Are you sure that the foreign registered entity in which the investor holds ‘shares’ is considered to be a company for UK tax purposes?
As we see more clients holding investments in non-UK entities the above question is vital to understanding the tax position of our clients. Income tax, capital gains tax, corporation tax and inheritance tax may all be impacted by the answer to this seemingly simple question.
A follow on question, if the conclusion is that the foreign entity is a company, is whether it has issued ‘ordinary share capital’ (OSC). Whether a company has issued OSC can be important for eligibility for Entrepreneurs’ Relief (and the 10% rate of CGT), exemption on corporate gains from UK corporation tax and other reliefs such as business property relief and holdover gift relief.
The table below provides a high-level summary of some the key tax issues:
|Transparent – non company||Opaque – company|
|Annual revenue profits||Profits of the entity will be taxable in the hands of the investors.||Profits of the entity will not be subject to UK tax in the hands of the investor. Investor subject to tax on the receipt of dividends (UK corporate shareholder could benefit from dividend exemption).|
|Disposal of investment – individual||Individual treated as disposing of underlying assets.||Investor treated as disposing of his/her ‘shares’ in the company. Entrepreneurs’ Relief can only be available if the company has issued OSC.|
|Disposal of investment – corporate||Corporate investor treated as disposing of underlying assets. Gains subject to UK corporation tax.||Corporate investor treated as disposing of ‘shares’ in the company. Substantial shareholdings exemption can only apply if the target company has issued OSC.|
|Business Property Relief||Akin to holding an interest in a sole trade or partnership. Depending on nature of business value of interest potentially qualifies for 100% BPR.||Shares can qualify for 100% BPR if company carrying on business not wholly or mainly of making investments.|
If holding investments in foreign companies through a UK holding company, status of foreign investments can impact on holding company status for BPR purposes.
|Trading status – S.165 gift relief||Gift of underlying qualifying business assets capable of qualifying for CGT holdover relief.||Gift of shares in a ‘trading’ company capable of qualifying for CGT holdover relief.|
If holding investments in foreign companies through a UK holding company, status of foreign investments can impact on trading status for holdover relief purposes.
It is important to understand the UK tax implications of the ownership structure of investment in foreign entities. This may range from portfolio investment in multiple entities or the set up of local entity as a UK business expands its trade into new markets. It is worth stressing that what may be the typical ‘norm’ in the overseas jurisdiction could have adverse consequences to the UK tax position.
Understanding the interaction between the UK and foreign tax position is vital. Greater complexity is created if the entity is treated as being a hybrid e.g. one country views the entity as transparent whilst another views it as opaque. This can lead to unintended double taxation and the need to consider the hugely complex UK anti-hybrid rules.
The most appropriate time to consider the issues raised above is on the initial set up of the structure. However, it may not be too late to take remedial steps later on if appropriate, so a review of current structures can also be beneficial.