Ch.5 - International expansion Flashcards
What is the tax treatment of the company with dual residency?
- double tax treaty will act as a ‘tie breaker’
- most treaties follow OECD model agreement (Organisation for Economic Co-operation and Development) - i.e. the company should be resident where it is effectively managed and controlled
What are tax implication of being UK resident for a company?
- must pay UK CT on ist worldwide income and gains (including PEs)
- can make irrevocable election for all its foreign PEs to be exempt from UK CT (effective from the start of the next accounting period)
What are tax implication of not being UK resident for a company?
- will only pay UK CT if:
a) it is carrying a trade in the UK through a PE
b) has profits from dealing in/developing UK land
What is a permanent establishment (PE)?
Business is carried through a fixed place:
- place of management
- branch or office
- factory or workshop
- agent acting on behalf of o/s company doing business in the UK
What are tax implication of company moving o/s?
- end of a CAP (chargeable accounting period)
- balancing adjustment on P&M attracting capital allowances
- utilisation of trading losses
- change in basis of assessment (UK resident - worldwide income, non-UK resident - ONLY UK income)
- loses the benefit of being in the UK group
- company will be deemed to have disposed of and reacquired all worldwide assets at the MV at the date of migration = ‘exit charge’
How can company defer gains on migration?
Gains can be deferred provided that:
- company is a 75% subsidiary of a UK resident company
- both companies make a written election with 2 years of migration
When does the deferred gain on migration crystalises?
- subsidiary ceases to be 75% subsidiary of a UK resident company
- parent company ceases to be UK resident
- assets are sold within 6 yearsL
GAIN = net deferred gain*(gain @ magration of asset sold/gross gains @ migration) - Gain will crystallise on UK parent, not subsidiary
How can a company defer exit charge when migrating to another EEA state?
Standard method:
- tax due in 6 annual instalments commencing 9 months and 1 day after the end of period of migration
Realisation method:
- tax due at the earlier of disposal of asset and 10th anniversary of the end of period of migration
- for intangibles and loan relationship exit charges, the charge is spread over 10 equal annual instalments beginning 9 months and 1 day after the end of accounting period of migration (if disposed before, balance becomes payable)
What are implications of establishing o/s PE?
- part of UK company (unless election to be exempt is made)
- profits taxed o/s as well as at UK CT, DTR available in the UK
- full UK cap.allowances avaialble (unless exempt)
- NGNL transfers of assets
- unrelieved losses of PE can be offset against UK company’s trading profits if UK resident
What are implications of establishing o/s subsidiary?
- separate legal entity established o/s
- profits taxed o/s ONLY, unless deals in UK land or trades through UK PE
- no UK cap. allowances available
- gain/loss on transfer of assets arises (balancing adjustments arise)
- o/s losses cannot be group relieved generally (75% EEA sub can surrender losses to UK parent where all loss relief options have been exhausted o/s)
What is the best option for a company when establishing an o/s business?
- may be beneficial to establish PE initially (transfer of assets, investment in capex, can transfer losses)
- as the business grows, may want to remove it from the scope of UK tax
a) elect for PE to be exempt from CT
b) incorporate as an o/s subsidiary
What are the implication of incorporating o/s PE?
- PE ceases to trade
- balancing adjustments on P&M attracting capital allowances
- chargeable gains/losses arise on transfer of assets (can be relieved)
- profits or losses arise on new IFAs
How can gains/losses on incorporation of o/s PE be relieved?
Can be deferred provided:
- all trade and assets (except cash) of that PE are transferred to a non-UK resident company
- the consideration is wholly or partially in the form of shares (where partially, only part of gain can be deferred)
- UK company holds at least 25% of share capital
- claim for incorporation relief is made
When does deferred gain on incorporation on o/s PE crystalises?
- UK company disposes of some shares (proportion of net gain deferred is chargeable)
- an asset transferred on incorporation is disposed of within 6 years
Gain = remaining balance of net gain deferred * (gain on asset on incorporation/gross gains on incorporation)
How is double taxation relief (DTR) available?
- treaty relief
- unilateral or credit relief
- expense relief
