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  • International Tax Planning

International Tax Planning

UK Companies and Partnerships


Analyses the advantages of UK companies in international tax planning

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This new edition describes how UK companies and partnerships can be used to generate various kinds of investment and trading income in a tax efficient manner. In describing these possibilities, the author considers current law and regulation in the UK as well as the current state of international and European law.

What’s new in this edition?
• A new chapter on double taxation relief issues for UK companies
• A new chapter detailing EU law’s moderation of UK anti-avoidance legislation pertaining to UK companies
• A new chapter concerning the UK’s proposed ‘benefi cial owner’ register
• New material on BEPS Action Plan 6

Commercial and tax lawyers and accountants in the UK, EU, Russia and the CIS; UK company fi nance directors; all international trust companies.
Table of Cases
Table of Statutes
Table of Statutory Instruments
Table of International and Foreign Material
List of Abbreviations

UK Companies and Partnerships: An Introduction to their UK Tax Liabilities, the Limits of UK Tax Liabilities, and Use of UK Double Tax Treaties
  • Definitions
    • The foreign withholding tax criterion
    • The local taxation criterion
    • The domestic withholding tax criterion
    • The capital gains exemption
  • The world’s leading IHC locations
    • The United Kingdom as an IHC location
The Impact of EU Law on International Tax Planning Using UK Companies and Partnerships
  • Mitigating foreign withholding tax
    • Relief under a double tax treaty
      • (a) Scope of treaty relief: the issue of residence
      • (b) Taxation of dividends in the country of source
      • Article 10 and the EC Parent/Subsidiary Directive
      • Double tax treaties and conflicting domestic law
      • Article 10
      • The importance of beneficial ownership
      • Nominees and conduit companies
      • Foreign withholding taxes
      • (c) Comparative table of withholding tax rates
    • Relief under Directive 90/435: the EC Parent/Subsidiary Directive
      • a) Domestic anti-avoidance provisions
      • Beneficial ownership
      • Minimum participating requirement and qualification periods
      • The Denkavit case
      • Post-Denkavit
      • (b) Requirements for control of the parent within the EU
  • Conclusion
    • Unilateral relief
UK International Holding Companies and Foreign Dividend Income: the Exemption Regime
  • Introduction
  • Small companies
  • Medium-sized and large companies
    • The UK company controls the dividend-paying company: s 931E of the CTA 2009
    • Non-redeemable ordinary shares: s 931F
    • Portfolio shareholdings: s 931G
    • Dividends paid in respect of relevant profits: s 931I
    • Dividends similar to interest
  • Election for a foreign dividend not to be exempt
  • Debt cap
  • Where the exemption does not apply: the foreign tax credit rules
    • Corporation tax
    • Relief from double taxation
      • (a) Unilateral relief
      • The mixer cap
      • Ownership threshold for credit relief
      • Preserving foreign tax credits
      • (b) Credit relief under the terms of a double tax treaty
      • (c) Credit relief under the terms of the EC Parent/Subsidiary Directive
    • Tax-sparing relief
Company Residence 
  • Residence and treaty protection
  • Domestic law considerations
    • UK-incorporated parent companies
    • Offshore companies and the EC Parent/Subsidiary Directive
  • Treaty law and Corporation Tax Act 2009, s 18
    • OECD model tie-breaker clause
    • The dangers of s 18 for UK IHCs
  • Central management and control and place of effective management
    • Central management and control
      • Wood v Holden
        • Company residence
        • The taxpayer’s argument
        • HMRC’s argument
        • First instance decision
        • Appeal to the High Court
        • Court of Appeal judgment
        • Conclusions from Wood v Holden
    • Place of effective management
      • The Wensleydale case
  • Conclusion
The Corporation Tax Exemption for Capital Gains 
  • Introduction
  • Meaning of ‘substantial shareholding’
    • The qualifying period
  • UK IHC status requirements: sole trading company or member of trading group
    • Sole trading company
      • (a) What is a trading company?
      • (b) The concept of a trade
      • One-off transactions
      • Activities related to trade
      • Subject matter
      • Modus operandi
      • Finance
      • Fabrication
      • Resale in whole or in lots
      • Intention
      • Memorandum of company
      • Pride of possession
      • HMRC interpretation
    • Meaning of the word ‘substantial’
    • The company’s trading history
    • The extensive scope of the meaning of the term ‘trading activities’
      • Investment activity
      • Seeking new acquisitions
      • Evaluating potential acquisitions
      • Business plans
      • Paying dividends
    • Member of a trading group
      • (a) What is a group?
      • (b) What is a trading group?
      • (c) Trading activities
  • Status requirements of the investee company
    • Trading company
    • Holding company of a trading group or sub-group
      • Trading sub-groups
    • The qualifying period and the time immediately after disposal
    • Ownership of the UK IHC
    • Treatment of holdings in joint venture companies
  • Case studies and commentary
    • Case Study 1
      • Comment
      • Scope of the definition of trading activities in Sch 7AC
      • Meaning of ‘significant interest’
    • Case Study 2
      • Comment
    • Case Study 3
      • Comment
    • Case Study 4
      • Comment
    • Case Study 5
      • Comment
    • Case Study 6
      • Comment
        • Investing company unable to fulfil status requirements immediately after disposal
    • Case Study 7
    • Aggregation of holding
    • Group re-organisation
      • Background
      • Objectives
        • Stage 1
        • Stage 2
      • Substantial shareholder exemption
    • Joint venture companies and the subsidiary exemption rule
  • Conclusion
Anti-Avoidance Issues 
  • Introduction
  • Anti-avoidance rules pertaining to the substantial shareholdings exemption
    • Limitations of TCGA 1992, Sch 7AC, para 5
    • Goodwill not to be regarded as untaxed profits
    • The ‘sole or main benefit’ rule
  • Treaty provisions (anti-avoidance or anti-abuse rules)
    • Anti-avoidance provisions in double tax treaties
      • UK/US treaty
  • Controlled foreign companies legislation
    • Resident outside the UK
    • Controlled by persons resident in the UK
    • Lower level of taxation
    • The charge to tax
  • CFCs resident and established in the EU
  • Overseas CFCs resident and established outside the EU
  • Conclusion
Beyond UK Holding Companies: Other Uses of UK Companies (and UK Limited Partnerships ) in International Tax Planning
  • Tax–efficient trading companies
  • UK nominee companies
  • Bank accounts
  • UK nominee company commission payments
  • UK service companies
  • VAT
  • Triangular trading
  • Accounting issues
  • Appearance and reality
  • Tax issues
  • UK trading companies
    • UK trading sub-contractors
    • UK sub-contractor companies
    • Exemption from UK transfer pricing rules
    • Aggregation of staff, turnover and balance sheet total
    • Accounting and VAT issues
  • UK royalty companies
    • UK treaty relief for foreign withholding taxes
    • Achieving reductions in foreign withholding tax under the double tax treaty
    • Avoiding UK withholding tax
  • UK corporation tax relief
  • UK registered non-resident companies
    • UK-registered companies dual-resident in Cyprus
    • Residence under Cyprus law
    • Residence in Cyprus under treaty law ie under the UK/Cyprus double tax treaty
    • UK tax compliance issues affecting UK non-resident companies
  • UK limited liability partnerships
    • Taxation of an LLP and its non-UK resident members
    • Management and control issues
    • Trading within or outside the UK
    • Non-UK resident trustees as members of an LLP: are the LLP interests owned by such trustees UK-situated assets for UK inheritance tax purposes?
    • Potential loss of UK tax transparency
    • Double taxation relief
    • VAT
    • Characterisation of UK LLPs in overseas countries
    • Accounts
  • Limited partnerships
    • Accounts requirements of limited partnerships
      • Partnerships and Unlimited Companies (Accounts) Regulations 1993
      • Offshore general partners
      • Avoiding the requirements of the Partnership and Unlimited Companies (Accounts) Regulations 1993
    • Alternative solutions
  • UK companies as ‘offshore discretionary trustees’
    • Corporate residence of Jersey trustee
  • Conclusion
The BEPS Action Plan 6: Treaty Planning in the New Era: Some Observations

