Holding
Companies Formation & Incorporation in the UK:
Welcome to Coddan online UK holding companies formation agent. We will guide you through the process of registering your holding company and establishing your registered identity. Complete and submit an application form. Adequate completion and submission of this form, along with the provision of payment, will enable Coddan to incorporate your proposed English Holding Company within three business hours. We will express mail your documents to the mailing address you specify in your incorporation order. UK Holding Company registration with a full set of limited company documents for as little as £115.00.
Holding Company is a company that usually confines its activities to owning stock in and supervising management of other companies. A holding company usually owns a controlling interest in the companies whose stock it holds. In order for a corporation to gain the benefits of tax consolidation, including tax free dividends and the ability to share operating losses, the holding company must own 80% or more of the voting stock of the corporation. A company may own one or more other companies which are its subsidiaries. The relationship between parent and subsidiary depends on majority control of the voting rights of shares or the ability to appoint the majority of directors. The precise definition of a holding company is in section 736 of the
Companies Act 1985. In June 2002 the UK government introduced a capital gains tax exemption for UK companies with substantial shareholdings in another company. The new rules have now been clarified and apply to UK registered companies, foreign registered companies resident in the UK for tax purposes, as well as UK branches of companies registered outside the UK.
Can a foreign-resident and domiciled person use the services of a UK trustee tax efficiently? There are three taxes to consider here: income tax, capital gains tax and inheritance tax. For income tax purposes, a foreign resident and domiciled settlor may retain the services of a UK-resident trustee without creating any adverse income tax consequences so long as there is at least one non-UK resident co-trustee. For capital gains tax purposes, the basic rule is that if all or a majority of the trustees of a trust are resident outside the United Kingdom, and the general administration of the trust is carried on outside the United Kingdom, the trustees will not be within the charge to capital gains tax. However, a UK-resident professional trustee of a trust which only contains settled property from a foreign resident and domiciled person will be treated as non-UK resident for the purposes of that trust. In such a case, where the trustees or a majority of them are or are treated - in relation to that trust - as not resident in the United Kingdom, the general administration of the trust will also be treated as not carried on in the United Kingdom. So, accordingly, a foreign resident and domiciled settlor may retain the services of a UK-resident trustee, so long as there is at least one other trustee who is non-UK resident (the income tax requirement) and the UK-resident trustee is a professional trustee (the capital gains tax requirement), without creating any adverse income tax or capital gains tax consequences. For inheritance tax, the residence of trustees is not a relevant factor.
Can a UK-incorporated company be non-resident? Prior to the enactment of s.66
Finance Act 1988, it was perfectly possible for a company incorporated under the laws of one of the constituent countries of the United Kingdom to be non-UK resident. All one needed to do was ensure that the company's central management and control was at all relevant times exercised outside the United Kingdom. SECTION 66 REMOVED THIS FLEXIBILITY. It provided that, subject to certain grand-fathering and transitional rules, a company which was incorporated in the United Kingdom would thenceforth be regarded for all UK tax purposes as resident in the United Kingdom, irrespective of where its central management and control was exercised. Where, however, a company is regarded for the purposes of any double taxation agreement as resident elsewhere, it is treated as non-resident for domestic purposes. Examples of UK tax treaties commonly used to take advantage of this provision are those with Barbados, Cyprus, Mauritius and Switzerland.
Is a UK-incorporated company an appropriate international group holding vehicle? A UK-incorporated company is in principle within the charge to corporation tax on its worldwide income and capital gains. However, if a UK-incorporated holding company holds only shares in subsidiary companies and all of those subsidiary companies are trading companies, the new "substantial shareholder" exemption from corporation tax may exempt a capital gain arising on a disposal of some or all of the shares in those companies. A UK-incorporated holding company will own a "substantial shareholding" in another company, i.e. the investee company, if it owns shares by virtue of which: it owns not less than 10% of the investee company's ordinary share capital; it is beneficially entitled to not less than 10% of the profits of the investee company available for distribution to equity holders of the investee company; and it would be beneficially entitled on a winding up of the investee company to not less than 10% of the assets of the investee company available for distribution to equity holders.
