Transfer of Trade and Corporate Tax Aspects for Offshore Company Formation UK along with Double Taxation Relief

02 Nov

This blog will discuss the case of trade being transferred by one company to another when set up a new company UK or an old one extends the business. It will further take into discussion the overseas aspects of corporate tax that include residence of the company, and double taxation relief in the formation of UK company.

In the process of set up a new company UK, the arising of succession happens when a trade that one company carries on gets shifted to some other company, while being considered under the same ownership. In such a scenario, there is a chance for the losses to be carried forward and for the purposes of allowance of capital, the adjustments of balancing do not occur.

Transfer of Trade from One Company to Another

As a general practice, if the transferring of trade is done from one company to another, then that transfer is considered to be the start of trade for the transferee and the end of trade for the company that transfers. In case of any losses of trade left by the company that transfers, these losses get vanished and cannot be brought into use by the company that acquires the trade. Additionally, the adjustments of balancing have a probability of occurrence on the assets that qualify for the capital allowances. However, in the case of the transfer of the amounts of trade to a succession, then it is considered as the one that continues for some special purposes.

The term “succession to trade”, is hence defined as the trade that is carried on by the predecessor company gets transferred to another successor company under the same type of ownership.

The test mentioned above can be satisfied if the same persons have at least 75% interest in the trade both at some time during the period of 24 months since the transfer and at some time during the period of 12 months before the transfer and within these periods, the trade is being carried on by a company that is liable to tax in relation to it.

A succession, as a general practice, will be qualified if the company makes a transfer of trade to its 75% subsidiary. This type of transfer is named as a hive down as a general practice.

There are some other scenarios in which a succession occurs that constitutes of an acquiring of transfer by parent from a 75% subsidiary and a transfer of trade between any two companies with a common parent of 75% or indeed owned by the same individual to at least 75% of an extent. There is no compulsory rule for these companies to be residing in the UK, and hence the provisions are applicable to the companies that reside outside the UK but have their branches in the formation of UK.

In the case of a trade terminating in the way mentioned above, an accounting period comes to an end on the day the transfer is made. There becomes a chance for the predecessor to make a claim of the capital allowances in the last period of accounting assuming that there was no transfer. In this case, the unrelieved expense is taken over by the successor and gets the entitlement of capital allowances in the period in which the occurrence of transfer is expected or happened. The successor also gets the entitlement of relief for the carried forward losses of trade that are not in use by the predecessor, against the upcoming profits due to trade in which the suffering of losses had to be faced.

When a transfer takes place, the capital losses and the deficits on the relationships of non-trading loan do not get transferred and are held within the company that makes the transfer.

It should be kept in mind that the provisions mentioned above do not allow a carry back of the loss of trade as suffered by the successor company, against the profits that are recognized by the predecessor. It should also be noted that the ceasing of trade by the predecessor does not mean that it is qualified for a carry back of losses for three years.

Corporate Tax in the Case of Overseas Companies

The question arises while providing a relief, that which country is a company resident of. The answer found opens its way to a new discussion of the manner in which the relief may be provided for the taxes that are suffered by the overseas companies, what is the impact of offshore companies on a group and what is the way of making the companies in UK, a subject to tax on the profits of some specific subsidiaries residing outside the UK.

Residence of the Company

A company is said to be a resident company in the UK if it is a UK company incorporation i.e. either its control and central management are in the UK or it is incorporated in the United Kingdom. The exercising of control and central management is, in a usual manner, considered here the meeting of board of directors occurs.

A UK company incorporation that is a resident of UK, has to make the payment of corporation tax based on its profits around the world. It can both obtain the marginal relief and can be made liable to tax at the rate of small profits.

Companies that are Non-UK Resident with a Trade in UK

A company that is not a resident of England will be liable to the corporation tax in the case if it runs a trade in the UK with the help of a PE, or the personal establishment.

A permanent establishment can be defined as a fixed place to carry out the business of enterprise entirely or in parts. Its components are a factory, mine, office, workshop, oil or gas well, construction and quarry project that exceeds the duration of 12 months. The utilization of facilities of storage, maintenance and delivery of goods or a fixed place of business used merely for buying goods or any activity of ancillary are excluded from this.

