The UK remains a great location for international holding companies despite Brexit
The sound and fury over the EU referendum result and ongoing Brexit should not distract international businesses from the fundamentals of how to decide where a group’s holding company should be based.
Access to the European market is clearly important but it is not a prerequisite when a group is considering where its holding company should be domiciled. Such location decisions should be based on financial and operational factors for the group as a whole allowing the holding company to support the business efficiently across all the markets in which it operates.
A favourable tax climate
UK Government has made a number of tax changes to UK business taxes over the last 10 years to make the UK a highly attractive place for groups to base their holding companies. These will not change as a result of the UK leaving the EU.
With the headline rate of UK corporation tax due to fall to 17% by 2020, the UK’s main business tax rates will be much lower than The Netherlands and most major trading nations. Even though business tax rates may fall in the USA in future, they are unlikely to fall below 17% in the near future from a starting point of nearly 40%.
Dividends received from subsidiaries anywhere in the world are tax free in the majority of cases and there is no withholding tax on dividends paid out to shareholders worldwide, making the UK a tax-free conduit of global profits. Another key advantage is that most sales of shares in subsidiaries will be tax free no matter where the subsidiary company is tax resident give a holding company complete flexibility to develop and reorganise across the globe without HQ tax issues.
Although the UK does impose 20% withholding taxes on interest and royalty payments, it has over 130 double tax treaties, the largest network in the world, and for many jurisdictions the withholding taxes are reduced to 10% or zero.
When managing businesses in other countries a UK company can elect for an overseas branch to be exempt from UK tax. And although the UK has controlled foreign company (CFC) rules for overseas subsidiaries, these are mainly anti-avoidance rules so only usually apply to the profits of a CFC derived from assets and risks managed in the UK. Where they do apply and UK tax rates are applied to a CFC’s profits, if the UK holding company controls 10% or more of the voting rights of the CFC, relief is given for local tax paid, including underlying tax.
The UK tax code allows the interest expense on funding share acquisitions to be tax deductible and although new limits on interest deductions will apply from 1 April 2017, the UK will simply apply the new OCED norm of a 30% deduction from profits (with a full deduction where interest does not exceed £2m a year).
Aside from supporting a pure holding company or head office function, the UK also offers favourable tax breaks to encourage the carrying out of research and development work in the UK and a patent box regime that cuts the rate of corporation tax on income from qualifying patents to just 10%. Therefore centralising such work in the UK may also prove attractive particularly if you can take advantage of UK research centres with highly skilled workforces.
While the UK offers all these tax advantages, it is far from being a tax haven in the established sense. By leading the way in implementing the OECD’s anti-BEPS agenda on international tax avoidance and transparency the UK Government is maintain its reputation for best practice in international tax. Maintaining an HQ or holding company in the UK rather than an ultra-low tax or tax haven jurisdiction is a great way for international businesses to demonstrate that they are “good corporate citizens” on the world stage: an increasing important factor for big brands in the retail sector and all B2C businesses.
This table highlights the key tax issues for holding companies and illustrates how favourable the UK regime is compared to many established holding company locations and major trading nations.
Running an efficient holding company or head office function demands more than just a low tax rate. The UK provides a legal and regulatory environment that is both strong and stable and allows the business to operate in the world’s business language – English.
While the UK is not the cheapest location to which a company can place international staff, it is a desirable residential location with excellent educational opportunities for their families. An added bonus for relocating workers is the personal tax breaks available to non-UK domiciled individuals: these will remain considerable for short term secondees even after the changes to be introduced from 1 April 2017. The UK also has the lowest rate of social security costs for employers in the EU – almost half the EU average.
While the terms of Brexit will take some time to clarify, it is possible that eventual deal will restrict the access of UK businesses to EU markets. However, most international groups already have several footprints in the EU so should be able to maintain the trading in the EU while keeping an HQ or holding company in the UK.
Your future in the UK
Just as London will remain a world financial centre after Brexit, so the UK will remain a great place to base the HQ and holding company for an international business. If you want to know more about siting your HQ in the UK please contact Stuart Lisle.
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