This article is produced by our London Tax team, which is part of our global Tax practice. Our series, "Understanding Tax", explores commercially relevant and recent changes to the UK's tax code.
The UK as a holding and investment company jurisdiction
As a decision-maker of your organization, have you noticed, or indeed shaped, how your organization deals with an increasingly complex international tax system and the increased oversight of tax authorities? We at White & Case have been actively supporting clients manage this inherently important issue, and over recent years have found ourselves discussing the role and function of the UK more and more frequently.
Recent international tax initiatives and sweeping changes to the domestic tax regimes in many jurisdictions have led many market participants to re-evaluate their international tax arrangements. No doubt you will have come across some, if not most, of these – changes such as the automatic exchange of tax information, the Organization for Economic Co-operation and Development's (OECD's) base erosion and profit shifting (BEPS) initiative and recent European anti-tax avoidance directives (ATAD and ATAD II).
In the period prior to these initiatives and other changes taking effect, and in particular over the last 10 to 15 years, there have been many examples of UK corporate groups who, in whole or in part, have left the UK due to concerns over the direction of travel of the UK domestic tax regime, and many other international corporate groups who have decided to locate their business infrastructure in other jurisdictions in Europe.
Over the last two to three years, however, there has been a re-appraisal of the comparative merits of the UK. We discuss below some of the drivers, both domestic and international, behind this changing narrative and perspective, and to aid an understanding of why the UK can be an attractive jurisdiction.
Attractions of the UK's domestic system
A clear attraction of the UK has always been the strong and robust rule of law, alongside a sophisticated and highly respected judiciary. When allied to the prominent and pro-active role played by the both the UK tax and regulatory authorities, the UK has a solid legal, tax and regulatory infrastructure. In a world where the need for clear legal and regulatory oversight has become ever more important, this is a key attraction of the UK.
From a pure tax perspective, the UK domestic system provides for a series of existing regimes and reliefs which facilitate the establishment of business and the making of investments.
- a low rate of corporation tax of 19 per cent, as compared to most Western jurisdictions;
- participation exemptions applying to many capital gains from the disposal of substantial shareholdings and a broad range of dividends (including non-UK dividends);
- no domestic withholding tax on dividend payments, and a series of practical reliefs to avoid domestic withholding tax on payments of interest; and
- a series of other tax benefits, exemptions and reliefs aimed at encouraging the growth and development of business, including: generous tax credits relating to research and development, an attractive patent box regime, a suit of tax deductions and a workable form of fiscal grouping through the use of tax groups.
It should, of course, be noted that the UK has a significant and robust range of anti-avoidance provisions found throughout the domestic tax code. The additional burden which such provisions often bring has historically been an area of concern for many. However, this view is starting to shift. In recent years the UK has revised a number of its anti-avoidance regimes, with an aim to ensuring they operate on a simpler and more transparent basis. When these developments are viewed through the prism of an increasing international acceptance and recognition that such provisions form an important part of the international tax system, the UK's position is arguably a positive. Further to this, it is important to note that many other jurisdictions are being required to introduce similar rules into their own domestic tax regimes. For example, the EU's recent ATAD/ATAD II have resulted in many jurisdictions across Europe, including Luxembourg, Ireland and the Netherlands, bringing their domestic tax systems more in line with the existing UK position.
Apart from looking at the domestic attractions of the UK, it is also important to consider developments from an international perspective.
One of the major observations on the global tax system is that countries are collectively heading in the direction of greater transparency and more conservative tax planning, i.e. being a "good tax citizen". As the UK is already at the forefront of such developments, it has the major advantage of not having to "play catch up". Examples of the UK leading global best practice are as follows:
- the UK's implementation of the US Foreign Account Tax Compliance Act (FATCA) and introduction of diverted profits tax (DPT) rules; and
- in comparison to EU jurisdictions such as Ireland and Luxembourg, which have had to "level the playing field" and have only introduced their own domestic anti-avoidance/hybrid measures relatively recently, the UK has had a direct hand in shaping, and is already highly familiar with, ATAD/ATAD II, BEPS and other similar EU developments.
The importance of the impact of the OECD's BEPS initiative, and in particular the concerns surrounding the perceived abuse of double tax treaties, should also not be underestimated. The ever-increasing focus on the need for a group to substantiate and evidence the basis upon which their entities are able to benefit from double tax agreements (DTAs) is a significant practical issue. As a result, seeking to locate a holding or investment company in a jurisdiction with which a group has existing links and which also has a good range of DTAs is a commercially prudent consideration. In this regard, and given many groups have many historic and existing links to the UK, it is important to note that the UK has an extensive range of DTAs with other jurisdictions, allowing for effective management of a corporate group's tax position. Concentrating corporate infrastructure in one jurisdiction may also prove to be cost-efficient and businesses may be surprised to find that, on the whole, the UK as a holding or investment jurisdiction can be as cost-effective, if not more so, than jurisdictions such as Luxembourg and the Netherlands.
Finally, if we look towards the future, it is important to note and be aware of the following:
- the UK has an increasingly pro-active approach to developing and managing its domestic tax system, which have previously included plans to lower the rate of corporation tax even further (to 17 per cent) and currently include revisions to the domestic regime for taxing intangibles;
- the UK has recently announced a major consultation on an "onshore" investment regime in the UK, possibly further opening up the UK to international business as an even more "user friendly" and tax efficient location;
- it is understood that the OECD may revisit certain aspects of the BEPS process, which could possibly result in even greater scrutiny on DTAs and place further pressure on investment structures based in "traditional" investment jurisdictions such as Luxembourg and Ireland; and
- the EU may seek to take further steps to shut down certain tax structures and practices in member states of the EU.
Our London Tax team sits at the very center of European and international legal and commercial arrangements, and is ideally placed to provide the ever more important advice and support with respect to planning and strategy around business establishment and infrastructure. As will be clear from the discussion above, we consider that many discussions should include the UK as a viable and sensible jurisdiction in which to establish a business.
To view the other documents forming part of the series please visit https://www.whitecase.com/law/practices/tax
Lily Teh (White & Case, Associate, London) contributed to the development of this publication.