This guide considers the tax implications of using a UK holding company to hold shares in other UK or overseas companies. The general principle is that a UK resident company is subject to UK corporation tax on its worldwide profits and gains. However, there are a variety of exemptions potentially available to a UK holding company which makes having a UK holding company an attractive prospect in certain circumstances.
Some of the general considerations which may apply to UK holding companies are set out below. Whether a UK holding company is the appropriate solution for a company or investors very much depends on the particular circumstances and the other jurisdictions involved, so this guide only gives a brief indication of the issues that may be relevant.
Tax treatment of payments made by a UK holding company to investors
Investors can invest in a UK holding company through a mixture of two methods:
- by way of debt, that is by lending the company money;
- by way of equity, that is subscribing for shares in the company.
The UK holding company is likely to make returns to investors either by way of interest, in the case of debt funding, or dividends, in the case of equity funding.
Debt and interest
A corporation tax deduction may be available to the UK holding company on the payment of interest to investors, although these payments may be subject to anti-avoidance provisions - for example, transfer pricing which is discussed below. These anti-avoidance rules are very complicated and may apply to deny any tax deductions for the UK holding company.
The general rule is that UK basic rate income tax must be deducted by the holding company from interest paid to investors. This deduction of tax is often referred to as withholding tax, and the holding company will have to pay the tax it deducts to HM Revenue & Customs (HMRC) to account for the investor's liability for UK tax. Investors can claim a repayment from HMRC of the tax withheld, to the extent that they are not liable to UK tax on the interest.
In most cases tax does not have to be withheld from interest payments made to UK resident companies or to banks. In the case of non-UK resident investors, there may be no requirement to withhold tax if the investor is based in a country which has a double tax treaty with the UK which provides that no UK tax is payable on interest paid to a resident of that country. A double tax treaty may also provide for a lower rate of withholding tax. Even if a double tax treaty does apply, the holding company cannot make the payments without deducting tax or with tax withheld at less than basic rate unless it has received clearance from HMRC to pay investors without withholding tax.
Shares and dividends
No tax deduction is available for the holding company for dividends paid to investors.
No withholding tax applies to dividends paid by a UK company.
Tax treatment of payments received by the UK holding company from its subsidiaries
Dividends received by the UK holding company from other UK companies or from overseas companies should benefit from an exemption from corporation tax, called the dividend exemption. If available this means that the UK holding company does not have to pay corporation tax on the dividends it receives.
Where the UK holding company gets the benefit of the dividend exemption will depend on whether it is a 'small' company. Generally a company will be a small company if it has fewer than 50 employees and its annual turnover or annual balance sheet is less than €10 million. If there are any linked enterprises, such as subsidiaries of the holding company, their employees, turnover and balance sheet will need to be added to that of the UK holding company for the purposes of these limits.
If the holding company is a small company then the dividend exemption should prevent UK tax being payable in respect of dividends paid to it by UK companies or companies resident in most places where the UK has a double tax treaty, provided a few additional conditions are satisfied.
If the holding company is not a small company, then the dividend exemption may still be available if it is paid by a company which the holding company controls provided certain other conditions are satisfied.
Controlled Foreign Company rules
Anti-avoidance rules, called the controlled foreign company (CFC) rules, prevent UK resident companies rolling up profits in jurisdictions where the tax rates are very low to avoid paying UK tax on the rolled up income. If any of the subsidiaries is a CFC, the rules provide that UK tax is payable by the holding company in respect of some of the profits of that overseas company.
A subsidiary will be a CFC if it is:
- resident outside the UK;
- controlled by persons resident in the UK or at least 40% controlled by a UK person and at least 40% controlled by a non-UK person; and
- subject to a lower level of taxation in its territory of residence. Broadly speaking, this applies where the amount of tax payable in the territory on the profits is less than three-quarters of the corresponding UK tax which would have been due on those profits if the overseas company was resident in the UK.
There are certain countries listed to which these CFC rules do not apply - generally, these countries are those which are considered not to be 'tax havens'.
There are exemptions to these rules. These include the situation where the CFC carries out exempt activities - for example, it is not a leasing business or does not deal in securities - or if the CFC's taxable profit is less than £50,000.
The CFC regime is currently undergoing reform and it is likely that the rules will change substantially over the next few years.
The transfer pricing anti-avoidance rules apply where services or transactions take place between connected parties for a price calculated to provide a UK tax advantage. The rules also apply to the terms of loans between connected parties.
A UK holding company may need to consider the impact of these rules when it enters into transactions with other companies in its group. Depending on the circumstances the rules may also prevent a tax deduction being available or restrict the tax deduction in respect of interest paid by the holding company to its investors.
The rules only apply to large companies – small and medium-sized companies are exempt. They apply to transactions which are cross-border, and to transactions which are between UK residents.
Sale of subsidiaries by the UK holding company: the UK holding company may wish to sell its shares in its subsidiaries and pass the money onto the investors by way of a dividend. On the disposal of the shares, this is likely to trigger a capital gain on which corporation tax will be payable. The UK holding company may benefit from a relief called the substantial shareholding exemption, which would have the effect of making the entire gain exempt from capital gains tax.
In order to benefit from this exemption various conditions need to be satisfied. These conditions are fairly complex but they include that the company has to have held at least 10% of the shares continuously for at least one year. The UK holding company and the subsidiary it is selling must both be trading companies, and their activities cannot include to a substantial extent activities other than trading activities. These conditions must be satisfied both before and after the disposal of the shares. There are a variety of other requirements which must also be satisfied, meaning that each transaction needs to be carefully checked to see whether the substantial shareholdings exemption would be available.
If the substantial shareholding exemption is available, this will prevent the gains being taxed in the holding company and mean that there are more funds to return to investors.
Sale of UK holding company by investors: if the investors decide to sell their shares in the UK holding company, any chargeable gain will be subject to capital gains tax unless the person disposing of the shares is not resident in the UK.