The United Kingdom is the world's second largest tax haven after the U.S.A. Even during the worst years of old left wing socialist Labour government, the City's nominee to head the Bank of England got the job. Foreign nationals who held external accounts with U.K. financial institutions could trade tax free from London. Until the mid 90's the U.K. even had legislation permitting the registration of exempt international companies on the model of the Cayman Islands and the Isle of Man. The people in charge understood that to try to tax the international businessman would only result in the money flows going elsewhere. Those who could not vote with their feet would vote with their money. Centuries of running an empire taught the British business and accounting practices which, while diplomatically giving lip service to taxing everyone, in fact gives rank its privilege. The U.S.A. learned this lesson much later and only from the early 80's exempted foreign nationals not resident in the U.S.A. from tax liability on earnings from capital invested in the U.S.A. Being a much larger economy, the U.S.A. was able within the eight years of the Regan administration to overtake the U.K. for the number one spot of the world's tax havens. Nevertheless, the U.K. is clearly number one in Europe and has the advantage of a more civilized approach than the U.S.A. You can expect the police in London to give you a fair warning. The U.S.A. authorities like to make test cases.
Substantial tax benefits accrue to U.K. residents who are not U.K. domiciled. It is possible for a non-U.K. national who has no U.K. capital or income to live indefinitely within the U.K. and legally avoid paying any U.K. tax. This has resulted in London having a larger number of expatriate millionaires than the rest of Europe's capitals combined. This also explains London real estate prices and the U.K.'s popularity as a corporate headquarter's for firms investing into the European Union. To this one must add the civility of the administrators and the advantage of speaking English.
A person who is U.K. resident but not U.K.-domiciled for tax purposes, pays income tax only on income and capital gains which arise within the U.K. and foreign income which is remitted to the U.K. This allows a non-U.K. domiciled person to reside in the U.K. free of tax as long as they have a foreign source income. Most wealthy investors can arrange their affairs so as to qualify. Furthermore, if a non-U.K. domiciled individual creates an offshore trust with non-U.K. assets then these assets will be exempt from U.K. taxation.
The U.K. corporation tax rates are amongst the lowest in the European Union. Tax is levied at 23% on a U.K. company which has net profits under GBP 300,000 and 33% where profits are over this figure.
U.K. NON-RESIDENT COMPANIES
Generally speaking, a U.K. company is taxable on its worldwide income. However, in certain cases, a U.K. incorporated company may be classified as non-resident for tax purposes, and therefore non taxable in the U.K. on non-U.K. source income. Such a company must be managed and controlled from a country with which the U.K. has signed a double taxation treaty. By careful selection of the country from which the U.K. company is managed it may therefore be possible to create a non-taxable U.K. entity. For exemple, Portugal has a suitable tax treaty with the U.K. so a U.K. company managed from Madeira, a part of Portugal, would neither be taxable in Madeira nor the U.K.
U.K. INTERNATIONAL HEADQUARTERS COMPANY (IHC)
Another recent innovation, by statute in 1994, has created the U.K. International Headquarters Company (IHC). This statute may be accorded to ordinary U.K. companies which are at least 80% beneficially owned by non-residents. An IHC is a useful vehicle for the collection of foreign dividend income as, in general terms, a full credit is given against U.K. tax for any tax paid on the remitted profits before arrival in the U.K. Thus as long as the dividendincome has already suffered tax at a rate higher than or equal to the applicable U.K. rate (33%/24%) no U.K. tax will be payable on that income either on arrival or on distribution. For example, a Danish sudsidiary of a U.K. IHC would pay tax on its profits at 34%. If the Danish subsidiary distributed profit by way of dividend to the IHC parent company no further tax would be levied on arrival in the U.K. because a credit would be given for tax paid in Denmark. This makes the U.K. IHC an attractive holding company vehicle for investment into Europe or otherwise and in many cases will be more attractive than competitive structures available through the Netherlands, Austria, Switzerland etc.
It is sometimes desirable to have a U.K. company structured for international trade as opposed to establishing a pure and visible offshore structure which may cause unwanted publicity and tax department interference from the countries in which the beneficial owners reside or where the company is effectively trading. To meet this need, there is the low tax U.K. company option. A U.K. company established for international trading purposes may only be liable for corporation tax on 10% of its provided that the U.K. company is structured in a way that it acts as agent to its offshore principal. This relationship does not have to be disclosed to any foreign tax department or foreign third parties.
The U.K. company can still be registered for VAT, conduct its banking activities in the U.K. The company must not be:
- owned by U.K. residents;
- managed from the U.K.; - or
- conduct any trading operations within the U.K.
It is becoming increasingly difficult for companies which are not registered for VAT in a European Union member state to trade with other in the EU. Most offshore jurisdictions are outside the EU VAT area and therefore are not easily able to make the necessary VAT registration. The Isle of Man, Ireland and Madeira are exceptions. However, it is possible for companies to register for VAT in the United Kingdom by setting up a U.K. limited company which acts as its VAT agent.
It is necessary to make an application to the Bank of England in order to set up a bank in the United Kingdom. Amongst other requirements it would be necessary to set up an office in the United Kingdom staffed by two responsible executive officers. These officers would necessarily have to have a detailed knowledge of banking procedures and would therefore expect to be paid salaries of between GBP 35,000 and GBP 70,000. Suitable office space would have to be located, administrative support staff would have to be hired and computer systems would have to be installed which are sufficiently sophisticated to run all facets oofa normal banking operation. The minimum required capital of a U.K. bank is 5 million ECUs (approximately USD 4 million) all of which would have to be paid in and maintained as unimpaired reserves. The typical time from application to granting of license would be unlikely to be less than six month.
The United Kingdom is typical of many of the onshore jurisdictions and similar standards would applyin all other European Union countries as standard criteria have been adopted under the applicable European Union directives on banking. It is difficult to estimate the costs of setting up a bank in the United Kingdom but it would be unlikely that these would be less than USD 120,000 and, as described, substantial annual running costs would necessarily be incurred. Additionally, the worldwide profits of the bank would be taxable at the normal U.K. rate of 33%. Similar costs and procedures would be experienced in the U.S.A., Canada and other mainstream onshore jurisdictions. These high costs, taxes and time delays may be avoided by combining a U.K. holding company with an offshore financial institution with a U.K. representative office. In such a case the offshore company could not accept deposits in the U.K. but could refer the client to the offshore company's office elsewhere.
THE NEW LABOR
There is some indication that the new administration may expand the tax net. There has been talt about changing the tax system to a residency test and the Inland Revenue has had its powers significantly expanded. Consistens with long standing tradition however, this is being done with sufficient warning so that it is possible to plan around the proposed changes and so maintain the status quo.
(Courtesy of the Baltic Banking Group).
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