View the related Tax Guidance about Double tax treaties
Introduction to setting up overseas ― companies
Introduction to setting up overseas ― companiesA UK company expanding overseas may do so in a variety of ways, including:•distance trading from the UK, with no local presence•a branch, which can be formed with just one employee working from home•a fully established local subsidiaryThe decision to trade in another jurisdiction involves a number of considerations, both commercial and tax-related. Some of the key tax issues include whether the activities constitute a permanent establishment and how the overseas activities should be structured. It is important, at the outset, that advice is taken by the company, not only in relation to tax, but on the wider business implications.The tax position of the UK company overseas will depend on the extent to which the company does business in the jurisdiction and the choice of overseas entity from which to carry on the business. In most cases, establishing the overseas operation will involve a choice between running the business as a branch or via a local subsidiary. There are a number of commercial and tax considerations which need to be considered in arriving at the most appropriate choice. For further discussion on the choice of overseas entity, see the Setting up overseas ― branch or subsidiary guidance note.A useful review of the tax impact of a business expanding overseas is given in ‘Practice guide ― Lifecycle of a business: international expansion’ by Helen Cox and Gemma Grunewald in Tax Journal, Issue 1472, 11 (24 January 2020).For a factsheet which summarises
Non tax-advantaged share option schemes
Non tax-advantaged share option schemesSummaryAs with any other discretionary option plan, a non tax-advantaged share option plan involves the granting of a specific number of options to an individual. These options provide that the individual can, at an agreed date or point in time, acquire a given number of shares (the underlying shares) for a fixed price. These share schemes used to be known as ‘unapproved’ share option plans.Given that there is both no up-front cost to acquiring the options and no requirement for the individual to pay over any monies unless the underlying shares increase in value, there is little risk attached to the receipt of options. As a result, the tax treatment and tax rates applicable will often appear to be very similar to cash bonuses.Key considerationsGrant of optionsThe terms of the options need to be set out in a suitable legal document known as ‘the Rules’. The Rules govern all pertinent matters between the company and employee and, given the tax complexities that can occur in such arrangements, a suitable and up to date precedent should be obtained.One of the key terms is the price that the individual has to pay to acquire the share, known as the exercise price. As no income tax charge arises when the non tax-advantaged options are granted, no matter the exercise price, the exercise price can be set at any figure from zero upwards. Under a non tax-advantaged plan, there is no limit as to how many options are granted.
Short-term business visitors (STBVs)
Short-term business visitors (STBVs)What is a short-term business visitor?An STBV for UK tax purposes is an individual who performs duties for a non-UK employer and as a part of those duties has been asked to spend a short period working in the UK. There is a common misconception that there is automatically neither a UK tax liability, nor are there any reporting requirements for the UK host employer in such circumstances. This is rarely the case. The PAYE obligations in respect of the STBV depend on whether an Appendix 4 or Appendix 8 arrangement is agreed with HMRC.However, if an employer has only one or two employees potentially affected by the STBV rules, then it may be administratively easier to consider applying for an NT (no tax) PAYE code on an individual basis instead.In his Spring Budget 2023 statement (paragraph 3.43) the Chancellor indicated that additional leeway would be introduced to HMRC’s STBV rules. Whilst full details have yet to be provided, it is understood the range of permitted business activities, within which it is accepted no UK tax liabilities arise, are to be extended from Autumn 2023. Updated guidance can be expected to be issued by HMRC in due course.Eligibility for an Appendix 4 or Appendix 8 arrangementThere are two arrangements that can be agreed with HMRC for short term business visitors (STBVs): Appendix 4 and Appendix 8. Appendix 8 applies for eligible STBVs from 6 April 2020 and replaces the special arrangement that an employer could agree
Remittance basis charge or assessment of worldwide income and gains
