offshore solutions since 1988
The United Kingdom ("UK") comprises England, Scotland, Northern Ireland and Wales and is one of the fifteen member states of the European Union. It has an area of some 244,100 square kilometres (94,250 sq. miles) with an estimated population in excess of 57 million. London is one of the world's leading centres for banking, insurance and other financial services; lying between New York and Tokyo it is the third leg of the world's capital markets. Not the least of its attractions is that it is a politically stable English speaking country.
The UK is strategically located off the Northwest coast of Continental Europe and has excellent communications; it has three major international airports in Heathrow, Gatwick and Manchester with extensive worldwide connections. Recently the UK was physically joined to the mainland continent by the opening of the Channel rail tunnel link which boasts frequent train services for passengers and cars to Paris and Brussels.
The UK has signed double taxation treaties with 100 countries and thus enjoys the most extensive double taxation treaty network in the world.
Despite the fact that the UK is by no means a low tax country, UK companies can be used effectively and advantageously in a tax planning structure. One of the major benefits of utilising UK companies flows from the very fact that the UK is not a tax haven so UK based tax planning structures would not generally attract the same level of attention as those based on a pure tax haven company.
TYPES OF COMPANIES
Non Resident Companies
A UK incorporated company may be classified as non resident for tax purposes, and therefore non taxable in the UK on non UK source income, if it is managed and controlled from a country with which the UK has signed a double taxation treaty which contains a recognised "tie-breaker clause". By careful selection of the country from which the UK company is managed it may therefore be possible to create a non-taxable UK entity. For example, Portugal has a suitable tax treaty with the UK so a UK company managed from Madeira (Madeira being part of Portugal) would neither be taxable in Madeira nor the UK.
It is important to note that such a UK company would not qualify to receive benefits under the tax treaty signed by the UK but might qualify for Portuguese tax treaty benefits so the major benefit of this structure is to create a non-taxable entity which has the added respectability of a UK persona.
International Headquarters Companies
In another recent innovation Section 246S of The Taxes Act 1988 (as inserted by Schedule 16 of The Finance Act 1994) creates the UK International Headquarters Company ("IHC"). This status may be accorded to ordinary UK companies which are at least 80% beneficially owned by non-residents. An IHC is an extremely useful vehicle for the collection of foreign dividend income as, in general terms, a full credit is given against UK tax for any tax paid on the remitted profits before arrival in the UK. Thus as long as the dividend income has already suffered tax at a rate higher than or equal to the applicable UK rate (33%/24%) no UK tax will be payable on that income either on arrival or on distribution. For example, a Danish subsidiary of a UK IHC would pay tax on its profits at 34%. If the Danish subsidiary distributed profit by way of dividend to the IHC parent no further tax would be levied on arrival in the UK because a credit would be given for tax paid in Denmark. This makes the UK IHC an extremely attractive holding company vehicle. It should be noted that any sale of shares would be subject to capital gains tax but there are a number of methods which can be used to reduce or avoid this tax. It should also be noted that it is necessary to declare to the Inland Revenue details of the ultimate beneficial ownership of the IHC and this information may be made available to a foreign tax authority under the exchange of information clause within a relevant tax treaty or otherwise. If this is problematical then an alternative, but similar, result may be achieved by using the Foreign Income Dividend Scheme.
UK Company Trading As Fiduciary
A UK company is incorporated and enters into an agreement with the offshore company whereby the UK company agrees that it will trade on behalf of the offshore company as its agent. All contracts of purchase and sale, all the invoicing and all the general correspondence will be made in the name of the UK company. The agreement should state that all monies received are received as nominee or trustee for the principal save insofar as there will be an agreed fee which will be retained by the UK company. That fee may either be expressed as a flat fee for all the trading done on an annual basis or, more usually, expressed as a percentage of the gross revenues received, usually 5% or more.
The practice of the UK revenue is to accept, subject to certain conditions, that all non UK source monies which are passed over to the offshore company are received as agent and are not therefore subject to tax in the UK. On the basis that 5% of profit is retained the effective rate of UK taxation on the gross receipts is 1.2% (5% of the normal 24% rate).
In order to protect the trading profits from UK taxation it is essential that no trading activity must occur within the UK. What constitutes UK trading activity would be construed by reference to the normal indicia such as the place where the contracts of sale are executed and the place of acceptance of an offer made outside the UK.
The offshore company must of course be non-resident in the UK for tax purposes itself. This means that its central management and control must reside outside of the UK.
General Partnership For Trading
Under this arrangement a UK resident company enters into a partnership with an offshore company. The UK company is designated as the minority partner carrying out the paperwork with the offshore company actually acting as the principle in the trading activities. The partnership agreement would stipulate that the UK company receives 5%-10% of partnership profits on which it is taxable at normal UK rates but the majority of those profits accrue to the offshore company and are not taxable. The existence of the partnership agreement does not have to be disclosed to any third party and all communications and correspondence are carried out by the UK company giving the arrangement a UK persona. The arrangement is similar to the fiduciary trading arrangement with the added advantage that the UK Inland Revenue will give an advance ruling on the acceptability of the scheme.
