Establishing a trade offshore
Using an offshore company can be very attractive in terms of privacy as well as providing some significant tax planning benefits.
However, one thing you do need to be careful of is whether there is a UK trade.
The old chestnut of using a non resident company to trade in the UK is one of the most complex areas. However it may well be the case that in this situation an offshore company could be the best option. To keep it simple, lets assume you yourself are a non resident and you’re interested in doing business with the UK.
If you do want to conduct business with the UK, you should not use a UK company to carry out your trade. If you did, you’d be subject to UK corporation tax on the company’s profits.
Using an offshore company to trade with the UK.
If the non-resident company’s activities in the UK do not amount to trading there is no charge to UK corporation tax on the profits arising, even if the income is derived from the UK. However, there is a distinction between trading in the UK and trading with the UK. Trading by a non-resident company with the UK, (as opposed to trading in the UK), does not bring the non-resident company within the UK tax charge on profits.
When looking at an offshore company, the UK doesn’t just look to see if there is a UK trade. It will firstly look to see if there is a UK permanent establishment (they used to look at whether there was a branch or agency). If a non-resident company trades in the UK through a permanent establishment/branch or agency the tax legislation says that its chargeable profits shall include `any trading income arising directly or indirectly through or from the permanent establishment/branch or agency’.
Therefore you’d need to firstly assess whether a UK permanent establishment/branch or agency arose. According to the Corporation Tax Acts `branch or agency’ means any factorship, agency, receivership, branch or management.
This is very important as if there is no UK permanent establishment there may well be no UK tax charge.
A foreign company can be classed as having a permanent establishment in the UK if:
- it has a fixed place of business in the UK
- it has a UK dependent agent
The concept or an agency is important and it is also a difficult and specialised element of UK law and should be looked at in detail. However briefly an agent represents a person (known as the ‘principal’) in accordance with the terms of the agreement to act. That agreement may be oral or in writing and it is called the agent’s authority. In representing the principal the agent may bring about a legal relationship between that principal and a third party.
Therefore if any UK salespeople do not have the power to bind the offshore company (ie the power to conclude a contract) this would signify there was no agency.
Ignoring the effect of any UK agent when looking at an offshore companies UK taxable presence the UK taxman would firstly look to identify if you have a permanent establishment (branch or agency) that trades in the UK, eg an office, and secondly, if not whether there is simply a trade in the UK.
Actually what constitutes trading in the UK can be difficult to determine, however a key consideration will be where contracts are signed. Providing contracts are signed overseas, and there is no branch of the new venture in the UK, it should not be charged to UK corporation tax so long as the key revenue generating activities are carried out overseas.
If you are resident in a country with which the UK has a double taxation treaty then the UK will consider the provisions of the treaty as well as domestic law before they decide whether there is a liability to UK tax. A treaty may exempt where the domestic law would charge.
Therefore of crucial importance in this area is any double tax treaty and this should be reviewed, however provided the non UK resident company does not have UK permanent establishment there should be no charge to UK corporation or income tax under either the UK’s domestic rules or any relevant tax treaties. Simply providing services from overseas, with no significant UK role in the provision of the service should therefore not be caught by these provisions.
So there you have it, when providing goods or services to the UK, via an offshore company you need to ensure that:
- there is no UK trade
- there is no UK permanent establishment
Questions asked by HMRC about a company’s residence