Remittance basis charge or assessment of worldwide income and gainsSTOP PRESS: At Spring Budget 2024, the Chancellor announced that the remittance basis would be abolished from 6 April 2025, although this only applies to foreign income and gains arising on or after that date. The remittance basis rules still apply to unremitted income and gains arising before that date but remitted later. For more details, see the Abolition of the remittance basis from 2025/26 guidance note.This guidance note explores whether those who are entitled to use the remittance basis should do so. Before this question can be answered, the individual needs to understand:•the scope of the remittance basis•whether they have to make a claim for the remittance basis, and•whether they have to pay the remittance basis charge for making a claimThe decision as to whether to use the remittance basis is made on an annual basis. If an individual chooses not to use it, then they are taxable in the UK on their worldwide income and gains using the arising basis of assessment, as if they were resident and domiciled in the UK.This means the individual must declare all their overseas income and gains in the year in which they arise, even if none of it is brought into the UK.Who can use the remittance basis?Certain individuals are taxable in the UK on their UK income and gains alone, and pay UK tax on foreign income and gains only if these are remitted (brought) to the
Setting up overseas ― branch or subsidiary
Setting up overseas ― branch or subsidiaryAlthough a UK company can do a reasonable amount of business in another country without a taxable presence in that country, eventually the company may need to consider whether to establish a more formal presence in such a country, generally by way of a branch or subsidiary.The decision will often usually depend on commercial factors, particularly where there are regulatory requirements which demand, for example, a particular level of capital which is more easily satisfied through a branch structure where the parent company capital is taken into account.Where there is no particular commercial pressure for one legal form over another, tax issues may influence the decision by taking into account the local country’s tax position for branches and subsidiaries. For example, the parent company should consider:•is there any difference in tax rates between a branch and a subsidiary?•can profits be remitted back from the country to the UK in the same way? For example, the US has a branch profits withholding tax which is reduced to 5% in the UK / US tax treaty, but dividends paid from a US subsidiary to a UK parent company owning more than 80% of the share capital in the subsidiary for more than a year before the dividend is paid would not suffer any US withholding tax on the profits distributed by the subsidiary (see DT19867A)•can start-up losses in the entity be easily relieved against group profits?It is important to consider the classification
Double tax relief for IHT
Double tax relief for IHTWhere a double tax treaty has been entered into between the UK and a foreign territory, double tax relief for inheritance tax (IHT) will apply. Where unilateral relief can also apply, the provision that provides the greatest relief can be claimed. See the Unilateral relief for IHT guidance note. Where a double tax treaty applies it should be considered in detail. Double tax treaties can be divided into those entered into before 1975 and more recent treaties.Pre-1975 treatiesThese include situs codes and have been made with:•France•India•Italy•Pakistan (not including Bangladesh)They apply only to IHT imposed on death and not for lifetime chargeable transfers or IHT charged on failed potentially exempt transfers (PETs). The pre-1975 treaties provide exemptions to UK IHT rather than credits against tax. This means that the tax is exempt from being paid, rather than being calculated as due but with a credit allowed for the amount of the foreign tax paid.Overriding deemed domicile rulesThe pre-1975 treaties can, in some circumstances, override the deemed domicile rules contained in IHTA 1984, s 267(2), but not those in the Constitutional Reform and Governance Act 2010, ss 41 and 44, which concern members of parliament and the House of Lords. This applies only in relation to death.Where a testator would satisfy the deemed domicile rules of IHTA 1984, s 267(2) and dies domiciled in India, Pakistan or France in accordance with the law of those countries, UK IHT will apply only to property
Transfer pricing and financing arrangements
Transfer pricing and financing arrangementsTransfer pricing rules also apply to financing arrangements. Loans between connected companies where one of those companies controls the other, or where both are under common control, are subject to the regime. The transfer pricing legislation takes precedence over the loan relationships legislation and the rules on the corporate interest restriction. See the Corporate interest restriction ― overview guidance note. The same principles of transfer pricing as set out in the UK transfer pricing in practice guidance note apply to financing transactions. Additional details and examples are provided in the OECD’s Transfer Pricing Guidance on Financial Transactions which have become part of the main OECD Transfer Pricing Guidelines republished in 2022.One important aspect of transfer pricing for loans is thin capitalisation, ie a company does not have enough capital to support the debt. A company will be considered to be thinly capitalised where:•a loan exceeds the amount which the borrower would or could have borrowed from an independent lender, or•the terms of the loan differ from those that would have been agreed with such a lender, eg a higher interest rateTIOPA 2010, s 152; INTM413200Where thin capitalisation occurs, the interest on the excessive part of the loan will be disallowed as a deduction in arriving at the assessable profits or allowable losses of the borrower. This is on the basis that the borrower would not have had a deduction for that amount if the loan had been arranged with a third party. See
