Hamilton Pratt

Tax Issues

Tax issues will be a major factor in deciding which vehicle is right for you. It is essential to understand the differences in the tax treatment of a representative office, a branch and a subsidiary before finalising your decision. You will also need to take account of tax advice in your own country.

Representative office/Branch: If you do not operate through a UK resident subsidiary, you will be subject to UK tax on your trading income only if you are carrying on a trade in the UK. Whether your UK business activities make you liable to UK tax will depend upon whether you are trading in or trading with the UK. In general the following factors are relevant in determining whether you are trading in the UK:-

  • where contracts are concluded;
  • where the goods or services are supplied;
  • where any goods are manufactured; and
  • where the purchase price is paid.

If your UK operation is a representative office in that it simply promotes the activities of your overseas business, takes orders in the UK and refers them all to your head office outside the UK for approval and all goods and services are supplied from overseas, you are unlikely to be trading in the UK.  However, even if you are not trading in the UK you will still be subject to UK tax on income from property located in the UK.

An overseas company which is trading in the UK will be liable to UK tax on the profits derived from its UK branch.  If there is a double taxation treaty between the UK and your country of tax residence, this rule is modified slightly so that the profits will be subject to UK tax only if you are carrying on a trade in the UK through a permanent establishment.

Subsidiary:  If you conduct your UK operations through a UK resident subsidiary company, it will be subject to UK corporation tax on its worldwide profits (subject to any relief which may be available under relevant double tax treaties, if it is carrying on activities outside the UK).

A company is resident in the UK for tax purposes if:-

    • it is incorporated in the UK; or
    • in the case of a non-UK company, central management and control is exercised in the UK.  Central management and control broadly means management at board level.  If the directors of the company are resident in the UK and board meetings are held in the UK, a company will normally be treated as resident in the UK.

If your subsidiary would be resident for tax purposes in both the UK and another country under the laws of that country, the "tie breaker" clause in any double tax treaty between the UK and that other country will determine whether the company will be treated as resident for tax purposes in the UK.

The UK tax regime is summarised in more detail in 'Profits:  Dealing with Tax Issues'.