Overseas aspects of corporate tax

Introduction
We have nearly completed our study of corporation tax, except for the
consideration of overseas aspects.
This chapter starts by considering which country a company ‘lives’ in. We then
see how relief may be given for overseas taxes suffered, how overseas
companies may impact a group and how UK companies are taxed on the profits
of certain overseas subsidiaries.
Finally, we look at UK companies trading abroad, and some miscellaneous
points on overseas companies trading in the UK.
In the next chapter we will turn our attention to VAT.

Study guide

    Intellectual level
4 Corporation tax liabilities in situations involving further overseas and group aspects and in relation to special types of company, and the application of additional exemptions and reliefs  
(d) The comprehensive calculation of corporation tax liability: 3
(i) Assess the impact of the OECD model double tax treaty on corporation tax  
(ii) Evaluate the meaning and implications of a permanent establishment  
(iii) Identify and advise on the tax implications of controlled foreign companies  
(iv) Advise on the tax position of overseas companies trading in the UK  
(v) Calculate double taxation relief  
(e) The effect of a group structure for corporation tax purposes: 3
(ix) Advise on the tax treatment of an overseas branch  
(x) Advise on the relief for trading losses incurred by an overseas subsidiary  

Exam guide

A question on the overseas aspects of corporation tax could require you to advise on the tax consequences of relationships with overseas companies. This could involve a discussion of the merits of trading through a permanent establishment (eg a branch) or subsidiary, and could extend to the anti-avoidance controlled foreign company rules where the subsidiary is resident overseas but controlled by UK shareholders. Double tax relief is an important consideration; the relief is the lower of the UK corporation tax and the foreign tax paid.

 

 

The topics in this chapter are new.

1 Company residence

FAST FORWARD

Company residence is important in determining whether its profits are subject to UK tax.

1.1 Introduction

A company is resident in the UK if it is incorporated in the UK or if its central management and control are exercised in the UK. Central management and control are usually treated as exercised where the board of directors meets.

A UK resident company is subject to corporation tax on its worldwide profits.

1.2 Non-UK resident companies trading in the UK

A non-UK resident company will be chargeable to corporation tax if it carries on a trade in the UK through a permanent establishment (PE).

The profits of such a company which are chargeable to corporation tax, whether or not they arise in the UK, are:

  • any trading income arising directly or indirectly from the PE
  • any income from property or rights used by, or held by or for, the PE (other than dividends from UK companies)
  • any chargeable gains arising from the disposal of assets situated in the UK.

Key term   A permanent establishment is a fixed place of business through which the business of the enterprise is

wholly or partly carried on. It includes a branch, office, factory, workshop, mine, oil or gas well, quarry and construction project lasting more than twelve months. It does not include use of storage facilities, maintenance of a stock of goods and delivery of them or a fixed place of business used solely for purchasing goods or any ancillary activity.

1.3 UK resident companies with overseas income

If a UK resident company makes investments overseas it will be liable to corporation tax on the profits made, the taxable amount being before the deduction of any foreign taxes. The profits may be any of the following.

  • Trading income: profits of an overseas permanent establishment controlled from the UK (unless an election for the exemption of profits and losses from overseas permanent establishments is made – see later in this chapter)
  • Interest income: income from overseas securities, for example loan stock in overseas companies (c) Overseas income: income from other overseas possessions including:
    • dividends from overseas subsidiaries
    • profits of an overseas branch or agency controlled abroad

(d)      Chargeable gains on disposals of overseas assets

A UK resident company may receive dividends from an overseas subsidiary. Most dividends received by a UK resident company from a non-UK resident company are exempt from corporation tax.

Taxable overseas dividends will not be examined in Paper P6.
Exam focus point

A company may be subject to overseas tax as well as to UK corporation tax on the same profits usually if it has a PE in that overseas country. Double taxation relief (see below) is available in respect of the overseas tax suffered.

                                2 Double taxation relief (DTR)   6/09, 6/11, 12/12, 12/13

FAST FORWARD

A company may obtain DTR for overseas withholding tax. The allocation of qualifying charitable donations and losses can affect the relief.

2.1 General principles

In the UK relief for overseas tax suffered by a company may be currently available in one of three ways.

  • Treaty relief

Under a treaty entered into between the UK and the overseas country, a treaty may exempt certain profits from taxation in one of the countries involved, thus completely avoiding double taxation. More usually treaties provide for credit to be given for tax suffered in one of the countries against the tax liability in the other.

