Chapter 5 International expansion Flashcards
1.1 Company residence
A company is UK resident if it is either incorporated in the UK, or centrally managed and controlled from the UK (deemed resident). To determine the location of central management and control you look at where the head office is situated, the location of board meetings, and where directors spend most of their time.
1.2 Dual residence
A company can be resident in more than one country, this means a double tax treaty will act as a tie breaker. Most treaties follow the OECD model agreement (the company should be resident where it is effectively managed and controlled).
1.3 Permanent establishment
A UK PE/branch exists if either:
- A business is carried on in the UK through a fixed place.
- An agent acting on behalf of the company has, and habitually exercises, authority to do business in the UK on behalf of the company.
If either of the situations exist, it would give rise to a taxable presence and therefore CT may be due on any profits arising.
1.4 Implications if UK resident
A UK resident company must pay UK CT on its worldwide income and gains (including profits of an overseas PE), irrespective of whether the profits are remitted to the UK or not. It is possible for a UK company to make an irrevocable election for all its foreign establishments to be exempt from UK CT. the election is effective from the start of the accounting period after the one in which the election is made. It affects both PEs the UK company has now and those opened in the future. Double tax relief is likely to be available if profits are taxed in the UK and an overseas country.
2.1 non-UK resident companies
A non-UK resident company will only pay UK CT if it:
- Is carrying on a trade in the UK through a PE, or
- Has profits from dealing in/developing UK land, or
- Has gains on assets that are either interests in UK land or UK property rich assets, or
- Receives UK property income.
Other UK income received by a non-resident company is subject income tax (for example if a non-UK resident company carries on a trade in the UK without having a PE). The tax here is limited to tax deducted at source.
2.2 Carrying on trade in the UK through a PE
If an overseas company carries on a UK trade through a PE, it will pay CT on:
- Trading income arising from/ through the PE.
- Property income from property held by the PE.
- Gains on assets held by the PE.
2.3 Gains made by non-resident companies.
If a non-resident company makes a disposal, the gain arising will be subject to UK CT if the asset was either:
- UK land
- UK property rich assets whereby the non-UK resident company owns a substantial indirect interest (at least 25% of the shares at the time of the disposal or at some point in the two-year period before the disposal)
If the asset was purchased by the company post April 2019, the full gain is subject to CT. The gain is calculated in the normal way. If the asset was purchased before April 2019 its treatment depends on the class of the asset.
Disposals of UK residential property have been in the charge to UK CT since April 2015. When calculating the gain, the market value in April 2015 is treated as allowable cost. There are two possible elections available to the company:
- The company can make an election to replace April 2015 market value with original cost, if so, a further election is available.
- The gain based on original cost can then be time apportioned based on proportion of the months of ownership that fall after April 2015
Disposals of UK non-residential property or property rich assets have only been in the charge to CT since April 2019. When calculating the gain, the April 2019 market value is treated as allowable cost. Only one election is available:
- The company can elect to perform the calculation using original cost (cannot subsequently be time apportioned). If this treatment leads to a loss, the loss is not allowable if it relates to a UK property rich asset.
A property rich asset is an asset that derives at least 75% of its gross asset value from UK land. If the UK land is used for trade purposes for at least one year prior to disposal, and for a more than insignificant period of time after the disposal. The gain on the property rich asset is exempt. As a note letting a property is not classed as trade.
2.4 UK property income
Income that a non-resident company receives from UK property is chargeable to CT. Finance costs, relating to UK property business will also be subject to CT as non-trading loan relationship deductions.
3.1 Migration of trade
A UK resident company can become non-resident. If the company is incorporated overseas with UK control and management, then the control and management need to be moved overseas. If the company is incorporated in the UK, the control and management needs to move to a territory which will treat is as resident. In addition, within the UK treaty with that country, there is an agreement that the company will no longer be classed as UK resident.
