UK as holding company jurisdiction: to have and to hold
This article was first published in CFO Insight, 28 May 2013
Recently, Taxand UK has been involved in a project that will redomicile a Luxembourg-headed group to the UK. This was somewhat unusual, as Luxembourg has long demonstrated a serious, long-term commitment to attracting holding companies. Taxand UK Partner,Kevin Hindley examines what’s changed to make the UK such an attractive jurisdiction for holding companies.
For many years, the non-fiscal qualities that make the UK an attractive jurisdiction for a holding company have been recognised internationally. The country has an educated workforce, an abundance of finance professionals, a good legal framework and a language that is the standard for international business. Its governance procedures are respected and UK companies are highly regarded on the international stage. This is all well and good, but no multinational company will choose a location for its holding company based upon these factors alone. Tax considerations will always factor into this equation too.
A major concern in the situs of a holding company will be that company’s ability to repatriate profits to its shareholders without tax leakage. There are generally 3 areas that a tax advisor will focus on when evaluating this repatriation, namely participation exemptions on the receipt of dividends, dividend withholding tax and whether the concerned jurisdiction has a good treaty network.
In July 2009, the UK introduced a participation exemption on dividends. Up until that point, dividends were taxed in the UK and credit was allowed from the UK tax liability for withholding tax and underlying tax (corporate income tax of subsidiary companies) suffered on the dividend streams. The receipt of such dividends could be subject to UK tax, particularly if received from a low-tax jurisdiction. This would mean that the overseas tax incurred on the dividends would not create sufficient tax credits to cover the UK tax liability upon receipt.
Favourable changes to the UK’s tax regime
Recent favourable changes to the UK’s tax regime mean that the vast majority of dividends received by UK companies are now completely free of tax at the UK level. In addition, the UK doesn’t impose dividend withholding tax on payments of dividends made by UK companies. Combining both of these features allows a UK holding company to receive a dividend from a subsidiary free of tax in the UK and to then pay a dividend to shareholders without any incremental UK taxation.
Traditional European holding company jurisdictions such as the Netherlands and Luxembourg do impose dividend withholding tax. Although structuring options are available so that profits can be repatriated to shareholders from these jurisdictions without suffering the withholding tax in practice, these structures add some undesirable complexity. Indeed, in some cases it is not possible to structure such arrangements without creating tax liabilities elsewhere. In this respect, the simplicity of the UK regime is quite compelling for multinationals.
The UK also has an excellent network of double taxation treaties. Double taxation treaties are agreements between nation states that serve to reduce taxes on cross-border payments. This can, for example, allow a UK holding company to receive a dividend from an overseas subsidiary without withholding tax, or at a reduced rate of withholding, in circumstances where the domestic law of the overseas payer would otherwise impose a higher burden of taxation. In addition, since the UK is a member of the EU, this allows UK holding companies have access to European Directives that can eliminate withholding tax on dividends received, as well as interest and royalties received, provided holdings are structured correctly.
Another important consideration is the availability of a participation exemption on capital gains. This exemption exists to ensure that the sale of shares in a subsidiary company can be made free of tax by a holding company. Such an exemption, the substantial shareholdings exemption, has been in place in the UK since 2002. In addition to helping M&A activity in a difficult economic environment, this exemption is important in providing future flexibility for the structure as it would be relied upon if the group chose to relocate to a different jurisdiction due to changes in circumstance. It is important to bear in mind that the substantial shareholdings exemption only applies to trading groups and that investment activity, such as real estate investment, is not allowed as a primary activity if the exemption is to apply.
The complexities of taxing corporate debt
The UK also has a relatively generous, albeit complex, regime covering the taxation of corporate debt. Although profits of overseas subsidiaries are no longer taxed when repatriated to the UK, it is possible for a UK holding company that borrows to invest in overseas subsidiaries to take a tax deduction for interest payable in making such an acquisition. The rules for calculating the deductions are certainly complicated, but this regime can provide valuable tax relief for UK-headed groups, particularly where there are also UK-sited operations, the profits of which can be sheltered by the financing costs.
The most recent (and arguably most important) change to UK taxation from the perspective of a holding company is the significant relaxation of the controlled foreign company (CFC) rules. These rules seek to tax the artificial diversion of profits from a UK company to a low-tax overseas subsidiary at the UK level. The old regime was widely criticised by business and saw several high-profile UK PLCs leaving our shores for jurisdictions without a CFC regime. The new rules, which are effective for periods starting after 1 January 2013, take a much more measured approach to the imposition of the charge to tax. In particular, the new regime only imposes a charge on the ‘bad income’ of a CFC rather than its profits as a whole and there is no longer an implicit assumption that profits have been diverted from the UK. These changes have truly facilitated the UK as a serious contender for the choice of a holding company jurisdiction.
For all of these reasons, the UK is becoming a significantly more attractive jurisdiction to locate a holding company for multinational trading groups. The UK’s tax regime has certainly hampered UK investment for a long time. But recent changes have made its tax system clearer, more certain and above all more competitive.
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This article was first published in CFO Insight, 28 May 2013
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