The taxation of companies in the UK, and particularly their foreign profits, has changed significantly in the last decade. One of the UK Government’s key ambitions has been to create the most competitive tax system in the G20. The goal of the government is to attract foreign investment into the UK to further increase economic growth and productivity.
The location of a holding company is an important consideration in any international structure where there is a desire to operate in a secure, well-regulated environment which also benefits from minimal taxes on income flows. The UK has become a highly desirable location to site an international holding company due to its stable economic, political, and legal system. Compared with the rest of the world, the UK also has an attractive tax regime and an extensive tax treaty network with the rest of the world. Below sets out a number of reasons why the UK will continue to attract holding companies in the future.
The corporation tax rate in the UK currently is currently set at 19%, which is far lower compared to our European counterparts of Germany at 30% and France at 26.5%. It is important to note that the future of corporation tax rates is unknown due to the current conservative party election, where both candidates have very different plans for the tax.
Since 2002, the UK has also had a favourable exemption in respect of the disposal of shareholdings held as investments. There is no capital gains tax on disposals of a trading company, by a member of a trading group, where the disposal is all or part of a substantial shareholding in a trading company or where the disposal is of the holding company of a trading group or sub-group. To have a substantial shareholding, a company must have owned at least 10% of the ordinary shares in the company and have held these for a continuous period of 12 months during the two years before disposal.
The UK does not charge capital gains tax on the sale of shares in the holding company situated in the UK by non-residents. Therefore, if the holding company is itself disposed of by non-UK owners (personal or corporate ownership) there is no exposure to UK capital gains tax.
No Withholding Tax
The UK is one of the only prominent members of the OECD which does not levy withholding tax on outward dividends as a matter of domestic law, regardless of the residence of the recipient.
Controlled Foreign Company Rules
Anti-avoidance rules, called the controlled foreign company (CFC) rules, are intended to apply only where profits have been artificially diverted from the UK. The CFC laws are intended to exempt foreign profits, where there is no risk to the UK tax base and ensure profits from genuine economic activity from outside of the UK are not taxed in the UK. As a result, CFC laws do not affect the majority of UK companies which are the parent of international groups whose intention is not to divert passive profits away from the UK.