CONSULCO UK PRESENTATION ON THE USES FOR UK COMPANIES IN INTERNATIONAL TAX PLANNING FOR NON-RESIDENTS Presented by Debor

1. CONSULCO UK PRESENTATION ON THE USES FOR UK COMPANIES IN INTERNATIONAL TAX PLANNING FOR NON-RESIDENTS Presented by Deborah Taylor

2. AGENDA • Overview of the UK • UK Non-resident Limited Liability Partnerships • UK Agency Companies • VAT • Other uses of UK companies in International Tax Planning – UK sub-contracted consultancy companies, Holding Companies, Public Companies, UK Routeing Companies

3. OVERVIEW OVERVIEW OF THE UK • Political and social stability • London – world class centre for financial services • Services contribute largest proportion to GDP – Global financial crisis impact • World Bank ratings for ease of doing business: - UK is 4th overall out of 181 countries - UK placed 1st when ranked by size of population (like for like) • Coalition Government elected 2010 – aim to increase attractiveness of the UK as a place to do business • Example, reduction of Corporation Tax from 28% to 26% in March Budget.

4. TAXATION The UK is an internationally competitive location for tax, with one of the lowest main corporate tax rates in the European Union. The “standard” or “main” rate of corporation tax in the UK is currently 26% and applies to both resident and non-resident companies. Rate Profit (£) • Small companies’ rate 20% 0-300,000 • Marginal relief 300,001-1,500,000 • Main rate 26%* 1,500,001 or more *Note: The main rate of corporation tax will be reduced by one percentage point each year from April 2012 until April 2014, when it will reach 23 per cent.

5. TAXATION The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide. The UK’s main corporate tax rate is competitive, not only in Europe, but also worldwide. Source: Deloitte 2011*Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes, turnover/sales taxes and other taxes not levied on income.

6. TAXATION • In addition, the UK has concluded over 100 tax treaties for the avoidance of double taxation and has the largest network of treaties globally (Source: HM Revenue & Customs, 2011). • An important feature of many treaties is a reduced rate for withholding tax on the payment of dividends, interest and royalties. • The majority of UK-based companies also benefit from an exemption from corporation tax on any foreign dividends that they receive. • The UK has extensive range of capital allowances that allow the costs of capital assets to be written off against taxable profits. • Tax credits for research and development

7. TAXATION Withholding Taxes in the UK are as follows: • Dividends – 0% • Royalties – 20% • Interest – 20%

8. General Features UK Companies – key features • No withholding tax on dividend payments, irrespective of where the shareholder is resident • Capital Gains Tax exemption where a UK resident company disposes its shareholdings, if certain conditions apply. • Access to the benefits of EU Directives. • No restriction on the location of meetings. • Swift incorporation / shelf companies • Company and LLP names may be in any language but must have the suffix “Limited”. “LLP” or in the case of a public company, “PLC”. • Registered office must be in the UK. • Minimum of one director.

9. General Features • Corporate Directors – as long as they are appointed alongside an individual director. • Nominee shareholders Permitted. • A single shareholder is permitted. • Shares without par value are not permitted. • No Capital Duty

10. UK LIMITED LIABILITY PARTNERSHIPS UK LIMITED LIABILITY PARTNERSHIPS

11. UK Limited Liability Partnerships UK LIMITED LIABILITY PARTNERSHIPS • The Limited Liability Partnership Act was introduced in 2000. • The Limited Liability Partnerships Regulations came into force in 2001. • Legal personality separate from its members. • Able to enter into contracts and own assets, whilst having the internal flexibility of a partnership.

12. UK Limited Liability Partnerships • “For a limited liability partnership to be incorporated two or more persons associated for carrying on a lawful business with a view to profit must have subscribed their names to an incorporation document.”(s.2(1)(a) LLP act) • Members can be individuals or a body corporate. • “Business” includes every trade, profession and occupation.