UK Companies and Beneficial Ownership Disclosure: the PSC Register

UK Company and Partnership Formation and Statutory Administration 

Appendix 1
Corporation Tax Act 2009

Appendix 2
Taxation of Chargeable Gains Act 1992

Appendix 3
Specimen Articles of Association for a UK International Holding Company

"A tax book to treasure ... a time-saver for busy practitioners ... a succinct and convenient source of advice"
Click here for the full review 
 Phillip Taylor and Elizabeth Taylor of Richmond Green Chambers

Reviews of the Previous Editions

"[a] timely and useful book ... presented in a clear and accessible format ... a most valuable addition to any tax planner's bookshelf"
New Law Journal

"an excellent guide to the subject ... of immense value not only to professional practitioners in this area, but also to directors and management of international enterprises, and their overseas advisers ... concise and well written" 
 Offshore Investment
Consultant Editor
John Dewhurst
Principal, Chown Dewhurst LLP
1.3.7 UK companies and the ‘branch profits exemption’

The UK Finance Act 2011 introduced a branch profits exemption from UK corporation tax. In effect, the United Kingdom is therefore now offering UK companies double taxation relief under the exemption method, as an alternative to the credit method which is normally employed by the United Kingdom in its double tax treaties relating to foreign branch or ‘permanent establishment’ profits.

