The UK introduced the concept of International Holding Companies (“IHC”) a number of years ago, as part of its aim to become the most competitive tax system in the G20 group of industrialised nations. The advantages offered are comparable to tax havens while offering the benefits of location in an EU member state and the UK’s wide network of international tax treaties. Understandably, UK resident holding companies have rapidly gained in popularity.
There are certain criteria that must be met by both the holding company and the subsidiary company in which it holds shares. In particular, the holding company must be a trading company or a holding company of a group of trading companies.
As an ‘ordinary’ UK company it falls within the scope of the general corporate tax legislation and will be taxed on its worldwide profits, subject to various exemptions.
UK resident holding companies are subject to UK corporation tax levied on the taxable profits at the rate of 20% from April 2015, plus VAT and payroll taxes.
There are two principal exemptions:
• Substantial shareholding exemption: a disposal by the holding company of shares held in a subsidiary will be exempt for UK tax, providing the holding company held an equity interest of more than 10% in that subsidiary for a continuous period of 12 months or more before the disposal, which includes tax on any capital gain on the disposal.
• Worldwide dividend exemption: dividends and any other distributions from both UK and non-UK subsidiaries to the holding company are exempt from UK tax.
In addition, interest payments as well as other finance costs are usually tax deductible. Anti-avoidance rules impose a cap on the level of deductions that can be claimed for interest payments made by worldwide groups with the objective of preventing groups establishing a network of intra-group debt finance to reduce the group’s tax liability.
To prevent abuse by holding companies, the UK has implemented Controlled Foreign Company Rules, a set of anti-avoidance rules, under which it is possible for non-UK profits to be drawn within the scope of UK taxation, if the profits are considered to have been artificially diverted away from the UK.
While the payment of dividends is not deductible, the receipt of dividends by a UK holding company from a non-UK subsidiary may be exempt from any withholding tax, by virtue of the UK’s double taxation treaties and the EU Parent Subsidiary Directive.
Payments of interest by a UK company to a non-UK company are subject to UK withholding tax, subject to the provisions of any applicable double tax treaty. There is, however, no withholding tax on dividend payments.
It should be noted that there is no capital duty on the paid up or share capital on incorporation, though stamp duty of 0.5% is payable on subsequent transfers of the shares. There no minimum paid up share capital for private limited companies, unlike public companies are required to have a minimum share capital of £50,000 of which at least 25% must be paid up.
A holding company, like all UK companies, can be incorporated quickly and inexpensively whether as an off the shelf company or specially incorporated. It can be incorporated either as a private limited company (‘Ltd’) or a public limited company (‘PLC’).