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The UK holding company regime
The UK provides an appealing tax environment for holding companies, offering key advantages such as a generous participation exemption, exemption from withholding tax, tax-free corporate dividend receipts, and a broad network of double tax treaties. These benefits make the UK an attractive location for establishing an international headquarters.
This article outlines the tax treatment of a holding company in the UK, highlighting the main advantages.
Tax on Profits
A UK holding company may have minimal taxable profits, given the availability of interest deductions and the tax exemption for inbound dividends. Any profits that do arise will be subject to corporation tax, as detailed below.
UK corporation tax applies to the worldwide profits and gains of a UK-resident company, with no distinction made between income and capital gains.
- Companies with profits of £250,000 or more are taxed at a 25% flat rate.
- The small profits rate of 19% applies to companies with profits up to £50,000, subject to certain exceptions.
- For profits between £50,000 and £250,000, a marginal relief applies, resulting in a tax rate between 19% and 25%.
The profit thresholds of £250,000 and £50,000 are reduced when considering companies that are grouped or associated with the holding company.
Tax on Funding
Debt Funding
If investment is made via debt, a UK holding company may be entitled to a tax deduction for interest payments, though this is subject to various restrictions, including anti-avoidance rules. If a group’s annual interest expenses exceed £2 million, deductions are capped at 30% of EBITDA, and additional restrictions may apply.
Typically, a UK holding company must withhold tax (currently 20%) on interest payments to investors providing loan finance. However, many situations allow for exemption from this withholding tax, including:
- Interest payments to non-UK resident investors from countries with UK double tax treaties that provide for interest exemptions or reduced withholding rates.
- Interest payments to UK banks and UK corporation taxpayers, which are exempt from withholding tax.
- Interest on quoted Eurobonds and certain private debt placements may also be exempt from withholding tax.
Equity Funding
UK companies are not required to withhold tax on dividends, regardless of the recipient's country of residence. However, dividends paid do not qualify for a tax deduction by the holding company.
Tax on Subsidiary Income
Dividends received by a UK holding company from UK or foreign subsidiaries are generally exempt from corporation tax under the UK’s “dividend exemption,” provided certain conditions are met. Small companies benefit from an exemption on dividends received from UK companies or countries with double tax treaties. Larger companies may still qualify for exemption if they control the subsidiary or meet other specified conditions.
Interest received by a UK holding company is typically taxable, but may be offset by interest deductions.
Shareholder Taxation
Non-UK resident shareholders are not subject to UK tax on dividend receipts but may be liable in their home country. Capital gains tax is generally not applicable to non-residents selling shares in a UK holding company unless the company holds UK real estate and is considered “property-rich.” UK shareholders may be subject to dividend tax rates based on their total income and will also face capital gains tax on share disposals.
Tax on Exit: Sale of Subsidiaries
If a UK holding company sells shares in its subsidiaries, it may benefit from the UK's substantial shareholding exemption (SSE), which allows for a tax-free disposal of shares under certain conditions. No election is needed, and the SSE applies automatically if the company holds at least 10% of the subsidiary for 12 months in the six years prior to sale, and the subsidiary is engaged in trading.
Capital and Transfer Duties
No capital duty applies to issued share capital in the UK, but stamp duty of 0.5% is due on share transfers, payable by the purchaser.
Anti-Avoidance Measures
The UK has numerous anti-avoidance rules to prevent abuse of its tax system, including Controlled Foreign Company (CFC) rules, hybrid mismatch rules, and transfer pricing regulations. These measures can limit the tax benefits outlined above.
Controlled Foreign Company (CFC) Rules: These rules prevent UK companies from shifting profits to low-tax jurisdictions by taxing a portion of the CFC’s profits in the UK, provided certain conditions are met.
Hybrid Mismatch Rules: These rules prevent the use of tax advantages from differences in treatment between jurisdictions, such as preventing deductions for interest payments in specific circumstances.
Transfer Pricing: Transactions between connected entities must be conducted at arm’s length to avoid tax advantages. This rule also applies to loans and can restrict interest deductions.
Diverted Profits Tax (DPT)
Multinational companies that divert profits away from the UK to avoid tax may be subject to DPT, which is charged at 31% of diverted profits, subject to certain conditions.
Maintaining Substance
To avoid challenges regarding tax residency, it is crucial for a UK holding company to demonstrate substance, such as through UK-based directors and regular board involvement in strategic decisions.
Conclusion
The UK offers significant tax benefits for international businesses, particularly regarding foreign income and investors. The UK’s lack of withholding tax on dividends and exemptions for both inbound and outbound payments makes it an attractive location for a holding company. However, companies should carefully consider their specific circumstances and seek professional tax advice.
