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The UK government has introduced, with effect from 1st April 2002, a corporation tax exemption for the capital gains of companies with substantial shareholdings in other companies. This legislation sets up the UK as a major international holding company location, especially for non-European Union based investors, investing into the European Union.
Set out below is a synopsis of the legislation:
To whom does the legislation apply?
UK registered companies as well as foreign registered companies which are resident for tax purposes in the UK. The exemption also applies to UK branches of foreign registered companies.
What is the nature of the exemption?
The exemption is from UK corporation tax which otherwise applies to the capital gains of UK companies. The rate of corporation tax for a UK holding company is 30% so the exemption is a significant development.
How does one qualify for the exemption?
The investing company must have held a "substantial shareholding" in the investee company throughout a 12 month period. The period of ownership must include a 12 month period of continuous ownership which began not more than 2 years prior to disposal.
What is a substantial shareholding?
A substantial shareholding is a holding of not less than 10% of the ordinary share capital of the investee company. The holding must bring with it beneficial entitlement to not less than 10% of the profits available for distribution to shareholders and not less than 10% of the assets of the company available for distribution on a winding up.
A company that is a member of a group is treated as holding any shares or interest in shares held by any other company in the group.
Are there any other requirements to be met in order to qualify for exemptions?
Yes. Both the investor company and its investee must meet certain status requirements throughout the qualifying period of 12 months and immediately after the time of disposal.
Investor company: The investor company must be either a sole trading company or a member of a trading group throughout the qualifying period and immediately after the time of disposal.
Investee company: The investee company must be either a trading company or a holding company of a trading group or sub-group throughout the qualifying period.
What is a group of companies for the purpose of the legislation?
A group is the principal company and its 51% subsidiaries owned directly or indirectly.
What is the definition of a trading company?
A trading company is a company carrying on trading activities whose activities do not include, to a substantial extent, activities other than trading activities.
A trade is anything that is a trade, profession or vocation and is conducted on a commercial basis with a view to profit.
Activities carried on by a company with a view to its acquiring a significant interest in the share capital of another company that is a trading company or the holding company of a trading group or sub-group will be regarded as trading activities. However, if the acquiring company is the member of a group, the company to be acquired must not be a member of that group.
What is the definition of a trading group?
A group of companies, one or more of whose members carrying on trading activities, and the activities of whose members taken together do not include, to a substantial extent, activities other than trading companies.
What is the definition of a holding company of a group?
The principal company of the group.
What is the definition of a holding company of a sub-group?
A company that would be the holding company of a group, but for being a 51% subsidiary of another company.
What happens if a company disposes of a substantial shareholding, and does not qualify for exemption, but previously had met the conditions for exemption?
Provided certain other basic conditions are met, if there was a time within the period of 2 years ending with the disposal when the UK company would have qualified for exemption if it had disposed of the shares, exemption will be granted.
Summary
A UK IHC can benefit from the EU Parent/Subsidiary Directive or a UK double taxation convention to eliminate foreign withholding tax on dividend distribution from overseas subsidiaries.
Such foreign income dividends, although subject to UK corporation tax at up to 30% will carry a tax credit (being the foreign corporation tax paid or payable on the profits from which the dividend is distributed). Where foreign corporate tax rates are charged at rates of 30% or more, the credit is normally a complete relief from UK corporation tax.
There is no dividend withholding tax in the UK, so a UK IHC can pay dividends to non treaty-protected entities, such as companies incorporated in tax havens.
There is no capital duty in the UK and no minimum paid up capital requirements. Company formation and administration is economic when compared with other IHC regimes.