CONSULCO UK

PRESENTATION ON THE USES FOR UK COMPANIES IN INTERNATIONAL TAX PLANNING FOR NON-RESIDENTS

PRESENTED BY DEBORAH TAYLOR

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AGENDA

 Overview of the UK  UK Non-resident Limited Liability Partnerships  UK Agency Companies  VAT  Other uses of UK companies in International Tax Planning – UK sub-contracted consultancy companies, Holding Companies, Public Companies, UK Routeing Companies Page 2

OVERVIEW OVERVIEW OF THE UK

• • • • • • Political and social stability London – world class centre for financial services Services contribute largest proportion to GDP – Global financial crisis impact World Bank ratings for ease of doing business: UK is 4 th overall out of 181 countries UK placed 1 st when ranked by size of population (like for like) Coalition Government elected 2010 – aim to increase attractiveness of the UK as a place to do business Example, reduction of Corporation Tax from 28% to 26% in March Budget.

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TAXATION

The UK is an internationally competitive location for tax, with one of the lowest main corporate tax rates in the European Union.

• • • The “standard” or “main” rate of corporation tax in the UK is currently 26% and applies to both resident and non-resident companies. Rate Small companies’ rate 20% Marginal relief Main rate 26%* Profit (£) 0-300,000 300,001-1,500,000 1,500,001 or more * Note: The main rate of corporation tax will be reduced by one percentage point each year from April 2012 until April 2014, when it will reach 23 per cent.

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TAXATION

The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.

Country Japan US Tax Rate

41% 39.5%

Germany France Spain Luxembourg UK Netherlands China

30% – 33% 34.43% 30% 28.59% 26% 25% 25% The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide.

Source: Deloitte 2011 *Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes, turnover/sales taxes and other taxes not levied on income.

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TAXATION

• • • • • In addition, the UK has concluded over 100 tax treaties for the avoidance of double taxation and has the largest network of treaties globally (Source: HM Revenue & Customs, 2011). An important feature of many treaties is a reduced rate for withholding tax on the payment of dividends, interest and royalties. The majority of UK-based companies also benefit from an exemption from corporation tax on any foreign dividends that they receive.

The UK has extensive range of capital allowances that allow the costs of capital assets to be written off against taxable profits.

Tax credits for research and development Page 6

TAXATION

Withholding Taxes in the UK are as follows:

•

Dividends – 0%

•

Royalties – 20%

•

Interest – 20%

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General Features

• • • • • • • •

UK Companies – key features

No withholding tax on dividend payments, irrespective of where the shareholder is resident Capital Gains Tax exemption where a UK resident company disposes its shareholdings, if certain conditions apply.

Access to the benefits of EU Directives.

No restriction on the location of meetings.

Swift incorporation / shelf companies Company and LLP names may be in any language but must have the suffix “Limited”. “LLP” or in the case of a public company, “PLC”.

Registered office must be in the UK.

Minimum of one director. Page 8

General Features

• • • • • Corporate Directors – as long as they are appointed alongside an individual director.

Nominee shareholders Permitted.

A single shareholder is permitted.

Shares without par value are not permitted.

No Capital Duty Page 9

UK LIMITED LIABILITY PARTNERSHIPS

UK LIMITED LIABILITY PARTNERSHIPS

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UK Limited Liability Partnerships UK LIMITED LIABILITY PARTNERSHIPS

 The Limited Liability Partnership Act was introduced in 2000.

 The Limited Liability Partnerships Regulations came into force in 2001.

 Legal personality separate from its members.

 Able to enter into contracts and own assets, whilst having the internal flexibility of a partnership.

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UK Limited Liability Partnerships

 “For a limited liability partnership to be incorporated two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document.” (s.2(1)(a) LLP act)  Members can be individuals or a body corporate.

 “Business” includes every trade, profession and occupation.

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UK Limited Liability Partnerships

 Limited liability  Separate legal personality  Private constitutional documents  Organisational flexibility  UK Tax transparency  Members liability limited to capital contributed  Duties of members (fiduciary and statutory) April 30, 2020 Page 13

UK Limited Liability Partnerships

If….

