International uses of UK International Holding Companies

The UK is considered to be an excellent jurisdiction for international holding companies for many reasons, including the following:

• Most foreign dividends exempt from UK tax
• No UK withholding tax on dividend payments to shareholders
• No capital gains tax on the disposal of shareholdings in subsidiaries, subject to meeting certain conditions
• No capital gains tax on profits from the disposal of UK Holding Company shares by non-resident shareholders
• Extensive double tax treaty network, thereby minimising withholding taxes on dividends received
• No capital duties on share capital
• No minimum paid up share for private limited companies

Tax exemption on foreign dividends

Dividends received by a UK company are exempt from UK tax subject to certain conditions. These conditions vary depending on whether the recipient is a small, medium or large company.

Small companies

A small company is defined as one with fewer than 50 employees and annual turnover or balance sheet total not exceeding €10 million. A dividend or other distribution received by a small company is exempt from UK tax provided all the following conditions are met:

• The payer is a resident of the UK or of a ‘qualifying territory’ at the time the distribution is received
• The distribution is not a payment of interest which is treated as a dividend for tax purposes
• The distribution is not tax deductible by the payer
• The distribution is not made as part of a tax advantage scheme
• A qualifying territory is one which has a double tax agreement with the UK that contains a non-discrimination clause.

Medium and large companies

For companies that cannot be classified as small, foreign dividends and distributions are exempt from UK taxation if they fall into one of five classes:

• Dividends and other distributions from controlled companies (majority shareholding)
• Dividends and other distributions in respect of non-redeemable ordinary shares
• Most portfolio dividends and other distributions
• Dividends derived from transactions not designed to reduce tax
• Dividends from shareholdings accounted for as liabilities

Where they do not fall into any of the above classes the foreign dividend or distribution will be subject to UK corporation tax; however relief may be given for foreign tax, including underlying tax, where the company controls at least 10% of the voting power of the overseas company.

No withholding taxes

The UK does not impose withholding taxes on the distribution of dividends to shareholders or parent companies. This is regardless of where in the world the shareholder or parent company is resident.

Capital gains tax exemption 

There is no capital gains tax payable by a UK trading company or member of a qualifying group on the disposal of a ‘substantial shareholding’.

A substantial shareholding is a holding of at least 10% of the ordinary shares in another company that have been held for a continuous period of at least 12 months during the two year period before disposal.

To qualify for the exemption, the investing company must itself be a trading company or a member of a qualifying group immediately after disposal. A qualifying group is a group where one or more of the members carry on trading activities and the activities of those members taken together do not include a substantial component of non-trading activities, which means that such non-trading activities should not form more than 20% of the total turnover within the group.

If following the disposal the investing company is no longer a trading company or member of a qualifying group, the investing company can still qualify for the exemption if it is wound up or liquidated as soon as possible after the disposal.

Disposal of UK holding company shares 

Non-UK resident shareholders are not subject to UK capital gains tax on disposals of shares they hold in a UK company.

Double tax treaty network

The UK has the largest number of double tax treaties in the world, many of which provide for a zero or low rate of withholding tax on dividend payments to the UK. 
As the UK is a member of the European Union, UK resident companies can benefit from the EU Parent-Subsidiary Directive, which exempts dividends paid between EU resident entities from withholding tax, subject to conditions.

Stamp Duty

In the UK there is no capital duty on paid up or issued share capital. Stamp duty of 0.5%, calculated on the transfer value of the shares, is payable on subsequent transfers.

Minimum Paid Up Share Capital

There is no minimum paid up share capital for private limited companies in the UK.

Public limited companies must have a minimum issued share capital of £50,000, of which 25% must be paid up.

Conclusion

The UK represents an extremely attractive holding jurisdiction as a result of the advantages highlighted above. A UK Holding Company can receive and pay dividends free of any UK taxation and may, subject to satisfying certain criteria, dispose of substantial shareholdings free of UK tax.