Corporate tax in United Kingdom

Summary

Corporate Income Tax Rate (%) 20 (a)(b)(c)
Capital Gains Tax Rate (%) 20 (d)
Branch Tax Rate (%) 20
Withholding Tax (%)
Dividends 0
Interest 20 (e)(f)
Royalties from Patents, Know-how, etc. 20 (e)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 1
Carryforward Unlimited

a) The rate of corporation tax is 20% for both large and small companies. Effective from 1 April 2017, the rate of corporation tax will decrease to 19%, and will decrease by a further 1% to 18%, effective from 1 April 2020. The main rate of corporation tax for ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf) is 30% (small profits rate of 19%). The rates for ring-fence profits are not scheduled to change.

b) The small profits rate of 19% for ring-fence profits applies in certain circum­stances if taxable profits are below GBP300,000. This benefit is phased out for taxable profits from GBP300,000 to GBP1,500,000. These limits are re­duced if associated companies exist.

c) An additional 8% surcharge is levied on the profits of banks in excess of GBP25 million (before the offset of losses carried forward), effective from 1 January 2016.

d) Capital gains are subject to tax at the normal corporation tax rate. See Sec­tion B for details concerning the taxation of capital gains derived by non­residents.

e) This tax applies to payments to nonresidents and non-corporate residents.

f) A 45% rate applies to compound interest received from the UK tax authori­ties in certain cases.

Taxes on corporate income and gains

Corporate income tax. Companies that are resident in the United Kingdom are subject to corporation tax on their worldwide prof­its, but several exemptions have the effect of focusing corporation tax on UK-related activities. Tax is imposed on the total amount of income earned from all sources in the company’s accounting period, including any charge able capital gains. However, a com­pany can elect to exempt non-UK branch income and losses from UK corporation tax, subject to transitional rules that govern entry into the regime. This election is irrevocable and takes effect from the accounting period after the one in which the election is made.

Nonresident companies are subject to UK corporation tax only if they carry on a trade in the United Kingdom through a permanent establishment. A permanent establishment arises either from a fixed place of business in the United Kingdom through which the nonresident company carries on its business, or from an agent exercising authority to do business in the United Kingdom on be­half of the nonresident company. The amount of profit attributable to a permanent establishment is computed in accordance with the separate enterprise principle.

A company is resident in the United Kingdom if it is incorporated in the United King dom or if the central management and control of the company is exercised there. However, companies regarded as resident under do mes tic law, but as nonresident under the tie­breaker clause of a double tax treaty, are regarded as nonresident for all corporation tax purposes.

Rates of corporation tax. The main rate of corporation tax for both large and small companies is 20%, effective from the financial year beginning 1 April 2015. The rate will decrease to 19%, effec­tive from the financial year beginning 1 April 2017 and to 18%, effective from the financial year beginning 1 April 2020. The rate is 30% for companies with ring-fence profits (that is, profits from oil extraction and oil rights in the United Kingdom and the UK continental shelf). If an accounting period does not coincide with the financial year, the profits for the accounting period are time-apportioned and the appropriate rate is applied to each part.

For ring-fence profits, a company may claim the small profits rate of corporation tax, which is 19%, if its taxable profits for an ac­counting period are less than GBP300,000. For the financial year beginning 1 April 2015, the effective marginal rate for companies with ring-fence profits between GBP300,000 and GBP1,500,000 is 32.75%. These limits are divided by one plus the number of associates if a company has associated companies (subsidiaries or fellow subsidiaries), regardless of whether they are in or outside the United Kingdom.

An additional 8% surcharge is levied on the profits of banks in excess of GBP25 million (before the offset of losses carried for­ward), effective from 1 January 2016.

A special rate of corporation tax of 45% applies on restitution interest, which is compound interest received from the UK tax authorities on the repayment of tax (either by agreement or an order of a court) originally collected in breach of law, which ap­plies to awards determined on or after 21 October 2015.

Capital gains. Gains on chargeable assets are subject to corpora­tion tax at the corporation tax rate. For UK tax purposes, a capital gain is usually the excess of the sale proceeds over the original cost plus any subsequent qualifying capital expenditure incurred on the chargeable asset being disposed of. If chargeable assets acquired before 31 March 1982 are disposed of, only the portion of the gain after that date is usually taxable. An allowance is available for inflation; the amount of the reduction is based on the increase in the retail price index. This indexation allowance may be used only to eliminate a gain; it may not be used to create or increase an allowable loss.

The Substantial Shareholdings Exemption (SSE) broadly exempts from UK tax any capital gain on disposals made by trading com­panies or trading groups with substantial shareholdings (at least 10%) in other trading companies or groups. The following three sets of conditions must be satisfied:

  • The substantial shareholding requirement
  • Conditions relating to the “investing” company or group
  • Conditions relating to the “investee” company or subgroup

Broadly, both the investing company and the investee company must be a trading company, group or subgroup for 12 months be­fore the disposal and immediately afterwards.

Tax on capital gains is not generally levied on nonresidents; con­sequently, no tax is levied on a gain on the sale of shares in a UK subsidiary by the foreign nonresident parent company. However, gains on the sale of assets situated in and used in a trade carried on by a permanent establishment in the United Kingdom are sub­ject to corporation tax at the corporation tax rate. From 6 April 2013, capital gains tax at a rate of 28% may be charged on the disposal of residential property by companies (both UK and non-UK resident). From 6 April 2015, this applies to residential prop­erty worth over GBP1 million. The tax is designed to prevent tax avoidance through the wrapping of residential property in corpo­rate or other “envelopes.” Several reliefs are available to reduce the impact of this tax on genuine business transactions. In addi­tion, from 6 April 2015, capital gains tax at a rate of 20% may be charged on the disposal of residential property by non-UK resi­dent closely held companies if the disposal is not subject to the 28% charge mentioned above.