  • Unilateral credit relief

Where no treaty relief is available, unilateral relief may be available in the UK giving credit for the overseas tax against the UK tax.

  • Unilateral expense relief Not examined in your syllabus.
2.2 Treaty relief

A tax treaty based on the OECD Model Agreement may use either the exemption method or the credit method to give relief for tax suffered on income from a business in country B by a resident of country R.

  • Under the exemption method, the income is not taxed at all in country R, or if it is dividends or interest (which the treaty allows to be taxed in country R) credit is given for any country B tax against the country R tax
  • Under the credit method, the income is taxed in country R, but credit is given for any country B tax against the country R tax.

Under either method, any credit given is limited to the country B tax attributable to the income.

2.3 Unilateral credit relief

FAST FORWARD

Double tax relief (DTR) is the lower of the UK tax on overseas profits and the overseas tax on overseas profits.

Relief is available for overseas tax suffered on PE profits, interest and royalties, up to the amount of the UK corporation tax attributable to that income. The tax that is deducted overseas is usually called withholding tax. The gross income including the withholding tax is included within the taxable total profits.

It is not relevant whether those profits are remitted back to the UK or not.

The amount of double tax relief (DTR) is the lower of:

  • the UK tax on overseas profits;
  • the overseas tax on overseas profits.

 

 

AS plc has UK trading income of £2,000,000 in the year to 31 March 2016.  In that year, AS plc also operated an overseas branch. The profits of the branch were £85,000, after deduction of 15% withholding tax. Compute the corporation tax payable, assuming that no election has been made to exempt the branch profits.

 

 

         
    Total UK Overseas
    £ £ £
Trading income   2,000,000 2,000,000  

Overseas trading profit (W1)                                                        100,000                           

Corporation tax at 20% 420,000 400,000 20,000
Less DTR (W2)    (15,000)                 (15,000)
    405,000   400,000    5,000

Taxable total profits                                                                   2,100,000      2,000,000

Working: 

1          £85,000  100/(100  15) = £100,000. 2       DTR is lower of

(i)       UK tax on overseas profit £100,000  20% =  £20,000

(i)       Overseas tax on overseas profit £100,000  15% =  £15,000

 

A company may allocate its qualifying charitable donations and losses relieved against total profits in whatever manner it likes for the purpose of computing double taxation relief. It should set the maximum amount against any UK profits, thereby maximising the corporation tax attributable to the overseas profits and hence maximising the double taxation relief available.

If a company has several sources of overseas profits, then deficits, qualifying charitable donations and losses should be allocated first to UK profits, and then to overseas sources which have suffered the lowest rates of overseas taxation.

Losses relieved by carry forward must in any case be set against the first available profits of the trade which gave rise to the loss.

A company with a choice of loss reliefs should consider the effect of its choice on double taxation relief. For example, a loss relief claim might lead to there being no UK tax liability, or a very small liability, so that overseas tax would go unrelieved. Carry forward loss relief might avoid this problem and still leave very little UK tax to pay for the period of the loss.

Companies that have claimed DTR must notify HMRC if the amount of overseas tax they have paid is adjusted and this has resulted in the DTR claim becoming excessive. The notification must be in writing within one year of any adjustment to the overseas tax.

 

 

Kairo plc is a UK resident company with five UK resident subsidiaries and two overseas branches, one in Atlantis and one in Utopia. The company produced the following results for the year to 31 March 2016.

  £
UK trading profits 10,000
Profits from overseas branch in Atlantis (before overseas tax of £6,000) 40,000
Profits from overseas branch in Utopia (before overseas tax of £110,000) 250,000
Qualifying charitable donations (15,000)

Compute the UK corporation tax liability, assuming an election has not been made to exempt the profits of overseas PEs.

 

 

 

Kairo plc – corporation tax year to 31 March 2016

     
                                                                                Total  UK  Atlantis   Utopia
                                                                                    £  £  £  £
              Total profits                                           300,000  10,000  40,000  250,000
               Less  qualifying charitable      
         
Corporation tax @ 20%  57,000  –  7,000 50,000
Less DTR (W)   (56,000)            –  (6,000)   (50,000)
Corporation tax    1,000            –    1,000             –

donations (W)  )  (10,000)    (5,000)              – Taxable total profits            Nil   35,000  250,000 Working

The DTR is the lower of:

Atlantis:    UK tax £7,000;

Overseas tax £6,000 (Rate of overseas tax = 15%), ie £6,000

Utopia:     UK tax £50,000;

Overseas tax £110,000 (Rate of overseas tax = 44%), ie £50,000

Note. The Atlantis branch profits suffer the lower rate of overseas tax so the qualifying charitable donations remaining after offset against the UK income are allocated against the Atlantis branch income in preference to the Utopia branch income.