On the face of it, such an exemption appears to be preferable to the credit method as it avoids not only the computational complexities of credit relief and their associated costs, but also the question that must be faced whenever considering credit relief: whether or not the foreign tax is in fact admissible for credit relief.

However, in practice things are not so straightforward. The branch exemption introduces significant accounting complexities, especially where there are multiple branches. There are also some important exclusions from the exemption.

1.3.8 Election for branch profits exemption

A UK company can make an election for exemption from UK corporation tax on its foreign branch profits (including post-election branch gains) at any time, to take effect from the first day of the company’s subsequent accounting period. Once made, the election applies to all branches of the UK company, and the election is irrevocable.

1.3.9 Exclusions from the branch profits exemption

The most notable exclusion applies to small UK companies whose foreign branches are located in countries that have not concluded a double taxation convention with the United Kingdom containing a non-discrimination clause based on Art 24 of the OECD Model. Small companies are defined in accordance with the European Commission Recommendation 2003/361/EC of 6 May 2003. Under this Recommendation, a UK company is small if it has fewer than 50 employees and either its turnover or gross assets do not exceed €10,000,000.

There is also an anti-diversion rule contained in s 18G of the CTA 2009. This provides that the exemption will not apply to foreign branches or permanent establishments which are subject to a lower level of tax compared with the UK corporation tax rate unless:
(a) the branch profits fall below £200,000; or
(b) a motive test is satisfied.

The motive test requires either that any reduction in UK tax arising from a transaction attributable to the branch is minimal, or that any reduction in UK tax was not the main purpose, or one of the main purposes of the transaction. It is further required that it was not the main reason, or one of the main reasons for the UK company carrying on business through the foreign branch to achieve a reduction in UK tax through the diversion of profits from the United Kingdom.

Broadly, a ‘lower level of tax’ compared with UK corporation tax requires the foreign tax rate on the overseas branch profits to be 75% or less of the UK corporation tax that would be payable on the same branch profits.

1.3.10 The branch profits exemption and losses

An election for the foreign branch profits exemption must be deferred where the aggregated profits and losses (excluding chargeable gains) of all a UK company’s overseas branches for the previous 6 tax years produces an overall loss. In this scenario, the exemption can only apply once these aggregate losses have been matched against future profits of the UK company’s permanent establishment.

Under s 18L of the CTA 2009, a ‘streaming election’ can be made which allows deferral to be made on a ‘branch by branch’ basis, such that if an election is made by a UK company, branch exemption is deferred only for branches which have made losses so that the exemption for profitable branches can begin immediately.

1.3.11 Relief for losses

An aspect of the foreign branch exemption for UK companies is that it is ‘all or nothing’: a UK company cannot select which branches it wishes to make subject to the exemption, and which it does not. So in the case of multiple branches either all the branches are elected into the exemption regime, or none at all. The only possibility in terms of differential treatment (ie double tax relief by way of exemption or credit) is to defer election for exemption for loss making branches that are in existence prior to the election.

1.3.12 Irrevocability of elections

Another aspect of the foreign branch exemption regime is that elections for exemption for non-loss-making branches, once made, are irrevocable. Therefore, future losses of such branches cannot be relieved against UK tax.

A UK company with multiple branches may consider segregating overseas trading activities into separate UK companies to overcome some of these difficulties, based on financial projections of profit or loss.

1.3.13 Other considerations

As already mentioned, losses incurred by an overseas permanent establishment subject to UK tax exemption are ineligible for relief.

Exemption should always be considered for branches located in low-tax jurisdictions compared with the UK corporation tax rate.

The foreign branch exemption rules are complex and give rise to potentially significant accounting and financial forecasting burdens.

In practice, UK companies wishing to undertake operations abroad should consider carefully whether the incorporation of foreign subsidiary companies will not be preferable to the registration of foreign branches, in order to avail of the following advantages:
• foreign dividend exemption rules (which are more user-friendly than the foreign branch exemption rules);
• substantial shareholder exemption;
• avoidance of potentially significant accounting and financial projections and forecasting associated with the branch exemption;
• insulation of commercial risk in a separate limited liability entity;
• marketing considerations – a local company arguably creates a stronger ‘corporate image’ than the branch projection of a foreign-registered company.


As has already been noted, the UK tax treatment of foreign dividends received by UK companies has been made much more attractive since 1 July 2009. Section  931A of the CTA 2009 now provides that a charge to UK corporation tax only  applies to dividends or other distributions of a company if the distribution is not exempt under the exemption rules provided in Part 9A of the CTA 2009. The foreign dividend exemption rules are more particularly described in Chapter 3.

1.4.1 Foreign dividends received by UK companies: international tax

This section of this chapter considers the international tax issues relating to dividend distributions received by UK companies from non-UK companies. In essence this involves a consideration of UK double tax treaty benefits. Without the interplay of a UK double tax treaty a UK company receiving a dividend from overseas may well face double taxation, principally resulting from the imposition of withholding tax in the country of source of the dividend at the maximum national rate.

