Do foreign companies pay tax in the UK

Simon Misiewicz

Expat & Property Tax Specialist

22nd March 2022

Do foreign companies pay tax in the UK?

Foreign companies pay tax in the UK if they hold British assets that generate income.

Foreign companies that own UK property need to file tax returns to HMRC.

Some companies have used tax loopholes to reduce their UK tax bills, such as shifting their profits to foreign subsidiaries in countries with lower tax rates, called offshore tax-shelter.

Foreign companies also use tax reduction tactics, including accelerated depreciation, awarding stock options, and maximising tax credits.


What are the basics of foreign companies paying tax in the UK?

As property accountants serving thousands of UK landlords that purchase buy to let properties, we know that some clients are interested in the potential benefits for foreign companies operating in the UK.

The UK has introduced several initiatives to reduce tax avoidance by foreign companies whilst also presenting a positive environment in which they can do business in this country.

Some of the key elements of UK business tax include:

– There is a low rate of corporation tax at 19%.

– The UK is attractive for holding companies.

– Company dividends are not subject to withholding tax.

– There are R&D tax reliefs available, including tax credits for certain SMEs.

It is crucial to understand HMRC rules around taxing the profits of companies not based in the UK but have a presence in the United Kingdom, such as a registered office, property investments etc


Can a foreign company own a UK company? 

Foreign nationals can become the director, shareholder, or company secretary of a UK business.

The company will be registered at Companies House and have a UK-based address corresponding to where the company is based. The foreign national does not have to live in the UK.

Non-UK resident directors of UK companies are allowed to live and work anywhere in the world.

When a director holds the title of company director in the UK, the company does not have to require them to reside in the country.

Companies House permits non-residents to register Limited Companies.

You usually are not required to be a UK resident to register a Limited Company. When you register a UK company, all you need is a registered UK office address which could be a family or friend’s address or a virtual office address.

Overseas companies must register with Companies House within one month of opening a UK establishment.

They can do so by filing Form OS IN01 ‘Registration of an overseas company opening a UK establishment with Companies House and a £20 registration fee.

If a company is registering its first UK establishment, it must also provide:

– a certified copy of the company’s constitution documents.

– the latest set of company accounts if it is required to file these in its own country.

– if the company is required to prepare, audit, and disclose accounts under parent law, they need to provide a copy of the latest set of accounts disclosed as of the opening date of the UK establishment.

What is a foreign entity classification?

Foreign entities may be classified as ‘transparent’ for UK tax purposes.

Entities are described as fiscally ‘transparent; to decide how a member is to be taxed on the income they receive from their interest in the entity.

If HMRC deems an entity transparent, UK resident members will be subject to tax as profits or gains arising from the entity.

HMRC has produced specific guidance around filing accounts in the UK as an overseas company.

Can a foreign company own UK property?

A non-resident company owning UK property is subject to Corporation Tax on any gain, and an individual is subject to Capital Gains Tax.

Since April 2019, non-residents have been liable to UK capital gains on commercial property.

UK real estate has been attractive for foreign investors who have traditionally used an offshore company structure to acquire UK properties.

Many investors choose to purchase a UK home while residing overseas through an offshore company.

Some of the main considerations for foreign individuals and companies purchasing UK property include:

– Ensure that you have the necessary cash/mortgage in place.

– Get up-to-date with all UK tax legislation affecting the property.

– Double-check the seller is legitimate and the rightful owner.

– Check the property price against the current market value.

Getting the right advice before investing in UK property as a foreign company is important.

There are several advantages of purchasing UK property through an offshore company, including:

Minimum Stamp Duty: if an offshore company owns the property, the property can be sold using company shares without incurring stamp duty land tax. It will mean the buyer will acquire the company’s shares, while the property will stay in the offshore company’s name.

– Identity Privacy: when an overseas company acquires property in the UK, the property documents include the company’s name as the new owner. The primary owner of the offshore corporation is not disclosed in property records.

– Inheritance Tax exemption: when a property owner dies, the Inheritance Tax is applied to the property’s net worth. If a foreign company purchases property in the UK, it is exempted from Inheritance Tax restrictions. This applies to individuals holding UK property through an offshore company and are not UK domiciled.

