Can you have a holding company in the UK?
Apr 22, 2022
What the UK Has to Offer in Terms of Tax Efficiency
Given its financial services industry and strong corporate law and governance framework, the United Kingdom is one of the world's major financial countries. This article focuses on the country's extremely competitive corporate tax regime for holding businesses.
The creation of the most competitive tax system in the G20 is one of the UK government's main goals. It has devised measures to promote growth and investment rather than stifle it.
The government hopes to make the UK the most desirable location for company headquarters in Europe by implementing these policies.
To accomplish this, the UK government has established an atmosphere in which:
- Corporations pay little taxes.
- The majority of dividend income is tax-free.
- The majority of share sales are tax-free, and there is a robust network of double tax treaties in place to reduce withholding taxes on dividends, interest, and royalties paid by a UK company.
- There is no withholding tax on dividend distributions.
- Due to the UK's double tax treaties, withholding tax on interest can be lowered.
- Profits from the selling of shares in a holding company by non-resident shareholders are not taxed.
- On the issue of share capital, there is no capital duty.
- There is no requirement for a minimum share capital.
- An election to exempt overseas branches from UK taxation is available.
- There are informal tax clearances available.
- Controlled Foreign Company Legislation only applies to narrowly targeted profits
In-Depth Tax Advantages Corporation Tax Rate
The UK corporate tax rate has been 19 percent since April 1, 2017, however it will rise to 25 percent on April 10, 2023.
Companies with profits of less than £50,000 will continue to pay the 19 percent rate, with minor relief for profits up to £250,000.
Small businesses have less than 50 employees and meet one or both of the following financial criteria:
Less than €10 million in revenue
A sum of less than €10 million is on the balance sheet.
If foreign income dividends are received from a territory that has a double taxation agreement with the UK that includes a non-discrimination item, small businesses are completely exempt from taxation.
Dividends from foreign sources are tax-free.
Companies of a Medium and Large Size
If a foreign payout falls into one of several categories of exempt dividends, it will be fully excluded from taxation. The following are the most important classes:
Dividends paid by a firm managed by the recipient company in the United Kingdom
Dividends paid in relation of non-redeemable ordinary share capital
The majority of portfolio dividends
Dividends from transactions that aren't intended to save you money on your taxes in the UK
Foreign dividends received by a UK company will be subject to UK corporation tax unless these exemption classes apply. However, when the UK firm owns at least 10% of the voting power of the overseas company, relief will be allowed for foreign taxation, including underlying taxation.
Exemption from Capital Gains Tax
When a member of a trading group sells all or part of a large interest in a trading firm, or sells the holding company of a trading group or sub-group, there is no capital gains tax.
A company must own at least 10% of the ordinary shares in the company and have held these shares for a continuous period of twelve months during the two years prior to disposal to have a substantial shareholding. In the event of a liquidation, the firm must be entitled to at least 10% of the assets.
A trading firm or trading group is one whose activities do not involve 'to a significant extent' activities other than trading activities.
A firm or a group is regarded to be a trading company or group if its non-trading turnover (assets, expenses, and management time) does not exceed 20% of its overall turnover.
Network of Tax Treaties
The United Kingdom has the world's largest network of double tax treaties. In most cases, where a UK firm holds more than 10% of an overseas subsidiary's issued share capital, the rate of withholding tax is decreased to 5%.
Interest is usually a tax deductible expense for a UK corporation that lends money for business reasons. There are transfer pricing and thin capitalization rules, of course.
While interest is subject to a 20% withholding tax, the UK's double tax treaties can decrease or remove this.
There is no withholding tax.
There is no withholding tax on dividends paid to shareholders or parent corporations in the United Kingdom, regardless of the shareholder's location.
Sale of shares in the Holding Company
Non-residents of the UK do not pay capital gains tax on the sale of assets located in the UK (other than UK residential property).
Since April 2016, UK residents have paid 10 percent or 20% capital gains tax on share sales, depending on whether they are basic or higher rate taxpayers.
There is no capital duty on paid-up or issued share capital in the United Kingdom. On subsequent transfers, however, a 0.5 percent stamp duty is due.
All profits earned by a company's overseas branches engaged in active functioning business are free from UK corporation tax. If this option is used, branch losses may not be offset against profits in the United Kingdom.
Controlled foreign company rules
The Controlled Foreign Company Rules (CFC) are meant to apply solely in cases where earnings have been artificially diverted from the United Kingdom.
If less than 10% of the revenue earned in that territory is exempt from or benefits from a notional interest deduction, subsidiaries in jurisdictions listed on a long list of excluded territories are normally exempt from CFC taxation.
All remaining firms' profits, other than interest income, are only liable to a CFC charge if a majority of the business tasks linked to assets utilised or risks carried are conducted in the UK; even then, only if taxed at an effective rate less than 75% of the UK rate.
Interest income is liable to a CFC taxation charge if it is taxed at less than 75% of the UK rate, but only if it is derived from capital invested in the UK or funds managed in the UK.
An election can be made to exempt 75 percent of interest received from direct or indirect non-UK subsidiaries of the UK parent from CFC taxes.
The Implementation of a New UK Tax — Aimed at Large Multinational Corporations
The UK established a new Diverted Profits Tax (DPT) in April 2015, often known as the "Google Tax." Its goal is to combat multinational corporations' active tax avoidance, which has historically weakened the UK tax base.
The United Kingdom is still considered as a top holding company jurisdiction. Because of the numerous genuine tax benefits available, its access to capital markets, and its strong company law and governance framework.
The recently enacted Diverted Profits Tax is aimed at a small but select group of huge multinational corporations.
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