 The members are non UK resident  There is no UK source income of the LLP  There are no gains realised on UK assets …then no tax is assessed on the LLP, as profits are only taxed in the hands of the members Page 14

UK Limited Liability Partnerships Illustrative example

Seychelles IBC Member 1 UK LLP (England and Wales) Seychelles IBC Member 2

Goods/services supplied to the LLP from EU (or non-EU territory) Goods/services sold to customers throughout other EU/non EU territories (but not in the UK)

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UK Limited Liability Partnerships

Annual Accounts    - Turnover and profit - Movements on members loans - Small LLP audit exemption Annual Return   - LLP registered office - Details of members Page 16

UK Limited Liability Partnerships

Partnership Agreement

 Private Document  Internal management of the LLP  Designated members

Disadvantages/issues

 Cannot apply for tax residency Certificates  Unsuitable for consultancy services where withholding taxes deducted  VAT registration – question of substance Page 17

UK Principal Agency Companies

UK PRINCIPAL AGENCY COMPANIES

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UK PRINCIPAL AGENCY COMPANIES

 Historical concept  Principal undisclosed  Act only with the consent of the Principal  Important - trading activity must be outside of the UK  Also referred to as UK “nominee” companies  Gives the veneer of a UK company but in fact the UK company does not act as the “beneficial owner”  Management and control Page 19

UK Principal Agency Companies

5% Agency fee Ownership 100% Offshore Principal Company 100% UK Agency Company Page 20

UK Principal Agency Companies

UK Agency Companies – examples of appropriate activity • • • • • • • Purchase and Sale of goods Management consulting Software Consulting Design Consulting Professional Services Commission earning Off balance sheet asset/investment holding Page 21

UK Principal Agency Companies

 Agent’s commission – how is this set?

 Accounting - format, requirements and disclosure  Corporation Tax – arm’s length remuneration  VAT registration – question of substance  Disadvantage - certificates of UK tax residency cannot be obtained  Still very useful for international trading in goods  Minimum level of activity in the UK Page 22

UK Principal Agency Companies

Principal Agency agreement  Undisclosed  Trading activities  Consideration clause  Sliding scale of remuneration for significant trading activity  Minimum fee  Execution of the agreement – outside of the UK Page 23

UK Principal Agency Companies

• •

UKco - Commercial Simulation of an Agency Company Sales of machinery etc. per annum via UKco as agent estimated at €8,000,000 Estimated average gross margin 10% = Gross Profit € 800,000 Assuming: Seychelles co: principal's entitlement @ 95% = € 760,000 (zero tax) UKco: agents remuneration @ 5% income = € 40,000 (UK tax @ 26% - net assessable

• • • • •

Accordingly: € UKco Income........................... 40,000 Less: UKco expenses................15,000 *estimated Operating Profit......................25,000 Less: UK corporation tax 26%.. 6,500 Net Profit............................. 18,500 is available for dividend up to Seyco free of UK tax

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UK Principal Agency Companies Therefore,

• Accordingly, the "effective" rate of corporation tax approximates to 0.81% and the cost of the UK company management and administration approximates to 1.88%.

(The cost of any banking/documentary credits has been ignored for this illustration) Page 25

UK VAT

UK VAT

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UK VAT

TYPES OF SUPPLY

:  Standard Rated - 20%  Reduce rate  Zero rate  Exempt  Outside of the Scope • Non-business • Place of Supply Abroad Page 27

UK VAT

 UK VAT Numbers can be obtained for any entity engaged in trading/provision of (most) services  Exceptions include “exempt” services (e.g. provision of finance/insurance, etc/some land transactions/holding companies  Can be cosmetically desirable  Essential for intra-EU trade Page 28

VAT Administration Problems with UK VAT registration

 UK Non-resident LLP and UK Agency Company  Accommodation Lists – boilerplate address, additional security checks on each application.

Solutions:

 Virtual office – dedicated telephone/fax and email  Limit the number of companies/LLPs at an address  Bank account set up before registration  Create supplies in the UK i.e. Stationery (approx €500 +)  Preassemble all information required such as invoices, proof of intent to trade - to be filed electronically with application  Work carried out in the UK – invoicing, bookkeeping, banking etc.

