Setting up and trading internationally involves a raft of commercial and strategic considerations, one of which will be choosing the most appropriate corporate structure. For most companies, the most sensible option will be to form a holding company.
Expanding into new geographical markets always involves increased risk, but this is far easier to manage when trading activities are segregated into subsidiary companies. Cash can be repatriated tax efficiently from overseas locations and personal liability deferred. In addition, corporate governance is improved when the board of a holding company is responsible for group strategy and the boards of subsidiaries focus on trading operations.
Another important factor is flexibility. A holding company structure provides a highly flexible platform for future acquisitions, disposals and joint-ventures.
This structure brings other commercial benefits. Having subsidiaries report their financial results to one holding company improves visibility and can allow the group to reduce its overall tax burden through the coordinated management of group profits.
If you do not currently operate through a holding company, the good news is that establishing one can often be relatively straightforward. The shareholders in an existing trading company would dispose of their shares and in exchange receive shares in a new holding company. Such share exchange transactions can often be undertaken by UK-resident shareholders on a tax-neutral basis. However, prior clearance should be obtained from HMRC to ensure that it does not give rise to capital gains tax, income tax or stamp duty.
Where to base your holding company
Once you have decided to create a holding company, the next decision is where to base it. Several commercial and tax factors will determine the best location.
On the commercial front you will want to consider the accessibility for shareholders and directors, the stability of the legal system and any local governance requirements.
On the tax front, you will probably want a jurisdiction that:
- Has a wide and well established tax treaty network
- Has low corporate tax rates
- Provides exemption from capital gains and tax on dividends received
- Levies minimal withholding tax on dividends, interest and royalties
- Has minimal anti-avoidance legislation
If you are trading in Europe, it will also be beneficial to based in a jurisdiction with access to EU Directives.
The importance and relevance of each factor will depend on individual circumstances. However, where the main shareholders are UK domiciled and resident, it would be unusual for a non-UK location to be the most appropriate option.
It is therefore good to know that recent changes to tax legislation have made the UK an excellent location for a holding company. The advantages of the regime are briefly summarised below:
- Low corporate tax rate (20% and reducing to 18% by 2020)
- Strong network of double tax treaties (over 120 countries)
- Dividend repatriation to the UK is taxable, but exemptions are available
- Anti-avoidance rules include the Controlled Foreign Company regime
- Disposal of subsidiaries are taxable, but exemptions are available
- No withholding tax on dividends paid
- Pre-transaction rulings are available on significant commercial transactions
- Access to all EU Directives
It is also worth noting that, when selling shares in a holding company, the tax residence of the shareholder needs to be taken into account, and not just the location of the company. So, if you are UK resident and domiciled, establishing a holding company in an offshore jurisdiction will not reduce your UK capital gains tax when you sell up.
In summary, structuring through the use of a holding company can bring considerable benefits when trading internationally. The UK has developed a very attractive holding company regime, although some elements are complex, such as dividend and capital gains exemptions and anti-avoidance legislation. However, an internationally competitive system is now in place, and this should result in the UK being the location of choice for many international groups.
Nick Farmer (nfarmer@menzies.co.uk) is International Tax Partner at Menzies chartered accountants.
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