HOLDING COMPANY FORMATION

UK AS A RECOMMENDED
HOLDING JUSRISDICTION

THE UK AS AN INTERNATIONAL
HOLDING COMPANY LOCATION

THE USE OF THE UK HOLDING COMPANY
IN INTERNATIONAL TAX PLANNING

INTRODUCTION
The UK is considered by many professional tax planners to be a tax haven for non-UK nationals, and the “best kept secret in Offshore Financial Planning”. Before we discuss the various features and advantages of using UK companies in international asset and tax planning, readers and users must be reminded that all UK companies are liable to UK Corporation Tax (CT) on all sources of income and capital gains.

That means UK companies are subject to CT on their worldwide income. All UK companies are deemed to be tax resident in UK. However, with proper advice and planning, a UK company can function as tax-efficiently as an IBC from a low-tax jurisdiction.

POTENTIAL ADVANTAGES OF A UK CORPORATION
The following is a summary of the core attractions of using a UK company in tax planning.

TAX TREATY NETWORK
The UK has the largest network of double tax treaties (over 100) in the world rendering UK companies a very efficient vehicle for minimizing withholding taxes on dividends received.

In some cases, if the UK company owns at least 10% of the share capital of an overseas company, the rate of withholding tax experienced on non-UK dividends can fall to nil or as little as 5% of the gross dividend.

The UK Company can also benefit from the EU Parent/Subsidiary Directive, whereby withholding taxes on intra-EU dividends, is eliminated altogether.

The following are the rates of withholding tax on dividends, royalties and interest paid to a UK parent company from various jurisdictions. In all cases, use of a UK company avoids the domestic rate.

LOW COST OF MAINTENANCE OF A UK COMPANY
Although the costs of maintaining UK companies cannot be compared with the cost of maintaining IBC’s, they are amongst the lowest in developed jurisdictions with comparable reputation, international respectability and protection.

SHARE CAPITAL
There is no minimum paid up share capital requirement and no capital tax on authorized or issued shares.

AUDIT OF ACCOUNTS
There is total exemption from audit for certain small companies if they are eligible and wish to take advantage of it. Some charitable companies are exempt from audit but must provide an accountant's report on the accounts (partial exemption). Further details about how to claim exemption are in this chapter.

To qualify for total audit exemption, a company must
(a) qualify as small;
(b) have a turnover of not more than £5.6 million; and
(c) have a balance sheet total of not more than £2.8 million.

EASE OF ESTABLISHMENT
Shelf companies are available. If required, tailor-made companies can be set up within 24 hours.

INTERNATIONAL RESPECTABILITY AND PROTECTIN
UK companies are often used to acquire assets in certain foreign locations to minimize risks of expropriation by foreign governments.

TAX ADVANTAGES
Reduced corporate tax rates - Profits up to GBP300,000 are taxed at the “small companies rate” of 20%. Profits in excess of GBP300,000 are taxed at a rate equivalent to 30%. This rate will fall to 28 per cent from April 2008.

Note that pure investment companies cannot benefit from the small companies rate.

Exemption from capital gains tax on disposal of shareholding in a trading group--Starting from 2002, tax exemption is available for capital gains from the disposal of substantial shareholdings” (shareholdings of 10% or more) in a trading group.

There is a qualifying shareholding period of 12 months. The disposal should not result in the UK Company ceasing to be a member of a trading group.

The exemption from capital gains tax, from the disposal of ‘substantial shareholdings’, also applies to sole trading companies, provided they own at least 10% of another company.

Exemption from capital gains Tax on disposal of assets situated in the UK by non-residents – The selling of a UK holding company's shares does not attract any tax in the UK.

Tax on dividends and royalty - There is no withholding tax on dividends received from other UK companies and companies in EU countries if the EC Parent/Subsidiary Directive applies. On distribution by UK companies of dividends to shareholders, there is no withholding tax on such dividends payable to non-resident shareholders. With proper planning, there is no withholding tax on royalty payments made by a UK company to a foreign shareholder.

Losses carried forward and backward - Company losses can be set off against income from the previous year or carried forward for many years against profits of the same trade.

Various relieves available on tax on foreign dividends received - Various credits and deductions are available for UK companies receiving foreign dividends to set off against their liabilities to UK corporation tax, as follows:

Non-UK withholding taxes paid on dividends received by the UK Company, and foreign taxes paid on profits from which the dividends are paid can be set off against UK corporation tax liabilities provided the UK Company owns not less than 10% of the share capital of the dividend-paying company.

Therefore in cases where the UK Company owns a 10% stake in an overseas company, foreign taxes incurred on overseas trading profits are fully deductible against corporation tax in the UK.

Foreign tax paid in excess of UK corporation tax, with certain limitations, can be surrendered between group companies (pooling arrangements).

Foreign tax paid in excess of UK corporation tax, can with certain limitations, be carried forward indefinitely or carried back to be used in the three immediately preceding years.

Alternatively, foreign tax can be deducted as an expense in arriving at the foreign income or capital gain liable to UK corporation tax. This will be advantageous if no UK taxes are payable, say, because of the tax losses carried forward from previous years.

TAX SPARING
Taxes may sometimes be forgiven by a developing country to foreign investors in order to attract investment into the country. That is, the tax rate applicable to a foreign investor will be less than the tax rate for locals.

To encourage UK corporations to invest in developing countries, the UK has entered into tax treaties with “tax sparing” clauses under which taxes forgiven by the developing countries will be treated as actually paid. Amongst the 30 countries, the most important for Asians are China, Singapore, Malaysia, Portugal, Spain, and Thailand.

The follow is an example to illustrate the operation of the clause:-

Foreign subsidiary's profit: 100
Foreign corporation tax payable, calculated according to local tax rate: 35
Less: Full exemption by foreign government: -35
Tax payable: Nil

UK Corporation tax computation
World-wide profits: 100
Corporation tax at 30%: 30
Less: Foreign tax paid (deemed to be paid): -35
Tax payable: NIL

EXAMPLE OF THE USE OF A UK HOLDING COMPANY

BVI Company – owning 100% of the share capital of a UK Holding Company
UK Holding Company – with share participation (at least 15%) of an EU Trading Company "A"
An EU Trading Company owned by the UK Holding Company

For trading company A situated in the EU, the UK holding company can benefit from the EC Parent Subsidiary Directive and there are no withholding taxes on payment of dividends to UK company.

Dividends from the UK Company can be paid to the BVI Company without any withholding tax.

There is no capital gains tax on the disposal by the UK Company of shareholdings in any of its subsidiaries, provided that the UK Company owns the subsidiaries for over one year and the disposal does not result in the UK Company ceasing to be part of a trading group. Even if, on a disposal, the UK Company ceases to be a member of a trading group, with appropriate tax planning the gains can remain tax exempt in the UK.

Dividends received by the BVI Company do not attract any income tax in the BVI.

HOW WE CAN HELP YOU
The directors and management of Eurofinanzza are professionals in the offshore industry having served the European and Asia markets for nearly 20 years. Through our offices in Hong Kong as well as our associates in other international financial centres, we offer a full range of comprehensive value-added services to professional advisors and their clients.

Eurofinanzza offers the following services:
Incorporation of UK companies and companies in other onshore and offshore jurisdictions
Full corporate management services
Registered office, business office, mail redirection and business centre (available in selected locations only)
Accounting services and VAT registration
Asset protection and preservation advisory services
Business establishment services
Market exploration services

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. Eurofinanzza prepares and files all the necessary documents to form your company. For further information on the following please Contact us.

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