News & insight

Brexit: Should I use the UK as a holding company location?

January 28, 2021

ANDREW WALLIS
Corporate and International Tax Partner
Kreston Reeves, United Kingdom

The UK has consistently ranked as one of the best places to locate a holding company due to its robust legal system, relative political and economic stability, geographic location, time zone, language, low costs of company administration and attractive tax environment.

Given Brexit, however, should companies be looking elsewhere – such as Ireland or the Netherlands – to locate their holding companies? In short, although both Ireland and the Netherlands have their attractions and will of course remain within the EU, we do not think that the attractiveness of the UK will be greatly diminished by Brexit.

A whole range of tax issues should be considered when determining the best location for a holding company. Although the final decision will depend on a group’s unique circumstances and priorities, key considerations include the factors outlined below, which continue to position the UK as an attractive holding company location regardless of its non-EU status.

Corporate income tax rate

The UK has the lowest corporate tax rate of the G7 group of countries: 19%. The fact that this is not as low as Ireland’s 12.5% tax rate for trading income may not matter, given that most holding companies will not have significant business activities.

Withholding taxes

One of the most attractive features of the UK is that it does not impose withholding tax on the payment of dividends by a company. This means that profits can be returned to parent entities/shareholders with no tax leakage.

The UK also has the most extensive double tax treaty network in the world; the rate of withholding on payments of interest and royalties is often reduced from the non-treaty rate of 20%, or can even be exempt. Further, as the UK seeks to agree free trade deals with non-EU territories, there is the potential for term treaties to become even more generous and widespread.

Taxation of dividend income

Dividends and distributions received by UK companies are typically exempt from corporate income tax regardless of whether they are paid by UK or overseas companies. In particular, subject to specific anti-avoidance cases, the following are exempt:

  • Distributions from controlled companies
  • Distributions from portfolio companies (<10% shareholding)
  • Distributions in respect of non-redeemable ordinary shares.

Taxation on sale of subsidiaries

The ‘substantial shareholding exemption’ (SSE) exempts any capital gain on the disposal of shares in a subsidiary (UK or overseas) in cases where:

  • More than 10% of the shares in the subsidiary have been held for a continuous 12-month period during the 6 years preceding the date of disposal
  • The company being disposed of has been a trading company, the holding company of a trading group, or the holding company of a trading subgroup.

Though Ireland has its own version of SSE and the Netherlands has a participation exemption, the generosity of the UK’s SSE should not be overlooked.

Controlled foreign company rules

Like many jurisdictions, the UK has controlled foreign company rules. However, the UK has moved to a much more territorial basis of taxation that can mitigate the application of the CFC rules by offering a broad range of exemptions and exceptions. These include a tax avoidance gateway test, an excluded territories exemption, a low profits exemption and a low profit margin exemption.

Of course, both Ireland and the Netherlands have now incorporated controlled foreign company rules into their domestic legislation under the EU Anti-Tax Avoidance Directive.

Capital taxes

The UK does not impose capital taxes (stamp duty) on the issue of shares by a UK company, although most transfers of shares in a UK company are subject to stamp duty at 0.5%.