Special provisions permit the deferral of the capital gains charge on qualifying business assets if the sales proceeds are reinvested. There are numerous other special rules relating to capital gains.

Capital losses may be offset against capital gains of the same ac counting period or carried forward indefinitely, but may not be carried back. Capital losses may not be used to reduce trading profits.

Administration. Tax returns, accounts and computations must be filed within 12 months after the end of the accounting period.

Large companies must make quarterly installment payments of their corporation tax. The first installment is due six months and thirteen days after the first day of the accounting period, and the last installment is due three months and fourteen days after the end of the accounting period. These payments are based on the estimated tax liability for the current year. Fewer payments may be required for shorter accounting periods.

All other companies must pay estimates of their corporation tax liability within nine months after the end of their accounting period.

Companies not complying with the filing and payment deadlines described above are subject to interest and penalties.

A self-assessment system requires companies to assess correctly their tax liabilities or face significant penalties. In addition, the tax authority (Her Majesty’s Revenue & Customs, or HMRC) has extensive investigative powers.

The 2016 Finance Bill will introduce a new requirement for large businesses to publish annually their tax strategy as it relates to or affects UK taxation. The requirement will take effect on the date of the Royal Assent to the bill (expected in July 2016). This will be accompanied by a framework for cooperative compliance that highlights a set of principles within which both large businesses and the HMRC should engage and work.

Inward Investments Support. Significant inward investors can ap­ply under HMRC’s Inward Investments Support service for writ­ten confirmation of the UK tax treatment of specific transactions or events. In this context, “significant” is regarded as an invest­ment of GBP30 million or more, but smaller investments are considered if they are potentially of importance to the national or regional economy.

Dividends. Dividends paid by UK resident companies are not sub­ject to withholding tax. For dividends received by UK resident companies, the United Kingdom has a dividend exemption re­gime. A dividend or other income distribution received on or after 1 July 2009 is generally exempt from UK corporation tax if all of the following conditions are satisfied:

  • The distribution falls within an exempt class or, if the recipient is a “small” company, the payer is resident in the United King­dom or a qualifying territory.
  • The distribution is not of a specified kind.
  • No deduction is allowed to a resident of any territory outside the United Kingdom under the law of that territory with respect to the distribution.

Until April 2016, UK resident shareholders other than companies were subject to income tax on the distribution received plus a deemed tax credit. The deemed tax credit attaching to dividends equaled 1/9 of the net dividend. Under several of the United Kingdom’s double tax treaties, a foreign shareholder in a UK company could claim payment of part or all of this deemed tax credit that would have been available to a UK individual. How­ever, in most cases, the benefit was eliminated or reduced to a negligible amount. Effective from 6 April 2016, the deemed tax credit is abolished for UK individuals, and therefore, the treaty benefit is denied in full.

Interest. Interest payments on “short loans” (loans with a duration that cannot exceed 364 days) may be made without the need to account for withholding tax. All interest payments by UK resident companies may be made without the imposition of withholding tax if the paying company reasonably believes that the interest is subject to UK corporation tax in the hands of the recipient.

Foreign tax relief. Foreign direct tax on income and gains of a UK resident company other than that relating to a non-UK branch for which an exemption election has been made (see Corporate

income tax) may be credited against the corporation tax on the same profits. The foreign tax relief cannot exceed the UK corpo­ration tax charged on the same profits.

If a company receives a dividend from a foreign company in which it has at least 10% of the voting power, it may also obtain relief for the underlying foreign tax on the profits out of which the dividend is paid. Foreign tax relief does not apply if the dividend satisfies the conditions for the dividend exemption (see Dividends).

Determination of trading income

General. The assessment is based on financial statements prepar­ed in accordance with generally accepted accounting principles (GAAP), subject to certain adjustments and provisions. Effective from 1 January 2015, most UK entities (with limited exceptions) must report either under International Financial Reporting Stan­dards or the new Financial Reporting Standards in the United Kingdom and Republic of Ireland (either FRS 101 or 102). Adop­tion of either standard may have a significant impact on cash taxes payable in the United Kingdom because the tax assessment is heavily influenced by the accounting result reported in the statutory financial statements.

In general, expenses must be incurred wholly and exclusively for the purposes of the trade. However, specific reliefs and pro­hibitions exist for certain expenses. For example, no deduction is allow ed for entertainment expenses, except for the entertaining of company employees (in certain circumstances).

Corporate and government debt and foreign-exchange differences. The rules under the “loan relationships” regime are designed to allow the tax treatment of interest, discounts and premiums on debt instruments to follow the accounting treatment in most cir­cumstances. However, the regime includes many anti-abuse mea­sures as well as other measures, such as the Worldwide Debt Cap, which can restrict the allowable deductions (for further details, see Section E).

Foreign-exchange differences on most items are taxable or reliev­able when they are recognized in the profit-and-loss account. Specific rules apply to foreign-exchange differences arising on loans that hedge exchange risk on shareholdings.

Inventory. Inventory is normally valued at the lower of cost or net realizable value. Cost must be determined on a first-in, first-out basis; the last-in, first-out basis is not currently acceptable under UK GAAP.

Provisions. HMRC allows specific provisions made in accordance with GAAP to be deductible for tax purposes unless specific leg­islation provides to the contrary. However, no expenditure may be relieved more than once.

Leased assets. If leases of plant or machinery function essentially as financing transactions (long-funding leases), they are taxed as such and the following rules apply:

  • The lessor includes only the finance element of the rentals aris­ing under the lease income.
  • The lessee deducts only the finance element of the rentals pay­able over the life of the lease and is entitled to capital allowances.

