UK corporate entities used in offshore tax structures

The UK is thought of worldwide as a high tax jurisdiction with strong tax avoidance legislation and a harsh attitude to users of offshore tax havens.  This is normally true for UK businesses and resident individuals that try to reduce their UK tax by diverting profits from UK activities into offshore structures.  However overseas companies and their owners living outside the UK are often surprised to learn that there can be major advantages from including a UK entity in any offshore structure they are looking to establish and that doing so will substantially help in the production of an effective tax saving arrangement.

Offshore entities in the Channel Islands, Monaco, Liechtenstein, Panama, or in Caribbean locations such as the British Virgin Islands (BVI), lack the tax treaty network available to UK companies that can secure favourable treatment on income and gains arising in over 110 jurisdictions.  No other country has as many tax treaties as the UK, where dividends, interest, royalties, consultancy fees, marketing commission, etc can all be received by a UK company without the level of overseas withholding tax or automatic ‘black list’ problems that would apply on direct payment to a tax haven entity.  For this reason a UK company will frequently be found to have been inserted into an offshore structure to secure significant cross border tax benefits.

In addition to the savings that can be obtained by combining a UK company with an offshore company, another UK entity offering sophisticated tax advantages to the offshore world is the UK limited liability partnership (LLP).  When one is formed having offshore companies as its members it can be used as a tax efficient investor or as a trader entitled to obtain UK VAT registration and generate gains and overseas income free of UK tax.

International tax advisers are also well aware of the advantages that can come by putting an offshore trust on top of a corporate structure primarily based on using tax haven vehicles such as offshore companies.  In many overseas jurisdictions the local tax laws do not have provisions that adequately deal with discretionary trusts and so the profits of companies held under such arrangements can escape being taxed on the persons who establish or benefit from the structure.  A trust formed under English law with a UK LLP as sole trustee or having a UK company amongst the trustees can help bypass both blacklists and basic anti avoidance legislation which foreign countries have produced with the aim of taxing profits within offshore companies.

Cross border tax planners engaged to establish an efficient structure for an active property business will know better than to recommend a simple arrangement of an offshore trust over a tax haven holding company that directly owns a mainland EU property development subsidiary.  If only an elementary structure like this was put in place then any dividends paid up from the property subsidiary direct to its offshore parent company would generally attract local withholding tax.  Furthermore, in addition to the dividends being reduced by the full rate of local withholding tax, the sale proceeds on a future disposal of the subsidiary might equally attract such local tax.  However, by having a UK holding company inserted between the EU subsidiary and the BVI parent one can potentially allow dividends to flow into the UK company with reduced or nil withholding tax, and this arrangement may also secure that any gain on a future sale or liquidation of the property development subsidiary would be exempt from overseas taxes.

A UK holding company with an offshore parent can receive and pass on both income and gains proceeds without generating UK tax because no UK withholding tax applies to the payment of dividends out of a UK company.  In addition, since 2009 almost all dividend income coming into a UK company from abroad will be exempt from UK tax and since as far back as 2002 any gains from disposal of an interest of over 10% in a trading company have been potentially exempt from UK corporation tax.

Turning to international trading scenarios, numerous forms of payment can be made by a UK company out of overseas income in ways that create a tax-free flow of funds to overseas.  This enables UK entities to operate as an effective bridge for the transport of profits from high tax jurisdictions to zero tax territories.  While the UK has many rules seeking to prevent profits being diverted out of the UK tax net when they have been wholly earned from UK based activities, the tax system of the UK will in practice normally oil the wheels of international commerce by facilitating uninhibited movement of overseas earnings through UK entities to other locations even when the destination is not a high tax country but is a pure tax haven.

So while one might expect UK laws to be unwelcoming towards cross border tax saving arrangements, the reality is that UK entities frequently help the efficient international use of offshore structures to minimise overseas taxes.  Advisers alert to the opportunities available can readily use the flexibility of UK entities in producing desirable tax outcomes for their overseas clients.

Vicena International is located on the border of London and Kent and is a specialist tax and accountancy services practice with many years’ experience of assisting clients with sophisticated tax advice, as well as providing a full range of related services on taxation, accounting, company law matters and trusts.

Particular expertise exists in providing creative solutions in the international tax arena so as to secure taxation advantages. A strength is assisting with offshore fiscal structuring and in facilitating tax mitigation by linking UK companies with such structures to minimise any potential fiscal difficulties.

Related corporate tax & personal tax compliance services are provided to supplement the tax planning and structuring advice, and the firm’s clients include UK and overseas companies, non UK resident and non UK domiciled individuals, property landlords, company directors, plus trustees, settlors & beneficiaries of both UK and foreign trusts. 

VAT planning & registration advice is also supplied for UK and cross-border trading, with a full support service to deal with the VAT reporting obligations imposed on a business.

As well as providing clients with a UK registered office address and arranging corporate officers if required for special purpose entities established as part of international tax planning arrangements, a comprehensive range of Company Secretarial compliance services is given.  Geoffrey can be contacted on +44 (0) 1689 898 222 or by email at g.simpson.consultant@vicena.co.uk