The UK-incorporated holding company must have owned the shareholding for a certain period of time before the disposal in order to qualify for the exemption. In short, in the two years prior to disposal, the UK-incorporated holding company must be able to show a continuous period of ownership of at least twelve months. Finally, the UK-incorporated holding company, in addition to having owned a substantial shareholding throughout the requisite continuous twelve-month period, must be either a sole trading company (and obviously where it is a pure holding company it will not be) or a member of a trading group, both throughout the requisite period of pre-disposal ownership and - crucially - immediately after the time of disposal. In terms of the investee company, it must have been a trading company, a holding company of a trading group or a holding company of a trading sub-group throughout the period beginning with the start of the UK-incorporated holding company's requisite continuous twelve-month ownership period and ending with the time of disposal, and immediately after the time of disposal. It is also worth remembering that any non-UK resident subsidiary company of a UK-incorporated holding company will be a controlled foreign company and, therefore, the controlled foreign company regime will need to be considered.
The UK holding company of overseas subsidiary companies already performs creditably as an international holding company. Consider the following: the United Kingdom has the widest network of double tax treaties in the world, and is also a signatory to the EU Parent / Subsidiary Directive. Given the quality and extent of the UK's tax treaty network, it is arguably the best performer in the important discipline of extracting overseas dividends at the minimum tax cost. Whilst the United Kingdom offers no exemption from UK corporation tax on foreign income dividends, it grants double tax relief by way of a credit for foreign corporation tax underlying the dividends provided that the company holds, directly or indirectly, at least 10% of the share capital of the company from whom the tax credit is claimed. Where the underlying foreign corporate tax rate is 30% or more, then the credit will normally be a complete relief from UK corporation tax - and therefore as good as an exemption. It is significant that the UK has lower rates of corporation tax than most other industrial nations. The UK is remarkable in not imposing any withholding tax on dividends distributed by UK companies to UK non-resident shareholders. It therefore outperforms the other leading holding company locations in this regard.
The United Kingdom has always had substantial non-tax attractions as a location for the holding company of an international group. The Headline corporate tax rate is the lowest of the major economies and generous interest relief provisions reduce taxable profits and make the effective tax rate even lower. The UK has an extremely extensive network of double tax agreements. Unlike many of its European counterparts, the UK does not have capital duty on share subscriptions and there is no withholding tax on dividends paid by United Kingdom companies, irrespective of the residence of the shareholder.
Legislation exempting capital gains on the disposal of substantial shareholdings took effect 1 April 2002 in advance of the publication of the 2002 Finance Bill which will enact the legislation retrospectively. This participation exemption is a major development and one which makes the UK even more attractive. For many years the business community has argued for the introduction of a "participation exemption" on capital gains and dividends to bring it in line with a number of other European jurisdictions in particular the Netherlands. The new legislation meets these demands whilst setting out certain conditions and anti-abuse provisions and effectively sets the UK ahead of its competitors in respect of its holding company facility.
For capital gains exemption the investing company must have held a substantial shareholding in the company invested in for a period of twelve months within the two years prior to the disposal. It is not therefore necessary for the investing company to have a substantial shareholding at the time of the disposal to qualify. A substantial shareholding is at least 10% of the ordinary share capital of the company invested in and 10% of the rights to profits available for distribution and assets on a winding up.
The investing company must be either a sole trading company or a member of a trading group throughout the period beginning with the start of the last twelve month period in which the substantial shareholding requirements was met, and ending at the time of disposal and also immediately after the disposal.
"Trading" in this sense extends to preparing to carry out a trade or to acquiring a significant interest in the share capital of another trading company or holding company of a trading group (subject to the proviso that the interest acquired is not already a member of the acquiring company's group).