This regime applies to finance leases and certain operating leases. With the exception of some hire-purchase transactions, leases of less than five years are not affected.

Tax depreciation (capital allowances)

Plant and machinery. Expenditure on plant and machinery, in­cluding some cars bought after April 2009, is pooled together (the main pool) and allowances are given at 18% on a reducing-balance basis. Assets with a useful life of 25 years or more (long-life assets) are depreciated at 8% on a reducing-balance basis. In­tegral features to a building also qualify for the 8% rate of cap­ital allowances. An annual investment allowance (AIA) of 100% is available. From 1 January 2016, the AIA applies to the first GBP200,000 of investment in plant and machinery (other than cars) by all businesses, regardless of size. One AIA is available to each individual business or corporate group.

A 100% first-year allowance rate applies to expenditure before 1 April 2018 on electric cars and cars with CO2 emissions of 75g/ km or less. Cars emitting between 75g/km and 130g/km are added to the main pool, and the 18% rate applies. Cars emitting above 130g/km are added to the special-rate pool, and the 8% rate ap­plies. For leased cars with CO2 emissions above 130g/km, 15% of the lease cost is disallowed for tax purposes. The 100% first-year allowance rate does not apply to cars that will be leased.

Energy-saving assets. A 100% first-year allowance is available to businesses for expenditure on gas-refueling infrastructure, water-efficient technologies and energy-saving technologies. Lists of qualifying technologies are reviewed regularly.

Renovation of business premises in disadvantaged areas. A first-year allowance of 100% is available for individuals and compa­nies that convert, renovate or repair a commercial building or structure located in a designated disadvantaged area. This allow­ance is scheduled to end on 31 March 2017 for companies and on 5 April 2017 for individuals.

Industrial and agricultural buildings. Allowances for industrial buildings and agricultural buildings were fully withdrawn on 1 April 2011.

Other. Capital allowances are usually subject to recapture on the disposal of an asset on which capital allowances have been claim­ed. Capital allowances are also available for expenditure on min­eral extraction.

Relief for losses

Trading Losses. Trading losses may be used to relieve other in­come and capital gains of the year in which the loss was incurred and of the preceding year, provided the same trade was then car­ried on. Losses may also be carried forward, without time limit, for relief against future profits from the same trade (however, the use of losses that are carried forward as at 31 March 2015 by banks is restricted from that date to an offset of a maximum of 50% of profits). Anti-avoidance provisions exist to prevent the offset of losses carried forward in arrangements that are princi­pally tax driven. A company that ceases trading may carry back trading losses and offset them against profits of the preceding 36 months.

Non-trading losses. Relief is also available for non-trading defi­cits and management expenses. Specific rules provide how such losses can be used or carried forward and the order in which they can be used.

Groups of companies. UK law does not provide for tax consolida­tion. However, a trading loss incurred by one company within a 75%-owned group of companies may be grouped with profits for the same period realized by another member of the group. Similar provisions apply in a consortium situation to allow a transfer of a proportion of the losses; for this purpose, a UK resident company is owned by a consortium if 75% or more of its ordinary share capital is owned by other companies, none of which individually has a holding of less than 5%. However, the consortium-owned company must not be a 75%-owned subsidiary of any company. In both situations, anti-avoidance provisions that aim to prevent artificial arrangements exist.

Capital losses cannot be grouped with capital gains of other group members under the above provisions. However, the seller of an asset and another group company may jointly elect to transfer a capital gain or allowable loss to enable offset of capital gains and capital losses. A transferred capital loss can be carried forward in the transferee company.