Permanent establishment
Permanent establishmentIntroductionA company that is not resident in the UK will only be subject to UK corporation tax if it carries on a trade in the UK through a permanent establishment. Where it does so, it will be subject to UK corporation tax on all profits that are attributable to the UK permanent establishment. There are exceptions to this rule for any person:•dealing in and developing UK land ― see the Transactions in UK land guidance note for further information•directly or indirectly disposing of UK land ― see the Disposals of UK land by non-resident companies (NRCG regime) ― overview guidance note•that generates profits from a UK property business, provided they arise on or after 6 April 2020 ― see the Non-resident landlords scheme (NRLS) guidance noteCTA 2009, s 5(2)This guidance note outlines when an overseas company will have a permanent establishment in the UK and how to calculate the profits attributable to that permanent establishment.The same principles may apply when determining whether a UK company has a permanent establishment in another country.In any case, where a double tax treaty is in place, this will typically provide that a UK company is only subject to tax in another country if it has a permanent establishment there. Most of the UK’s double tax treaties follow the Organisation for Economic Co-operation and Development (OECD) model tax treaty and the definition of permanent establishment is therefore the same as the UK definition.As part of the OECD’s base erosion and
Transactions in UK land
Transactions in UK landThe rules on taxing the profits of dealing in and developing UK land introduced by FA 2016 replace the previous legislation on transactions in land. The rules are widely drafted and catch all persons undertaking transactions in UK land and property, whether resident in the UK or resident outside the UK. The rules apply to profits recognised in the accounts on or after 8 March 2017, regardless of the date of the contract, ie even if the contract was entered into prior to 5 July 2016 (the date upon which the legislation came into force).This guidance note covers the latest rules as they apply for corporation tax purposes. The pre-2016 rules for corporation tax are covered in Simon’s Taxes at B5.235 onwards.Similar provisions apply for income tax as explained in the Transactions in UK land ― individuals guidance note. HMRC has confirmed that it is not the purpose of the rules to alter the treatment of the activity if it is clearly investment. Transactions such as buying or repairing a property to generate rental income and to enjoy capital appreciation are not likely to be treated as trading activity under the transactions in UK land provisions. Introduction to the current regimeEven with the rate of corporation tax being the same on income and gains, the relevance of these rules is:•foreign companies, or their permanent establishments (PEs) in the UK (and in some cases those even falling short of being a PE using double tax treaties) which
Residence ― issues on coming to the UK up to 5 April 2013
Residence ― issues on coming to the UK up to 5 April 2013IntroductionThe impact of residency status on the liability to UK tax is discussed in the Residence ― overview guidance note.The rules on determining residency status changed on 6 April 2013 with the introduction of the statutory residence test (also known as the SRT). This guidance note considers the impact of coming to the UK has on the UK residence position under the old rules in place up to 6 April 2013. For guidance on determining residence status in the tax years prior to 2013/14, see the Determining residence status (pre 2013/14) guidance note.It is a good idea to read both the Residence ― overview and Determining residence status (pre 2013/14) guidance notes before continuing. The Ordinary residence ― issues on coming to the UK up to 5 April 2013 and Domicile guidance notes may also be useful.As noted above, this guidance note deals with those who came to the UK before 6 April 2013. The position for those who left the UK before this date can be found in the Residence ― issues on leaving the UK up to 5 April 2013 guidance note.The position from 6 April 2013 is covered in the Residence ― issues on coming to the UK (2013/14 onwards) guidance note.Important note regarding links to legislationThe legislative links in this guidance note are for reference only. It is important to consult the historic version of the Yellow Tax Handbook which relates to the
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