How to structure your overseas development tax efficiently
As UK companies grow and start to operate internationally, commercial opportunities may require international expansion so that the company is no longer trading with a country, but rather is actually trading within a country, writes Tim Shaw – associate partner at Ensors Chartered Accountants.
Once this stage is reached, it is likely that the company has fallen into the scope of overseas corporate taxes and a decision normally needs to be made as to whether to regularise this by forming a local branch of the UK company or by incorporating a local subsidiary.
In deciding which is the most appropriate route, local legal and fiscal advice should be sought but there are likely to be certain common factors which should be borne in mind.
As an example, a subsidiary is a separate legal person and so ring fences liability, whereas a branch may have less onerous local accounts and tax filing requirements.
It is possible however that commercial considerations may drive the decision; for instance a subsidiary may be perceived as showing more commitment to a marketplace by both local customers and employees.
Irrespective of the structure adopted, it is likely that there will be a consequent need to register with the local fiscal authority for corporate taxes, value added taxes and payroll withholdings.
This should not be overlooked as penalties could be charged for late registrations and may impact adversely upon the relationship with the local fiscal authority going forward.
Once the overseas business is up and running, the following taxation issues may arise.
Where transactions are undertaken between the UK company and the overseas entity, it will be necessary to comply with both the transfer pricing legislation of the UK and of the overseas territory.
If the overseas territory follows the OECD’s approach to transfer pricing, it is likely that transactions will need to be undertaken at open market value (‘arms length’) to meet the local and UK requirements.
Dependent on the level of profits involved, it is possible that the local fiscal authority may have a different opinion to HMRC on what is an arm’s length price!
Repatriation of profits
Hopefully, the overseas operation will be profitable. It will therefore be necessary to consider how profits, or surplus funds, may be repatriated to the UK in a tax efficient manner.
For a branch, this can be relatively straightforward as it can simply repatriate surplus cash to the company of which it forms part. A subsidiary can achieve the same by lending surplus funds to a UK parent, but this can have unfortunate taxation consequences dependent upon the territory at issue.
Conventional ways for an overseas subsidiary to repatriate funds to a UK parent are dividends (from post corporate tax distributable profits but unlikely to be subject to UK corporation tax on receipt), interest on loans extended to finance the subsidiary or royalties charged for the local use of intellectual property owned by the parent.
Withholding taxes may be applied locally on such payments to the UK. These may be reduced by applicable double taxation treaties or potentially mitigated completely by EU law if the subsidiary is resident in an EU member state – this later relief may well disappear of course following Brexit.
Dependent upon the UK parent’s corporation tax position, UK tax relief may be available in part or in full for such withholding taxes.
Alternatively, parent companies may choose to repatriate profits by charges made to the overseas subsidiary for services provided such as strategic management or group back office functions.
Any such charges will need to be carefully considered to ensure that they are tax deductible in the subsidiary and comply with appropriate transfer pricing rules.
Secondment of staff
It is quite usual for staff to be seconded from a UK parent to assist in setting up and developing the subsidiary’s operations. It is important to ensure that local income tax requirements are met and that, to the extent possible, double taxation does not arise to such employees who also remain taxable in the UK.
Expatriate tax issues can be extremely complicated with often minimal guidance under tax legislation and it is essential that professional advice is taken in advance of secondment arrangements being put in place so that any available tax reliefs may be obtained and tax costs minimised.
Where a UK company imports goods into the EU and supplies these onward to an EU resident subsidiary, it is possible, dependent on the manner in which Brexit is undertaken, that a double charge to customs duties may arise post Brexit – on the import of goods into the UK and on the subsequent import into the (then) EU.
Despite the current lack of clarity, this should be considered when looking to put in place commercial operating structures pre Brexit.
Whilst it is increasingly common for UK employees, particularly in the tech sector, to receive part of their remuneration in share options, it should not be assumed that, for employees of the local subsidiary, share options will be tax effective or even desired.
Setting up an overseas operation is often a natural progression and an indication of growth. Professional advice, both UK and local, should always be sought before doing so to ensure that the expansion is structured in a tax efficient manner and meets the commercial and operational aims of the company.
For more information on setting up an overseas operation, call Tim on 01223 428314 or email: tim.shaw [at] ensors.co.uk