In a 75%-worldwide group, the transfer of assets between group companies does not result in a capital gain if the companies in­volved are subject to UK corporation tax. This rule applies regard­less of the residence status of the companies or their shareholders. The transferee company assumes the transferor’s original cost of the asset plus subsequent qualifying expenditure and indexation. However, under an anti-avoidance provision, if the transferee company leaves the group within six years after the date of the transfer of the asset, that company is deemed to have disposed of and reacquired the asset at its market value immediately after the transfer. In certain circumstances, the chargeable gain or allow­able loss that arises is added to or deducted from the proceeds of a share sale that caused the company to leave the group in the first place. The resulting gain or loss can then potentially be exempted or disallowed under the SSE (see Capital gains). If this provision does not apply, the gain or loss remains in the company that has left the group, but the gain or loss can be transferred by election to another company in the group. Anti-avoidance provisions that aim to prevent artificial arrangements exist.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate
Value-added tax (VAT); on any supply of goods
or services, other than an exempt supply, made
in the United Kingdom by a taxable person
in the course of business (for businesses
established in the United Kingdom only);
taxable if annual supplies exceed GBP81,000
0%/5%/20%
Stamp duty; imposed on transfers of shares,
securities and interests in certain partnerships;
duty charged on the stampable consideration
0.50%
Stamp duty land tax (SDLT); imposed on
transfers of land and buildings and certain
partnership transactions; tax is charged on the
final consideration, but this may be replaced
by market value in certain circumstances
(not applicable in Scotland: see Land and
Buildings Transaction Tax below)
Residential property
(SDLT is charged at increasing rates for each portion of the price paid)
Portion up to GBP125,000 0.00%
Portion between GBP125,001 and
GBP250,000
2.00%
Portion between GBP250,001 and
GBP925,000
5.00%
Portion between GBP925,001 and
GBP1,500,000
10.00%
Portion above GBP1,500,000 12.00%
Acquisitions by companies and certain
other bodies
Consideration up to GBP500,000 Rates as above
Consideration exceeding GBP500,000 15% on total
Nonresidential or mixed-use property (SDLT is charged at a single rate for the entire price of a property.)
Up to GBP150,000 0.00%
GBP150,001 to GBP250,000 1.00%
GBP250,001 to GBP500,000 3.00%
More than GBP500,000 4.00%
Land and Buildings Transaction Tax (LBTT);
in Scotland, LBTT has replaced SDLT from
1 April 2015 on the acquisition by individuals
and companies of residential and nonresidential
land and buildings; charged at increasing rates
for each portion of the price paid
Residential property
Portion up to GBP145,000 0.00%
Portion between GBP145,001 and GBP250,000 2.00%
Portion between GBP250,001 and GBP325,000 5.00%
Portion between GBP325,001 and GBP750,000 10.00%
Portion above GBP750,000 12.00%
Nonresidential or mixed-use property
Portion up to GBP150,000 0.00%
Portion between GBP150,001 to GBP350,000 3.00%
Portion above GBP350,000 4.50%
Social security contributions, on employees’
salaries and wages; payable on weekly
wages by
Employer; imposed on employees’ weekly
wages exceeding GBP156
13.80%
Employee; imposed on employees’ weekly
wages
On first GBP155 0.00%
On next GBP660 (GBP672 from April 2016) 12.00%
On balance of weekly wage 2.00%
Bank levy; based on the total chargeable
equity and liabilities (subject to various
exclusions) as reported in relevant balance
sheets at the end of a chargeable period;
a half-rate applies to long-term amounts
and a nil rate allowance is granted for the
first GBP20 million (2016 rates)
0.18%/0.09%
Annual tax on enveloped dwellings; a UK-wide
levy on certain higher value residential property
held by companies and partnerships with a
corporate member; several reliefs are available
to exempt genuine property development and
investment rental businesses from the tax; the
tax is levied at a flat rate per year
Properties worth between GBP500,000
and GBP1 million (additional band
from 1 April 2016)
GBP3,500
Properties worth more than GBP1 million
and not more than GBP2 million
GBP7,000
Properties worth more than GBP2 million
and not more than GBP5 million
GBP23,350
Properties worth more than GBP5 million
and not more than GBP10 million
GBP54,450
Properties worth more than GBP10 million
and not more than GBP20 million
GBP109,050
Properties worth more than GBP20 million GBP218,200

Miscellaneous matters

Foreign-exchange controls. Foreign-exchange regulations were suspended in 1979 and subsequently abolished. No restrictions are imposed on inward or outward investments. The transfer of prof­its and dividends, loan principal and interest, royalties and fees is unlimited. Nonresidents may repatriate capital, together with any accrued capital gains or retained earnings, at any time, subject to company law or tax considerations.

Anti-avoidance legislation. UK tax law contains several anti-avoidance provisions, which include the substitution of an arm’s-length price for intercompany transactions (including intercom­pany debt) with UK or foreign affiliates, the levy of an exit charge on companies transferring a trade or their tax residence from the United Kingdom and the recharacterization of income for certain transactions in securities and real property. Some of these anti-avoidance provisions apply only if the transaction is not carried out for bona fide commercial reasons. Specific anti-arbitrage provisions applying to both deductions and receipts may be rel­evant to cross-border transactions.

The UK government has published draft legislation to implement the recommendations in Action 2 (hybrid arrangements) of the Base Erosion and Profit Shifting (BEPS) project of the Organis­ation for Economic Co-operation and Development (OECD). When the legislation comes into effect on 1 January 2017, it will replace the existing anti-arbitrage rules. The new rules do not contain a purpose test.

In certain situations, legislation provides a facility for an advance clearance to be obtained from HMRC. If legislation does not pro­vide this facility and if uncertainty exists as to the tax treatment for a transaction, a non-statutory clearance facility exists under which companies may apply to HMRC in advance of the transac­tion for a written confirmation of HMRC’s view on how the tax law will apply to the transaction. HMRC undertakes to provide advance clearance within 28 days if evidence exists that the trans­action is genuinely contemplated. It also aims to respond within this time period if certainty is sought for a transaction that has already taken place. HMRC does not provide clearance if it be­lieves that the arrangements are primarily intended to obtain a tax advantage.

The United Kingdom has implemented a system requiring the disclosure of certain transactions and arrangements to HMRC. As a direct result of this disclosure regime, tax-planning schemes are frequently disclosed in advance to HMRC.

A general anti-abuse rule (GAAR) entered into force on 17 July 2013. The GAAR targets artificial and abusive tax-avoidance schemes and is intended to apply to the main taxes but not VAT.

Transfer pricing. UK tax law contains measures that substitute an arm’s-length price for certain intercompany transactions with UK or foreign affiliates. Companies are required to prepare their tax returns in accordance with the arm’s-length principle, and retain adequate records or other documentation to support their compli­ance with that principle, or otherwise suffer substantial penalties. These rules have other far-reaching consequences, and taxpayers should seek specific advice concerning their circumstances.

If both parties to a transaction are subject to UK corporation tax, and one is required to increase its taxable profits in accordance with the arm’s-length principle, the other is usually allowed to decrease its taxable profits through a corresponding adjustment. Companies that were dormant as of 31 March 2004 and remain dormant are exempt from the transfer-pricing rules. Although small and medium-sized companies (unless they elect otherwise) are exempt from the rules with respect to transactions with per­sons in qualifying territories (broadly, the United Kingdom and those countries with which the United Kingdom has entered into a double tax treaty containing a non-discrimination article), they can be subject to the issuance of a transfer pricing notice by HMRC. However, for small companies, this notice can be issued only if the company has undertaken a non-arm’s-length transac­tion with an affiliate that is taken into account in determining profits under the Patent Box regime (see Patent Box).