– Less UK Income Tax on rental income: income tax is payable on rental income from UK property, whether owned by an individual or business. While an offshore company owns the property, the tax rate is 19%, compared to 45% when an individual owns the property.

Offshore or non-residents owning UK property can represent a fantastic investment opportunity.

What are the benefits of running a UK business through an overseas company?

There are several benefits from running a UK business through an overseas company, including:

– The reporting requirements in overseas jurisdictions may be reduced compared to the UK.

– Non-resident companies in some countries are not required to publish financial information or the details of directors and shareholders.

– An offshore company may have tax advantages, as offshore companies are only subject to UK tax on their profits arising in the United Kingdom. UK-sourced dividends paid to an overseas company are tax-free.

For United Kingdom permanent tax residents setting up an overseas company, these tax advantages are likely to be minimal due to increased anti-avoidance legislation.

Where overseas companies are controlled and managed from the UK, they are treated as UK residents and subject to UK tax.

One of the benefits is that they are generally ‘tax neutral’, meaning that they are often tax-exempt in the country of incorporation, or they pay a low or nil effective rate of taxation when used as a holding company receiving dividend income.

International Expat Tax Advice: Working as an employee, employing people, real estate property investing in the UK, US or Spain or conducting a service-based business trade activity. You will need to get tax advice from an international tax advisor that truly understands your international tax circumstances

When is a company subject to pay UK tax? 

A UK tax-resident company is subject to Corporation Tax on its worldwide profits.

If a company is incorporated in the UK, it will be deemed a UK tax resident.

This is also the case for a non-UK incorporated company if the central management and control of the business are in the UK.

Non -UK tax resident companies are liable to Corporation Tax if they trade in the UK through a ‘permanent establishment’.

This includes a fixed place of business for trading operations and may include agents in the UK.

Other rules can affect when a company is or is not subject to UK tax, such as:

– The terms of any double tax treaty may be relevant.

– A ‘foreign branch exemption’ may allow a UK resident company to exclude profits and losses attributed to non-UK permanent establishments.

– Diverted profits tax can apply where a non-UK company avoids a UK taxable presence.

– Non-residents may be taxed on gains made from direct or indirect disposals of UK land.

– A non-UK company may need to register for VAT.

– Stamp Duty Land Tax can apply on acquisitions of shares and land.

We have written detailed articles concerning tax treaties, including the following:

US and UK tax treaty

Spain and UK tax treaty

Hong Kong and UK tax treaty

Are there any pitfalls for foreign companies?

It is a mistake to assume that the UK taxation of foreign companies only arises if a company has a real presence in the UK, through tax residence or a similar establishment.

Some of the main UK tax pitfalls for foreign companies to consider include:

Corporation Tax – if a non-UK resident company has a physical presence in the UK as a place of management, branch, office, factory, workshop, mine, quarry or building site, they will be liable to pay UK Corporation Tax.

Diverted Profits Tax – HMRC has reported that since the introduction of Diverted Profits Tax (DPT) in 2015, it has secured over £4.6bn in additional revenue from this tax.

This has included indirect revenue such as VAT from business restructuring and Corporation tax, where DPT helped to settle investigations.

Where any structure touches the UK and even more so in borderline permanent establishment cases, a DPT consideration should be included by a foreign company looking at UK tax liabilities.

Withholding Tax – in addition to UK Income tax collected directly through self-assessment, it may also be collected through Withholding Tax in respect of payments of UK-sourced annual interest and royalties from items including patent, copyright and design royalties.

Digital Services Tax – introduced in April 2020, the new tax applies to groups whose total revenues from any digital services is in excess of £500m, and in excess of £25m of that revenue is attributable to UK users.

Value Added Tax – different to the other taxes above, as VAT has its own rules for determining liability and cost.

It is comparable with a permanent establishment for UK Corporation Tax purposes, and HMRC refers to a fixed establishment for UK VAT purposes.

Corporation Tax is increasing from April 2023

Corporation tax at 19% is globally competitive but things change from April 2023. Companies that earn more than £50,000 will be subject to an increased corporation tax rate between 19% to 25%. Once profits of the company exceed £250,000, the company will be subject to a corporation tax rate of 25%

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