The investing company must be a "qualifying trading company" or a "qualifying holding company" throughout the period beginning with the start of the last twelve month period in which the substantial shareholding condition is met and ending at the time of the disposal and also immediately after the disposal. The definition of a "qualifying trading company" is one which does not carry on to any substantial extent non-trading activities such as holding intellectual property and ownership of land or assets as investments. A "qualifying holding company" is one which together with its 51% subsidiaries does not carry on to any substantial extent non-trading activities.
Whilst the legislation marks the UK out further as an attractive jurisdiction for holding company purposes it is important to remember that exemption applies only where the conditions set out in the legislation are met. The investing company must be a trading company immediately after the disposal. If as a consequence of a disposal, a company ceases to be a trading company or the holding company of a trading group because its non-trading activities comprise more than 20% of its activities, the gains will not be exempt.
United Kingdom owned groups have frequently used intermediate holding companies to hold shares in overseas trading companies. This has been done for a variety of reasons including getting the best mix of tax rates. With the advent of the new legislation the need for such intermediate holding companies is now questionable and the cost of establishing and maintaining such companies may no longer be justified in many situations. The withholding tax suffered on distributions via an intermediate holding company is more likely to be more than would be the case if the UK parent owned the company directly.
The following requirements must be observed: the Investing company (or Holding company) must hold at least 10% of the ordinary share capital of the Subsidiary company for at least 12 continuous months (then 12 months must not begin more than 2 years prior to the disposal of the shares). The Investing company (or Holding company) must be a trading company by itself or a holding company of a trading group during the 12 months period mentioned above. The Subsidiary company must be either a trading company by itself or the Holding company of a trading group for the whole of the 12-month period. Trading activities mean activities in a trade, profession, or vocation carried on, on a commercial basis with a view of generating profits. Similar provisions apply for group companies.
What
is a Holding Company?
UK holding companies as companies the purpose of which consists exclusively or primly in the administration of assets or in participation in or the permanent administration of interest in other enterprises. A standard limited company may be used as a holding company of any kind of entity anywhere in the world. Such a structure enhances the owner's privacy, facilitates ultimate sale of the underlying business and may have other practical benefits in the course of day-to-day operations. For example, the holding company could be used to provide loans to subsidiaries in various countries, on which the subsidiaries may obtain the benefit of tax deductions on interest paid.
The English or Scottish holding company of overseas subsidiary companies already performs creditably as an international holding company. Consider the following: the United Kingdom has the widest network of double tax treaties in the world, and is also a signatory to the EU Parent / Subsidiary Directive. Given the quality and extent of the UK's tax treaty network, it is arguably the best performer in the important discipline of extracting overseas dividends at the minimum tax cost. Whilst the United Kingdom offers no exemption from UK corporation tax on foreign income dividends, it grants double tax relief by way of a credit for foreign corporation tax underlying the dividends provided that the company holds, directly or indirectly, at least 10% of the share capital of the company from whom the tax credit is claimed. Where the underlying foreign corporate tax rate is 30% or more, then the credit will normally be a complete relief from UK corporation tax - and therefore as good as an exemption. It is significant that the UK has lower rates of corporation tax than most other industrial nations. The United Kingdom is remarkable in not imposing any withholding tax on dividends distributed by companies to UK non-resident shareholders. It therefore outperforms the other leading holding company locations in this regard.
The United Kingdom has always had substantial non-tax attractions as a location for the holding company of an international group. The Headline corporate tax rate is the lowest of the major economies and generous interest relief provisions reduce taxable profits and make the effective tax rate even lower. The UK has an extremely extensive network of double tax agreements. Unlike many of its European counterparts, the UK does not have capital duty on share subscriptions and there is no withholding tax on dividends paid by United Kingdom companies, irrespective of the residence of the shareholder.
Legislation exempting capital gains on the disposal of substantial shareholdings took effect 1 April 2002 in advance of the publication of the 2002 Finance Bill which will enact the legislation retrospectively. This participation exemption is a major development and one which makes the UK even more attractive. For many years the business community has argued for the introduction of a "participation exemption" on capital gains and dividends to bring it in line with a number of other European jurisdictions in particular the Netherlands. The new legislation meets these demands whilst setting out certain conditions and anti-abuse provisions and effectively sets the UK ahead of its competitors in respect of its holding company facility.
