United Kingdom

Setting up a company in the UK

With its simple incorporation process, low cost and running costs, a UK company is a good solution for those who need a reputable European company as well as a favourable tax environment for their business (especially in relation to UK “offshore” overseas territories). For these reasons too, the UK can be called a little tax haven.

Capital: London
Official language: English
Currency: Pound Sterling – GBP

Description and advantages of British jurisdiction

• high international prestige of English companies
• the most common legal form of an English company is called LTD (similar to the Czech s.r.o.)
• each company must have at least one natural person as a director, who may be a non-resident
• a shareholder can be a natural or legal person, also the possibility to be filled by a non-resident of Great Britain
• the commercial register is publicly accessible
• obligation to keep accounts
• an obligation to submit annually to the UK tax authority annual accounts, a balance sheet at the end of the financial year and a profit and loss account, where appropriate, annotated by a UK registered auditor
• the obligation to submit an Annual Report
• Income tax for an English offshore company is based on the amount of the company’s profits, usually around 20%

UK and EU

The relationship between the European Union and the United Kingdom changed on 23 June 2016 when the UK held a referendum on its membership of the EU. Fifty-two per cent of voters were in favour of leaving the EU (48% were in favour of remaining in the Union).

On 29 March 2017, the UK notified the European Council that it intended to leave the EU, formally invoking Article 50 of the Treaty on European Union. The Withdrawal Agreement was then ratified by the European Union in early 2020.

The United Kingdom withdrew from the European Union at midnight (CET) on 31 January 2020, when the agreement came into force, becoming a third country. This began a transition period that lasted until 31 December 2020.

On 24 December 2020, the EU and the UK agreed a trade and cooperation agreement that will reshape their future relationship. All 27 Member States approved the agreement on 29 December 2020. On 31 December 2020, the EU-UK Trade and Cooperation Agreement was subsequently published in the Official Journal of the European Union.

International treaties – offshore UK

International conventions against money laundering and terrorist financing

The UK has signed the following treaties. The practical significance of these agreements for owners of offshore companies from England is mainly that in the event that money laundering or terrorist financing is suspected on the part of an offshore company registered in England, its registering agent can pass on the personal data of the persons involved in the company – i.e. in the case of nominee services of the beneficial owners of the offshore company – and a basic description of its activities to its superior authorities, who will pass them on, e.g. to the Czech Republic, as part of international assistance.

Double taxation treaty with the Czech Republic

This treaty is in place. Withholding taxes apply to direct payments from the Czech Republic to the UK only in cases where this international treaty does not provide otherwise. A UK offshore company is therefore suitable for direct sales of goods or services to the Czech Republic in the cases provided for in the international treaty. The double taxation treaty between the UK and the Czech Republic is very broad and favourable for tax optimisation opportunities.
On the basis of this treaty, tax relevant information is exchanged between the two countries – i.e. the UK and the Czech Republic.

Tax Information Exchange Treaty with the Czech Republic

Not concluded.

Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters

It is concluded – the UK is a signatory.

Double taxation treaties with other tax havens

The UK is one of the few European countries to have double taxation treaties with other tax havens, particularly its former colonies. This makes it possible to partially shift tax liability from the UK to a tax haven where there is zero income tax.

The most common use of UK companies

• Holding company, parent company, other, e.g. Czech companies for anonymity of ownership and high prestige
• trade in goods and services

The standard rate of corporation tax in the UK is 28%. For holding companies, there is partial relief on dividend income. Put simply, a UK company can offset tax already paid in the country from which the dividends are paid. However, in the vast majority of cases, countries such as Malta, Cyprus and the Netherlands, which offer full exemption for dividends and capital gains, are preferred for holding companies.

The most common element of optimisation through UK companies is the notorious “Principal & Agent Company” concept, which can reduce the income tax burden to an effective rate of around 1.5%.

