Key Tax Issues for Australian Companies Expanding Into the UK

For Australian companies looking to expand into the UK, it is important to understand the tax and legal issues regarding the Australian and UK operations.

Here are some of the issues and factors to consider:

• Choosing the right business structure
• Taxation of profits
• Profit repatriation
• Residency issues
• Transfer pricing and thin capitalisation
• CGT concessions.

Choosing the right business structure

Generally speaking, there are two main ways an overseas company can establish business operations in the UK:

1. Incorporating a private limited company, or
2. Setting up a branch (referred to as a UK “permanent establishment”).

What are the pros and cons of each?

A company has the benefit of being a separate legal entity. This means that the Australian head company, generally, cannot be held liable for the debts accruing to the UK subsidiary.

A permanent establishment is when the business is carried on via a fixed site or office. It can include an agent who is authorised to do business on behalf of the overseas parent.

The right business structure for your operations will depend on tax considerations, the proposed activities of the UK business and financing considerations.

Taxation of profits

Both business structures above are subject to UK tax on profits at the current UK corporate tax rate of 19%. It is proposed to fall to 17% by 2020.

Under Australian tax law, any profits of the UK branch are generally not taxable in Australia under the Branch Profits Exemption.

Repatriation of profits

Generally, the repatriation of profits (via dividends) from a UK company to the Australian head company can be done in a tax-efficient manner. Generally, there is no withholding tax on dividends from the UK. Furthermore, where the Australian company has a greater than 10% voting shareholding in the UK entity, the dividend is generally not taxable to the Australian company in Australia.

In relation to the UK branch, generally inter-office remittances between the UK and Australia are not taxable.

Residency and decision-making

An Australian head-quartered company decides to incorporate a UK company. All the Directors of the UK company live in Australia, and key decisions in respect of the UK company are also made in the Australian board meetings. In this situation, there is a risk that the ATO may deem the UK company to be tax resident in Australia, rather than the UK. To reduce the risk of potentially facing taxation in Australia (as well as the UK), consider appointing UK directors and ensure that board meetings and key decisions take place outside of Australia.

Transfer pricing and thin capitalisation

Transactions between Australia and the UK will be subject to transfer pricing rules of both countries. Apart from the purchase and sale of goods, transactions covered include financial transactions (including loans), transfers of rights and licences and letting of property. Seek advice from both UK and Australian tax perspectives to ensure a comprehensive understanding.

Furthermore, the UK thin capitalisation provisions operate to ensure the UK entity does not claim interest deductions where the UK operations have excessive debt above the safe harbour limit. Before funding the UK operations, seek advice to ensure optimal financing from both Australian and UK tax perspectives.

UK CGT concessions – entrepreneur’s relief

The UK also offers generous CGT concessions, including “entrepreneur’s relief” in respect of “qualifying business disposals”. Gains qualifying for entrepreneur’s relief are subject to a reduced rate of CGT at 10%. Receiving advice during the structuring of the UK business is crucial to guarantee eligibility for the concessional rate of CGT.

Please do not hesitate to get in contact with us to discuss your circumstances further and we would be happy to assist you further.

Disclaimer 

This document is intended as an information source only. This publication does not provide legal advice, and you should not depend on the comments and references to legislation and other sources within it as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations.