page 7
General Features
UK Companies – key features
• No withholding tax on dividend payments, irrespective of where
the shareholder is resident
• Capital Gains Tax exemption where a UK resident company disposes
its shareholdings, if certain conditions apply.
• Access to the benefits of EU Directives.
• No restriction on the location of meetings.
• Swift incorporation / shelf companies
• Company and LLP names may be in any language but must have the
suffix “Limited”. “LLP” or in the case of a public company, “PLC”.
• Registered office must be in the UK.
• Minimum of one director.
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General Features
• Corporate Directors – as long as they are appointed alongside an
individual director.
• Nominee shareholders Permitted.
• A single shareholder is permitted.
• Shares without par value are not permitted.
• No Capital Duty
Page 9
UK LIMITED LIABILITY PARTNERSHIPS
UK LIMITED LIABILITY PARTNERSHIPS
Page 10
UK Limited Liability Partnerships
UK LIMITED LIABILITY PARTNERSHIPS
The Limited Liability Partnership Act was introduced in 2000.
The Limited Liability Partnerships Regulations came into force in
2001.
Legal personality separate from its members.
Able to enter into contracts and own assets, whilst having the
internal flexibility of a partnership.
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UK Limited Liability Partnerships
 “For a limited liability partnership to be incorporated two or
more persons associated for carrying on a lawful business with a
view to profit must have subscribed their names to an
incorporation document.” (s.2(1)(a) LLP act)
 Members can be individuals or a body corporate.
 “Business” includes every trade, profession and occupation.
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UK Limited Liability Partnerships
 Limited liability
 Separate legal personality
 Private constitutional documents
 Organisational flexibility
 UK Tax transparency
 Members liability limited to capital contributed
 Duties of members (fiduciary and statutory)
April 8, 2015
Page 13
UK Limited Liability Partnerships
If….
 The members are non UK resident
 There is no UK source income of the LLP
 There are no gains realised on UK assets
…then no tax is assessed on the LLP, as profits are only taxed in the
hands of the members
Page 14
UK Limited Liability Partnerships
Illustrative example
Seychelles IBC
Member 1
Seychelles IBC
Member 2
UK LLP
(England and Wales)
Goods/services supplied to the LLP from
EU (or non-EU territory)
Goods/services sold to customers
throughout other EU/non EU
territories (but not in the UK)
Page 15
UK Limited Liability Partnerships
Annual Accounts



- Turnover and profit
- Movements on members loans
- Small LLP audit exemption
Annual Return


- LLP registered office
- Details of members
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UK Limited Liability Partnerships
Partnership Agreement
 Private Document
 Internal management of the LLP
 Designated members
Disadvantages/issues
 Cannot apply for tax residency
Certificates
 Unsuitable for consultancy services
where withholding taxes deducted
 VAT registration – question of substance
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UK Principal Agency Companies
UK PRINCIPAL AGENCY
COMPANIES
Page 18
UK PRINCIPAL AGENCY COMPANIES
 Historical concept
 Principal undisclosed
 Act only with the consent of the Principal
 Important - trading activity must be outside of the UK
 Also referred to as UK “nominee” companies
 Gives the veneer of a UK company but in fact the UK company
does not act as the “beneficial owner”
 Management and control
Page 19
UK Principal Agency Companies
Ownership
100%
Offshore Principal Company
100%
5% Agency fee
UK Agency Company
Page 20
UK Principal Agency Companies
UK Agency Companies – examples of appropriate activity
•
•
•
•
•
•
•
Purchase and Sale of goods
Management consulting
Software Consulting
Design Consulting
Professional Services
Commission earning
Off balance sheet asset/investment holding
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UK Principal Agency Companies
 Agent’s commission – how is this set?
 Accounting - format, requirements and disclosure
 Corporation Tax – arm’s length remuneration
 VAT registration – question of substance
 Disadvantage - certificates of UK tax residency cannot be
obtained
 Still very useful for international trading in goods
 Minimum level of activity in the UK
Page 22
UK Principal Agency Companies
Principal Agency agreement
 Undisclosed
 Trading activities
 Consideration clause
 Sliding scale of remuneration for significant trading activity
 Minimum fee
 Execution of the agreement – outside of the UK
Page 23
UK Principal Agency Companies
UKco - Commercial Simulation of an Agency Company
• Sales of machinery etc. per annum via UKco as agent estimated at €8,000,000
• Estimated average gross margin 10% = Gross Profit € 800,000
Assuming:
Seychelles co: principal's entitlement @ 95% = € 760,000 (zero tax)
UKco: agents remuneration @ 5%
= € 40,000 (UK tax @ 26% - net assessable
income
Accordingly:€
• UKco Income........................... 40,000
• Less: UKco expenses................15,000 *estimated
• Operating Profit......................25,000
• Less: UK corporation tax 26%.. 6,500
• Net Profit............................. 18,500 is available for dividend up to Seyco free of
UK tax
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UK Principal Agency Companies
Therefore,
• Accordingly, the "effective" rate of corporation tax approximates
to 0.81% and the cost of the UK company management and
administration approximates to 1.88%.
