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The UK is a leading economic power and is one of the world’s leading recipients of foreign direct investment.    

Numerous factors contribute to the UK's success at attracting foreign direct investment, including, but not limited to, having an attractive tax regime for holding companies.

Whilst we have seen an increase in corporation tax from 19% to 25% as from 1 April 2023 (although a small companies’ tax rate of 19% remains), there are numerous features of the UK tax regime which make it a strategic choice to be the headquarter country for UK-headed multinational enterprises or the prime European location for US and Asian-headed commercial groups.

The key attributes of the UK holding company tax regime are as follows:

The (non) taxation of inbound dividend income

• Dividend income received by a UK holding company should benefit from the UK's "dividend exemption" (i.e. not subject to UK corporation tax) as long as the dividend income falls within one of several broad categories of exemptions.
  
  
• There are additional complexities if the holding company is part of a group which is ”small”, the principal condition being that to qualify for the dividend exemption, the dividend should be from a company tax resident in a jurisdiction that has entered into a double tax treaty with the UK and includes a standard-worded non-discrimination article.
  
  
• A group is small if it does not breach two of the following criteria: €10m turnover; €10m gross assets; staff numbers -50.
  
  
• Where a dividend benefits from the dividend exemption regime, any local territory withholding tax (“WHT”) suffered is not creditable against corporation tax in the UK. However, treaty claims are still required to minimise the impact of local territory WHT.
  
  
• The UK has one of the most comprehensive networks of double tax treaties, many of which have the scope to mitigate overseas WHT. As noted above, a tax clearance would be required to mitigate any WHT being deducted on dividends remitted from an overseas company.

No WHT on outbound dividends

• The UK does not withhold tax on outbound dividends (except for REIT distributions).

Taxation of Income and capital profits

• A UK tax-resident company (including holding companies) is generally subject to corporation tax on its worldwide profits and gains. Accordingly, trading profits, property income, management income, interest income, royalties and certain capital gains are subject to corporation tax at 25%.

Tax exempt income

• As noted above, qualifying dividends are exempt from taxation.
  
  
• Additionally, there is scope to exclude from UK tax the profits arising from an overseas branch / permanent establishment of a UK tax-resident company by way of an irrevocable tax election.

Exempt capital gain on the disposal of qualifying share capital

• When a UK holding company disposes of its investment in subsidiaries (irrespective of the subsidiary’s residence), the capital gain arising on the sale of shares in subsidiaries or joint ventures would be exempt through the availability of the substantial shareholding exemption (“SSE”).
  
  
• The vendor needs to hold beneficially at least 10% of the ordinary share capital of the selling company for the continuous period of 12 months in the previous 6 years. Additionally, the company being sold must be a trading company or acting as the holding company of a trading group. This exemption ring fences the capital gain from UK corporation tax.
  
  
• Under the SSE regime, any capital loss arising would not be an allowable loss for tax purposes.

Tax losses

• Tax losses are carried forward indefinitely.
  
  
• The UK does not have the concept of group consolidation / fiscal unity for tax purposes. However, a UK loss-making member of a group may be able to transfer its losses to a profitable UK member of the group, if the qualifying conditions for “group relief” are met.

Tax relief on debt financing

• Interest payable (finance cost) and interest receivable (finance income) are, respectively, tax deductible and taxable in the hands of the UK holding company. The quantum of tax relief in relation to the net interest charge may be reduced, further to a myriad of anti-avoidance provisions in the UK tax code.

Corporate interest restriction

• If significant loans are required to fund the development of the UK business, consideration of the corporate interest restriction (“CIR”) rules will be required.  
  
  
• Subject to a de minimis of £2m, the CIR regime restricts the quantum of tax relief attaching to net finance expense to – as a default - 30% of Tax EBITDA. The CIR is complex and includes various elections which ultimately impacts the amount of tax relief attaching to the net finance expense, so a prior analysis of this regime before funding should be undertaken.

Other anti-avoidance provisions relating to interest expense

• Other anti-avoidance provisions potentially impacting the ability to obtain tax relief in respect of interest expense include “transfer pricing” (i.e. are the terms of any connected party loan undertaken on arm’s length terms?) and the “unallowable purposes” provisions, which restrict the tax relief where it is determined that the purpose of the loan is not amongst the business or other commercial purposes of the company. It is prudent that prior to any significant debt funding, an analysis of the funding from a tax perspective should be undertaken.

Withholding tax on interest payment

• UK companies are not required to deduct WHT on interest payments made to other UK companies.
  
  
• However, UK companies are required to deduct 20% WHT on the interest payments made to overseas companies where the interest has a "UK source" and interest expense represents the “yearly interest” i.e. the loan lasts for a period in excess of 1 year.
  
  
• Fortunately, the UK has an extensive bilateral double tax treaty network. Pursuant to the network of bilateral double tax treaties, there may be a scope to reduce, if not eliminate, the WHT obligation. It is worth noting that a double tax treaty clearance will be required to take advantage of the beneficial provisions of a double tax treaty.

Equity funding

• The UK does not impose any tax on subscribing to new issues of shares in a company. However, stamp duty of 0.5% would be chargeable on the purchase of a non-group UK company.

Conclusion

The UK remains a good place to have a holding or intermediate holding company from a tax perspective.

In summary:

• Dividends received from overseas subsidiaries should not be subject to corporation tax
• Dividends paid from the UK should not be subject to WHT
• Subsidiaries can be disposed of tax free further to the application of the SSE regime

There is an increasing range of complex tax issues to consider in the UK, including a wide array of tax anti-avoidance measures including but not limited to complying with the “controlled foreign company” regime and “profit fragmentation” rules. Any investments made into the UK should be accompanied by a tax analysis with regards to its operations.

For further information on this topic, please contact Reuben Fevrier on +44 (0) 7864 650055 or Saqib Sarwar on 0207 306 9100.

Written by Reuben Fevrier and Saqib Sawar.

Written by Reuben Fevrier and Saqib Sawar.

Image Source: Unsplash