 

Exam focus         If there are several sources of overseas income it is important to keep them separate and to calculate point      double tax relief on each source of income separately. Get into the habit of setting out a working with a separate column for UK income and for each source of overseas income. You should then find arriving at the right answer straightforward.

3 Groups of companies

FAST FORWARD

The group relief rules allow groups and consortia to be established through companies resident anywhere in the world.

3.1 Introduction

Groups and consortia can be established through companies resident anywhere in the world. 

However, group relief is normally only available to, and may only be claimed from, companies which are within the charge to corporation tax. Group relief therefore applies to companies which are:

  • resident in the UK, or
  • resident overseas but operating through a permanent establishment in the UK.

If the company is operating through a permanent establishment in the UK, it can only usually surrender losses made by that permanent establishment. There is a very limited exception for group companies resident in another country in the European Economic Area (EEA). Such companies may surrender non-UK losses to UK group members, but only where all current and future loss relief options have been exhausted overseas. In practice, this means it may be difficult to make a claim unless the company is in liquidation.

Similarly, a consortium may exist for relief purposes where one or more of the members is not resident in the UK but relief cannot be passed to or from a company which is not within the charge to corporation tax.

3.2 Example

A Ltd, B Ltd and C Ltd are all UK resident companies. As the three UK companies share a common parent they will be treated as part of a group relief group despite the fact that the parent company is not UK resident. The UK companies may surrender losses to each other (but not normally to or from the overseas parent company).

3.3 Permanent establishments (PEs) of companies

UK PEs of EEA resident companies can surrender UK losses under group relief to UK group members, if those losses have not been relieved against profits in the overseas country.

UK PEs of companies resident in non-EEA countries can also surrender UK losses to UK group members, but only if those losses are not available for use against profits in the overseas country (regardless of whether the losses have actually been relieved overseas).

Losses incurred by overseas PEs of UK companies can be surrendered as group relief only if they not available for relief against profits in the overseas country.

Exam focus         The use of losses in terms of overseas operations is complex and is simplified here for the purpose of the point            P6 (UK) examination.

3.4 The global group concept

The ‘global group concept’ means that instead of looking at the residence of a company one needs to look at whether the company is subject to UK corporation tax on any of its chargeable gains. Provided the assets transferred do not result in a potential leakage of UK corporation tax, no gain/no loss transfers will be possible within a worldwide (global) group of companies.

The global group concept applies to the transfer of the whole or part of a trade and extends to certain intra-group transfers of assets and to transfers of assets where one company disposes of the whole or part of its business to another company as part of a scheme of reconstruction or amalgamation.

3.5 Interest restriction

The tax deduction for interest payable by UK members of a group of companies are restricted to the consolidated gross finance expense of the group. This is known as the ‘worldwide debt cap’. The rules apply to groups other than those consisting entirely of companies that are small or medium sized.

The examination team has stated that students are only required to be aware of the worldwide debt cap to the extent that it might result in an interest expense being disallowed.
Exam focus point
4 Controlled foreign companies 6/10, 12/14

FAST FORWARD

Chargeable profits of a controlled foreign company (CFC) are apportioned to UK resident companies entitled to at least 25% of those profits, and are subject to a CFC charge.

4.1 Introduction

The controlled foreign company (CFC) rules focus on the artificial diversion of income profits (ie not chargeable gains) from the UK.

Where a CFC has ‘chargeable profits’ and the CFC is not covered by one of the exemptions, those chargeable profits are apportioned to the CFC’s UK corporate shareholders.

Any UK resident company with at least a 25% holding in the CFC will be required to self-assess a CFC charge, in respect of the apportioned profits. Any overseas tax attributable to the apportioned profits can be credited against the CFC charge.

4.2 What is a CFC?

A controlled foreign company is a company which is not resident in the UK but is controlled by persons resident in the UK.
Key term

A company is controlled by persons resident in the UK if:

  • A UK person, or persons, controls the company (ie more than 50%, or control as a matter of fact), or
  • It is at least 40% held by a UK resident and at least 40% but no more than 55% by a non-UK resident.