For capital gains exemption the investing company must have held a substantial shareholding in the company invested in for a period of twelve months within the two years prior to the disposal. It is not therefore necessary for the investing company to have a substantial shareholding at the time of the disposal to qualify. A substantial shareholding is at least 10% of the ordinary share capital of the company invested in and 10% of the rights to profits available for distribution and assets on a winding up.
The investing company must be either a sole trading company or a member of a trading group throughout the period beginning with the start of the last twelve month period in which the substantial shareholding requirements was met, and ending at the time of disposal and also immediately after the disposal.
"Trading" in this sense extends to preparing to carry out a trade or to acquiring a significant interest in the share capital of another trading company or holding company of a trading group (subject to the proviso that the interest acquired is not already a member of the acquiring company's group).
The investing company must be a "qualifying trading company" or a "qualifying holding company" throughout the period beginning with the start of the last twelve month period in which the substantial shareholding condition is met and ending at the time of the disposal and also immediately after the disposal. The definition of a "qualifying trading company" is one which does not carry on to any substantial extent non-trading activities such as holding intellectual property and ownership of land or assets as investments. A "qualifying holding company" is one which together with its 51% subsidiaries does not carry on to any substantial extent non-trading activities.
Whilst the legislation marks the UK out further as an attractive jurisdiction for holding company purposes it is important to remember that exemption applies only where the conditions set out in the legislation are met. The investing company must be a trading company immediately after the disposal. If as a consequence of a disposal, a company ceases to be a trading company or the holding company of a trading group because its non-trading activities comprise more than 20% of its activities, the gains will not be exempt.
United Kingdom owned groups have frequently used intermediate holding companies to hold shares in overseas trading companies. This has been done for a variety of reasons including getting the best mix of tax rates. With the advent of the new legislation the need for such intermediate holding companies is now questionable and the cost of establishing and maintaining such companies may no longer be justified in many situations. The withholding tax suffered on distributions via an intermediate holding company is more likely to be more than would be the case if the UK parent owned the company directly.
There may be tax-planning opportunities in eliminating the overseas holding companies. In particular, if such companies have retained profits, it may be possible to bring those profits onshore tax-free. In June 2002 the UK government introduced a capital gains tax exemption for UK companies with substantial shareholdings in another company. The new rules have now been clarified and apply to UK registered companies, foreign registered companies resident in the UK for tax purposes, as well as UK branches of companies registered outside the United Kingdom.
The following requirements must be observed: the Investing company (or Holding company) must hold at least 10% of the ordinary share capital of the Subsidiary company for at least 12 continuous months (then 12 months must not begin more than 2 years prior to the disposal of the shares). The Investing Company (or Holding company) must be a trading company by itself or a holding company of a trading group during the 12 months period mentioned above. The Subsidiary company must be either a trading company by itself or the Holding company of a trading group for the whole of the 12-month period. Trading activities mean activities in a trade, profession, or vocation carried on, on a commercial basis with a view of generating profits. Similar provisions apply for group companies.
The United Kingdom has generally been overlooked as an international holding company location. For many years this state of affairs was exacerbated by the UK tax regime's requirement that an advanced payment of corporation tax, known as ACT, become due whenever a dividend was paid. In many cases zero or very low rates of UK corporation tax would be payable on the foreign income of such companies (due to double taxation relief), and thus ACT became irrecoverable as there was no UK corporation tax payable against which to set off the ACT. Fortunately, ACT is no longer with us, and this has put the United Kingdom in a very competitive position with the famous international holding company regimes of the European continent: Austria, Belgium, Denmark, Luxemburg, The Netherlands, Spain and Switzerland.
