company overseas issues Flashcards
company is UK resident
UK tax on worldwide income
company is non UK resident
UK tax on UK income only
how is company residency determined?
subjective matter, it is decided after considering following factors:
R: Registered place
H: Head office location
O: Operations (location of main operations)
P: Primary customer base
E: Executive (residency of directors)
double tax relief
if a company is UK resident, double tax on overseas income may be paid if no double tax treaty exists
in this case double tax relief will be given at lower of=
1) overseas tax
2) UK tax on foreign income
2 ways in which UK resident company can operate an overseas business
-overseas branch/ permanent establishment
-overseas subsidary
overseas branch/ permanent establishment tax implications
not incorporated as a separate entity, it is considered part of UK resident company
B: Branch of UK entity
A: Allowances (UK capital allowances available for overseas branches)
R: Reliefs: normal loss reliefs on losses
E: Election can be made to exempt it from UK tax. ALL overseas branches will get exempted (no tax, loss, capital allowance)
is the election to exempt overseas branch from UK tax advisable?
no because it applies on
ALL overseas branches of now and future
and this election is IRREVOKABLE for lifetime.
overseas subsidary tax implication
S: Separate company (overseas subsidiary is registered separately, It will be a non UK resident company)
T: Tax (no UK tax on overseas profits or dividends)
A: Allowances (capital allowances on subsidiary assets N/A!)
R: Relief (no loss relief for subsidiary losses, 75% group rule (losses could be surrendered if company was part of EU ) Before 2020)
which option is better, overseas branch or overseas subsidary?
if business is in loss, then use branch model as loss relief will be available
if business is in profit, then SUB model is better, no UK tax on overseas profit
-normally, it is advised that initially operate branch model, (due to initial losses, capital allowances due to investment in assets) and then convert to SUB model when established and profitable
why is branch model advisable in early phase of overseas operations
-losses occur initially, will be surrendable to UK
-capital assets purchased initially, capital allowance can be claimed
-branch is easy to manage legally. beneficial in start of operations
what is a controlled foreign company CFC
it is a non UK resident company which is controlled by UK residents (shares > 50%)
what is the tax implication of CFC?
-UK residents controlling a foreign company must have a legitimate reason.
-If the reason is legitimate, no tax.
-If not legitimate, CFC charge applies.
-If the foreign company diverts UK profits to avoid tax, UK taxes its profits.
what is consdiered a legitimate reason for CFC
major customer base
cheap raw material
access to resources not available in UK
not legit reason: Tax rates are lower. mazay UK ke lerahe, tax nahi dena?
what is the CFC charge
SLICD
S- shareholding: No CFC charge if shareholding < 25%.
L- legitimate : CFC charge applies only on diverted trading income without a legitimate reason
I-individuals: No CFC for individuals, only for companies.
C: Charge is calculated as:
Profit × Holding % × UK Tax Rate (25%). (always taxed at main rate)
D: Double tax relief available if overseas tax paid.
exemptions of CFC charge
T: Treaty (no charge)
R: Reversal (first time CFC charge, not expecting in future)
E: Exemption (overseas tax 75%+ of UK tax)
N: No large profits (profit margin <10%)
D: Diminished income (<£500k, non-trading <£50k)
what is a close company/ friends and family company
one that is controlled (50% owned) by
1) 5 or fewer SH
2) any number of directors
additional tax implications for such company (SETHYA COMPANY)
when assessing each shareholder’s ownership, ownership of associates (family and business partners) will also be seen.
how is close company evaluation done for a sub company?
if parent is close company, then whole group is close company
if parent is not close co., then whole group is not close co.
Benefit given to Shareholder in a close company
Employee = Treated like a salary/benefit (taxed and deductible for the company).
Non-employee = Treated like a dividend (not deductible for the company).
Normal dividends are not involved, and non-cash benefits use standard valuation rules.
Q1- Loan given to shareholder, implications?
Q2- And what if loan is provided at less than official rate of interest?
CROWN - B
C-Charge: charge of 33.75% on outstanding loan at tax payment date (9 months post year-end).
R: Repaid then no charge, or charge is returned
O: outstanding amount at tax payment date.
W: Written off: no charge/ chargee returned. dividend income tax will be triggered
N: NIC: class 1 NIC will be paid irrespective of employment status. ER will pay if employee.
If loan is given at less than official rate of interest
non cash benefit implication will also arise
When is loan to SH charge waived?