The benefits conferred by a UK double tax treaty to a UK company receiving foreign source dividends are as follows:

(a) mitigation or elimination of source withholding taxes arising under the domestic laws of the company paying the dividend;
(b) credit for any applicable foreign withholding taxation permitted by the tax treaty (such credit will only be applicable if the dividend is liable to tax in the United Kingdom, ie not within the terms of the foreign dividend exemption);
(c) credit for any applicable foreign ‘underlying tax’ paid by the UK company’s foreign subsidiary on the profits from which the dividend is paid to the UK company (such credit will only be applicable if the dividend is liable to tax in the United Kingdom, ie not within the terms of the foreign dividend exemption).

The UK credit for underlying tax referred to in (c) above is normally restricted to UK companies holding not less than 10% of the voting power of the dividend-paying company. However, this provision has been held by the Court of Justice of the European Union (CJEU) to be an infringement of EU law. Furthermore, credit relief for holdings by a UK company of more than 10% are also in breach of EU law if the credit is anything less than the nominal rate of tax borne by the foreign subsidiary.

In the absence of a UK double tax treaty, a UK company receiving foreign dividends may rely on the so-called ‘unilateral relief’ rules to obtain credits for withholding tax and underlying tax. These rules are contained in ss 9–18 of the Taxation (International and Other Provisions) Act 2010, and these rules are also subject to EU law.

1.4.2 Diminished importance of the credit relief rules

As the majority of foreign dividends received by UK companies are now exempt from UK corporation tax (because of the requirements of EU law), the United Kingdom’s credit relief rules are much less important than they once were. Therefore, it may be said that the chief benefit of a UK double tax treaty in the context of foreign dividends received by a UK company is to mitigate or eliminate source withholding taxes arising under the domestic laws of the company paying the dividend.

This note updates readers on the subject of the UK company beneficial owners’ register which is dealt with in Chapter 8 of the book.  In section 8.22 of chapter 8, the question was asked “will this Bill become law?”  This was the Small Business Enterprise and Employment Bill.  The answer is that the Bill did become law on 26 March 2015 – just after the publication of the book.

Section 8.21.1 of chapter 8 of the book showed a way of protecting indirect participators in UK companies by making them discretionary beneficiaries of a Jersey trust whose discretionary trustees own the UK company’s shares.  The section stated “Professionals advising on this solution to the problems, posed by the PSC register should await the Secretary of State’s guidance on the meaning of “significant influence and control”.”  This statement was made because if a trust owns the UK company’s shares, and an individual X has the right to exercise, or actually exercises significant influence or control over the activities of the trust, X is a PSC of the company whose shares are owned by the trustees.

Draft guidance has now been circulated.  The government have stated that “this is a rough and incomplete draft.  It has not been approved by government, or government lawyers”.  Nevertheless this must be getting close to the final draft.

Section 6.2-6.3 of the draft guidance on the meaning of “significant influence and control over the activities of a trust” are reproduced below:

6.2 - An individual would be considered to be exercising significant influence or control over the activities of the trust if they have the right to, or actually exercise powers over the activities of the trust.  The following is a non-exclusive list of examples, where we would consider that an individual is exercising significant influence or control over the trust;

  • a power to unilaterally appoint or remove trustees, except through application to the courts;
  • an ability to direct the distribution of funds or assets;
  • an ability to direct investment decisions of the trust;
  • a power to amend the trust deed;
  • a power to revoke the trust;                                
  • the individual has issued instructions as to the activities of the trust (whether binding or not) to the trustee(s) or to any other person who is exercising significant influence or control over the trust.
6.3 - Any Settlor or Beneficiary who is actively involved in directing the activities of the trust.

It is not clear why a power to appoint or remove trustees results in significant influence or control over the activities of the trust, if the other powers referred to in section 6.2 above are not reserved to the hypothetical individual “X” but are retained by the trustees under an irrevocable discretionary trust (So no-one has power to revoke the trust).

It is clear from the last bullet point in 6.2 that communications between settlors and beneficiaries on the one hand, and trustees on the other, will need to be managed carefully.  However, professional trustees in reputable and well-regulated territories like Jersey will not generally tolerate being issued with instructions (or if they are, will decide themselves whether to follow the instructions).  That said, it is clear that communications to trustees should always be precatory in nature, and not couched in imperative terms.

Until the draft guidance referred to above is approved by the Secretary of State, it remains subject to possible amendments.

Finally it appears that the offshore jurisdictions referred to in footnote 24 of chapter 8 will succeed in resisting the concept of a public register of beneficial owners, although service providers in the offshore jurisdictions will have to be able to provide timely access to beneficial owner details from their private records to competent authorities.

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