The UK as an International
Holding Company Location
Ideal Characteristics for the Location of an International Holding Company
The location of a holding company is an important consideration in any international structure where there is a desire to minimise the tax charged on the income flow.
Ideally the company should be resident in a jurisdiction which:
- has a good double tax treaty network, thereby minimising withholding taxes on dividends received
- exempts dividend income from taxation
- does not charge capital gains tax on the disposal of subsidiaries
- does not impose withholding taxes on distributions from the holding company to its parent or shareholders
- does not impose capital gains tax on profits arising from the sale of shares in the holding company by non-resident shareholders
- does not impose capital duties on share capital
- does not have a minimum paid up share capital
A UK holding company can benefit from all of the above requirements.
Advantages Available to UK Holding Companies
Tax Treaty Network
The UK has the largest network of double tax treaties in the world. In most situations where a UK company owns more than 10% of the issued share capital of an overseas subsidiary, the rate of withholding tax is reduced to 5%.
As the UK is part of the EU, it can also benefit from the EU Parent/Subsidiary Directive, thereby reducing withholding tax to zero on dividends from many EU countries.
Subject to certain conditions the profits realised on the sale of shares in an overseas subsidiary can also be tax exempt.
Typically The Netherlands and Luxembourg have been the most popular countries in which to establish a holding company, but with the low cost of formation and administration, its simple statutory requirements, and relatively simple set of regulatory requirements the UK holding company should be seriously considered.
The UK Holding Company is an ordinary company which falls within the scope of general tax law and therefore benefits from the double taxation treaties and the European tax directives.
Tax Exemption for Foreign Income Dividends
Small companies are defined as companies with less than 50 employees that meet one or both of the financial criteria below:
- turnover less than €10 million balance sheet
- total of less than €10 million
Small companies receive a full exemption from the taxation of foreign income dividends if these are received from a territory which has a double taxation agreement with the UK that contains a non-discrimination article. See the attached list of treaties.
Medium and Large Companies
A full exemption from taxation of foreign dividends applies if the dividend falls into one of several classes of exempt dividend.
The most relevant classes are:
- dividends paid by a company that is controlled by the UK recipient company
- dividends paid in respect of ordinary share capital that is non-redeemable
- most portfolio dividends
- dividends derived from transactions not designed to reduce tax
Where these exemption classes do not apply, foreign dividends received by a UK company will be subject to UK corporation tax.
However, relief will be given for foreign taxation, including underlying taxation, where the UK Company controls at least 10% of the voting power of the overseas company.
Capital Gains Tax
There is no capital gains tax on disposals by a trading company or by a member of a trading group.
This relates to the disposal of all or part of a substantial shareholding in another trading company, or the disposal of the holding company of a trading group or sub-group.
To have a substantial shareholding, a company must have owned at least 10% of the ordinary shares in the company and have held these for a continuous period of 12 months during the two years before disposal.
To qualify for this exemption the investing company must still be a trading company or a member of a trading group immediately after the disposal. If it is no longer a trading company or member of a trading group, dissolution of the holding company should proceed immediately in order to qualify for the exemption.
Sale of Shares in the Holding Company
The UK does not charge capital gains tax on the sale of assets situated in the UK by non- residents.
UK residents pay capital gains tax at a rate of 18% or 28% depending on whether they are basic or higher rate taxpayers.
No Withholding Taxes
The UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies. This is regardless of where in the world the shareholder is resident.
In the UK there is no capital duty on paid up or issued share capital. Stamp duty at 0.5% is, however, payable on subsequent transfers.
No Minimum Paid up Share Capital
There is no minimum paid up share capital for normal limited companies in the UK.
In the event that a client wishes to use a public company, the minimum issued share capital is £50,000, of which 25% must be paid up.
Public companies are normally only used for substantial activities.
UK Controlled Foreign Company (CFC) Legislation
European Courts regard overzealous CFC legislation to be an infringement of the fundamental right of the freedom of establishment throughout the EU.
UK CFC laws have therefore been updated.
The laws now:
- Target and impose a CFC charge on the artificial diversion of UK profits
- Exempt foreign profits, where there is no risk to the UK tax base
- Do not tax profits from genuine economic activity from outside of the UK
The UK CFC laws do not therefore affect the majority of UK International Headquarter Companies established by non UK residents wanting to benefit from the participation exemption, lack of withholding tax on dividends and the capital gains tax exemption.
The UK international holding company is a leading contender for trading groups, due to:
- The UK’s extensive double tax treaty network
- Exemption of dividends from taxation in the UK
- Capital gains tax exemption for trading companies
- The absence of withholding taxes
- The absence of capital gains tax on the sale of shares in the holding company by foreign shareholders
If you are interested, or engaged in holding company formation, our team stands ready to provide you with expert advice and services. Incorporation of your business may shield you from personal liability. We prepare and file all the necessary documents to form your company.