Setting up overseas
With Brexit negotiations ongoing, businesses are assessing the option of establishing an EU subsidiary. This may be to overcome concerns centred around the UK’s withdrawal from the EU and common market e.g. to secure supply chains and routes to customers. In other cases overseas subsidiaries may be considered to assist opportunities to expand into new markets post Brexit.
Assuming the decision has been made to set up a subsidiary overseas, there are a number of key tax issues which need to be considered. There are also numerous commercial issues which should be taken into account and a holistic approach must be taken in determining the final structure.
Key tax matters
- Overseas corporation tax – The subsidiary will be required to pay corporation tax on the profits it earns in the local jurisdiction. Registration and other compliance obligations e.g. payment and filing deadlines, will need to be met.
- UK corporation tax – Ordinarily the profits of overseas subsidiaries are not subject to UK tax until remitted back to the UK in one form or another (see below). However, anti-avoidance rules in the form of the controlled foreign company rules can apply. If they do then some, if not all, of the profits of the subsidiary can be assessed to UK corporation tax in the hands of the UK company.
- Transfer pricing – In determining the taxable profit of the subsidiary, regard to local and UK transfer pricing rules will be required. Even though the SME exemption may mean there is little to think about from a UK perspective, no such exemption is available in numerous EU countries therefore compliance with local TP rules is required.
- Employees – This can be split into two broad categories: locally employed workers and those visiting/seconded from the UK. Locally employed staff will be subject to local PAYE and social security taxes on the entirety of their salary. The same is likely for UK workers visiting the overseas territory but tax is restricted to the salary attributable to their overseas workdays.
- Understanding the full PAYE obligations of all staff members is vital to ensure compliance and importantly, where UK staff are travelling overseas, that their net of tax position is known and equalisation arrangements are put in place.
- Corporate Residency – If the overseas subsidiary is centrally managed and controlled from the UK, the company is likely to be viewed as tax resident in the UK. This can create dual residence issues that should be settled by the relevant UK tax treaty. The position needs to be reviewed to ensure the correct compliance matters are dealt with in both territories. It can also have an impact on determining the double tax treaty that should be under review.
- Extracting profits back to the UK – Profits can be extracted back to the UK in many forms. The most common are through the payment of dividends, interest and royalties. These types of income are viewed as being sourced in the overseas subsidiary’s territory and can be subject to local withholding taxes. The WHT position must be reviewed as part of the set up process to understand whether WHT will arise to assess the impact on cashflow and whether WHT is a permanent cost to the group.
- VAT / Sales Tax – It is likely that the overseas subsidiary will be required to register for VAT if it is located in the EU. This may be attractive if the subsidiary is to engage directly with EU customers as it would largely replicate the current relationship with UK suppliers. The VAT position also needs to be considered in respect of any intra-group supplies to assess whether the
- UK company needs to register in the overseas jurisdiction.
- Customs Duties – Depending on the nature of the subsidiary’s business, it may be the importer of goods in to the EU and the free market. If so it will need to meet its compliance obligations and it should consider whether any reliefs are available to mitigate its customs bill.
The above is just a flavour of the key tax matters to be considered when establishing an overseas subsidiary and is not a comprehensive list. The tax issues need to be assessed on a case by case and business by business basis. Most important is understanding the commercial objectives and ensuring the tax position does not jeopardise the success of meeting those objectives.