- Investment basics
Business entities – These are the public and private limited liability company, limited liability partnership, limited partnership, partnership, real estate investment trust (REIT) and branch of a foreign corporation.
- Corporation tax
Residence – A company is UK resident if it is incorporated in the UK or its place of central management and control is in the UK.
Basis – A UK resident company is subject to corporation tax on worldwide profits and gains, with credit given for overseas taxes paid. Foreign profits and losses arising from a permanent establishment of a UK resident company may be excluded by making an irrevocable election. The effect of the election may be deferred where the permanent establishment has incurred a loss. Anti-diversion rules based on the CFC rules may restrict the profits that can be excluded from the charge to UK tax by virtue of the election. A non-resident company is subject to tax only in respect of UK source profits, which include the income of a UK permanent establishment of the nonresident, certain income and gains from UK real estate, UK source interest income and royalties and gains and assets used for the purposes of a permanent establishment’s trade.
Taxable income – For a UK resident company, corporation tax is imposed on trading income, on non-trading income and capital gains. Normal business expenses may be deducted in computing taxable income provided these are not capital expenditure. No deduction is available for the depreciation or amortization of land, buildings or other tangible fixed assets. Full relief is available for the first GBP 200,000 of expenditure (excluding automobiles) incurred per annum per business/group of companies.
Taxation on dividends – A dividend exemption applies to most dividends and distributions unless received by a bank, insurance company or other financial trader. Dividends received by a non-small UK company on most ordinary shares and many dividends on non-ordinary shares from another company (UK or foreign), are exempt from UK corporation tax with no minimum ownership period or minimum ownership level. The exemption also can apply to small companies.
Capital gains – Capital gains form part of a company’s taxable profits. Gains or losses on the disposal of substantial shareholdings in both UK and foreign companies can be exempt. The main conditions require the selling company to have continuously owned at least 10% of the shares of the company being sold for at least 12 of the 24 months before disposal. A non-resident company generally is not subject to tax on its capital gains unless the asset is held through a UK permanent establishment or, in certain cases, where UK land/property is owned. All gains on the disposal of UK residential property held by non-resident individuals, trustees, partners, some funds and narrowly-held companies are taxed.
Losses – Trading losses may be carried forward indefinitely unless there is a change of ownership of the company and a major change in the nature and conduct of the trade within three years, but can be offset only against trading income. Capital losses may be offset only against capital gains and only may be carried forward.
Rate – The main rate of corporation tax is 20%, reducing to 19% as from 1 April 2017.
Foreign tax credit – A UK resident company is subject to corporation tax on its worldwide profits (including capital gains), with credit given for most overseas taxes paid. A UK company may elect to exempt the profits and losses of foreign permanent establishments from UK corporation tax, provided certain conditions are satisfied. Where such profits are excluded from UK taxation, no credit is available.
Participation exemption – Most dividends, including foreign ones, are exempt. Capital gains on the disposal of substantial (10% or more) shareholdings in certain companies are not subject to corporation tax.
Incentives – A patent box regime allows companies to elect to apply a preferential rate of corporation tax to all profits attributable to qualifying patents. As a consequence of the OECD’s initiative on base erosion and profit shifting (BEPS), the current regime was closed to new entrants as from July 2016 and a new regime was introduced.
- Withholding tax
Dividends – There is no withholding tax on dividends paid by UK companies under domestic law, although 20% withholding tax generally applies to distributions paid by real estate investment trust (REIT) from its tax exempt rental profits (subject to relief under a tax treaty).
Interest – Interest paid to non-resident is subject to 20% withholding tax, unless the rate is reduced under a tax treaty or the interest is exempt under the EU interest and royalties directive.
Royalties – Royalties paid to a non-resident are subject to 20% withholding tax, unless the rate is reduced under a tax treaty or the royalties are exempt under the EU interest and royalties directive.
- Anti-avoidance rules
Transfer pricing – Comprehensive transfer pricing provisions apply to transactions with both domestic and foreign companies. The UK transfer pricing rules follow OECD principles. This includes a requirement to prepare documentation to demonstrate compliance with the arm’s length standard.
Thin capitalization – The arm’s length principle applies. Advance thin capitalization agreements are available.
Controlled foreign companies – CFC provisions are applicable where a UK company has a direct or indirect interest of at least 25% in a non-resident company that is controlled by UK residents. Where the CFC rules apply the relevant profits of the CFC are computed as though it were UK resident and its UK shareholder is subject to tax accordingly. Additionally, an overseas finance company can be fully or partially exempt from a CFC charge on profits derived from certain overseas group financing arrangements.
Disclosure requirements – Certain tax arrangements that result in a UK tax advantage and fall within prescribed hallmarks must be disclosed to the UK tax authorities by a promoter and the user must note the use of such arrangements on the tax return. Certain transactions valued at more than GBP 100 million must be reported to the UK tax authorities within six months of the transaction (issue of shares or debentures).
- Compliance for corporations
Tax Year – The tax year is the shorter of 12 months or the period for which the accounts are prepared.
Consolidated returns – All companies file separate tax returns, however losses may be group relieved between UK group companies, where one is a 75% subsidiary of another or both are 75% subsidiaries of the same corporate parent in terms of share ownership.
Filing requirements – The UK operates a self-assessment regime. Large companies pay tax in quarterly installments starting in month seven of their financial year. The tax return is due to be filed within 12 months of the period end. Electronic filing is mandatory for all company tax returns.
Penalties – Companies are liable to a fixed penalty of GBP 100 for failure to file a tax return by the due date, plus an additional GBP 100 if the return is not submitted within three months of the due date. Interest is paid on late paid tax.
Rulings – UK tax legislation includes a number of anti-avoidance provisions for which advance statutory clearance may be sought.
- Value Added Tax
Taxable transactions – VAT applies to most sales of goods, the provision of services and imports.
Rates – The standard VAT rate is 20%, with a reduced rate of 5% for certain items. There are also some specific zero-rated reliefs and exemptions.
The UK has concluded approximately 125 tax treaties.