Persons that are otherwise independent but collectively control a business and have acted together with respect to the financing arrangements for the business are also subject to the UK transfer-pricing regime.

Interest restrictions. The United Kingdom’s transfer-pricing mea­sures apply to the provision of finance (as well as to trading in­come and expenses). As a result, companies must self-assess their tax liability on financing transactions using the arm’s-length principle. Consequently, HMRC may challenge interest deduc­tions on the grounds that, based on all of the circumstances, the loan would not have been made at all or that the amount loaned or the interest rate would have been less, if the lender was an unrelated third party acting at arm’s length.

Worldwide Debt Cap. The World wide Debt Cap (WWDC) is a cap on allowable interest deductions in addition to thin-capitalization restrictions and other anti-avoidance provisions. The WWDC pro­visions are de sign ed to restrict the UK tax deduction available for financing expenses of large groups based on the gross financing expense of the worldwide group. The WWDC legislation applies to accounting periods beginning on or after 1 January 2010. The WWDC does not apply to groups if substantially all of their in­come relates to banking and insurance.

The WWDC provisions include a gateway test. If the gateway test is satisfied, the UK group falls outside of the remaining provi­sions. Under the gateway test, broadly, the WWDC applies only if a group’s UK net debt exceeds 75% of the worldwide gross debt.

If the WWDC applies and if the tested expense amount exceeds the available amount, the excess amount is disallowed. Broadly, the tested expense amount is the aggregate net finance expense of all UK group companies that have a net finance expense, and the available amount is the group’s external worldwide finance expense, which is taken from the consolidated financial state­ments. If a disallowance arises, some interest income may also be exempted from UK tax. The amount of the exempted income is limited to the lower of the aggregate net finance income of all UK group companies and the total disallowed amount.

Controlled foreign companies. The controlled foreign company (CFC) regime was significantly revised in 2012, effective for ac­counting periods beginning on or after 1 January 2013. The re­gime applies to non-UK resident companies that are controlled by UK residents. It also applies to non-UK branches of UK resident companies for which an exemption election has been made.

The regime is similar to the prior regime in that, if a CFC has profits that do not meet any of the exemptions, those profits are taxed on any UK resident companies having a 25% or more in­terest in the CFC. However, the new regime is much more focus­ed on identifying artificial diversion of profits out of the United Kingdom. Consequently, it is necessary to examine a company’s income on a source-by-source basis to determine whether it falls within one of the “gateways,” or whether one of the entity exemp­tions apply.

The legislation does not indicate whether the full company ex­emptions or the “gateway” provisions should be applied first. The following are the five “gateways,” which must all be considered:

  • Profits attributable to UK activities
  • Non-trading finance profits
  • Trading finance profits
  • Captive insurance business
  • Solo consolidation (for banking subsidiaries), which allows a UK bank to treat the foreign company as it were a division of the UK bank

For each gateway test, it is necessary to establish whether the test applies, and then determine which profits pass through the gate­way and are chargeable profits of the CFC. Such profits are then subject to apportionment to the appropriate UK resident share­holders. Profits that fall outside one gateway may still fall within one of the others.

Several safe harbors and specific exemptions exist with respect to the gateways. In particular, a company may make a claim that between 75% and 100% of profits arising from certain “qualify­ing loan relationships” are exempt.

The entity-level exemptions apply if any of the following circum­stances exist:

  • The CFC’s local tax liability is 75% or more of the equivalent UK liability.
  • The CFC has low profits or a low-profit margin.
  • The CFC is resident in certain qualifying territories.
  • A foreign company has become a CFC for the first time (in certain circumstances).

Diverted profits tax. The diverted profits tax (DPT) is an anti-avoidance measure, which is effective from 1 April 2015. It is aimed at perceived abuse in certain circumstances involving “in­sufficient economic substance” somewhere in the supply chain or avoided UK permanent establishments. The DPT is separate from the corporation tax and is imposed at a rate 25% on profits divert­ed from the United Kingdom, broadly in the following situations:

  • A different transfer-pricing outcome allocating more profits to the United Kingdom and less to a low-tax entity would have resulted had all the facts, including the full supply chain and the activities undertaken by each entity in that chain, been consid­ered.
  • An alternative transaction would have been entered into in the absence of tax considerations, and it would have resulted in more taxable profits in the United Kingdom and less in a low-tax entity.
  • A UK resident or nonresident carries on an activity in the United Kingdom in connection with the supply of goods, ser­vices or property by a non-UK trading company, and it is rea­sonable to assume that the activities are designed to ensure that no permanent establishment is established in the United Kingdom, and certain other conditions are satisfied. An exclu­sion applies if the total UK-related sales revenues of the com­pany (together with connected companies) that are not already included within the charge to UK corporation tax in a 12-month accounting period are less than GBP10 million. Likewise, an exclusion applies if the total UK-related expenses of the com­pany (together with connected companies) in a 12-month accounting period are less than GBP1 million.

In both circumstances, exclusions apply based on substance and the relative values of the tax and other benefits of the transactions. Transactions are also excluded from DPT if they only give rise to one or more loan relationships and associated hedging deriva­tives. Notification requirements (which are broader than the tax-levying measures) and a unique charging mechanism are imposed with respect to DPT.

Patent Box. The Patent Box regime was introduced in 2012, and is effective for accounting periods beginning on or after 1 April 2013. The regime taxes qualifying income relating to patents and certain other intellectual property (IP) at a rate of 10%, but this rate is being phased in over five years.