The profits of both the UK resident or the Non-UK resident companies that are liable to the charge of tax include any income of trade that occurs from the PE either in a direct or an indirect manner, any income from rights or property that are held or used by the PE, excluding the dividends from UK companies and any chargeable gains that take place as a result of the disposal of assets situated in the UK.

The profits of the PE, or the personal establishment are liable to tax at only the corporation tax’s main rate. The marginal relief and the small profits rate are not applicable.

Companies Residing in UK, Acquiring Income from Outside the UK

In case of a company residing in the UK making investments outside the UK, then it will have to make the payment of the corporation tax on the profits received, the amount liable to tax is then before the subtraction of any foreign taxes. These profits can be any one of the profits mentioned below:

  • Income from the offshore securities, such as loan stock in offshore companies, known as the income of interest or the interest income
  • Chargeable gains occurring when you dispose of the assets from overseas
  • The profits from a permanent establishment that are not resident but are controlled from the UK, unless an election is done for the exemption of losses and profits from the overseas PEs or the permanent establishments, also known as the income of trade or the trading income
  • The income acquired from overseas possessions that include profits of a branch outside UK or an agency controlled from outside and the dividends acquired from the subsidiaries abroad

A company that is residing in England may acquire dividends from a subsidiary of outside. Most dividends that are acquired by a company that resides in the UK from a company that is not a resident of the UK do not have to make the payment of the corporation tax

There can occur a case where a company has to make the payment of bot the incorporation tax and the overseas tax. Usually, this happens in the case when there is a PE on the same profits in that offshore company. In the case of the overseas tax that is suffered, an availability of a relief of double taxation can be found.

Double Taxation Relief (DTR)

It is possible that a company acquires a double taxation relief for the overseas tax that withholds. The relief can be affected by the allocation of losses and charitable donations that qualify.

Main Principles of Relief

The relief for the overseas tax that a company suffers in the UK may be available presently in any of the three ways mentioned below:

  • Relief of Treaty: when the UK company and the overseas company come under a treaty, then there is a chance that some specific profits are not included in the taxation in any one of the companies involved and hence it entirely avoids the double taxation. In a more usual manner, treaties give the credit to be provided for the tax that is suffered in any one of the countries against the liability of tax in the other country.
  • Relief of unilateral credit: In the case where no relief of treaty is available, then there may be an availability of unilateral relief in the UK providing credit for the overseas tax against the tax of UK.
  • Relief of Unilateral expense.

Relief of Treaty

A treaty of tax that is based on the agreement of OECD model may either make use of the credit method or the exemption method in order to provide relief for the tax that is suffered on income against a business in a country, say B, by a company residing in UK, say R.

According to the method of exemption, the income is not liable to tax at all in the resident country or in the case if it is dividends or interest, that the country allows for taxation in the resident country, credit is provided for any country B’s tax against the resident company’s tax.

According to either of the methods, any credit that is provided id restricted to the B country tax that is to be acquired from the income.

Relief of Unilateral Credit

The relief of double tax is the lower of the tax of UK based on the profits of overseas type, and the overseas tax on the overseas profits.

The availability of reliefs can be detected for the overseas tax that is suffered on the PE profits, royalties and interests, up to an amount of the tax of UK corporation attributable to that income at the average rate of the company. The subtraction of tax that is done overseas is known usually as the withholding tax. The gross income that constitutes the withholding tax is a part of the total profits that are liable to tax. It is not of relevance or importance here that if the profits are conveyed back to UK or they are not. The amount of relief of double tax is the lower of the overseas tax on overseas profits and the UK tax on the overseas profits.

It is possible for a company to opt for the allocation of its charitable donations that qualify and losses that are relieved against the net profits in any of the way it like in order to fulfill the purpose of the computation of relief of double tax. A maximum amount against any UK profits should be set, resulting in the maximization of the corporation tax that is attributable to the profits from overseas and hence, as a result, maximizing the relief of double taxation that is available.

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