Where genuine intercompany services are provided overseas for offshore companies
UK companies can use an offshore structure to recharge amounts to the UK company, reducing UK corporation tax.
In terms of the offshore company itself you would need to ensure:
- it was controlled and managed overseas
- It had no UK trade (as even if non resident, profits from a UK trade could still be within the scope of UK tax). The location of the trade is usually where the key revenue generating activities are undertaken and therefore again it should be possible to ensure that there is no UK tax.
There are various opportunities as to how this could be structured
The simplest way to use an offshore company is for non resident directors to provide services via this to the UK company. This is a form of service company. You would need to ensure that the rates charged were at market levels for the services provided.
The offshore company would receive the receipts free of UK and local tax. The UK company would obtain a tax deduction for the payments.
Another option could be to transfer part of the trade to an offshore company, which could avoid UK tax. The offshore company would recharge for the services to the UK company which would be free of tax in the offshore company. A BVI or IOM company is often used for this purpose.
It’s frequently the admin type operations that are transferred to an offshore company.
HMRC usually accept that a service company used to employ staff, own or lease business premises or provide other administrative services is genuine assuming that the company recharges the UK co at an appropriate mark up (eg 10-15%).
Any genuine services provided from overseas could be provided by the offshore company eg
- international sales operations
- investment services
- holding company functions
Another option would be to use an offshore holding company. You’d achieve this by using a share for share exchange to place the new offshore company as the holding company of the UK company.
A management recharge from the UK to the offshore company would be deductible for corporation tax purposes but again you would need to ensure that it related to genuine services provided by the offshore co to the UK company. A management recharge of 100% of the profits for instance would not be acceptable.
An important issue on a transfer of any aspect of the trade would be whether there was a transfer of goodwill from the UK company.
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.
However, if the value of the goodwill is represented by the personal services carried out by the directors they may be able to argue that it is effectively personal goodwill. If this was the case they may be able to argue that there was no disposal for CGT purposes.
Aside from this a transfer of back office operations with a recharge to the UK company would usually be acceptable.
In terms of actually transferring the revenue generating activities the best option could be to undertake new activities in the offshore company where there could be no argument of a transfer of goodwill. The profits would then arise free of UK tax in the offshore company.
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. If the shareholders were non UK residents they would only be 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.