One important area which is due to come up in the Advanced Tax in September or December 2023 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%. (this will soon be increasing to 25%)

·       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.

In practice, we don’t know what the future will bring. In the exam, the examiner will always make it clear if future profits or losses are anticipated to enable you to make the correct recommendation in relation to making a branch election.  

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 the branch into an overseas sub so profits not taxed in the UK.

Double tax relief is always available even if there is no double tax treaty between the UK and the overseas country as HMRC offer unilateral relief.

Finally, is important to remember that the overseas subsidiary must be controlled and managed outside the UK to avoid becoming UK resident. This essentially means that the board of directors must be based abroad as opposed to being based in the UK. Most companies hold meetings using Zoom, Microsoft Teams, or Google Hangouts this can be achieved.

It is important to try and avoid a UK resident company migrating overseas as it will create punitive tax charges.

If you are planning on doing Tax or Advanced Tax in September or December 2023, I recommend you purchase Tax or Advanced Tax Condensed which will allow you to learn the technical rules at lightning speed.  

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