When SH is an employee and:
-loan is less than 15,000
-Shareholding is less than 5%
this shows tax chori is not the intention, genuine loan
if shareholder takes a loan to invest in a close company or give loan to a close company
Qualifying loan interest expense:
this interest expense will be deductable from total income
for this, SH should be an employee of close company OR should own 5% or more shares
close investment company (CIC)
if a close company is an investment entity only, no trading
tax implications are:
C – Corporation tax is at the main rate only.
I – Investment assets: Shares are not considered business assets for CGT/IHT reliefs.
C– Ch** is pe No Borrowing relief (qualifying loan interest relief not available).
a SH who is also a director can extract profits from a company in two ways
employment bonus
dividend
profit extraction in form of bonus vs dividend: factors to consider.
RANT
relevant earnings for pension: bonus yes, dividend no
allowed exp: bonus yes, dividend no
NIC: bonus: class 1 NIC, dividend , no NIC
T: Taxx rates for SH. Bonus N/S rate, dividend rate.
3 ways to extract investment from close company
-sell shares (normal)
-liquidate company
-repurchase of shares by the company
sell shares implication
normal cgt implication will arise (dp less cost= gain)
liquidate the company - implication
-any fund distribution before appointing liquidator- treat as dividend
-after appointment - treat under CGT head
repurchase of shares by company
normally treated as dividend, income tax will be charged on it.
DP less par value of shares = dividend (this dividend is taxable)
shares repurchased will be cancelled by company, other SH holding will increase
however may be assessed in CGT head if conditions met.
when is repurchase of shares considered CGT?
transaction may qualify for CGT if all of the following conditions are satisfied:
“RUINSS”
R – Reason of repurchase must be genuine.
U – Unquoted company.
I – Influence ends: shareholding falls to 30% or less.
N – Noteworthy reduction: shareholding decreases by 25% or more.
S – Shares held long enough: 5 years (or 3 years if inherited, plus donor donee holding combined)
S – SH must be a UK resident.
what is a genuine reason for repurchase
sad, phadda, retirement, SH sucks
how will gain be calculated if cgt conditions met, and will BADR be available?
repurchase price
less cost of share
=
chargeable gain
yes BADR may be available
what is a personal service company
An individual creates a PSC (Personal Service Company) to get paid as fees, avoiding salary (which incurs NIC + income tax).
How they save:
Profits are distributed as dividends, taxed at a lower rate than salary.
Catch:
They still pay corporation tax on company profits.
IR 35 regulation
introduced to cover PSC avoidance in order to avoid income tax and NIC
factors that the tax department uses to determine if company is legitimate or just a tax avoidance tool
company should have its own: SMART PET
S: Substitute workers
M: Management
A: Activities (policies)
R: Risk (financial)
T: Timings
P: Premises
E: Employees (helpers)
T: Tools (equipment)
what happens if tax dept determines that company is not legit and just a tax avoidance tool
-IR 35/ personal service company rule will now apply
-company is seen as providing employment services
-Deemed salary is calculated on the income received.
Income tax and NIC apply to the deemed salary.
who determines the deemed salary?
If large or medium business:
-Client is required to issue status determination statement to the individual providing service.
-if deemed employee, then the client will determine deemed salary in the same statement
if small business:
the individual will do the calculation of deemed salary, not the business.
how will DEEMED SALARY be calculated by the client/ large medium sized entity?
Payment in respect of services xxx
Less: Direct cost of material incurred by PSC
Less: Deductable employment expenses done by PSC
= Deemed direct payment
On this DDP, Client will pay Class 1 ER NIC
and employee will pay Income tax + Class 1 EE NIC
If PSC is rendering services to a small sized client…
then the PSC itself will have to determine deemed salary
how will the PSC determine its own deemed salary
it will be calculated in the following manner:
FAST PED
+F: fees received xxx
-Actual employment income paid (salary expenses)
-Statutory deduction: 5% of fees received
-Taxable expenses: any other expenses done for employee
-Pension contribution done for its employee
-Employer NIC on actual salary (usually allowance of 5k not available cuz only 1 EE in co.)
=
=Deemed employment income
-less: Employer NIC on deemed employment income
(deemed emp income *13.8%/113.8%)
=notional salary
on this notional salary amount, income tax and class 1 EE nic will be paid
if question is silent the client will be considered…small or large?
SMALL and the above working will have to be made
is tax paid on deemed salary or profits
Deemed salary: Taxed as employment income (paid by the individual).
Profit after expenses: Taxed as corporation tax (paid by the company).
sale of patent
Profit earned from patenting activities eg. royalty income will be shown in patent box. It will be charged at 10% instead of 19%.
