Brexit: Should I use the UK as a holding company location?

Published by Andrew Wallis on 23 October 2020

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The UK has consistently ranked as one of the best places to locate a holding company due to its robust legal system, relative political and economic stability, geographical location, time zone, language, low costs of company administration and attractive tax environment. Given Brexit, however, should companies be looking to other locations such as Ireland or the Netherlands to locate their holding companies? In short, whilst both Ireland and the Netherlands have their attractions and will of course be within the EU, we do not think that the attractiveness of the UK should be impacted by Brexit. There are a variety of tax issues that should be considered when determining the best location for a holding company. The main considerations are detailed below, albeit that each decision should be based upon a Group’s own circumstances and priorities.

These include the following:

  • Corporate income tax rate
  • Withholding taxes
  • Taxation of dividend income
  • Taxation on sale of subsidiaries
  • Controlled foreign company rules
  • Capital taxes (stamp duty)

Corporate income tax rate

The UK has the lowest corporate tax rate of the G7 group of countries at 19%, albeit not quite as low as the tax rate in Ireland for trading income of 12.5%. Whilst this is an attractive headline rate of taxation, given that most holding companies will not have significant business activities this may not be an important factor.

Withholding taxes

One of the most attractive features of the UK is that it does not impose withholding tax on the payment of dividends by a company which means that profits can be returned to parent entities / shareholders with no tax leakage.

The UK also has the most extensive double tax treaty network in the world which means that the rate of withholding on payments of interest and royalties are often reduced from the non-treaty rate of 20% or are even exempt. Further as the UK seeks to agree Free Trade Deals with non-EU territories there is the potential that term treaties will become even more generous and widespread.

Taxation of dividend income

Dividends and distributions received by UK companies are typically exempt from corporate income tax regardless of whether they are paid by UK or overseas companies. In particular, subject to specific anti-avoidance cases, the following are exempt:

  • Distributions from controlled companies
  • Distributions from portfolio companies (<10% shareholding)
  • Distributions in respect of non-redeemable ordinary shares

Taxation on sale of subsidiaries

The Substantial Shareholding Exemption (“SSE”) can apply to exempt any capital gain on the disposal of shares in a subsidiary (UK or overseas). The SSE applies where:

  • More than 10% of the shares in the subsidiary have been held for a continuous 12-month period during the six years to the date of disposal
  • The company being disposed of has been a trading company, the holding company of a trading group or the holding company of a trading sub-group.

It is of course the case that Ireland has its own version of SSE and the Netherlands has a participation exemption, but the generosity of the UK SSE should not be overlooked.

Controlled foreign company rules

Like many jurisdictions the UK has controlled foreign company rules, however, the UK has moved to a much more territorial basis of taxation through a broad range of exemptions and exceptions which can mitigate the application of the CFC rules. The exemptions and exceptions include a tax avoidance gateway test, an excluded territories exemption, a low profits exemption and a low profit margin exemption.

It is, of course, the case that both Ireland and the Netherlands have now incorporated controlled foreign company rules into their domestic legislation under the EU Anti-Tax Avoidance Directive.

Capital taxes

The UK does not impose capital taxes (stamp duty) on the issue of shares by a UK company, although most transfers of shares in a UK company are subject to stamp duty at 0.5%.

As set out above, groups should not overlook the advantages of the UK as a holding company location. Yes, the UK may have left the EU, but it still has an attractive holding company regime and of course the other non-tax benefits highlight at the top of this article.

For further information and guidance on this topic, or for any corporate or international tax queries, please contact me here.

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