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June 7, 2023

Setting Up a Company Overseas – The UK Tax Obligations

Welcome to our blog, where we delve into the intriguing topic of setting up a company overseas and explore the complexities surrounding the UK tax obligations. Lately, we have noticed an increasing number of enquiries from both individuals and companies seeking information on establishing a business overseas, whilst aiming to minimise their UK tax liabilities.

While the process may seem relatively straightforward in other countries, the scenario becomes more intricate when it comes to mitigating UK tax liabilities. Today, we embark on a journey to shed light on the recurring themes surrounding this issue and provide guidance on how to navigate the tax landscape responsibly.

Company Resident

There are a number of scenarios that can establish whether a company is resident in the UK. If a company is incorporated in the UK, it will be considered to be UK resident.

When it comes to establishing the UK residence status of a company abroad while the directors reside in the UK and maintaining control over it, the concept of Central Management and Control becomes crucial. In such cases, HMRC may seek to tax the foreign company within the UK jurisdiction.

Why is this important? Well companies which are UK resident could potentially be subject to tax on their worldwide income and gains (subject to certain elections on overseas permanent establishments). Whereas a company which is non-UK resident is only generally liable to UK Corporation Tax on:

  1. Profits of a trade and chargeable gains attributable to a UK permanent establishment;
  2. Profits of a UK property rental business;
  3. Profits arising from a trade of dealing in or developing UK land;
  4. Income and chargeable gains from UK property interests; and
  5. Chargeable gains that arise on the direct, and certain indirect, disposals of UK land and property.

There is also a tie-breaker clause in most Double Taxation Agreements which may determine the applicable residence status if a company is resident in two jurisdictions. This is known as the ‘treaty override rule’.

The risk of getting the company’s residence status is significant, including interests and penalties on unpaid UK tax.

Individual Shareholder Resident Abroad

While residing abroad, it is important to note that the UK still maintains taxing rights over specific types of UK source income. This can include income from UK employment, UK property income and UK self-employment. Additionally, Capital Gains Tax obligations can also apply in relation to UK property and land transactions for non-UK residents.

If, however, you work and perform duties in the UK as a self-employed individual, employee, or director, it is important to be aware that you may be subject to taxation on your earnings derived from UK activities – an apportionment calculation will be required. For employees, there is a certain exception for non-UK residents UK work duties where they are ‘merely incidental’ to the overseas duties. This is complicated area so tax advice should be sought on what is meant by merely incidental.

If your non-UK residency is ‘temporary’, it is important to be aware that certain gains and income may become subject to taxation when you return to the UK. Therefore, tax advice is paramount to ensuring that you do not fall foul of these anti-avoidance provisions.

There are also circumstances where chargeable gains of non-UK resident companies can be apportioned to UK resident participators.

UK Statutory Residence Test and Double Tax Agreement

Please do not assume that you are non-UK resident, just because you do not live in the UK. For tax purposes, you could still be a UK resident even when living aboard. The UK Statutory Residence Test will need to be examined to see if and how you are non-UK resident. The Double Tax Agreement will also need to be reviewed to establish what you are going to be taxed on anything in the UK. The Double Tax Agreement will also contain a tie-breaker clause to determine your tax residence status if you are tax resident in two different countries (if such agreement is in place).

UK company leaving the UK - Exit Charge

In some cases, the UK company may seek to emigrate from the UK. If so, there could be an exit charge that needs to be calculated and paid and HMRC needs to be notified as well.

Remuneration from a UK Company

In cases where your UK company is unable to relocate outside the UK, it has the option to continue paying you a salary, and it can engage in contracts to procure services from overseas. However, it is crucial that these arrangements are conducted at a fair and commercial rate. If an excessive amount is paid for services, the UK company may face limitations in obtaining a tax deduction for the full amount.

Value Added Tax (VAT)

Despite you and the company residing aboard, if you sell to people in the UK, it may be necessary for you to register for VAT.

Inheritance Tax (IHT)

Changing your residency status to become a non-UK resident does not automatically eliminate your UK domicile for Inheritance Tax (IHT) purposes. As a result, you may still be liable to pay UK IHT on your assets worldwide. Establishing a new domicile of choice can be a lengthy process, potentially taking several years. However, it is important to note that a non-UK domiciled individual should generally be subject to UK IHT solely on assets situated within the UK (although there are certain rules surrounding being deemed UK domicile)

Remember, doing it the right way will not only safeguard your business's reputation but also contribute to the sustainable growth of your enterprise.

If you have any queries on any of the information in this article, or need help with regards to your company’s residence status, please do not hesitate to contact me at hassan@pd-tax.co.uk

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice to review whether your company is subject to UK Corporation Tax.

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