(The cost of any banking/documentary credits has been ignored for
this illustration)
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UK VAT
UK VAT
Page 26
UK VAT
TYPES OF SUPPLY:
 Standard Rated - 20%
 Reduce rate
 Zero rate
 Exempt
 Outside of the Scope
• Non-business
• Place of Supply Abroad
Page 27
UK VAT
 UK VAT Numbers can be obtained for any entity engaged in
trading/provision of (most) services
 Exceptions include “exempt” services (e.g. provision of
finance/insurance, etc/some land transactions/holding
companies
 Can be cosmetically desirable
 Essential for intra-EU trade
Page 28
VAT Administration
Problems with UK VAT registration
 UK Non-resident LLP and UK Agency Company
 Accommodation Lists – boilerplate address, additional security
checks on each application.
Solutions:
 Virtual office – dedicated telephone/fax and email
 Limit the number of companies/LLPs at an address
 Bank account set up before registration
 Create supplies in the UK i.e. Stationery (approx €500 +)
 Preassemble all information required such as invoices, proof of
intent to trade - to be filed electronically with application
 Work carried out in the UK – invoicing, bookkeeping, banking etc.
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VAT Administration
ADMINISTRATION POINTS:
 VAT REGISTRATION - issues, timing,
HMRC queries
 QUARTERLY VAT RETURNS
 EC SALES LISTS (quarterly/ monthly)
 Intrastat’s (monthly)
 Inspection of records by HMCE
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UK Companies in International Tax Planning
Other uses of UK companies in
International Tax Planning
Page 31
UK SUBCONTRACTING COMPANY
RAK Company
Services
€950
UK Company
Independently owned
Services
€1,000
Customer Company
Page 32
UK Sub-Contracting Companies
UK CO BENEFICIALLY Receives 100% of the income.
Therefore
 Treaty benefits can usually be obtained
 Certificates of UK tax residency can be obtained
 Accounts show
100% of turnover
95% cost of sales
5% gross profit
UK Sub-Contracting Companies
PRICING ISSUES:
 Is the 95% paid to the BVI service company a justifiable deduction?
Justifications for the 95% deduction:
 BVI service provider introduces the customer
 BVI service provider performs all of the services required
 BVI service provider as director of the UK sub-contracting
company?
UK Sub-Contracting Companies
 Consequences of the Indofood Decision?
 Is the UK company truly the beneficial owner?
THE IMPORTANCE OF SUBSTANCE
CANNOT BE UNDERSTATED
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UK Routeing Companies
UK Routeing Companies
 Used to obtain reduced treaty withholding tax rates
 Can route
Consultancy fees
Royalties
Interest
 Can obtain certificates of UK tax residency
 Transfer pricing traps and solutions
UK Royalty/ Interest Routeing Companies
BVI Co
Beneficial
Ownership
Cyprus Co
licence
Trademark/
Patent
Cyprus/ UK
DTT has 0%
on royalties
$950 royalty
Independent ownership
UK Co
Sub-licence
$1,000 royalty
Foreign
Trading Co
UK Royalty/ Interest Routeing Companies
BVI Company
$900 interest
Loan
Cyprus company
Loan
Cyprus/ UK DTA
provides for
10% WHT on
interest but
could use the
EU Directive
$950 interest
Independent Ownership
UK Company
loan
$1,000 interest
Foreign Trading Co
UK Royalty/ Interest Routeing Companies
UK Company BENEFICIALLY receives the interest from the Foreign
Trading Co
SO:
Reduced treaty rate of withholding tax can usually be applied
by the Foreign Trading Co
UK company accounts show 100% of income
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UK Royalty/ Interest Routeing Companies
Treaty Protection?
• UK/ Cyprus DTA – 10% interest/ 0% royalties
• EU Directive – Royalties & Interest
Watch for Treaty anti-abuse clauses
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UK Royalty/ Interest Routeing Companies
TRANSFER PRICING (AGAIN)
• No magic percentage figure
• Independent ownership of UK company
BENEFICIAL OWNERSHIP?
Page 41
UK Holding Companies
CLIENT
Owns
BVI COMPANY
Dividends
Hold shares
with dividend
rights
Independently owned Company
Voting shares
Dividends
UK HOLDING
COMPANY
Owns
FOREIGN
TRADING CO
UK Holding Companies - CGT
Exemption available for disposals of
“substantial shareholdings”
by a trading company
or
the holding company of a trading group
UK Holding Companies
“Substantial” = 10%
BUT
Normally in practice = 51% due to requirement to be a “holding
company of a trading group”
UK Holding Companies
 Must be “trading company or holding company of trading group”
before and immediately after the disposal
 If winding up the UK holding company, different rules can apply
Certificates of UK Tax Residency
Certificates of UK Tax Residency
 IR manuals
 IR “Tax Bulletin”
 Beneficial ownership of income
 Genuine UK control and management
Certificates of UK Tax Residency
IR Arguments:
 Foreign “shadow directors”
 Avoidance/evasion of foreign tax
 Automatic exchange of information
Page 47
Certificates of UK Tax Residency
What can you do?
 UK directors
 UK board members
Substance of the UK Company is important
 No general POA’s
UK PLC
UK Public Limited Company
 Not necessarily listed on the stock exchange
 More onerous corporate duties
 Substance and presentation. Better?
Page 49
Conclusion
In conclusion:
• Increasingly technical solutions required
• Foreign tax structures must be sound
• Provided those requirements are met, the UK remains a useful
jurisdiction
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