Tax Planning Case Studies

Using a UK holding company in International Tax Planning - Case study: China

Introduction

The UK is considered by many professional tax planners to be a tax haven for non-UK nationals, and the “best kept secret in Offshore Financial Planning”. UK companies are liable to UK Corporation Tax on all sources of income and capital gains. This means UK companies are subject to Corporation Tax on their worldwide income. All UK companies are deemed to be tax resident in the UK. However, with proper planning, a UK company can function as tax efficiently as an International Business Company from a zero or low tax jurisdiction.

Advantages of a UK Holding Company

Managing your international tax affairs through a UK Holding Company provides many advantages to worldwide group.

Tax Treaty Network

The UK has the largest network of double tax treaties (over 100) in the world meaning the UK is a very efficient location for minimising withholding taxes on dividends, royalties and interest received.

In some cases where the UK company holds at least 10% of an overseas company the rate of withholding tax experienced on non UK dividends can fall to nil or as little as 5% if of the gross dividend.

In the case of China the following rates apply.

• Dividends – Nil
• Royalties – 10%
• Interest – 5%

Low Cost of Maintenance of a UK Company

Although not as cheap as some of the Offshore jurisdictions the UK Holding Company is amongst the lowest to maintain in a developed jurisdiction with such a high reputation, international respectability and protection.

Share Capital

There is no minimum paid up share capital requirement and no capital gains tax on authorised or issued share capital.

Audit of Accounts

There is no requirements for companies with turnover below £5.6 Million, unless the company is part of a larger group.

Ease of Establishment

ATC Solutions can set up a UK Holding Company in less than 24 hours.

International Respectability and Protection

UK Companies are often used to acquire assets in certain foreign locations to minimise risks of expropriation by foreign governments.

Tax Advantages

Assuming the UK company has a 10% or more holding in a foreign company there will be no capital gains tax on the sale of the foreign company under the 'substantial shareholdings' rules.

We are also assuming the UK company will be held by a non-resident, on this basis there will be no capital gains tax on the disposal of the UK company by a non-resident. The selling of a UK holding company's shares does not attract any tax in the UK.

There is no withholding tax on dividends received from other UK companies and companies resident in EU countries if the EC Parent/Subsidiary Directive applies. O distribution by UK companies of dividends to shareholders, there is not withholding tax on such dividends payable to non-resident shareholders. With proper planning, there is no withholding tax on royalty payments made by a UK company to a foreign shareholder.

Losses made by the UK company can be carried back or forward to obtain relief as soon as possible.

Foreign taxes suffered on dividends or profits in other countries can be set off against UK corporation tax.

Tax Incentives for Chinese Subsidiaries

From 1st January 2008, the rate of tax paid by a foreign-invested enterprise will be 25%. However this will start at 15% and increase to 25% over a 5 year period. In addition if the company is a small low profit or hi-tech enterprise company the new law will apply a 20% or 15% rate.

For companies that qualify as venture investment enterprises and to enterprises investing in projects involving environment protection, agricultural development, water conservation, production safety, high-tech development and public welfare undertakings. There will remain the current preferential policy of a two year tax exemption and subsequent three year 50 per cent reduction of standard tax rate.

Example of the Use of a UK Holding Company

In the above example

• For trading company A situated in the EU, the UK holding company can benefit from the EC Parent Subsidiary Directive and there is no withholding taxes on payment of dividends to the UK company.
• For Mauritius trading company M, the effective tax rate is 3% (or 80% tax credit on 15% income tax)
• Withholding tax on payment of dividends to UK company is 10%, utilising the Double Tax Treaty between Mauritius and the UK.
• Withholding tax on payment of dividends to the UK company by the China company is Nil. If the China company falls within the tax exemption there is no Chinese tax for the first two years, however Chinese tax is deemed paid. Therefore when dividends are paid to the UK they are deemed tax paid from China. Therefore the resulting tax credit will leave little or no UK tax to pay on these dividends.
• Dividends from the UK company can be paid to the BVI company without any withholding tax.
• There is no capital gains tax on the disposal by the UK company of shareholdings in any of its subsidiaries, provided that the UK follows the substantial shareholding rules.
• Dividends received by the BVI company do not attract any income tax in the BVI.

How ATC Solutions can help you

ATC Solutions can provide the following assistance

• Incorporation of UK companies and companies in other onshore and offshore jurisdictions
• Full corporate management services
• Registered office, mail redirection and meeting facilities
• Accounting, Audit, Tax, and Company Secretarial services
• Bookkeeping and invoicing services
• VAT registration and compliance

ATC Solutions can fully manage your UK compliance requirements on your behalf of your company.