Overseas enterprises operating in the UK
Where an overseas enterprise carries on business activities in the UK a key concern is whether the UK tax authorities will have the right to tax the element of the profits of the overseas enterprise that are attributable to the activities carried on in the UK.
Before we go any further in to the details the principal the basis for determining whether this right exists is the concept of a permanent establishment (PE). Only where it is deemed that the overseas enterprise has a PE in the UK can the UK tax authorities levy taxes on its business profits.
Typically, companies seeking to access UK customers will do so via one of the following options:
• Set up a UK subsidiary company
• Set up a UK branch
• Establish a UK place of business
• Trade directly from overseas
The first three options are clearly creating a Permeant establishment and will result it to be strictly comply with all UK tax laws. Only financial relief from this could be any double tax relief in the home territory of the overseas enterprise.
Trading directly from overseas are generally considered to be trading with the UK rather in the UK. However, the method of operation and the activities of the representatives must be carefully reviewed to ensure that a PE is not established.
An enterprise can be deemed to have a PE in the UK in two situations:
• Where an enterprise has a fixed place of business in the UK through which the business of an enterprise is wholly or partly carried on.
The premises do not need to be used exclusively for the purpose nor does it matter whether the premises are owned, rented or otherwise at the disposal of the enterprise and fixed doesn’t imply the place is actually attached to the ground. What matters is there existence of a single commercial aim.
• Where a person, other than an agent of independent status, is acting on behalf of the enterprise in the UK and has (and habitually exercises) the authority to conclude certain contracts that are binding on the enterprise.
The person must be deemed to be a dependent agent. This is essentially all agents that are not considered to be independent agents. Agents are considered to be independent if they are independent from the overseas enterprise both legally and economically and, when acting on behalf of the enterprise, are acting in the ordinary course of their own business.
There are important considerations aside from taxation that must be taken into account when deciding the optimum manner in which to access the UK market.
As noted earlier the first consideration is whether a fixed place of business or the continued presence of dependent agents in the UK is necessary to support commercial objectives. If not, then the enterprise can potentially access the UK market without creating a taxable presence.
Where a physical presence is required then the decision regarding whether to set up a UK subsidiary company or a branch should consider the following areas.
Separate legal entity
A UK subsidiary is a separate legal entity, usually with limited liability. As such the overseas enterprise’s liability is limited to the capital injected. A branch is legally the same entity as its “parent” and the overseas enterprise is liable for all losses.
As the same entity, the profits of the branch flow automatically to the overseas enterprise. A company has greater control over the profits generated from the operations, with the ability to retain them in the UK or remit them to the overseas enterprise as a dividend.
A subsidiary company is run by a board of directors. While the overseas enterprise, as the owner of that company, has the right to appoint this board, the directors are
legally responsible for the company and are obliged to act in its best interest. As such, a branch structure may facilitate closer and more efficient control of the UK operation.
In some cases, customers, suppliers and finance providers may be more comfortable dealing with a UK company rather than an overseas enterprise. The decision may therefore impact such things as sales and credit terms.
Using a company may provide a more convenient exit route if this is part of the medium to long term strategy.
Filing and administrative requirements
A UK incorporated company must be registered with Companies House, provide certain documentation, operate within a more complex legal framework than that applied to branches and file annual accounts.
A branch of an overseas company or business must also register with Companies House within one month of being established. While a branch does not have to submit accounts for the UK operation it must submit each year (in English) the accounts of the overseas enterprise of which it is a branch. As submitted documents are a matter of public record, this requirement could be seen as a competitive disadvantage. These accounts must be audited where turnover of the UK Company or the entire international group combined exceeds £6.5m or if aggregate total net- balance sheet assets exceed £3.26m.
It’s important to understand VAT, CIS, PAYEE and other tax obligations. you need to speak to your accountant, agent or tax advisor.