The UK is an extremely attractive jurisdiction in which to locate your international 'holding' company. The primary benefits of a UK holding company, including amongst others, broad corporate tax exemptions, absence of withholding taxes on dividend payments, investor friendly tax regime and access to an extensive tax treaty network are summarised in this overview.
Holding company explained
Before we outline some of the key benefits of the UK as a holding jurisdiction, we need to first understand what is a holding company.
In summary, although the term may vary dependant on the context in which it is used, a holding company is generally one which exists to hold shares or voting rights in another company; or is one which is a member of another company and holds the right to appoint or remove a majority of that other company’s board of directors.
The term holding company may also be applied to companies utilised to hold a range of assets e.g. real estate, intellectual property, vehicles etc.
UK participation exemptions
Exemptions apply which exempt a UK resident holding company from UK corporation taxation on profits/gains from a disposal of shares in a subsidiary (substantial shareholding exemption or ‘SSE’) and from profit distributions received (‘dividend exemption’).
Broadly, the SSE will apply in instances where a trading group disposes of a trading company in which it has held a greater than 10% equity interest for over 12 months.
Where applicable, the dividend exemption will apply to the receipt of dividend or other distributions, subject to satisfaction of certain conditions which differ for small, medium and large sized companies however the applicable legislation is broad, ensuring that many such payments will be exempted.
Qualifying asset holding
In April 2022, the UK introduced the QAHC regime to recognise circumstances where an intermediate asset holding company is used to facilitate the flow of capital, income and gains between investors and underlying assets. The regime broadly taxes investors as if they had invested directly in the underlying assets, with the objective being that the QAHC pays no more tax than is proportionate to the activities it performs.
There are a number of conditions to be met in order to avail of this new regime which is expected to greater facilitate and encourage the use of UK holding companies by funds and certain institutional investors.
Withholding tax on outward bound dividends
The UK does not impose withholding tax on outward-bound dividend payments to anywhere in the world.
Extensive tax treaty network
The UK has concluded the largest number of Double Tax Treaties (‘DTTs’) worldwide (currently over 130) many of which provide for a zero or low rate of dividend withholding tax on dividend payments to the UK.
Deduction for interest
Subject to certain restrictions, funding costs and in particular interest payments incurred by UK, resident holding companies may be deductible for corporation tax purposes.
The UK rules in this area, introduced in response to the OECD’s Base Erosion and Profit Shifting (BEPS) project, amongst other things, aim to ensure that groups do not use intra-group loans to generate interest deductions exceeding actual third-party expenses and do not maximise interest deductions by placing higher levels of third-party debt in high tax countries.
Notably, groups with net tax-interest expense amounts of £2 million or below for an accounting period do not incur any restrictions on deductibility for that period.
Sales of shares in a UK company
The transfer of shares in a UK holding company by a non-UK resident (person or entity) will generally not be subject to UK taxation on chargeable gains.
Stamp duty
Generally, the UK imposes 0.5% stamp duty (based on the consideration/ value) on the transfer of shares in UK companies. Where a charge of stamp duty does arise, it is payable by the transferee within 30 days of the effective date of the transfer.
Conclusion
The UK holding company regime provides numerous advantages and planning opportunities, with several of the most attractive ones outlined within this overview.
At Hawksford, we have a team of experts who can handle all the back-end business matters for establishing a UK holding company such as company formation, bookkeeping and accounting, tax compliance etc.
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