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Introduction to setting up overseas ― companies

Introduction to setting up overseas ― companiesA UK company expanding overseas may do so in a variety of ways, including:•distance trading from the UK, with no local presence•a branch, which can be formed with just one employee working from home•a fully established local subsidiaryThe decision to trade in another jurisdiction involves a number of considerations, both commercial and tax-related. Some of the key tax issues include whether the activities constitute a permanent establishment and how the overseas activities should be structured. It is important, at the outset, that advice is taken by the company, not only in relation to tax, but on the wider business implications.The tax position of the UK company overseas will depend on the extent to which the company does business in the jurisdiction and the choice of overseas entity from which to carry on the business. In most cases, establishing the overseas operation will involve a choice between running the business as a branch or via a local subsidiary. There are a number of commercial and tax considerations which need to be considered in arriving at the most appropriate choice. For further discussion on the choice of overseas entity, see the Setting up overseas ― branch or subsidiary guidance note.A useful review of the tax impact of a business expanding overseas is given in ‘Practice guide ― Lifecycle of a business: international expansion’ by Helen Cox and Gemma Grunewald in Tax Journal, Issue 1472, 11 (24 January 2020).For a factsheet which summarises

Entity classification

Entity classificationImplications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.See the following guidance notes:•Introduction to CFCs•Shareholder issues ― international corporate structuresIt may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:•the availability of business asset disposal relief (previously known as

Pillar Two ― overview of the UK’s domestic top-up tax

Pillar Two ― overview of the UK’s domestic top-up taxFinance Act 2024 amends certain aspects of the multinational top-up tax and domestic top-up tax rules contained in Finance (No 2) Act 2023. The amendments have retrospective effect for accounting periods beginning on or after 31 December 2023. The original draft legislation for Finance Bill 2024 contained provisions implementing the Under Taxed Profits Rule (UTPR) which is due to have effect for accounting periods beginning on or after 31 December 2024. However, in Autumn Statement 2023, it was confirmed that the UTPR will be introduced by a later Finance Bill, although the effective date will remain the same. The ‘offshore receipts in respect of intangible property’ (ORIP) rules will also be abolished for income arising from 31 December 2024 alongside the introduction of the UTPR.What is the domestic top-up tax?The UK has committed to introduce measures which support the OECD’s two-pillar approach to ensuring that large multinational enterprises (MNEs) pay their fair share of tax, no matter which territory they operate in. Pillar One deals with the taxation of profits of MNEs by reference to the territories in which they have the most engagement, rather than those in which they have a physical presence. Pillar Two ensures that qualifying MNEs pay tax on profits at a minimum effective rate (currently set at 15%), with a multinational top-up tax being applied in instances where the effective rate falls below the minimum. See the Pillar Two ― overview of the UK’s multinational

Introduction to cross-border financing

Introduction to cross-border financingIntroductionThis guidance note outlines the UK tax considerations that arise when a foreign company makes a loan to a UK company.An overseas company may make a loan to a UK company in a number of circumstances, including:•when an acquisition is made by a subsidiary in the UK•to fund expansion or working capital of the UK companyOne of the key tax considerations arising in the context of cross-border financing is the extent to which interest payable by the UK company to the overseas company will be deductible. There are various elements of the UK tax regime that may restrict the deductibility of interest, such as transfer pricing, the corporate interest restriction and targeted anti-avoidance provisions. These are outlined below. It should also be noted that UK withholding tax may arise on interest which is paid by a UK company to a company in another country, whereas payments of interest between UK companies is not subject to withholding tax.See the Withholding tax and Withholding tax on payments of interest guidance notes.Factors affecting the deductibility of interest in the UKTransfer pricing and thin capitalisationTransfer pricing is the price at which an enterprise transfers either physical goods, intangible property or services, including financing arrangements, to associated enterprises, as explained in the Transfer pricing rules ― overview guidance note. Two persons are associated if one of them participates directly or indirectly in the management, control or capital of the other, or if each of them is subject to direct

A–Z of international tax terminology

A–Z of international tax terminologyList of commonly used phrases in international taxThe table below lists some of the terminology commonly used in the context of corporate international tax and transfer pricing, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.TerminologyDefinitionFurther detailsAAmount A and Amount BPart of the OECD’s package of measures to be introduced under Pillar 1 ― see ‘Pillar 1’ belowAnti-conduitCertain double tax treaty provisions contain anti-conduit conditions, which deny treaty benefits where the amounts received are paid on to another company. This ensures that treaty benefits are only obtained by the contracting states, rather than residents of third countries who have deliberately arranged their transactions to obtain treaty benefits to which they would not otherwise be entitledDT19850PPArm’s length arrangementAn arm’s length arrangement reflects the price that would be payable and the terms which would be agreed for a transaction between unconnected parties. This is important for the purposes of the transfer pricing legislation (see ‘Transfer pricing’ below)Transfer pricing rules ― overview guidance note Simon’s Taxes B4.147INTM412040ATAD (anti-tax avoidance directive)ATAD is an EU directive which provides for a series of anti-abuse rules relating to interest expense deductions, controlled foreign companies and hybrid mismatches, and requires the introduction of a corporate GAAR and an exit tax (these two measures not being part of the BEPS