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VAT Administration

ADMINISTRATION POINTS :  VAT REGISTRATION - issues, timing, HMRC queries  QUARTERLY VAT RETURNS  EC SALES LISTS (quarterly/ monthly)  Intrastat’s (monthly)  Inspection of records by HMCE Page 30

UK Companies in International Tax Planning

Other uses of UK companies in International Tax Planning

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UK SUBCONTRACTING COMPANY

€950 € 1,000 RAK Company UK Company Independently owned Services Services Customer Company Page 32

UK Sub-Contracting Companies

UK CO BENEFICIALLY Receives 100% of the income.

Therefore  Treaty benefits can usually be obtained  Certificates of UK tax residency can be obtained  Accounts show 100% of turnover 95% cost of sales 5% gross profit

UK Sub-Contracting Companies

PRICING ISSUES:  Is the 95% paid to the BVI service company a justifiable deduction?

Justifications for the 95% deduction:

 BVI service provider introduces the customer  BVI service provider performs all of the services required  BVI service provider as director of the UK sub-contracting company?

UK Sub-Contracting Companies

 Consequences of the Indofood Decision?

 Is the UK company truly the beneficial owner?

THE IMPORTANCE OF SUBSTANCE CANNOT BE UNDERSTATED Page 35

UK Routeing Companies

UK Routeing Companies

  Used to obtain reduced treaty withholding tax rates Can route  Consultancy fees  Royalties  Interest  Can obtain certificates of UK tax residency  Transfer pricing traps and solutions

UK Royalty/ Interest Routeing Companies

Beneficial Ownership Trademark/ Patent BVI Co Cyprus Co licence Cyprus/ UK DTT has 0% on royalties $950 royalty Independent ownership UK Co Sub-licence $1,000 royalty Foreign Trading Co

UK Royalty/ Interest Routeing Companies

Loan Loan BVI Company Cyprus company UK Company $900 interest Cyprus/ UK DTA provides for 10% WHT on interest but could use the EU Directive $950 interest Independent Ownership loan Foreign Trading Co $1,000 interest

UK Royalty/ Interest Routeing Companies

UK Company BENEFICIALLY receives the interest from the Foreign Trading Co SO:  Reduced treaty rate of withholding tax can usually be applied by the Foreign Trading Co  UK company accounts show 100% of income Page 39

UK Royalty/ Interest Routeing Companies

• • Treaty Protection?

UK/ Cyprus DTA – 10% interest/ 0% royalties EU Directive – Royalties & Interest Watch for Treaty anti-abuse clauses Page 40

UK Royalty/ Interest Routeing Companies

• • TRANSFER PRICING (AGAIN) No magic percentage figure Independent ownership of UK company BENEFICIAL OWNERSHIP?

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UK Holding Companies

Dividends Independently owned Company Voting shares Dividends

CLIENT

Owns BVI COMPANY Hold shares with dividend rights UK HOLDING COMPANY Owns FOREIGN TRADING CO

UK Holding Companies - CGT

Exemption available for disposals of “substantial shareholdings” by a trading company or the holding company of a trading group

UK Holding Companies

“Substantial” = 10% BUT Normally in practice = 51% due to requirement to be a “holding company of a trading group”

UK Holding Companies

 Must be “trading company or holding company of trading group” before and immediately after the disposal  If winding up the UK holding company, different rules can apply

Certificates of UK Tax Residency

Certificates of UK Tax Residency

 IR manuals  IR “Tax Bulletin”  Beneficial ownership of income  Genuine UK control and management

Certificates of UK Tax Residency

IR Arguments:

 Foreign “shadow directors”  Avoidance/evasion of foreign tax  Automatic exchange of information Page 47

Certificates of UK Tax Residency

What can you do?

 

UK board members



Substance of the UK Company is important



UK directors No general POA’s

UK PLC

UK Public Limited Company

 Not necessarily listed on the stock exchange  More onerous corporate duties  Substance and presentation. Better?

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Conclusion

• • • In conclusion: Increasingly technical solutions required Foreign tax structures must be sound Provided those requirements are met, the UK remains a useful jurisdiction Page 50