This document summarizes key international tax considerations for trading overseas, including setting up overseas operations, transfer pricing, controlled foreign companies (CFCs), and the UK's worldwide debt cap. It covers topics such as payroll and VAT obligations, corporate residence rules, permanent establishments, branch vs. subsidiary structures, and the foreign branch exemption. The document also discusses proposed changes to the UK's CFC rules and taxation of foreign company income.

1. Advisory circle
International Tax – Trading overseas
“Powered by Mazars”
23 May 2012

2. Mazars International Tax – Trading overseas Agenda
• Setting up overseas for the first time
• Worldwide debt cap
• Foreign branch exemption
• Transfer pricing
• Controlled Foreign Companies (“CFC’s”)
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3. Mazars International Tax – Trading overseas Setting up overseas for the first time
• Payroll obligations
– Where are the duties of the employment?
– Social security rates – often very high!
– Within EU – 12 month exemption from overseas SS
– Double tax treaty?
• VAT obligations
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4. Mazars International Tax – Trading overseas Is there a trading presence?
• Is there a taxable activity?
• Goods
– The place of sale
– Where the contract is concluded
• Acceptance
• Delivery
• Services
– Where the work is done
– Unless reduced or eliminated by treaty
– Beware withholding taxes on management fees
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5. Mazars International Tax – Trading overseas Personal tax residence
• Ceasing to be UK resident?
• Becoming tax resident overseas
• Fixed term contract of employment
• Tax planning whilst out the UK?
• Responsibility for reporting?
• UK resident owning non-resident company – CGT trap
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6. Mazars International Tax – Trading overseas Corporate residence
• Generally:
– where it is incorporated
or
– where it is centrally managed and controlled
• Tie breaker usually available in Double Tax Treaty
– Usually based on “effective” management
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7. Mazars International Tax – Trading overseas Permanent establishment
• Place of management
• Branch
• Office
• Factory / Workshop
• Mine
• Building site
• Dependent agent
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8. Mazars International Tax – Trading overseas Branch vs Subsidiary
• Often a commercial decision as much as a tax one
• Customers prefer dealing with a recognised entity (subsidiary)
• Investors prefer to limit their exposure (subsidiary)
• Filing requirements often more onerous, eg UK (branch)
• Losses available to UK company (branch)
• Generally avoid branches unless:
– Commercial reason for not doing so
– Likelihood of losses
– Foreign branch exemption elected for and host jurisdiction is low tax
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9. Mazars International Tax – Trading overseas Worldwide debt cap
• The net financing cost should be no greater than the worldwide groups
consolidated gross finance expense
• De-minimus levels (includes intra-group):
– Net loan’s £3m
– Net interest £500k
• Gateway test applies to prevent the dept cap applying where UK average
net debt is less than 75% of average worldwide gross debt
• Applies for accounting periods commencing on or after 1 January 2010
• Each period needs to be tested in turn
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10. Mazars International Tax – Trading overseas Foreign Branch Exemption
• Elect for all branch profits and losses to be taxed in overseas jurisdiction
and not in the UK
• Must elect before start of accounting period
• Irrevocable
• Applies to all branches, cannot pick and chose
• Anti-profit diversion rules
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11. Mazars International Tax – Trading overseas Transfer pricing
• “A transfer price is the price at which a company undertakes transactions
with associated enterprises”
• Small & Medium sized companies excluded
• Associated enterprises:
– where one enterprise controls another
– two or more are under common control
– “control” can be as low as 40% in JV’s
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12. Mazars International Tax – Trading overseas Arms length principle
• The principle which allocates profits between group member by reference
to conditions which would have been obtained between independent
enterprises in comparable transactions and circumstances
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13. Mazars International Tax – Trading overseas Controlled Foreign Companies (CFC’S)
• Not resident in the UK
• Subject to a lower level of taxation (broadly tax rate of less than 75% of
UK rates)
• Controlled by persons resident in the UK
• “Control” = 40% as other party has at least 40% but not more than 55%
• Control is broadly defined “by virtue of any powers conferred by articles
of association”
• CFC profits charged on any UK company with a 25% or greater share
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14. Mazars International Tax – Trading overseas Consequences of being a CFC
• Unless 90% of Income is paid up within 18 months of year end, profits of
CFC are taxed on parent
• Gains of CFC are not taxed on parent
• Small profits exemption £50k
• Small profits exemption £500k if all profits are trading
• Practical difficulties of CTSA
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15. Mazars International Tax – Trading overseas CFC’s – New Proposals
• All income is excluded unless it passes through the “gateway”
• Only income passing through gateway taxed in UK (previously all income
tax in UK)
• Three tests to pass through the gateway
– Separation of key assets and risks from management activity
– Tax motivation (“one or main purpose = tax avoidance”)
– Would not have been entered into between independent entities
• Various safe harbours
• Various exemptions based on entities
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