13. UK Limited Liability Partnerships • Limited liability • Separate legal personality • Private constitutional documents • Organisational flexibility • UK Tax transparency • Members liability limited to capital contributed • Duties of members (fiduciary and statutory) June 6, 2014 Page 13

14. UK Limited Liability Partnerships If…. • The members are non UK resident • There is no UK source income of the LLP • There are no gains realised on UK assets …then no tax is assessed on the LLP, as profits are only taxed in the hands of the members

15. UK Limited Liability Partnerships Illustrative example Goods/services supplied to the LLP from Goods/services sold to customers EU (or non-EU territory)throughout other EU/non EU territories (but not in the UK) Seychelles IBC Member 1 Seychelles IBC Member 2 UK LLP (England and Wales)

16. UK Limited Liability Partnerships Annual Accounts • - Turnover and profit • - Movements on members loans • - Small LLP audit exemption Annual Return • - LLP registered office • - Details of members

17. UK Limited Liability Partnerships Partnership Agreement • Private Document • Internal management of the LLP • Designated members Disadvantages/issues • Cannot apply for tax residency Certificates • Unsuitable for consultancy services where withholding taxes deducted • VAT registration – question of substance

18. UK Principal Agency Companies UK PRINCIPAL AGENCY COMPANIES

19. UK PRINCIPAL AGENCY COMPANIES • Historical concept • Principal undisclosed • Act only with the consent of the Principal • Important - trading activity must be outside of the UK • Also referred to as UK “nominee” companies • Gives the veneer of a UK company but in fact the UK company does not act as the “beneficial owner” • Management and control

20. UK Principal Agency Companies Ownership 100% Offshore Principal Company 100% 5% Agency fee UK Agency Company

21. UK Principal Agency Companies UK Agency Companies – examples of appropriate activity • Purchase and Sale of goods • Management consulting • Software Consulting • Design Consulting • Professional Services • Commission earning • Off balance sheet asset/investment holding

22. UK Principal Agency Companies • Agent’s commission – how is this set? • Accounting - format, requirements and disclosure • Corporation Tax – arm’s length remuneration • VAT registration – question of substance • Disadvantage - certificates of UK tax residency cannot be obtained • Still very useful for international trading in goods • Minimum level of activity in the UK

23. UK Principal Agency Companies Principal Agency agreement • Undisclosed • Trading activities • Consideration clause • Sliding scale of remuneration for significant trading activity • Minimum fee • Execution of the agreement – outside of the UK

24. UK Principal Agency Companies UKco - Commercial Simulation of an Agency Company • Sales of machinery etc. per annum via UKco as agent estimated at €8,000,000 • Estimated average gross margin 10% = Gross Profit € 800,000 Assuming: Seychelles co: principal's entitlement @ 95%   = € 760,000 (zero tax) UKco: agents remuneration @ 5%        = € 40,000 (UK tax @ 26% - net assessable income Accordingly:- €  • UKco Income...........................  40,000 •  Less: UKco expenses................ 15,000 *estimated •   Operating Profit...................... 25,000 •   Less: UK corporation tax 26%.. 6,500 •   Net Profit............................. 18,500 is available for dividend up to Seyco free of UK tax

25. UK Principal Agency Companies Therefore, • Accordingly, the "effective" rate of corporation tax approximates to0.81%and the cost of the UK company management and administration approximates to 1.88%. (The cost of any banking/documentary credits has been ignored for this illustration)

26. UK VAT UK VAT

27. UK VAT TYPES OF SUPPLY: • Standard Rated - 20% • Reduce rate • Zero rate • Exempt • Outside of the Scope • Non-business • Place of Supply Abroad

28. UK VAT • UK VAT Numbers can be obtained for any entity engaged in trading/provision of (most) services • Exceptions include “exempt” services (e.g. provision of finance/insurance, etc/some land transactions/holding companies • Can be cosmetically desirable • Essential for intra-EU trade

29. VAT Administration Problems with UK VAT registration • UK Non-resident LLP and UK Agency Company • Accommodation Lists – boilerplate address, additional security checks on each application. Solutions: • Virtual office – dedicated telephone/fax and email • Limit the number of companies/LLPs at an address • Bank account set up before registration • Create supplies in the UK i.e. Stationery (approx €500 +) • Preassemble all information required such as invoices, proof of intent to trade - to be filed electronically with application • Work carried out in the UK – invoicing, bookkeeping, banking etc.

