Bloomberg Tax
March 13, 2023, 7:00 AM

UK Holding Companies—Key Tax Issues for Investors to Consider

Eloise Walker
Eloise Walker
Pinsent Masons LLP

When choosing a holding company jurisdiction, commercial (not tax) considerations will be the key driver—long gone are the days when it was possible to just establish a shell company in a lower tax jurisdiction with a decent treaty network. But tax will still be an important consideration, so why not consider the UK? While a UK resident company pays corporation tax on its profits and gains worldwide (19% currently, 25% from April), this is subject to various attractive exemptions.

This article considers a UK holding company used to hold shares in other companies—UK or overseas. Of course, whether a UK holding company works in any particular case depends on a detailed analysis of all the circumstances before implementation.

Dividends Received

Dividends received by the UK holding company from its subsidiaries (UK and non-UK) usually benefit from the dividend exemption, which means no corporation tax is payable on them.

How the UK holding company becomes eligible to benefit from the dividend exemption depends on whether it is a “small” company, that is, if it (plus any linked enterprises) has under 50 employees and its annual turnover or annual balance sheet is under 10 million euros ($10.5 million).

If the holding company is “small,” the exemption applies to payments from UK subsidiaries or those resident in most places where the UK has a double tax treaty (subject to certain conditions).

If the holding company isn’t small, the exemption is even easier to apply—it is usually available provided the dividend comes from a company controlled by the holding company (subject to a few additional conditions).

While dividends are usually exempt, the UK, like most jurisdictions), has a comprehensive system of anti-avoidance rules to prevent artificial diversion of profits. These include:

  • Controlled foreign company rules: A CFC is essentially a non-UK company controlled by one or more UK resident persons and set up in a low-tax jurisdiction to escape UK corporation tax. The rules will—subject to exemptions—attribute profits of the CFC to a UK company to pull them back into the corporation tax net.
  • Transfer pricing regime: Only applicable to large companies (small and medium-sized enterprises are exempt), these rules broadly substitute a market price for the price actually charged between connected persons, for example, on goods, services, and interest on loans, to counteract any attempt to inflate tax deductions available to a UK company or otherwise achieve a UK tax advantage.
  • Diverted profits tax: DPT is a complex regime aimed at multinational groups that are operating in the UK but diverting profits abroad trying to escape UK tax, by applying penal rates (6% above the normal rate).

Payments Made to Investors

Investors usually invest in a UK holding company in two ways:

  • Equity (buying shares in the company), which pays them dividends; or
  • Debt (lending money to the company), which pays them interest.

Shares and Dividends

Like most countries, the UK provides no tax deduction to the holding company for dividends paid to investors.

However, unlike most countries (and an attractive benefit of the UK over other nations), the UK has no withholding tax on dividends paid by a UK company as a matter of domestic law, with no need to claim an exemption or other compliance.

Debt and Interest

A tax deduction may be available to the UK holding company on payment of interest to investors. Like most countries, the UK has a comprehensive set of anti-avoidance rules aimed at preventing misuse of this tax deduction, including the transfer pricing regime discussed above.

There is also, like most countries that follow recommendations from the Organization for Economic Cooperation and Development, a general restriction on the ability of a UK company to deduct interest from taxable profit. This broadly operates to restrict interest tax deductions by reference to a fixed ratio (30% of earnings before interest, taxes, depreciation, and amortization), subject to a de minimis threshold and an alternative ratio linked to a group’s third-party interest expenses.

On withholding tax, a UK holding company’s general duty to withhold tax (currently at 20%) on UK source payments of interest to investors is subject to a range of exemptions which usually reduce the effective rate to 0%. These include interest payments:

  • To UK banks;
  • To UK corporation taxpayers;
  • On “quoted Eurobonds”—essentially a debt security, carrying a right to interest, issued by a company and listed on a recognized stock exchange;
  • In certain qualifying private placements—basically a type of unlisted debt instrument sold in a private offering to a limited number of investors; and
  • To investors resident in a double tax treaty jurisdiction, subject to the completion of compliance formalities to claim exemption. The UK has one of the widest networks of double tax treaties in the world, which decreases the 20% rate substantially (often to zero).

Exit Strategies

It is important to consider exit strategies when setting up a new holding company, and the UK has two attractive features.

Sale of Subsidiaries

If the UK holding company sells shares in its subsidiaries and distributes the profits to investors as dividends, it can do this tax free under the substantial shareholding exemption. This participation exemption applies automatically and makes the entire gain exempt from corporation tax otherwise applicable to any capital gain.

The substantial shareholding exemption has various conditions but broadly applies where:

  • The holding company has held at least 10% of the shares continuously for at least 12 months; and
  • The subsidiary satisfies conditions relating to its status as trading (or holding company of a trading sub-group) for that one-year period—essentially, it/its group activities can’t substantially involve activities other than trading.

Sale of Holding Company

UK corporate investors may have the benefit of substantial shareholding exemption (see above), while individuals, as in most countries, can expect to pay capital gains tax, subject to exemptions and reliefs.

Non-UK investors, however, should generally be outside the scope of UK taxation on a share sale, unless the UK company is rich in UK real estate, where special rules apply.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Eloise Walker is the global head of corporate tax with Pinsent Masons LLP.

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