International Trade
21 June 2010
Many UK companies now have business interests abroad, including foreign customers, or a foreign branch or a foreign subsidiary company. Claire Avery of Griffins writes
The direct corporation tax implications can differ considerably depending on the country in which the business is being carried out and the entity that is used.
If a company merely has a customer abroad and carries out some work in that country, often a tax liability doesn’t arise abroad on the income generated.
Each country is different and many insist that a certificate of UK residence is provided by HMRC, which then avoids tax being deducted in the other jurisdiction. However, in some countries withholding tax is deducted from income generated in that country, even if a certificate of UK residence is provided.
In these circumstances either the tax may be claimable from the foreign tax authority, or if it remains deducted, there will usually be double taxation relief available against the UK corporation tax liability arising on that income, up to the rate of UK tax applicable.
Often the profits earned abroad will be liable to tax in that country if there is a permanent establishment there. This covers where there is a fixed place of business or branch in that country, or whether the management of the business is exercised in that country; or due to the number of days work is carried out in that country.
Establishing a branch in another country means that the profits of the branch will be taxable in that country and the accounts will need to be prepared under domestic accounting rules. The branch profits will also form part of the overall UK company’s income; although there will be double taxation relief available for the foreign tax suffered on that same income.
By having a foreign subsidiary company the activities are separated from the UK activities. The foreign subsidiary pays tax in the country where it resides and draws up its accounts under that country’s rules. By having a foreign subsidiary company, the UK company will have an associated company for UK corporation tax purposes; which may affect the corporation tax rate that the UK company pays on its profits, if it isn’t already paying it at the full rate.
There are other significant tax implication to consider including VAT, Transfer Pricing and distribution of profits which can have significant effects.