In fact, the United Kingdom has many competitive advantages over these "designer" holding company regimes. The country has a wider network of double tax treaties than its main competitors. There is no capital duly, no minimum paid-up share capital requirements and no dividend withholding tax regime. In addition, the administrative costs of UK companies are comparatively low.
Qualifying For Treaty Relief On Withholding Tax: The reduced or zero rate of withholding tax must be dependent on the British company being the beneficial owner of the dividend income. It cannot be dependent on the English company being the beneficial owner of the shares themselves.
Foreign Tax Credit Relief: The UK company must hold at least 10% of the voting power target company too claim the tax relief in the United Kingdom for underlying foreign tax payable on the target company's income.
Foreign Capital Gains Tax Regimes: These should be no domestic capital gains tax (CGT) levied in the target company's country on the gains of the United Kingdom company arising from the disposal of the shares of the target company.
The double tax treaty between the UK and the target company's country will often oust the target company's domestic taxing rights in favour of UK taxing rights, but the question is: can a UK company, which is receiving capital gains as a bare trustee of an offshore principal, obtain treaty protection from any domestic CGT levied by the target company's country?
This is not a problem with the US case study shown, as its domestic law does not tax capital gains of non-resident disposing US shares, provided that the greater part of the US company's value is not derived form real estate. But this is an interesting area where these is such a foreign domestic tax. Take Italy as an example, whose law does impose a domestic capital gains tax on the gains non-resident derive from selling Italian company shares. If the UK company in this case study also wholly owned an Italian subsidiary, and assuming that it held the shares of Italian company under the terms of an agreement with its offshore parent of the kind just outlined, then on the face of it treaty between Italy and the UK giving taxing rights to the United Kingdom.
When one look at the articles of the some treaty governing distribution of dividends, interests and royalties, there are express provision in those various articles stipulating that the recipient of those distribution must be the beneficial owner of such income in order to benefit from the treaty provisions. It would therefore appear that advisors have a basis for relying on the wording of Article 13 (4) of the UK-Italian treaty to claim treaty exemption from capital gains tax in Italy for a United Kingdom company holding shares in an Italian company under a division of share rights agreement of the kind considered in this article.
Tax Fraud: This does lead on the question of the money laundering. If a UK professional service provider assists a foreign client to commit tax fraud on a foreign revenue authority, then if a United Kingdom service provider offers his assistance knowing or suspecting foreign tax fraud, a money laundering offence may be committed in the UK. So in a scenario such as this where reliance is being placed on the capital gains article of the UK-Italian treaty by the British company under a "division of share rights agreement", the tax planning must be meticulously implemented. The division of share rights must be valid and effective and the parties must ensure that they are in a position to substantiate their respective entitlement to the appropriate Revenue authorities.
Conclusion: The division of shares rights agreement is a simpler solution to the CGT problem of UK holding companies than other planning techniques involving split share capital arrangements in the target company or the UK business entity.
A division of share rights agreements becomes contentious where the target company's country has a domestic CGT regime. This can be overridden by an appropriately worded United Kingdom double tax treaty, but much will be depend upon the precise wording of this treaty.
Meanwhile, the Treasure have proposed an exemption for UK companies which meet certain criteria from corporation tax or capital gains realized from disposing of "substantial" shareholdings, and the Chancellor of the Exchequer, in his pre-budget report on November 27, 2001 has confirmed that the government are now proceeding the draft legislation to progress this welcome initiative. The precise details of the exemption should be published following the Chancellor's Budget Speech in the House of Commons on 17 April 2002. UK holding companies which do not come within the terms of the new participation exemption should consider relying on the CGT planning points referred to in this article.
Exporting Companies Using Double Tax Treaties:
Prior to the enactment of section 66,
Finance Act 1988, it was perfectly possible to migrate a company incorporated under the laws of one of the constituent jurisdictions of the UK to a non-UK jurisdiction. All one needed to do was to ensure that the company's central management and control was at all times exercised outside the UK. Section 66, Finance Act 1988 removed this flexibility; it provided that (subject to certain grand-fathering and transitional rules) a company which was incorporated in the UK would thenceforth be regarded for UK tax purposes as resident in the UK, irrespective of where its central management and control was exercised from.
