6 February 2014 Newsletter
Setting up an offshore joint venture to reduce UK tax
Many people ask whether they can use an offshore company to carry out their trade and avoid UK tax. For many UK residents this is very difficult to do however forming an offshore joint venture with an overseas colleague or supplier could be a good option. In our free newsletter article this week we look at how offshore joint ventures could reduce UK tax.
In this book we look at a variety of tax planning strategies that arise from the terms of the UK's double tax treaties. This book is updated for the 2022 changes....keep reading
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Our latest articles for Practitioner members look at:
When to use private trust companies and private trust foundations
Tax planning and the new Contolled Foreign Company (CFC) rules
New proposals for a public register of the beneficial owners of UK companies
Detailed tax analysis of how a UK agency structure operates
Setting up an offshore joint venture to reduce UK tax
Many people ask whether they can use an offshore company to carry out their trade and avoid UK tax. For most people this is very difficult to do due to the two main problems in using an offshore company:
- Company residence
- Transfer of assets abroad legislation
Company residence
The offshore company would be classed as UK resident if its management and control was situated in the UK. If you are UK resident the only way you could argue that the company was non UK resident would be to appoint an independent overseas board of directors.
Nominee directors would not be acceptable to HMRC if they acted purely as nominees for you. In this case the company would be controlled from the UK and would be UK resident. We've looked in detail at how this test operates in the following article:
Overseas directors and the central management and control test
You'd therefore need to ensure that control was definitely overseas.
Anti avoidance rules
The other issue with the use of an offshore company is the transfer of assets abroad provisions principally contained in what used to be S739 (now S720 ITA).
The conditions for this to apply are:
- There must be a transfer of assets by an individual
- As a result of the transfer income becomes payable to a non-resident person (eg an offshore company or trust).
- The transferor must have power to enjoy that income
- The transferor must be ordinarily resident in the UK in the year of liability.
If all of these conditions are fulfilled, the income which becomes payable to the offshore company is deemed to be that of the individual who made the transfer for UK tax purposes.
This is a wide provision and therefore any disposal of assets by an individual to a non-resident company or trust is a transfer of assets for these purposes.
What if you're non UK domiciled?
If you are non UK domiciled an amended form of the anti avoidance rules would apply. You could be effectively exempt from the anti avoidance provisions provided the cash in the offshore company is retained abroad. However to achieve this a non UK domiciliary would need to claim the remittance basis.
If you've been UK resident for 8 tax years you would then be subject to an annual £30,000 tax charge for the privilege of using the remittance basis (and avoiding the anti avoidance rules). This rises to £50,000 after 12 years of UK residence. For many people this is unlikely to be tax efficient.
Therefore whilst using an offshore company is possible you may have difficulties both in terms of the company residence and avoiding the anti avoidance rules.
Setting up an offshore joint venture
Rather than forming an offshore company controlled by you from the UK an alternative option could be to set up a joint offshore company with an overseas colleague or supplier company where you could do projects together.
In many cases this could be a good option. You could ensure that control was not from the UK, and could potentially utilise an exemption from the anti avoidance rules.
The main exemption to the avoidance rules is where a motive exemption applied. Under this you would essentially need to argue that the purpose of the transfer was not to avoid tax, and that it was a bona fide commercial transaction.
The main application of the motive defence is to trading scenarios where a taxpayer carries on business abroad. It will be in point where a taxpayer carries on business abroad, and where for example a trader incorporates a local company for commercial reasons the anti avoidance rules should not apply.
In order to use a directly owned offshore company you would need to argue that the motive defence applied. As such you would need to provide reasons to support the use of an offshore company to ensure that the primary reason for using the company were the business benefits.
If you're establishing a new JV arrangement there should be fewer problems in establishing the commercial justification for the overseas company.
Providing the company was then carrying out a trade overseas it should be exempt from UK tax on the trading profits. Clearly any profits extracted from the company would be taxed in the UK for any UK resident shareholders.
Structure of the Joint Venture
You'd be looking to structure the joint venture as a form of corporate entity.
As such you'd avoid a partnership arrangement. Under a partnership arrangement the partners would be automatically taxed on the profits generated as it would be classed as a 'transparent entity'. Any of the offshore IBC's would therefore be effective for incorporating the joint venture.
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