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View the related Tax Guidance about Hybrid entity

Introduction to setting up overseas ― companies

Introduction to setting up overseas ― companiesA UK company expanding overseas may do so in a variety of ways, including:•distance trading from the UK, with no local presence•a branch (also often referred to as a permanent establishment), which may be formed by just one employee working from home•a fully established local subsidiaryThe decision to trade in another jurisdiction involves a number of considerations, both commercial and tax-related. It is important, therefore, that advice is taken by the company at the outset, not only in relation to tax but on the wider business implications. However, some companies may inadvertently start trading overseas, perhaps because they have an employee or agent of the company in another jurisdiction. It is therefore important to consider the issues covered in this series of notes whenever there is a change to a company or its trade which touches on foreign jurisdictions in any way.This note deals only in broad outline with the UK tax issues which should be considered for companies. In addition, the tax regime in the overseas country and the ways in which the two systems interact should also be explored, ideally before any decision to expand overseas is taken.Key tax issuesThe tax position of the UK company overseas will depend on the extent to which the company does business in the other jurisdiction and the choice of entity from which to carry on the business.The first tax issue to consider is whether the existing (or proposed) activities (would) constitute

Entity classification

Entity classificationNon-UK entities do not always obviously correspond with UK entity classifications. A number of jurisdictions have legal entities which have no direct UK legal equivalent. For UK tax purposes, it is necessary to determine whether a foreign entity is transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).When a foreign subsidiary is established it is important to consider all the facts and circumstances and, if the position is in any way unclear, consider whether clearance from HMRC on the classification of the foreign entity should be obtained.Implications of entity classificationIf a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent or opaque.If a subsidiary is transparent, then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits. See the following guidance notes:•Tax treatment of partnerships and partnership types•Foreign trading incomeIf a subsidiary is opaque, then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine

Pillar Two ― overview of the UK’s domestic top-up tax

Pillar Two ― overview of the UK’s domestic top-up taxWhat is the domestic top-up tax?The UK has committed to introduce measures which support the OECD’s two-pillar approach to ensuring that large multinational enterprises (MNEs) pay their fair share of tax, no matter which territory they operate in. Pillar One deals with the taxation of profits of MNEs by reference to the territories in which they have the most engagement, rather than those in which they have a physical presence. Pillar Two ensures that qualifying MNEs pay tax on profits at a minimum effective rate (currently set at 15%), with a multinational top-up tax being applied in instances where the effective rate falls below the minimum. See the Pillar Two ― overview of the UK’s multinational top-up tax guidance note for further details.The introduction of a ‘qualifying domestic minimum top-up tax’ (QDMTT), in addition to the multinational top-up tax, falls within the UK’s Pillar Two obligations. A QDMTT is a top-up tax charged by a territory on the profits of entities situated within that territory, to ensure that they pay an aggregate minimum level of tax. One of the aims of the UK’s QDMTT, known as the domestic top-up tax, is to ensure that the UK members of a multinational group have an aggregate effective tax rate of 15% as a result of UK taxes only. This allows any top-up tax due under the Pillar Two framework from UK economic activities and profits to go directly to the UK Exchequer,

Introduction to cross-border financing

Introduction to cross-border financingIntroductionThis guidance note outlines the UK tax considerations that arise when a foreign company makes a loan to a UK company.An overseas company may make a loan to a UK company in a number of circumstances, including:•when an acquisition is made by a subsidiary in the UK•to fund expansion or working capital of the UK companyOne of the key tax considerations arising in the context of cross-border financing is the extent to which interest payable by the UK company to the overseas company will be deductible. There are various elements of the UK tax regime that may restrict the deductibility of interest, such as transfer pricing, the corporate interest restriction and targeted anti-avoidance provisions. These are outlined below. It should also be noted that UK withholding tax may arise on interest which is paid by a UK company to a company in another country, whereas payments of interest between UK companies is not subject to withholding tax.See the Withholding tax and Withholding tax on payments of interest guidance notes.Factors affecting the deductibility of interest in the UKTransfer pricing and thin capitalisationTransfer pricing is the price at which an enterprise transfers either physical goods, intangible property or services, including financing arrangements, to associated enterprises, as explained in the Transfer pricing rules ― overview guidance note. Two persons are associated if one of them participates directly or indirectly in the management, control or capital of the other, or if each of them is subject to direct

A–Z of international tax terminology

A–Z of international tax terminologyList of commonly used phrases in international taxThe table below lists some of the terminology commonly used in the context of corporate international tax and transfer pricing, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.TerminologyDefinitionFurther detailsAAmount A and Amount BPart of the OECD’s package of measures to be introduced under Pillar 1 ― see ‘Pillar 1’ belowAnti-conduitCertain double tax treaty provisions contain anti-conduit conditions, which deny treaty benefits where the amounts received are paid on to another company. This ensures that treaty benefits are only obtained by the contracting states, rather than residents of third countries who have deliberately arranged their transactions to obtain treaty benefits to which they would not otherwise be entitledDT19850PPArm’s length arrangementAn arm’s length arrangement reflects the price that would be payable and the terms which would be agreed for a transaction between unconnected parties. This is important for the purposes of the transfer pricing legislation (see ‘Transfer pricing’ below)Transfer pricing rules ― overview guidance note Simon’s Taxes B4.147INTM412040ATAD (anti-tax avoidance directive)ATAD is an EU directive which provides for a series of anti-abuse rules relating to interest expense deductions, controlled foreign companies and hybrid mismatches, and requires the introduction of a corporate GAAR and an exit tax (these two measures not being part of the BEPS