However, section 66, Finance Act 1988, is subject to the provisions of any applicable double tax treaty. Thus, the provisions of a double tax treaty may make a UK incorporated company a resident of an overseas jurisdiction (and not of the UK) for the purposes of that treaty. See, for example, Article 3(3) of the UK-Barbados Agreement of 26th March 1970, as amended:
"3(3) Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States then it shall be deemed to be a resident of a Contracting State in which its place of effective management is situated."
Other examples of UK double tax treaties that can be used for this purpose are those with Cyprus, Mauritius and Switzerland. It should be noted that the concept of central management and control is not quite the same as the place of effective management. The former test looks to the highest level of policy decision-making relating to the company's business, whereas it is thought that effective management refers more to the day-to-day management of the business.
The Substantial Shareholder Exemption:
UK incorporated (and resident) companies have always been somewhat troublesome as international holding vehicles. Over the years, successive UK Governments have tinkered with the corporation tax system in an effort to attract international corporate business to the UK, with varying degrees of success. The position that we are now in is as follows.
A UK incorporated holding company is within the charge to corporation tax on its worldwide income and capital gains. If its only income is dividend income from subsidiary companies, that income will either be exempt (UK dividend income) or within the charge to corporation tax (foreign dividend income). Unilateral relief or double tax relief may be available to mitigate the incidence of corporation tax on foreign dividend income, in respect of underlying tax borne by the dividending company or withholding tax payable on the dividend itself. Where the credit given for the underlying tax and/or the withholding tax is greater than or equal to the corporation tax payable (the highest rate of corporation tax is 30%), no corporation tax will be due; where, however, the credit given is less than the corporation tax payable, the difference between the credit and the corporation tax payable will be due. Dividends declared (or, in the case of interim dividends, declared and paid) by a UK resident company attract no withholding tax.
If a UK registered holding company only owns shares in subsidiary companies (wherever incorporated and resident) and all (or predominately all) of those companies are trading companies, the new substantial shareholder exemption from corporation tax may be in point on a disposal of some or all of the shares in those companies.
A UK incorporated holding company will own a substantial shareholding in another company (the "investee company") if it owns shares by virtue of which: it owns not less than 10% of the investee company's ordinary share capital; it is beneficially entitled to not less than 10% of the profits of the investee company available for distribution to equity holders of the investee company; and it would be beneficially entitled on a winding-up of the investee company to not less than 10% of the assets of the investee company available for distribution to equity holders.
The UK incorporated holding company must have owned the shareholding for a certain period of time before the disposal, in order to qualify for the exemption. In short, in the 2 years prior to disposal, the UK incorporated holding company must be able to show a continuous period of ownership of 12 months.
Finally, the UK registered holding company, in addition to having owned a substantial shareholding throughout the requisite continuous 12 month period, must either be a sole trading company (which, where it is purely a holding company, it won't be) or a member of trading group, both throughout the requisite period of pre-disposal ownership and immediately after the time of disposal. In this respect, a group of companies consists of the UK incorporated holding company and its direct or indirect 51% subsidiaries. A trading group is a group, one or more of whose members carry on trading activities, in which the activities of its members, taken together, do not include to a substantial extent activities other than trading activities.
In terms of the investee company, it must have been a trading company, a holding company of a trading group or a holding company of a trading sub-group throughout the period beginning with the start of the UK incorporated holding company's requisite continuous 12 month ownership period and ending with the time of disposal, and immediately after the time of disposal.
The above is a merely a snapshot of the relevant legislation. It is complex, and contains certain anti-avoidance provisions, which would always need to be considered. It is also worth remembering that any non-UK resident subsidiary company of a UK incorporated holding company will be a controlled foreign company and, therefore, the exemptions to the controlled foreign company legislation (most notably, the exempt activities exemption and the motive test exemption) would need to be considered.
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