Tax planning for an offshore company with shareholders coming to the UK

Many overseas individuals (usually non doms) come to the UK to live and work. A large number of them may be shareholders in an offshore company formed before they were UK resident. This company may well hold UK and overseas investments. After the shareholder becomes UK resident how will they and their offshore company be treated for UK tax purposes? Clearly any dividends that are declared from the offshore company would need to be considered from a UK tax standpoint (either under the arising basis or the remittance basis) how does the transfer of the shareholder to the UK impact on the company? Management & Control A company is UK resident if its central management & control is from the UK. Therefore the first issue to consider should be where the company is controlled from. This will depend not only on where the directors and shareholders are but also what the activities of the company are. HMRC will look at the high level 'strategic' management when assessing where the control is. So although you may have an offshore company carrying on a trade overseas (with an overseas office etc) if there is a UK director who is the real leader of the company and who has the main authority over how the trade is carried out in the future, there is a risk of UK residence. Usually control is with the board of directors. This is based on UK law and has led some people to argue that having an overseas board of directors will make a company non resident. This is not though always the case. HMRC look at where the high level control is in reality. Therefore if there is a sole UK shareholder who directs the overseas board control would again be in the UK. An overseas board of directors would only be effective if it was genuinely a board with independent authority that took actual decisions in relation to the direction of the business. If the offshore company was an investment company it can be more difficult to argue that it's controlled overseas if there is little activity to be undertaken by an overseas board. Having said that, many non doms that come to live in the UK do manage to retain a shareholding in an offshore company and avoid it being classed as UK resident. They do this by making full use of family overseas. Generally the company is a form of family investment company which holds UK and overseas properties, cash, investments etc. The UK property would still be within the scope of UK income tax if it generated any rental income. However the overseas investments (property etc) would all be exempt from any UK tax. In type of scenario, the board of directors would consist of family members including the UK resident non dom. Given that practically all the family members are non resident, providing the UK resident non dom doesn't have any special authority it would not be controlled from the UK. If there is more than 1 director resident in the UK they would then usually ensure that an overseas director was the 'chairman' or 'managing director' and had the actual authority to back this up. Another option could be to consider using non executive directors, based overseas to oversee the operation of the board. Of course the UK resident director/shareholder could consider becoming non resident to clearly point to overseas control. In many cases though this would not be necessary if the board consists of overseas directors. Anti Avoidance Rules Even if you do show that the company is controlled from overseas you're not 'home & dry' yet. If you have a UK shareholder with an interest in an offshore company there are a few key tax implications that should be taken into account:

Dividends that are declared from the offshore company would in principle be subject to UK income tax. If the shareholder was taxed on the arising basis they would undoubtedly be taxed. If they were taxed under the remittance basis they could avoid UK income tax on the dividends but they'd need to retain the cash overseas. As outlined in other articles on this site this would then also raise the issue of the £30,000 remittance tax charge and the loss of UK personal allowance & annual CGT exemption.

There are anti avoidance rules that can attribute any capital gains of the offshore company to UK resident shareholders in proportion to their shareholding (eg a 20% shareholder would be taxed on 20% of the gain. There is a de minimis limit of 10% below which no gain is attributed.

There are anti avoidance rules that can tax UK residents on income from an offshore company if they've transferred assets to the offshore company which then generates income. The big exemption to this is that there is a motive exemption. Where the transfer to the offshore company was not made for the purposes of avoiding UK tax and was a genuine commercial decision no income would be taxed on the shareholder/transferor. For many non doms who've established companies overseas before coming to the UK they'd be looking to rely on this exemption on the basis that they had no UK tax concern when forming the company. They may have been chiefly concerned with overseas tax but this is insufficient to charge income to tax on the shareholder. The other exemption which applies to both capital gains as well as income is that the non dom rules can ensure that any overseas gains or income allocated under the anti avoidance rule is taxed on the remittance basis IF the shareholder claims the remittance basis. The overall effect here is to ensure that non doms holding overseas assets via an offshore company are in a similar position to what they would be if they owned personally. Ie if they owned personally they could choose whether to assess the overseas income/gains according to the remittance basis but would then suffer the disadvantages of the remittance basis (ie loss of allowances & £30K tax charge). This now applies where a non dom uses an offshore company to own the overseas assets. Even if the anti avoidance rules do apply of course avoiding any capital gains and keeping income arising to the company to a minimum (eg using deferred income investments) could assist in avoiding a UK tax charge until the non dom has left the UK. Sale of assets A sale of any assets by the company would be subject to UK corporation tax if the company was UK resident but exempt from corporation tax if it was non UK resident. One of the problems of course is that a UK resident shareholder would be taxed on a gain even if the company was non resident. If you did want to wind up the company and extract the assets you'd need to do this before the shareholder came to the UK. If you could structure the offshore company as a family investment company with the UK shareholder having less than a 10% interest this would ensure there was no attribution to the UK. In this case you could then ensure control of the company was overseas and transfer asses directly to out of the company. The other issue is that a receipt from a company would be likely to be classed as a distribution from the company to you and subject to income tax -- unless it was made during the course of a winding up (in which case CGT treatment could apply).