 

 

Alpha AG is resident in Germany and is owned as follows:

 Lime Ltd  25%
 Pomegranate Ltd (Resident in the Bahamas)    25%
 

Beta Ltd is resident in Ireland and is owned as follows:

 100%
Apple GmbH (resident in Switzerland, 80% owned by Orchard plc which is UK resident) 60%
Pear SpA (resident in Italy)    40%
 

Gamma Ltd is resident in Jersey and is owned as follows:

 100%
Tiny SA (also resident in Jersey) 56%
Big plc (UK resident) 42%
Mr Average (resident in Guernsey)      2%
   100%

Orange Ltd  35%

Lemon Ltd UK resident companies                                                                     15%

Explain which of the companies are CFCs.

 

 

Alpha AG is a CFC because it is 75% owned by UK resident persons.

Beta Ltd is a CFC because, although Orchard plc only has a 48% ‘effective’ interest, Orchard plc can control it as a matter of fact. This is because it controls Apple GmbH, which in turn controls Beta Ltd.

Gamma Ltd is not a CFC. This is because although there is a UK shareholder (Big plc) with a shareholding of at least 40%, and also a non-UK shareholder with a shareholding of at least 40% (Tiny SA), the non-UK shareholder has a holding of more than 55%.

Note that if Tiny SA’s shareholding had been 55% or less, Gamma Ltd would be a CFC under the 40% test.

 

4.3 Chargeable profits

Chargeable profits are those income profits (not chargeable gains) of the CFC, calculated using UK tax rules, which have been artificially diverted from the UK.

Profits are chargeable profits unless a company meets at least one of the following conditions:

  • The company has not been a party to arrangements, one of the main purposes of which is to

reduce or eliminate a charge to UK or overseas tax at any time in the accounting period.

  • None of the company’s assets or risks are managed or controlled from the UK to any significant extent at any time in the accounting period.
  • If the company does have assets or risks that are managed or controlled from the UK, it has the commercial capability to ensure that the company’s business could continue if the UK managed assets and risks were no longer being managed from the UK. This is intended as a test of how reliant the CFC is on UK management.
There are further rules in relation to, among other things, finance companies, and companies in the financial services industry. These rules are not examinable in P6(UK).
Exam focus point
4.4 Exemptions

Even if a CFC has chargeable profits, there is no CFC charge if one of the following exemptions applies.

4.4.1 Exempt period

This is intended to give companies coming within the UK CFC rules time to restructure so that they are not subject to a charge.

An exempt period ends 12 months after a company comes under the control of UK residents. An accounting period ending within the exempt period is exempt (with periods falling partly within the exempt period being partly exempt). To qualify for exemption, the company must be within the scope of the CFC rules (ie still be a CFC) in its first accounting period after the end of the exempt period, but with none of its profits in that subsequent accounting period subject to an apportionment (ie not be subject to a CFC charge).

4.4.2 Excluded territories

HMRC issues regulations setting out a list of ‘good’ territories, where a company’s profits are not generally subject to a low rate of tax. 

A company which is resident and fully taxable in a listed territory will not generally be subject to a CFC charge.

4.4.3 Low profits

A company is exempt from an apportionment (and so a CFC charge) where its profits are:

  • No more than £50,000, or
  • No more than £500,000, of which no more than £50,000 is non-trading profits

Profits can be determined on either a tax or accounts basis, and the limits are scaled down for accounting periods of less than 12 months.

4.4.4 Low profit margin

A company is exempt from an apportionment if its accounting profits are no more than 10% of its relevant operating expenditure.

4.4.5 Tax exemption

A company is exempt from an apportionment if its tax paid in its territory of residence is at least 75% of the UK corporation tax which would have been payable if it had been resident in the UK.

The local tax must be adjusted for items which are taxed locally but not in the UK, and expenditure which is allowed locally but is not allowed in the UK computation.

4.5 The CFC charge
4.5.1 Apportionment of profits

UK companies which own at least 25% of a CFC will be taxed at the usual rate of corporation tax on their share of the CFC’s profits which represent its chargeable profits.

The UK company is responsible for self-assessing the corporation tax due on the CFC’s chargeable profits.