The Patent Box regime can apply to patents granted by UK and European patent offices and certain other patent offices in the European Economic Area, as well as to patent applications that can not be published for reasons of national security or public safety. Other innovative IP found in the medicinal, veterinary and agriculture industries is also included, such as regulatory data, marketing exclusivity, supplementary protection certificates and plant variety rights.

The 10% effective tax rate is achieved by creating an additional deduction from taxable profits and applies to all income arising from the patents, including royalties and income from the sale of patents. Significantly, it also applies to profits from the sale of products, services and processes with embedded patents. Accord­ingly, for example, all profits from the sale of cars manufactured with a combination of patented and unpatented components can qualify in full (subject to an adjustment for any routine returns or notional marketing royalties). Consequently, the Patent Box re­gime is potentially of very wide application.

With effect broadly from 1 July 2016, and subject to some anti-forestalling measures, which address actions taken by taxpayers before the rules enter into force, the regime will be amended in line with the recommendations of the OECD in its October 2015 report on harmful tax practices under Action 5 of its BEPS proj­ect. For new entrants (new IP or new claimants) after 30 June 2016, an additional requirement will be introduced into the re­gime. This requirement restricts the availability of the 10% tax rate if the claimant company has, to a significant extent, out-sourced development to related parties or has acquired the IP. Existing IP in the regime as of 30 June 2016 should continue to qualify under the existing regime for up to a further five years. Details of the amended UK regime have been published in the form of draft legislation, which is expected to be enacted in July 2016.

Dual-resident companies. A dual-resident company that is broad­ly not a trading company loses the right to surrender its losses to fellow group members and is prevented from enjoying certain other reliefs. These rules effectively prevent such dual-resident companies from obtaining double reliefs in both countries of residence.

Impact of decisions of the Court of Justice of the European Union. The UK tax system is currently subject to significant external influence in the form of binding decisions rendered by the Court of Justice of the European Union (CJEU). These decisions have held that several UK domestic tax measures are contrary to Euro­pean Fundamental Freedoms (for example, the decisions in Marks & Spencer, Test Claimants in the Franked Investment Income Group Litigation, Cadbury Schweppes and Philips Electronics UK Limited).

At this stage, it is impossible to reach a definitive conclusion on the ultimate impact of the CJEU decisions, because, among other reasons, the cases are likely to continue for years. New UK legis­lation was enacted as a result of cases, such as Marks & Spencer, Cadbury Schweppes and Philips Electronics. Also, UK legislation has been amended following CJEU decisions that concern the tax system in another EU member state, when an equivalent tax pro­vision exists in UK domestic law (for example, National Grid Indus BV). Because these cases and several other cases have held that some fundamental aspects of the domestic law in the United Kingdom or other EU member states are contrary to EU law, it is possible that CJEU decisions will lead to further changes in the UK tax system in the future.

Devolution of tax powers. Legislation enabling devolution of some corporation tax powers to the Northern Ireland Assembly was en­acted during 2015, and will take effect on a date to be determined by statutory instrument. Although certain tax-raising powers have been devolved to the Scottish Parliament and Welsh Assembly, power over corporation tax has not been devolved.

Treaty withholding tax rates

The rates in the following table reflect the lower of the treaty rate and the rate under domestic tax law. The table is for general guid­ance only.

  Payments by UK companies of
Residence of recipient Dividends (a) Interest (b) Royalties (b)
    % %
Albania (2) 0/6 (cc) 0
Antigua and      
Barbuda (2) 20 0
Argentina (2) 0/12 (l) 3/5/10/15 (m)
Armenia (2) 5 5
Australia (2) 0/10 (o)(aa) 5
Austria (1) 0 0/10 (dd)
Azerbaijan (2) 0/10 5/10 (n)
Bahrain (2) 0 (x) 0
Bangladesh (2) 7.5/10 (o) 10
Barbados (1) 0 0
Belarus (2) 0 0
Belgium (2) 0/10 (z) 0
Belize (1) 20 0
Bolivia (2) 0/15 15
Bosnia and      
Herzegovina (s) (1) 10 10
Botswana (2) 0/10 10
Brunei Darussalam (1) 20 0
Bulgaria (2) 5 5
Canada (2) 0/10 0/10 (d)
Chile (2) 5/15 (f) 5/10 (j)
China (2) 0/10 6/10 (v)
Côte d’Ivoire (2) 0/15 10
Croatia (s) (2) 5 5
Cyprus (1) 10 0/5 (g)
Czech Republic (2) 0 0/10 (h)
Denmark (2) 0 (c) 0 (c)
Egypt (2) 0/15 15

 

