Using an offshore subsidiary to avoid UK tax

Companies looking to expand overseas could use an offshore company to potentially avoid UK corporation tax.

The company would still need to be non resident in order to avoid UK corporation tax on the foreign trade. Therefore it would need to have foreign directors actually operating the company at a senior level. The UK parent company would therefore need to ensure that the foreign directors actually exercised real control over the company and that they didn't just rubber stamp decisions of the UK parent company.

However, the foreign subsidiary was non resident the profits from the overseas trade could potentially accumulate free of UK corporation tax in the offshore company.

Note that an offshore subsidiary is only an effective shelter if a taxable presence in high tax jurisdictions is avoided. The rules as to the extent of a taxable presence vary from country to country and therefore local advice should be taken in the countries trades will be carried out.

The Controlled Foreign Companies (CFC) provisions

Where the offshore subsidiary is caught by these rules the effect is to make the UK parent company subject to corporation tax in respect of the the subsidiary's profits.

Therefore being caught by the CFC rules would eliminate any UK tax advantage.

Currently there are significant changes to the CFC rules. CFC reform is being implemented in two stages, with interim improvements taking effect from 1 January 2011, while further, long-term improvements apply from 2012.

An important exemption for many small/medium companies is the increase in the de minimis limit. Previously, the CFC rules did not apply where the profits of the offshore company was less than £50,000. This has now been increased to £200,000.

However, the Finance Bill 2011 does not restrict the size of the company/group that can benefit from this new increased de minimis amount of profits above which the CFC rules may apply.

This means that you can use offshore subsidiaries to generate profits of up to £200,000 free of UK corporation tax.

One of key conditions for this to apply is that the exemption is denied where a scheme is entered into, the main purpose, or one of the main purposes of which, is to avoid a CFC apportionment.

Therefore providing there wasn't any tax planning specifically designed to take advantage of the increased de minimis limit, this is an exemption that can be relied upon by many companies trading overseas.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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