4.5.2 Creditable tax

Where CFC profits are apportioned the UK tax payable may be reduced by ‘creditable tax’ which is the aggregate of:

  • Any DTR which would be available if the CFC’s chargeable profits were chargeable to UK corporation tax under normal rules, ie the lower of the UK corporation tax payable and actual foreign corporation tax paid,
  • Any income tax deducted at source on income received by the CFC,
  • Corporation tax payable in the UK on any CFC income taxable in this country.

 

 

R Inc is owned 75% by J Ltd and 25% by Mr J. Both J Ltd and Mr J are UK resident. R Inc is a non UK resident company such that it is a controlled foreign company. None of the CFC exemptions apply to R Inc.

In the year to 31 March 2016, R Inc had chargeable profits of £650,000. It paid income tax in its own country at the rate of 8%.

Show how the profits of R Inc will be apportioned to J Ltd and the CFC charge on J Ltd.

 

 

     
     £
Chargeable profits of R inc    650,000
     
Apportioned to J Ltd (75%)

J Ltd’s CFC charge

   487,500
Tax on apportioned profits    
£487,500  20%   97,500

Less creditable tax (8%  £650,000)  75%                                                                                                                                                                (39,000)

CFC charge                                                                                                                                                                  58,500

 

4.6 Clearance procedure

There is a clearance procedure whereby HMRC will confirm how the rules will apply in a company’s particular circumstances.

5 Permanent establishment (PE) or subsidiary abroad

                                                                                                 6/11, 12/13
A UK resident company intending to do business abroad must choose between a permanent establishment and a subsidiary.

FAST FORWARD

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to assess the tax implications of proposed activities or plans of an individual or entity with reference to relevant and up to date legislation. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.

5.1 General principles

Where a overseas country has a lower rate of company taxation than the UK, it can be beneficial for the UK company to conduct its overseas activities through a non-UK resident subsidiary if profits are anticipated (assuming that the CFC rules (see above) do not apply), or through a PE, if losses are likely to arise.

The general rule is that the profits of a overseas PE are treated as part of the profits of the UK company and are normally included in its computation of trading profits. If, however, the operations of the overseas PE amount to a separate trade which is wholly carried on overseas, the profits are assessed as separate overseas trading income.

The losses of an overseas PE are normally netted off against the UK company’s trading income and the usual loss reliefs are available, subject to the restriction on group relief mentioned earlier in this chapter. Any such overseas income trading loss can be carried forward to set against future profits of the same trade.

The profits of a non-resident overseas subsidiary are not liable to UK tax when remitted to the UK, for example in the form of dividends. However, no relief can be obtained against the UK parent’s profits for any overseas losses of a non-resident subsidiary except in very limited circumstances.

5.2 Election to exempt overseas PE profits and losses
An irrevocable election can be made to exempt profits and losses of all overseas PEs from UK corporation tax.

FAST FORWARD

A UK company may make an election to exempt the profits and losses of all its overseas PEs from UK corporation tax. Note that the election will disallow loss relief for overseas PEs against UK profits and that the election must apply to all of the UK company’s PEs – it is not possible to exclude, for example, a loss making PE from the election. The election also means that no capital allowances can be claimed by the UK parent company in respect of past or current future capital expenditure by exempt overseas PEs.

The election takes effect from the start of the accounting period after the one in which the election is made. The election is irrevocable and so it is important to consider the effect of making the election for all future accounting periods, in particular whether any of the PEs is likely to make a loss.

Double taxation relief should also be taken into account when deciding whether or not to make the election. If the operation of DTR means that there is little or no UK corporation tax payable on overseas profits, it may be better not to make the election. This means that loss relief will be available in future accounting periods.

 

 

Brown Ltd is a UK resident company with two overseas PEs. It prepares accounts to 31 March each year. In the year to 31 March 2016, Brown Ltd made a UK trading profit of £210,000, the first overseas PE made a trading profit of £40,000 (overseas tax payable £6,000), and the second overseas PE made a trading loss of £25,000. Compute the UK corporation tax payable for the year to 31 March 2016 by Brown

Ltd if:

  • no election has been made to exempt the profits and losses of the overseas PEs; or
  • an election was made prior to 1 April 2015 to exempt the profits and losses of the overseas PEs.