Another positive effect that a UK Ltd type company can offer is the anonymity of the owner. This is because Ltd. companies can issue shares to the owner. Because of this element of protecting the identity of the ultimate owner, Ltd companies are used to acquire and hold shares in other companies or own real estate.

A foreign investor and owner based in London, for example, is definitely a good calling card that has an undeniable effect in negotiations of all kinds. A company resident in the UK can also take advantage of the International Investment Treaties that the UK has signed with other countries, including the Czech Republic, if the conditions are met.The UK is a country that has 112 Double Tax Treaties, making it unique in the world. The treaty with the Czech Republic provides for reduced withholding tax rates of 5% on dividends, 0% on interest and 10% on royalties.

The 0% withholding tax on interest payments between the UK and the Czech Republic makes Ltd. companies well placed to optimise lending services. Malta is a major competitor in this respect, with a more flexible and much less administratively demanding system.

We can say that the UK has been and has long been the clearly preferred country for building structures for international tax optimisation. However, many countries with Anglo-Saxon law have learned from the UK and adopted some positive elements. This has given the UK a strong and numerous competitor, which also benefits from a maximally liberal and flexible environment, something that cannot exactly be said of the British system, which is already ossified at many points.

Countries such as Malta, Cyprus, Ireland and even New Zealand have adopted the basic British method of optimisation and introduced their own low-tax “Principal & Agent” model. It will be interesting to continue to monitor the trend that the UK will exhibit.

The use of UK LLPs (limited liability partnerships)

Non-UK citizens can, in certain circumstances, use LLPs as a tax-efficient vehicle for international trade.

Taxation

LLP forms of UK companies are tax transparent. In other words, members of a UK LLP are taxed as if they were members of the company.Income and capital gains are therefore treated as income and gains of the members as set out in the articles of association. If the members are not resident in the UK and the income and gains are not derived from a source or trade in the UK, then they are not chargeable to any UK tax.

There are some anti-avoidance provisions to ensure that the LLP is not used to reduce UK tax that might otherwise be payable.

Main features of an LLP

• Limited liability corporation
• Does not require objects clauses and can therefore carry on a wide range of activities
• Incorporated in England and Wales and domiciled in the UK
• Not required to have a memorandum of association (memorandum of association)
• Must have at least two members (none need be resident in the UK)
• There is no share capital requirement and no minimum contribution to the share capital is required
• Decision making is flexible and governed by the memorandum of association
• There are no managing directors or secretary. The LLP is controlled by its members. Two of the members must be designated members who will have specific responsibility for the LLP’s compliance with the law
• Any member is entitled to bind the LLP, but this may be limited by the memorandum of association
• The company seal is optional
• The annual report and accounts must be filed with the Registrar of Companies. If the profits exceed £200,000, the amount due to the member with the largest share of the profits must be disclosed
• An audit is only required if more than two of the following thresholds are exceeded: – more than 50 employees – turnover more than £6.5 million – gross assets more than £3.26 million
• Must be a commercial enterprise operated for profit.

Structure for trading outside the UK, with members resident outside the UK

In the example above we have a Guernsey company and a UK company that is managed from the Channel Islands, both of which are members (partners) of a UK LLP. The UK LLP will have a UK address and will file accounts and annual reports on the Companies Register.

It will trade outside the United Kingdom as well as receive commissions and fees for advisory services. In our example, the Guernsey company would receive 95% of the profits and, as it is not UK tax resident, there would be no UK tax liability in respect of this income.

The UK company, on the other hand, would be entitled to 5% of the profits on which it would pay corporation tax at the rate of 25% in the first year of business, 24% in the second year of business and a further 23%, after deduction of company expenses.

Although LLP members are not required to be resident in the UK, a UK company with non-UK directors has been included here. This is for the purpose of establishing some tax basis as, although the affairs of the company would be wholly managed outside the UK, the profits of the UK company, representing 5% of income after deducting the expenses of running the company, would be subject to corporation tax.

Interested in setting up a UK company? Contact us.