30. VAT Administration ADMINISTRATION POINTS: • VAT REGISTRATION - issues, timing, HMRC queries • QUARTERLY VAT RETURNS • EC SALES LISTS (quarterly/ monthly) • Intrastat’s (monthly) • Inspection of records by HMCE

31. UK Companies in International Tax Planning Other uses of UK companies in International Tax Planning

32. UK SUBCONTRACTING COMPANY RAK Company Services €950 UK Company Independently owned Services €1,000 Customer Company

33. UK Sub-Contracting Companies UK CO BENEFICIALLY Receives 100% of the income. Therefore • Treaty benefits can usually be obtained • Certificates of UK tax residency can be obtained • Accounts show 100% of turnover 95% cost of sales 5% gross profit

34. UK Sub-Contracting Companies PRICING ISSUES: • Is the 95% paid to the BVI service company a justifiable deduction? Justifications for the 95% deduction: • BVI service provider introduces the customer • BVI service provider performs all of the services required • BVI service provider as director of the UK sub-contracting company?

35. UK Sub-Contracting Companies • Consequences of the Indofood Decision? • Is the UK company truly the beneficial owner? THE IMPORTANCE OF SUBSTANCE CANNOT BE UNDERSTATED

36. UK Routeing Companies UK Routeing Companies • Used to obtain reduced treaty withholding tax rates • Can route • Consultancy fees • Royalties • Interest • Can obtain certificates of UK tax residency • Transfer pricing traps and solutions

37. UK Royalty/ Interest Routeing Companies BVI Co Beneficial Ownership Cyprus/ UK DTT has 0% on royalties

38. UK Royalty/ Interest Routeing Companies Cyprus/ UK DTA provides for 10% WHT on interest but could use the EU Directive BVI Company $900 interest Loan

39. UK Royalty/ Interest Routeing Companies UK Company BENEFICIALLY receives the interest from the Foreign Trading Co SO: • Reduced treaty rate of withholding tax can usually be applied by the Foreign Trading Co • UK company accounts show 100% of income

40. UK Royalty/ Interest Routeing Companies Treaty Protection? • UK/ Cyprus DTA – 10% interest/ 0% royalties • EU Directive – Royalties & Interest Watch for Treaty anti-abuse clauses

41. UK Royalty/ Interest Routeing Companies TRANSFER PRICING (AGAIN) • No magic percentage figure • Independent ownership of UK company BENEFICIAL OWNERSHIP?

42. UK Holding Companies Dividends Dividends

43. UK Holding Companies - CGT Exemption available for disposals of “substantial shareholdings” by a trading company or the holding company of a trading group

44. UK Holding Companies “Substantial” = 10% BUT Normally in practice = 51% due to requirement to be a “holding company of a trading group”

45. UK Holding Companies • Must be “trading company or holding company of trading group” before and immediately after the disposal • If winding up the UK holding company, different rules can apply

46. Certificates of UK Tax Residency Certificates of UK Tax Residency • IR manuals • IR “Tax Bulletin” • Beneficial ownership of income • Genuine UK control and management

47. Certificates of UK Tax Residency IR Arguments: • Foreign “shadow directors” • Avoidance/evasion of foreign tax • Automatic exchange of information

48. Certificates of UK Tax Residency What can you do? • UK directors • UK board members • Substance of the UK Company is important • No general POA’s

49. UK PLC UK Public Limited Company • Not necessarily listed on the stock exchange • More onerous corporate duties • Substance and presentation. Better?

50. Conclusion In conclusion: • Increasingly technical solutions required • Foreign tax structures must be sound • Provided those requirements are met, the UK remains a useful jurisdiction