Choosing the right business structure

Having decided to set up your business overseas, the next immediate step is your company structure.

Unless it’s part of the business plan to raise significant funds on the stock exchange within a defined period, you probably won’t want to start off as a public limited company (PLC); although there will be several options available, the most relevant types of entities in the UK are the limited company and the limited liability partnership (LLP), each one depending on the structure to be implemented.

The advantages of the UK as a location for a Holding company

Since 2009, dividends received by UK companies from foreign-registered subsidiary companies have generally been exempt from UK corporation tax. Further, by utilising the UK’s network of over 100 double tax treaties, UK companies can also mitigate source withholding tax on the overseas dividend. If the UK company is itself owned by a further company, even an overseas entity, the dividend income received by the UK company can be paid to its parent without any dividend withholding tax.

The Substantial Shareholdings Exemption (SSE) rules also provide an exemption from capital gains for disposals of shares by companies that meet certain conditions. If a UK company owns a group of active subsidiaries (at least two) and one of these is sold, the resulting capital gain arising should not be subject to UK tax.

The combination of the UK’s DTA network and attractive holding company regime, together with the high status in which the UK company is perceived, represent compelling reasons for using the UK to establish an international headquarters. This can prove hugely beneficial when considering business expansion worldwide.

UK International Trading Companies – the UK agency company

The methodology is straightforward. A UK company enters into an agreement with its international counterpart to carry on trade on its behalf as its nominee. All sale/purchase contracts and related invoicing will be undertaken by the UK company.

The agreement should also state that all monies received are accepted as nominee for the principal in exchange for a pre-agreed fee, which will be retained by the UK company. The amount retained is usually expressed as a percentage of the gross revenues received. Commonly, some 10% of the profits can be retained in this way by the UK company, resulting in an effective rate of corporation tax of just less than 2%.

In order to be effective and compliant, this arrangement must be seen to be transparent. It is essential that no trading activity takes place in the UK and that no UK-source income is generated. The UK and international companies must have a different board of non-UK resident directors and the ultimate beneficial owners of each company must also be distinct and non-UK resident.

The UK company can register for VAT in the UK, open a bank account in the UK and have its accounting and administration provided in the UK.

UK Limited Liability Partnerships (LLP)

However LLPs are ‘tax transparent’, which means that each member, rather than the partnership itself, will be assessed to tax on their share of the LLP’s income or gains. Any non-UK source profits or gains made by an LLP will not be subject to UK tax unless the members are UK resident individuals or companies.

There are no restrictions on the tax residence or nationality of the members of an LLP. Therefore, if the members of the LLP are non-resident and its income is non-UK sourced, the LLP itself will not be subject to UK taxation.

In determining residence status, a UK LLP would be deemed resident in the jurisdiction from which it is controlled, which would ordinarily be the jurisdiction in which its members are situated. There is an obligation for an LLP to file an annual partnership tax return whether the partners are taxed or not.

It should be noted that LLPs with overseas members cannot generally avail themselves of treaty benefits because of the LLP’s tax transparent status.