 
Estonia (2) 0/10 (c) 5/10 (c)(j)
Ethiopia (2) 0/5 (c)(aa) 7.5 (c)
Falkland Islands (2) 0 (c) 0 (c)
Faroe Islands (2) 0 (c) 0 (c)
Fiji (1) 10 0/15 (n)
Finland (2) 0 (c) 0 (c)
France (1) 0 (c) 0 (c)
Gambia (1) 0/15 (aa) 12.5
Georgia (2) 0 (c) 0 (c)
Germany (2) 0 0
Ghana (2) 0/12.5 (c)(aa) 12.5 (c)
Greece (2) 0 0
Grenada (2) 20 0
Guernsey (2) 20 20
Guyana (2) 0/15 (c)(aa) 10/20 (c)(r)
Hong Kong SAR (2) 0 (c) 3 (c)
Hungary (2) 0 0
Iceland (2) (c) 0 (c) 0/5 (c)
India (2) 0/10/15 (o)(aa) 10/15 (j)
Indonesia (1) 0/10 (c)(aa) 10/15 (c)(j)
Ireland (2) 0 (c) 0
Isle of Man (2) 20 20
Israel (2) 15 0/15 (r)
Italy (4) 0/10 (c)(aa) 8
Jamaica (1) 12.5 (c)(aa) 10
Japan (2) 0/10 (c) 0 (c)
Jersey (2) 20 20
Jordan (2) 0/10 (c)(aa) 10 (c)
Kazakhstan (2) 0/10 (aa) 10 (c)
Kenya (1) 0/15 (aa) 15
Kiribati (1) 20 0/20 (u)
Korea (South) (2) 0/10 (c)(aa) 2/10 (c)(i)
Kosovo (y) (2) 0 0
Kuwait (2) 0 (c) 10 (c)
Latvia (2) 0/10 (c)(aa) 5/10 (c)(j)
Lesotho (2) 0/10 (c)(aa) 10 (c)
Libya (2) 0 (c) 0 (c)
Liechtenstein (2) 0 (c) 0 (c)
Lithuania (2) 0/10 (c)(aa) 5/10 (c)(j)
Luxembourg (4) 0 5
Macedonia (s) (2) 0/10 (c)(z) 0 (c)
Malawi (1) 0/20 (p) 0/20 (p)
Malaysia (2) 0/10 (c)(aa) 8 (c)
Malta (3) 0/10 (c)(aa) 10 (c)
Mauritius (1) 0/20 (o)(aa) 15
Mexico (2)          0/5/10/15 (c) 10 (c)
Moldova (2) 0/5 (o)(aa) 5 (c)
Mongolia (2) 0/7/10 (o)(aa) 5 (c)
Montenegro (s) (1) 10 10
Montserrat (2) 20 0
Morocco (2) 0/10 (aa) 10
Myanmar (Burma) (2) 20 0
Namibia (2) 20 0/5 (n)
Netherlands (4) (c) 0 (c) 0 (c)
New Zealand (2) 0/10 (c)(aa) 10 (c)

 

Nigeria (2) 0/12.5 (c)(aa) 12.5 (c)
Norway (2) (c) 0 (c) 0 (c)
Oman (2) 0 (c) 8 (c)
Pakistan (2) 0/15 (aa) 12.5
Panama (2) 0/5 (bb) 5
Papua New Guinea (2) 0/10 (c)(aa) 10
Philippines (1) 0/10/15 (q)(aa) 15/20 (t)
Poland (2) 0/5 (c)(aa) 5 (c)
Portugal (2) 10 5
Qatar (2) 0/20 (c) 5 (c)
Romania (1) 10 10/15 (n)
Russian Federation (2) 0 (c) 0 (c)
St. Kitts and Nevis (2) 20 0
Saudi Arabia (2) 0 5/8 (i)
Serbia (s) (1) 10 10
Sierra Leone (2) 20 0
Singapore (2) 5 (o)(aa) 8 (c)
Slovak Republic (2) 0 0/10 (h)
Slovenia (s) (2) 0/5 (c)(z) 5 (c)
Solomon Islands (1) 20 0
South Africa (2) 0 (c) 0 (c)
Spain (1) 0 0
Sri Lanka (2) 0/10 (c)(o) 0/10 (w)
Sudan (1) 15 (c) 10
Swaziland (2) 20 0
Sweden (2) 0 0
Switzerland (2) 0 (c) 0 (c)
Taiwan (2) 0/10 (c)(aa) 10 (c)
Tajikistan (2) 10 7
Thailand (1) 0/10/20 (o)(aa) 5/15 (n)
Trinidad and Tobago (1) 0/10 (aa) 0/10 (n)
Tunisia (2) 10/12 (o) 15
Turkey (2) 0/15 (aa) 10
Turkmenistan (2) 0 0
Tuvalu (1) 20 0
Uganda (2) 0/15 (aa) 15
Ukraine (2) 0 (c) 0 (c)
United States (2) 0 (c) 0 (c)
Uzbekistan (2) 0/5 (c)(aa) 5 (c)
Venezuela (2) 0/5 (c)(aa) 5/7 (c)(k)
Vietnam (2) 0/10 (c)(aa) 10 (c)
Zambia (1) 10 10
Zimbabwe (1) 0/10 (aa) 10
Non-treaty
countries
– (e) 20 20

(a) Under UK domestic law, withholding tax is not imposed on dividends. As explained in Section B, under the law until April 2016, a UK resident indi­vidual receiving a dividend obtained a tax credit of 1/9 of the dividend; this satisfied his or her basic rate income tax liability on the grossed up amount. The United Kingdom’s double tax treaties fall into the following four general categories concerning dividends:

(1) Treaties that give no tax credit to companies resident in the other state possessing more than a portfolio holding of the company paying the dividend (usually more than 10% of the voting power), but give a full credit to other shareholders resident in the other state, subject to a reduc­tion based on the total of the dividend and the tax credit.

(2) Treaties that give no tax credit to residents of the other state.

(3) Treaties that give no tax credit to corporations, but give a full credit to other shareholders resident in the other state, subject to a reduction of 15% of the total of the dividend and the tax credit.