 

 

  • No election made

£

UK trading profit                                                                                     210,000

First overseas PE trading profit                                                               40,000

Second overseas PE trading loss                                                          (25,000)

Taxable total profits                                                                               225,000

 

Corporation tax at 20%                                                                            45,000

Less double taxation relief (W)           (6,000) UK corporation tax payable by Brown Ltd         39,000

Working

DTR is lower of

  • UK tax on overseas profit £40,000  20% = £8,000
  • Overseas tax on overseas profit £6,000
  • Election made

£

UK trading profit/Taxable total profits                                                  210,000

 

UK corporation tax at 20% payable by Brown Ltd                                 42,000

The election was therefore not beneficial.

 

The rules regarding the exemption of overseas PE profits are complex, especially where small companies are concerned. The examination team has stated that these more complex aspects are not examinable. In any examination question, it should therefore be assumed that the exemption option is available for all overseas PEs.

Exam focus point

5.3 Incorporating an overseas PE

5.3.1 The decision to incorporate

Where a overseas operation is likely to show a loss in the early years, it may be worthwhile to trade through an overseas PE whilst losses arise (these are usually then automatically netted off against the company’s UK profits).

If the PE then becomes profitable, consideration should be given to either making the election to exempt all branch profits and losses or converting the PE into a non-UK resident subsidiary company (so that profits can be accumulated at potentially lower rates of overseas tax).

Both of these methods mean that the overseas profits will not be subject to UK corporation tax (provided the subsidiary does not become a controlled foreign company).  However, they also both mean that any future overseas losses cannot be relieved against UK profits and capital allowances are not available.

It is important to remember that the election to exempt PE profits and losses is irrevocable and applies to all the PEs operated by the UK company.  It may therefore be better to incorporate profitable PEs and maintain a mixture of PEs and subsidiaries which may give more flexibility.

If it is decided to convert a overseas PE into a non-UK resident subsidiary, there are important tax implications both in the UK and the overseas country.

5.3.2 Issue of shares/loan stock by non-UK company

It is illegal for a UK resident company to cause or permit a non-UK resident company over which it has control to create or issue any shares or loan stock. It is also illegal for a UK resident company to transfer to any person, or cause or permit to be transferred to any person, any shares or loan stock of a non-UK resident company over which it has control.

However, there are a number of situations which are excluded from these rules, for example where the transaction is intra-group or full consideration is given.

Where the transaction has a value of more than £100m, the transaction must be reported to HMRC within six months, subject to certain exclusions, for example where the transaction is carried out in the ordinary course of a trade.

5.3.3 Postponement of gains

The conversion will constitute a disposal of the assets of the PE giving rise to a chargeable gain or loss in the hands of the UK company. A chargeable gain can be postponed where:

  • the trade of the overseas PE is transferred to the non-UK resident company with all the assets used for that trade except cash, and
  • the consideration for the transfer is wholly or partly securities (shares or shares and loan stock), and
  • the transferring company owns at least 25% of the ordinary share capital of the non-resident company, and
  • a claim for relief is made.

There is full postponement of the net gains arising on the transfer where the consideration is wholly securities. Where part of the consideration is in a form other than securities, eg cash, that proportion of the net gains is chargeable immediately.

The postponement is indefinite. The gain becomes chargeable only when:

  • the transferor company at any time disposes of any of the securities received on the transfer, or
  • the non-UK resident company within six years of the transfer disposes of any of the assets on which a gain arose at the time of the transfer.

The ‘global group’ concept applies to certain intra-group transfers of assets and also where one company disposes of the whole of part of its business to another company as part of a reconstruction or amalgamation scheme. Such asset transfers are on a no gain/no loss basis provided the assets transferred do not result in a potential leakage of UK corporation tax.

5.4 European Union companies

If all or part of a trade carried on in the UK by a company resident in one EU state is transferred to a company resident in another EU state, then the transfer is deemed to be at a price giving no gain and no loss, if all the following conditions are fulfilled.

  • The transfer is wholly in exchange for shares or securities
  • The company receiving the trade would be subject to UK corporation tax on any gains arising on later disposals of the assets transferred
  • Both parties claim this special treatment
  • The transfer is for bona fide commercial reasons. Advance clearance that this condition is satisfied may be obtained.

6 Non-UK resident companies

FAST FORWARD

A non resident company is liable to UK corporation tax if it carries on trade in the UK through a permanent establishment.

6.1 Corporation tax charge

A non resident company is liable to tax in the UK if it carries on a trade in the UK through a permanent establishment (defined as above).

The PE has the profits it would have made if it were a distinct and separate establishment engaged in the same or similar activities in the same or similar conditions, dealing wholly independently with the non resident company attributed to it. Deductions are available for allowable expenses incurred for the purposes of the PE including executive and general administrative expenses whether in the UK or elsewhere. The term ‘allowable expenses’ has the same meaning as for a UK resident company. Relief is available for the expenses of managing investments for all companies whether or not they qualify as ‘investment companies’.

Transactions between the PE and the non resident company are treated as taking place at arm’s length prices.

For the purposes of collection of tax a PE will be treated as the UK representative through which the non resident company carries on a trade in the UK.

These rules align with the normal provision in tax treaties (based on the OECD Model Agreement) that a overseas trader is taxable on his trading profits in the UK if he has a permanent establishment in the UK.

6.2 Tax charge on income

Income charged to corporation tax comprises:

  • Trading income arising directly or indirectly through or from the permanent establishment, and
  • Any income, wherever arising, from property or rights used by, held by or held for the permanent establishment.

Annual interest and other annual payments are received under deduction of income tax. Provided that the income is charged to corporation tax, the company can offset the income tax suffered against its corporation tax liability and, in appropriate circumstances, obtain repayment in the same manner as a resident company.

Income from sources within the UK which is not subject to corporation tax is subject to income tax. This could arise, for example, if a non-resident company carries on a trade in the UK without having a permanent establishment, or receives letting income from a UK property.

6.3 Tax charge on capital gains

Capital gains are charged to corporation tax where the company carries on a trade in the UK through a permanent establishment if they arise on:

  • Assets situated in the UK used in or for the purposes of the trade at or before the time when the gain accrued
  • Assets situated in the UK held or used for the purposes of the permanent establishment at or before the time when the gain accrued.

As it would be possible to avoid gains being chargeable by, for example, ceasing to trade in the UK through a permanent establishment prior to selling the asset or exporting the asset, there are two further charging provisions:

 

  • 6.4 Tax planning
    Where a non-UK resident company ceases to trade through a permanent establishment in the UK, a charge will arise. Any chargeable asset which would otherwise become non-chargeable shall be deemed to be disposed of and reacquired at market value immediately before it ceases to trade.
  • Where a non-UK resident company trading through a UK permanent establishment exports a chargeable asset, so that it becomes non-chargeable, the gain will crystallise immediately before it is exported.

An overseas resident company may have to decide whether to trade in the UK through a PE or via a UK subsidiary. A PE may be favoured because if the subsidiary makes losses the overseas company may be restricted in the relief it can claim. The overseas company would also need to consider the repatriation of profits and the provision of finance.

Chapter roundup

Company residence is important in determining whether its profits are subject to UK tax.
A company may obtain DTR for overseas withholding tax. The allocation of qualifying charitable donations and losses can affect the relief.
Double tax relief (DTR) is the lower of the UK tax on overseas profits and the overseas tax on overseas profits.
The group relief rules allow groups and consortia to be established through companies resident anywhere in the world.
Chargeable profits of a controlled foreign company (CFC) are apportioned to UK resident companies entitled to at least 25% of those profits, and are subject to a CFC charge.
A UK resident company intending to do business abroad must choose between a permanent establishment and a subsidiary.
An irrevocable election can be made to exempt profits and losses of all overseas branches from UK corporation tax.
A non resident company is liable to UK corporation tax if it carries on trade in the UK through a permanent establishment.

Quick quiz

  • When is a company UK resident?
  • How best should qualifying charitable donations be allocated in computing credit relief for overseas tax?
  • What is the definition of a CFC?
  • A UK company is planning to set up a new operation in Australia that will initially be loss making. Should it set up as a permanent establishment or a subsidiary of the UK company?

Answers to quick quiz

  • A company is resident in the UK if it is incorporated in the UK or if its central management and control are exercised in the UK.
  • Qualifying charitable donations should be set-off firstly from any UK profits, then from overseas income sources suffering the lowest rates of overseas taxation before those suffering at the higher rates.
  • A CFC is a non-UK resident company that is controlled by UK resident companies and/or individuals.
  • If losses are expected then a PE is best since losses of a overseas PE can be used by the UK company whereas losses of an Australian subsidiary cannot be group relieved.

 

 

Number Level Marks Time
Q30 Introductory 15 29 mins

 

 

 

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