What are the ways to avoid double taxation of company profits in the UK?

What are the ways to avoid double taxation of company profits in the UK?

UK-resident companies are required to pay Corporation Tax on all taxable profits, regardless of whether the income is generated in the UK or overseas. However, if your company operates through a fixed place of business abroad or is considered tax resident in another country, it may face double taxation on its foreign income.

In such cases, relief or exemption is often available through a Double Taxation Treaty (DTT). This prevents your company from being taxed twice on the same income by different countries. While not all nations have a DTT with the UK, unilateral relief is typically available for countries without an agreement.

Double taxation and company residency rules can be complex, so seeking professional advice from a tax specialist is strongly recommended. This guide provides a general overview for informational purposes only.

Paying UK corporation tax on company profits

UK-resident companies are generally liable for Corporation Tax in the UK on their global profits. These profits may include:

• Trading profits from the sale of goods or services.
• Investment income, such as dividends.
• Capital gains, earned from selling business assets at a profit.

Corporation Tax rates range between 19% and 25%, depending on your company’s total annual profits from all sources. This tax is payable to His Majesty’s Revenue and Customs (HMRC), the UK’s tax authority.

Is my company resident in the UK?

A company is generally considered tax resident in the UK if it meets one of the following criteria:

1. Incorporated in the UK – Companies registered in the UK are automatically regarded as UK tax residents.
2. Central management and control – For companies incorporated abroad, residency is determined by the location where the business’s central management and control takes place. This refers to the place where key decisions are made, and the company’s real business activities occur.

Tax implications for UK-resident companies

UK-resident companies are typically not subject to overseas corporate taxes on their foreign income unless they operate through permanent establishments (PEs), such as fixed places of business, in those countries.

For instance:

• If your company sells goods or services to international customers through a website, the profits from these sales will generally be subject to UK Corporation Tax only. The physical location of your customers does not result in double taxation in this case.
• However, if your company operates through a permanent establishment in another country, the profits earned through that PE may be taxed both in the UK and in the foreign country, resulting in double taxation.

Determining residency in complex cases

Establishing a company’s residency becomes more complicated when trading internationally or when the business is managed from outside the UK by a non-UK resident individual. For example, if your company’s central management and control is deemed to be located outside the UK, it may be considered tax resident in another country. This could lead to double taxation of foreign profits, even if the company is incorporated in the UK.

What should you do?

Determining a company’s tax residency requires careful consideration of various factors and must be assessed on a case-by-case basis. To ensure compliance and minimize tax liabilities, we recommend:

• Reading HMRC’s internal manual on company residence for detailed guidelines.
• Consulting a qualified tax specialist with experience in international tax matters.

By seeking professional advice, you can better navigate the complexities of international tax residency and avoid potential pitfalls.

What is a permanent establishment?

A permanent establishment (PE) is defined under UK law as a physical presence or agent through which a business conducts part or all of its activities in a country. It typically falls into one of two categories:

1. Fixed place of business – This refers to a tangible location, such as an office, store, factory, workshop, or construction site, where the company’s personnel perform business activities.
2. Dependent agent – This involves a person who is not independent of the company and regularly conducts business on its behalf, often by concluding contracts in the company’s name.

International perspective on PEs

Most other countries follow a similar approach to the UK when it comes to defining and taxing permanent establishments. Consequently, UK-resident companies operating abroad through a PE are generally subject to comparable treatment in foreign jurisdictions.

Tax implications of foreign PEs

If your UK-resident company conducts business through a foreign permanent establishment, any profits generated by the PE may be subject to taxation both in the UK and in the foreign country. In such cases, you may be able to reduce or eliminate double taxation by claiming relief or exemption under a Double Taxation Treaty (DTT), also referred to as a double tax agreement (DTA).

Managing tax liabilities

Understanding the concept of permanent establishments and their tax implications is crucial for international business operations. If your company operates through a PE abroad, consulting with a tax specialist can help you navigate complex regulations and take advantage of applicable treaties or relief mechanisms.

Tax relief and exemption under double taxation treaties

A Double Taxation Treaty (DTT) is an agreement between two countries designed to:

• Prevent individuals and businesses from being taxed twice on the same income in both countries.
• Provide clarity on tax treatment for cross-border trade and investments.
• Protect UK businesses from excessive foreign taxation or discriminatory practices abroad.

The UK’s extensive DTT network

The UK has one of the largest networks of DTTs, covering approximately 120 countries. Globally, there are over 3,000 such treaties. Detailed guidance on the UK’s DTTs is available on GOV.UK and in HMRC’s Double Taxation Relief Manual, which outlines specific country agreements and related tax documentation.