(4) Treaties that give the following to residents of the other state:

  • A half tax credit to companies possessing 10% or more of the vot­ing power of the company paying the dividend, subject to a reduc­tion of 5% of the total of the dividend and credit.
  • A full credit to other shareholders, subject to a reduction of 15% of the total of the dividend and the tax credit. However, effective from 6 April 1999, the tax credit available to shareholders resident in the other state is eliminated. This results from the reduction of the tax credit available to UK shareholders to 1/9.

b) Under a European Union (EU) directive, payments of interest and royalties made between, broadly, associated companies resident in EU member states are exempt from withholding tax. Numerous conditions and transitional rules apply, including some that delay the application of the rules for several years.

c) Anti-avoidance provisions restrict the tax credit repayment or other treaty benefits in certain circumstances.

d) No withholding tax is imposed on royalties paid for copyrights of literary, dramatic, musical or artistic works (except motion pictures, films, videotapes and certain other items), payments for patents or commercial or industrial experience or payments for the use of computer software.

e) See Section B.

f) The lower rate applies to interest paid with respect to the following: loans from banks and insurance companies; securities quoted on a stock exchange; and certain sales of machinery and equipment.

g) The higher rate applies to cinematographic royalties.

h) The higher rate applies to industrial, commercial, scientific, technical and technological royalties, and royalties with respect to patents, trademarks, designs or models, plans, and secret formulas or processes.

i) The lower rate applies to payments for the use of, or right to use, industrial, commercial or scientific equipment. The higher rate applies to other royal­ties.

j) The lower rate applies to payments for the use of industrial, commercial or scientific equipment. The higher rate applies to other royalties.

k) The 5% rate applies to royalties for patents, trademarks or processes as well as to royalties for know-how concerning industrial, commercial or scientific experience. The 7% rate applies to royalties for copyrights of literary, artistic or scientific works.

l) The standard rate of withholding tax on interest is 12%. Interest is exempt from withholding tax if any of the following apply:

  • The state is the payer of the interest.
  • The interest is paid on a loan made, guaranteed or insured by the other contracting state.
  • The interest is paid on a loan granted by a bank to an unrelated party at preferential rates and the loan is repayable over a period of not less than five years.
  • The interest is paid on a debt resulting from either of the following:

— Sales on credit of industrial, commercial or scientific equipment by a resident of the other contracting state (excluding sales between related persons).

— Purchases of industrial, commercial or scientific equipment financed through a leasing contract.

m) The 3% rate applies to royalties for the right to use news. The 5% rate applies to royalties for copyrights of artistic works (excluding motion picture films and television). The 10% rate applies to royalties for patents or payments for industrial experience, including the rendering of technical assistance. The 15% rate applies to other royalties.

n) The lower rate applies to copyright royalties.

o) The lower rate (the 7% rate under the Mongolia treaty and the 10% rate under the India and Thailand treaties) applies to interest paid to banks and other financial institutions.

p) The higher rate applies if the recipient is a Malawi company that controls more than 50% of the voting power in the UK company that makes the payment.

q) The 10% rate applies to interest on listed bonds.

r) The higher rate applies to cinematographic, television and radio broadcasting royalties.

s) The applicability to Bosnia and Herzegovina of the treaty entered into with the former Yugoslavia is uncertain. The UK tax authorities request that claims for relief be examined by their Tax Treaty Team. The UK tax authorities consider the former Yugoslavia treaty to be applicable to Montenegro and Serbia. New agreements have been entered into with Croatia, Kosovo, Mace­donia and Slovenia.

t) The lower rate applies to royalties with respect to cinematographic films and films or tapes for television or radio broadcasting.

u) The higher rate applies to royalties with respect to mines, quarries or other extractions of natural resources.

v) The lower rate applies to the right to use industrial, commercial or scientific equipment.

w) The lower rate applies to copyright royalties. The higher treaty rate applies to all other royalties payable with respect to rights granted after the signing of the double tax treaty.

x) The 0% rate applies to, among other interest payments, the following:

  • Interest paid to the state (or a subdivision), an individual, a pension scheme, a financial institution, a quoted company or an unquoted compa­ny if it is less than 25% owned by Bahrain residents, provided that such interest is not paid as part of an arrangement involving back-to-back loans
  • Interest paid by the state (or a subdivision) or a bank, or on a quoted Eurobond

y) This is a new treaty between the United Kingdom and Kosovo.

z) The lower rate applies to interest on loans between enterprises (20% rela­tionship required in the case of Slovenia), interest paid to a pension scheme (some treaties) or to a state or political subdivision.

(aa) The lowest rate applies, depending on the treaty, to interest paid to a state or political subdivision or the central bank. Some treaties also apply this rate to interest guaranteed by or paid by the state.

(bb) The lower rate applies if any of the following circumstances exists:

  • The interest is paid to a state or political subdivision or the central bank.
  • The interest is paid with respect to the sale on credit of merchandise or equipment to an enterprise of either country.
  • The interest is paid as a result of financing provided in connection with agreements concluded between the two governments.
  • The beneficial owner of the interest is a pension scheme. (cc) The 0% rate applies if any of the following circumstances exists:
  • The recipient and beneficial owner of the interest is the other state or the central bank or a political subdivision or local authority thereof, a finan­cial institution or a pension scheme.
  • The interest is paid by the state in which the interest arises or by a political subdivision, or local authority thereof, or the interest is paid with respect to a loan, debt claim or credit that is owed to or made, provided, guaran­teed or insured by that state or a political subdivision, local authority or export financing agency thereof.
  • The interest is paid with respect to indebtedness arising as a result of the sale on credit of equipment, merchandise or services.

(dd) The higher rate applies if the Austrian company controls more than 50% of the voting stock in the UK company.

The United Kingdom has also entered into tax treaties with Algeria, Brazil, British Virgin Islands, Cameroon, Cayman Islands, Congo (Democratic Republic of), Iran and Lebanon. These trea­ties do not have articles covering dividends, interest or royalties. Payments to these countries are subject to withholding tax at the non-treaty countries’ rates set forth in the above table. A new tax treaty was concluded in 2015 with Algeria, which does have dividend, interest and royalty articles, but this treaty has not yet entered into force.

The United Kingdom also has new treaties, amendments or proto­cols to treaties with Belgium and Senegal, as well as with Guern­sey, Isle of Man and Jersey, all of which are signed but not yet in force.