A typical structure would involve the end user of intellectual property paying a royalty to a UK company utilising the UK tax treaty to obtain reduced withholding tax on that payment. The UK company would in turn pay royalties to an offshore company located in a jurisdiction which had a suitable tax treaty with the UK e.g. Cyprus or Madeira and that company may hold and reinvest the profit or pay profit on to an offshore company.
It may be attractive to have a UK company hold assets as nominee. This provides anonymity and allows the asset to be owned by a structure located in a reputable jurisdiction. The UK company would take title to the asset but simultaneously execute a nominee declaration which makes it clear that the asset is beneficially owned by the investor or by an offshore company controlled by the investor. Under these conditions any profits accruing to the UK company would be outside the scope of UK taxation because the UK law taxes according to beneficial and not legal ownership.
CHARACTERISTICS OF COMPANIESTaxation
The corporation tax rates are the lowest in the European Union. Tax is levied at 20% on a U.K. company which has net profits under GBP300,000. For profits between GBP300,000 and GBP1.5million there will be an effective marginal rate of 32.5% and a tax rate of 30% is levied where the profits are over this figure. Generally speaking, a U.K. company is taxable on its world wide income at the rates indicated above. However, a U.K. incorporated company may still be classified as non-resident for tax purposes, and therefore non taxable in the U.K. on non U.K. source income, if it is managed and controlled from a country with which the U.K. has signed a double taxation treaty which contains a recognised "tie-breaker clause". By careful selection of the country from which the U.K. company is managed it may therefore be possible to create a non-taxable U.K. entity. For example, Portugal has a suitable tax treaty with the U.K. so a U.K. company managed from Madeira (Madeira being part of Portugal) would neither be taxable in Madeira nor the U.K. It is important to note that such a U.K. company would not qualify to receive benefits under the tax treaty signed by the U.K. but might qualify for Portuguese tax treaty benefits so the major benefit of this structure is to create a non-taxable entity which has the added respectability of a U.K. persona.
Another recent innovation Section 246S of The Taxes Act 1988 (as inserted by Schedule 16 of The Finance Act 1994) creates the U.K. International Headquarters Company ("IHC"). This status may be accorded to ordinary U.K. companies which are at least 80% beneficially owned by non-residents. An IHC is an extremely useful vehicle for the collection of foreign dividend income as, in general terms, a full credit is given against U.K. tax for any tax paid on the remitted profits before arrival in the U.K. Thus as long as the dividend income has already suffered tax at a rate higher than or equal to the applicable UK rate (32.5%/30%/20%) no U.K. tax will be payable on that income either on arrival or on distribution. For example, a Danish subsidiary of a U.K. IHC would pay tax on its profits at 34%. If the Danish subsidiary distributed profit by way of dividend to the IHC parent no further tax would be levied on arrival in the U.K. because a credit would be given for tax paid in Denmark. This makes the U.K. IHC an extremely attractive holding company vehicle for investment into Europe or otherwise and in most cases will be more attractive than competitive structures available through the Netherlands, Austria, Switzerland etc.
A UK company must have a minimum of one shareholder who may be corporate or individual. Details of the shareholders appear on public record but anonymity may be retained by the use of nominee shareholders or holding companies.
A UK company must have at least one director and a company secretary. A sole director cannot also be the secretary. The Director can be an individual or a company. UK company law is complex so it is strongly recommended that a professional secretary with relevant experience is appointed. Details of the directors appear on the public file but anonymity can be retained by the use of third party professionals.
Generally a UK company must appoint an auditor and audited accounts must be filed with the Companies Registry within 9 months of the financial year end but companies with sales of under GBP90,000 may be exempt from this requirement and those with turnover of less than GBP350,000 need only produce abbreviated accounts with a special accountant's report. An annual return giving details of directors and shareholders is required for all companies.
Restrictions On Name And Activity
Names will not be allowed if they are considered undesirable, too similar to an existing company or misleading - for example, if it suggests that a company with small resources is trading on a great scale or over a wide field. Names cannot ordinarily be allowed if they suggest connection with the Crown or Government Departments.
Incorporation of a new company can take up to 3 weeks but ready-made companies are available for immediate use. A premium can be paid of GBP300 for a 48-hour incorporation service.
As a matter of local company law the company MUST maintain a registered office address within the UK and must also appoint a company secretary who, for practical reasons, must be resident in the UK.
There is no specific statutory provisions governing secrecy in relation to companies but English Common Law imposes a common law duty on professionals to keep the affairs of their clients confidential.
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