The tax implications are similar to a company ceasing to trade. It creates the end of the accounting period; the company loses the benefit of being in a UK group. Balancing adjustment on capital allowances are done for P+M, but not land and buildings. Inventory is disposed of at MV. The company will be deemed to have disposed of and reacquired all worldwide assets at MV at the date of migration. This will lead to gains on chargeable assets and profits on IFAs held as trading assets. This will be subject to UK CT. There will be no gain arising on assets held by a UK PE of the company, or UK land and buildings. This is because these assets stay within the charge to UK tax. Lastly, change in basis of assessment. Non-UK resident means UK tax on profits of UK PE, dealings in/gains on UK land and property income.
4.1 Establishing an overseas business.
A UK resident company wishing to trade overseas has a choice of business structure. The company can set up trade as a PE or as a subsidiary incorporated overseas. There are different CT implications in the UK depending on the structure.
Overseas PE Overseas subsidiary Legal status Part of the UK company Separate legal entity incorporated overseas Profits taxed overseas Yes Yes Profits taxed in the UK PE profits taxed as part of trading
income, however DTR available in the UK
Only if deal in UK land/has UK property income, or
Trade through a UK PE UK capital allowances
Full CA available unless election
made to exempt profits from UK CT
No UK allowances available Transfer of assets
No gain or loss arises, no balancing
adjustments in the CA pools
Gain or loss on transfer. Balancing
adjustments arise but not on transfer of
buildings qualifying for SBAs
Use of overseas losses
Unrelieved losses of PE can be offset
against UK company’s trading profits provided
the trade of the PE does not constitute a separate
trade carried out wholly overseas.
If wholly separate overseas trade, then losses can only
be offset against future profits from that PE’s trade
Overseas losses can generally not be
group relieved to a group company
5.1 Incorporating an overseas PE.
An overseas PE is part of the UK company and overseas profits/losses are automatically included in the CT computation in the UK. An overseas subsidiary is separate to the UK company and profits/loses are not included in the UK company’s tax computation. Where a loss is expected in the early years of trade, it may be worthwhile to start trading as a PE, then incorporate the business into a subsidiary overseas when it becomes profit making.
5.2 Incorporation
The trade and assets of the PE are transferred into the newly incorporated company in exchange for shares. The implication is that the PE ceases to trade. Balancing adjustments on P+M attract capital allowances. Chargeable gains/losses arise on the chargeable assets transferred. Profits/losses will arise on IFAs held as trading assets (based on market values at date of incorporation).
5.3 Incorporation relief
The chargeable gains on chargeable assets and trading profits on IFAs arising on incorporation can be deferred through incorporation relief providing the following conditions are met:
- All the trade and assets (except cash) of that foreign PE are transferred to the non-UK resident company.
- The consideration is wholly or partly in the form of securities (shares or shares and loan stock)
- The UK company owns at least 25% of the ordinary share capital of the non-UK company, and
- A claim for incorporation relief is made.
Where consideration is partly securities and partly cash, full incorporation relief is not available, only a proportion of the net gains relating to the securities consideration received can be deferred.
5.5 Crystallisation of gains/profits
Gains deferred on incorporation will become chargeable on a proportionate basis in the following situations:
- The UK company disposes of some of the shares of the non-UK resident company, a proportion of the remaining net gain deferred is chargeable. However, if the disposal is a share for share exchange as part of a corporate restructure, the deferred gain will not crystallise.
- An asset transferred on incorporation is disposed of within 6 years of incorporation, to calculate the gain chargeable the following formula is used:
Gain on asset = remaining balance of net gain deferred x (gain on asset on incorporation / gross gains on incorporation).
6.1 Double tax relief
A UK resident company which has income from overseas will pay, UK corporation tax on its worldwide income (unless it has made the election to exempt the profits of an overseas PE) and is also likely to pay overseas tax on overseas profits. This means the same profits are being taxed twice.
Withholding tax (aka border tax) is charged on overseas income as it is remitted back to the UK. It is also the overseas tax paid on the profits of a UK company’s overseas PE. Underlying tax is the overseas CT applied to overseas company’s profits, from which foreign dividends are paid.
To alleviate this situation double taxation relief is available with either: treaty relief, unilateral or credit relief, or expense relief.
Treaty relief is applied first if it exists. Then expense relief is given where losses/other deductions would reduce the UK CT liability to nil as this will waste less losses. Then credit relief is given in all other situations.
