Using an offshore company – Summary
If you’re planning on using an offshore, non resident company to reduce your UK taxes, there are some tremendous opportunities available. However, it’s not all plain sailing and you definitely need to consider some of the anti avoidance rules that HMRevenueCustoms have at their disposal to challenge your entitlement to these tax benefits.
Benefits of an offshore company
For most people, there are two key tax benefits that could be obtained by using an offshore company:
Tax exemption for foreign income
A non resident company is only charged to UK tax on UK income. This means that a non resident company can be used to avoid UK tax on all sources of foreign income such as foreign rental income, foreign trading income and foreign investment income.
In actual fact the exemption goes much further than this, as there are also exemptions for certain forms of UK income. UK dividends for instance would not be taxed on a non resident parent company.
Tax exemption for capital gains
If a non resident company holds assets which increase in value, they can generally sell them free of UK tax. This means that a non resident company could be used to hold property, shares or other investments and could sell them free of UK taxes.
The capital gains exemption doesn’t just apply to overseas assets either. Capital gains on all assets (except for assets used in a UK business) would be free of UK taxes. UK investment property for instance could be sold free of UK tax.
The combination of these two massive advantages to using offshore, non resident companies means they are highly attractive for UK tax planning purposes.
However, as you’d expect the rules are not quite as straightforward as this. Whilst these benefits are achievable , HMRevenueCustoms has a number of strict anti avoidance rules to attempt to reduce the effectiveness of tax planning designed to utilise offshore companies.
Therefore for anyone to obtain a tax benefit from using offshore companies its essential that the anti avoidance rules are considered in detail.
Summary of the anti avoidance rules
There are three main obstacles to using an offshore company tax efficiently. Each would need to be considered to see how it effected your plans:
The central management and control test
In order to get the tax benefits from an offshore company, it needs to be classed as a non resident company. However, an offshore company will only be non resident for UK tax purposes if its central management and control is overseas. When looking at this, its the high level control that needs to be located overseas, as opposed to the day to day running of the business.
We look at this in detail here:
Establishing the central management and control overseas.
The transfer of asset and capital gains tax provisions
Once you’re satisfied that the control is located overseas. You then need to look at the anti avoidance rules.
There are rules that apply for both income tax and capital gains tax and although they operate independently they both have the effect of taxing UK residents on the actual income and gains of the offshore company.
If you’re caught by these rules the income tax and capital gains tax advantages of using an offshore company will usually be reduced and tax will be charged on you directly.
We’ve looked at these rules in these articles:
How the transfer of asset rules work
When capital gains of your offshore company are taxed on you in the UK
The location of the trade
Irrespective of the above, if you have a trade in the UK there is likely to be a UK tax charge on the profits that arise from that trade.
The terms of double tax treaties can apply here to restrict any UK tax charge to just the profits arising from a permanent establishment arising in the UK. Therefore if you establish your offshore company in a country which has a suitable double tax treaty with the UK (eg Cyprus,Singapore, Hong Kong etc) you can restrict or eliminate the UK tax charge.
Avoiding a UK trade, or at least splitting out your activities can therefore be crucial.
We’ve looked at this in this article: