How establishment of groups of companies be made in setup UK and what are controlled foreign companies?


In the process to open new company UK, there is a need to understand its rules in order to avoid any violation. This blog will focus on the relief of unilateral credit, establishment in the form of groups of companies when working on how to register a limited company in UK and controlled foreign companies including the definition of a CFC, profits that are chargeable, exemptions, the charge of CFC and the procedure for clearance.

In the case if a company having various overseas profits resources, then the charitable donations that qualify, deficits and the losses must be subject to allocation first to profits of UK, followed by the sources abroad that have been subject to the suffering lowest rates of foreign taxation.

In any case, the relieved carry forward losses should be set against the trade’s profits that are available first due to which the loss occurred.

The effect of its choice on the relief of double taxation should be considered by a company that possesses a choice of reliefs for loss. As an example, consider that you open new company UK and with time, a claim made for the relief of loss can result in the absence of liability of UK tax, or a liability of very minute manner, so that the unrelieving of foreign tax can occur. This issue can be avoided by the relief of carry forward loss and can still result in a very little payment of UK tax to be made for the duration of loss.

The companies that have made the claim for DTR must issue a notice to HMRC to inform if the payment of overseas tax is subject to adjustment and it has made a DTR claim in an excessive manner as a result. The notification should be given in the written form within one year of any adjustment to the foreign tax.

Establishment of Groups of Companies

The establishment of consortia and groups can be done with the help of group relief, via the companies residing anywhere in the world. However, the availability of group relief can only be found and made a claim from the companies that are within the corporation tax’s charge. Hence, the group relief is applicable to the companies that are either residing in England or are residing outside the UK but running with the help of a permanent establishment or a PE in the United Kingdom.

If the company performs its operation through a permanent establish company in UK, then as a usual manner, it can only sustain the losses that are made by the permanent establish company in UK. The group companies residing in the European economic area or in EEA’s other country, then a very restricted exception exists for such companies. These companies may be seen surrendering the non-UK losses to the members of UK group, but only at the place where all the options for relief of the present and the upcoming losses have been exhausted abroad. In more practical terms, this can be explained by the statement that it is not easy to make a claim until and unless a company enters liquidation.

In a similar manner, an existence of a consortium can be found for the purposes of relief in the case when one or more of the members does not reside in the UK but the relief is not able to be passed to or from a company that is not within the corporation tax’s charge.

Suppose that someone was planning on how to register a limited company in UK, and finally he/she came up with three limited companies, say A Ltd, B Ltd and C Ltd that were UK based. Since these three companies have one common parent or owned by the same person, so they will be held accountable in the form of a group relief irrespective of the fact that the parent company does not reside in the UK. These companies in UK may sustain losses to each other, but as a normal practice, not to or from the parent company that is abroad.

Companies’ Permanent Establishments

The UK based permanent establishments of the companies that are resident in the European economic area, are allowed to sustain the losses of UK under the group relief to the members of UK group. In the case if these losses not being relieved against the profits in the foreign country.

The UK based permanent establishments of the companies that are resident in the non-European economic area countries are also allowed to sustain the losses of UK to the members of UK group, but only in the case if those losses’ availability cannot be found against profits in the country abroad irrespective of the fact that whether the losses have been relieved overseas in reality.

The losses that are suffered by the foreign permanent establishments of the UK companies can be sustained in the form of a group relief only if their availability cannot be found for the relief against profits in the foreign countries.

The Concept of Global Group

The global group concept means that one needs to have a look at whether the company is supposed to pay the corporation tax of UK based on any of its chargeable gains, instead of having a look at the residence of the company. No loss or no gain transfers can be made possible within a global or a worldwide group of companies under the condition that the assets that are transferred do not provide a potential leakage of the corporation tax UK.

The global group concept is applicable to the transfer of the entire or a portion of trade and is extended to specific transfer of assets within the group and to the transfer of the assets that are subject to disposal by one country of the complete or a portion of the business to some other company in the form of a scheme of amalgamation or reconstruction.