How DTTs prevent double taxation

DTTs ensure income or profits are not taxed twice across different jurisdictions. The relief available depends on the specific terms of the treaty and typically includes:

• Identifying the types of income covered by the agreement.
• Allocating taxing rights between the two countries.
• Specifying applicable tax rates.
• Establishing the procedure for claiming tax relief or exemptions.

If your company’s foreign income is subject to double taxation, start by checking whether the UK has a tax treaty with the relevant country. If no DTT exists, unilateral relief may be available under UK law.

Determining residency for treaty purposes

In cases where a company is considered a resident of both the UK and the foreign country, its tax residency is usually determined by its place of effective management – often the location of its central management and control. However, this may also be the company’s true operational center if management is exercised elsewhere.

Types of relief from double taxation

DTTs provide three main forms of relief, depending on the situation:

1. Credit Relief: A credit is applied to reduce the UK tax liability by the amount of foreign tax already paid. This credit is limited to the lower of the two countries’ tax rates.
2. Deduction Relief: Foreign taxes paid are deducted from the taxable amount of foreign profits subject to UK tax.
3. Exemption: Foreign income or profits may be exempt from UK taxation entirely.

Credit relief and foreign branch exemption

For UK-resident companies, HMRC typically offers credit relief to offset foreign taxes paid against UK Corporation Tax on overseas income. However, if the foreign tax rate is lower than the UK rate, the company may still owe additional UK tax.

Alternatively, companies with foreign permanent establishments can opt for a foreign branch exemption, where profits or losses from the foreign branch are exempt from UK Corporation Tax. This can be advantageous if the foreign tax rate is lower than the UK rate, as the taxation of foreign profits is limited to the overseas rate.

Careful consideration is needed when choosing the most beneficial form of tax relief, as these decisions can significantly impact a company’s overall tax liability.

Claiming double taxation relief or exemption

There are several ways to claim relief or exemption from double taxation, depending on whether your company’s foreign profits have already been taxed.

Applying for tax relief before foreign income is taxed

If your company’s overseas profits are exempt from foreign tax but subject to taxation in the UK, you must apply for tax relief in the country where the income arises. This is often required under the terms of the double taxation agreement (DTA) between the UK and that country. To apply:

1. Request the appropriate form from the relevant overseas tax authority.
2. Provide proof of your company’s eligibility for tax relief by either:
   • Completing the form and submitting it to HMRC for confirmation of the company’s UK residency, after which HMRC will return the form to you.
   • Including a UK certificate of residence for the company when applying via letter.

Once you have the required proof, submit the form or letter to the overseas tax authority.

Applying for relief when foreign tax has already been paid

If your company has already paid tax on its foreign income, you can claim credit relief by completing Box 450 on your Company Tax Return (form CT600). When filing, include:

• A detailed calculation of the credit relief amount.
• Information on any underlying tax relief claims.
• Relevant supporting documents, if available, attached to the tax return.

The amount of tax relief you receive depends on the specific terms of the DTA between the UK and the country where the income was earned. However, you might not recover the full amount of foreign tax paid if:

• The DTA specifies a lower relief amount.
• The foreign profits would have been taxed at a lower rate in the UK.

Note: You cannot claim relief from UK tax if the DTA requires you to reclaim the tax from the foreign country where the income arose.

Claiming deduction relief

If you prefer to claim deduction relief, subtract the foreign tax already paid from the company’s overseas profits when declaring income to HMRC. Include the adjusted figure in the computations submitted with your Company Tax Return.

Each method of relief should be carefully evaluated to determine the most beneficial option for your company’s specific circumstances.

Claiming foreign branch exemption 

To claim foreign branch exemption, your company must submit an election to HMRC at the Corporation Tax office handling your Company Tax Return. You can find the contact details for this office in any letters from HMRC regarding company tax, or you can reach the Corporation Tax helpline at 0300 200 3410 (or +44 151 268 0571 from outside the UK).

It is important that HMRC receives the election before the start of the first accounting period to which it applies. There is no specific form required, nor any prescribed wording for the election.

FAQs about how double taxation works

Do you have any other questions?

Double taxation is a highly complex issue with many factors to consider, including company residency, permanent establishments, and the location of central management and control.

While it may not always be possible to avoid double taxation, especially when trading internationally or managing a UK company from abroad, relief or exemption is typically available through Double Taxation Treaties when profits are taxed in multiple countries. Besides Corporation Tax, there may be other forms of double taxation, such as Value Added Tax (VAT) on business turnover and tax on personal income for non-UK resident directors and shareholders.

We explore these matters further in the following article: How does the taxation work in the UK?

If your business or personal income is subject to taxation in more than one country, it is crucial to seek advice from a tax expert specializing in international tax issues.

For more details, check out the Startxpress Help Center and Startxpress Blog.

If you have any more questions or need further assistance, feel free to reach out to us via support@startxpress.io. Our team is here to support you every step of the way.

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