Transferring a UK trade to an offshore company
If you carry out a trade via a UK company the company will automatically be UK resident and as such subject to corporation tax on its worldwide income and gains.
You can’t ‘migrate’ the company to transfer it overseas. The only way you could achieve this result would be by establishing treaty residence overseas.
This involves establishing the effective management and control under a double tax treaty as overseas.
Another option though would be to simply transfer the trade from the UK to an offshore company. The UK company would then be a shell company and simply wound up. You could also retain cash in the company if you wished and extract this as a capital distribution on the winding up. It would then be subject to capital gains tax at 10% or 28% depending on if full Entrepreneurs Relief was due or not.
What are the tax implications of a transfer of a trade to an offshore company?
Transferring your trade to an offshore company will have two main tax implications:
Firstly the transfer of the trade from the UK company to the offshore company would be a disposal for capital gains purposes. This isn’t a specific rule that applies to transfers to offshore companies but rather is a general rule that applies on the transfer of any assets out of a company.
Therefore irrespective of the disposal consideration that is actually transferred from the offshore company to the UK any capital gain in the UK company would be based on the market value of the assets transferred. You would therefore need to value the assets that were transferred to the offshore company. This would include plant/machinery, any land or property but usually goodwill is the largest asset transferred.
Secondly the other key tax issue on the transfer of the trade overseas is that the transfer would also be treated as a distribution (ie a dividend) to the shareholders given that they have extracted value from the company. The amount of the distribution would be the undervalue at which the trade was transferred. Note though that non UK residents are only charged to UK income tax on dividends to the extent that tax was deducted at source. Given that there would be no tax deducted at source it may be possible to avoid income tax on the distribution. The alternative would be for the offshore company to pay the full market value to the UK company for the trade. There would then be no distribution on the transfer but the shareholders could extract the cash as non residents free of further income tax.
It’s also worth noting that there would be no relief for losses unless there was a UK trade carried on.
The other issue is that even if you did use an offshore non UK resident company, the UK would still tax profits that arise from a UK trade carried out via a UK permanent establishment. Therefore you would need to be very careful to ensure that there was no UK trade/permanent establishment. We’ve looked at this here
Establishing a trade overseas
You should in any case think very carefully before making a transfer and should take detailed advice. As stated above a capital gain would arise in the UK company on the assets transferred — including goodwill. This gain in the UK company would effectively be the same as the deemed tax charge on a non UK company when it migrates overseas (ie the uplift in value to market value is subject to corporation tax).
Mechanics of a transfer
If you did want to go ahead with the transfer you should draw up a disposal agreement for the transfer of the trade and assets listing the assets transferred. There is no requirement for there to be financial consideration for the transfer.You would also need to arrange for a board resolution approving the transfer from the UK company.
After the transfer
After you’ve transferred the trade you’ll be left with a shell UK company. This could be wound up/struck off relatively simply. If the company held cash assets you could extract these as a capital distribution. If you were non resident capital gains tax could be avoided. If not you’d be taxed at 10% or 28% depending on whether Entrepreneurs Relief is due or not.
The tax position of the offshore company and the trade would then depend on general principles ie whether the company is clearly established as controlled overseas and whether there is a UK trade.