Restriction of Interest

The interest that is to be paid and the subtraction of tax by group members of UK companies are limited to the group’s consolidated gross finance expense. This is said to be the worldwide debt cap. The rules are applicable to groups excluding those that constitute completely of the companies that are medium or even small in size.

CFC (Controlled Foreign Companies)

The chargeable profits of a controlled company abroad are subject to the appointment of the companies residing in UK having an entitlement of a minimum of 25% of these profits, and are subject to a charge of CFC at the corporation tax’s main rate.

The focus of the controlled foreign company is on the artificial diversion of profits of income from the UK. Note that these are not the chargeable gains.

In the case when a CFC owns some profits that are chargeable, and covering of CFC is not done by one of the exemptions, then those profits that are chargeable are divided or apportioned to the corporate shareholders of the UK CFC.

Any company residing in the UK and having a holding of at least 25% in the CFC will have need of the self-assessment of a charge of CFC, in relation to the profits that are apportioned or divided, at the corporation tax’s main rate. Any foreign tax that is attributable to the profits that are divided or apportioned can be subject to the credit against the charge of controlled foreign companies or the CFC.

How is a CFC Defined?

A CFC, i.e. a controlled foreign company is defined as the company that is not residing in the UK but is under the control of persons who are resident in the United Kingdom.

Persons resident in the United Kingdom can control a company in the conditions if a person or persons from the UK control the company, that is, 50% or more control, or if it is held with at least 40% by a person residing in England and at least 40% but less than 55% by a person who is not a resident of the UK.

What are Chargeable Profits?

Chargeable profits are defined as those profits of income of the controlled foreign companies that are not chargeable gains of the CFC and their calculation is done by making use of the rules of UK tax, whose diversion is done automatically from the United Kingdom.

One of the following conditions need to be fulfilled in order to cease the rendering of the profits as chargeable profits:

  • The assets or risks of the company are not controlled or managed from the UK to any noticeable extent at any instant in the period of accounting.
  • The company is not considered as a party to the arrangements, this is done in order to eliminate or lessen a charge made to overseas or UK tax at any point in the period of accounting.
  • In the case of company having risks or assets whose control or management is performed from inside the UK, it is then commercially capable to make sure that the business of the company would not stop if the risks and assets managed in the UK were not being managed from there anymore. This is done in order to test the reliability of the CFC on the management of United Kingdom.

Existing Exemptions

In case if one of the following exemptions are applicable, there is no charge of CFC even if the CFC has chargeable profits:

  • Period of Exempt: the intention of this period is to provide the companies with time for restructuring that come under the rules of UK CFC so that they do not have to make the payment of any charge. A period of exempt terminates 12 months after a company is controlled by the UK residents, an accounting period that ends within the period of exempt is exempt. In order to make a qualification for exemption, the company should be within the scope of the rules of CFC in its first period of accounting after the termination of the period of exempt, but not any profits in that particular period of accounting is subject to division or apportionment or a CFC charge.
  • Territories that are excluded: the issuance of regulation is done by the HMRC that provides a list of ‘good’ territories where the profits of a company are not in general, subject to a tax’s low rate. A company that is completely liable to tax and is resident in a mentioned territory, then it will not be required to make the payment of a charge of CFC.
  • Profits at a Low rate: a company is not included in an apportionment and charge of CFC if its profits are less than 50,000 pounds or less than 50,000 pounds out of which only 50,000 pounds amount is considered to be profits of non-trading type. The profits can be determined on either of the two basis, i.e. tax or accounts, and the scaling down of limits is done for periods of accounting of less than 12 months.
  • Margin of Low Profit: a company is not made subject to apportionment if its periods of accounting are less than 10% of its related expense of operation.
  • Exemption from tax: a company is not subject to apportionment if its tax whose payment is made in its territory of residence is at least 75% of the corporation tax of UK that could not be made payable in the case if it had resided in the United Kingdom. The adjustment of local tax is done for the items that are liable to tax in a local manner not in the United Kingdom, and the expense whose permission is acquired at a local level but is not permitted in the calculation or computation of UK.

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