One important area which is due to come up in the Advanced Tax December 2022 exam is advising a company on setting up either an overseas branch or an overseas subsidiary.

The branch would be an extension of the UK company and its profits would be subject to UK corporation tax at 19%.

·       The branch is a permanent establishment and subject to corporation tax in the overseas country called underlying tax.

·       As a result, double tax relief is available based on the lower of UK and overseas tax.

·       To avoid the branch profits being taxed in the UK, it is possible to make an irrevocable branch election which makes all overseas branches exempt from UK tax.

·       If trading losses are anticipated, these can be offset against the UK company’s profits and here the branch election would not be beneficial.

Alternatively, setting up an overseas subsidiary would mean that the overseas profits and dividends would not be taxed in the UK.

·       Double tax relief is only relevant if the overseas company pays rent or interest to the UK company. The overseas country would hold back tax called withholding tax on this income and DTR compensation is available.

·       The overseas company would become a related company reducing the threshold and could lead to quarterly payments being required for the group companies

·       Consider recommending a branch first to use up branch losses in the UK and then incorporate branch into an overseas sub so profits not taxed in the UK

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