Taxation of UK Companies on Foreign Profits & Double Taxation Relief
Any UK limited company which carries out overseas business operations will normally need to include profits generated abroad to its overall company profit, which will be subject to Corporation Tax.
As the company may also be subject to the imposition of foreign tax in each jurisdiction where it conducts business, there exists the potential risk of ‘double taxation.’
In order to counter this potential liability, a company may:
- elect for profits of foreign branches to be exempt from UK Corporation Tax,
- apply for double taxation relief.
Tim Thompson of KANGS comments generally on the taxation of the profits of UK companies abroad, double taxation and available reliefs such as exemptions and credits.
Foreign Branch Profits Exemption
UK resident companies can elect to exclude the profits of their foreign branches from UK Corporation Tax.
A foreign branch is a ‘permanent establishment,’ generally meaning any fixed place of business of the company located in a foreign territory. This option may be beneficial where the rate of foreign tax is lower than the UK rate, as the branch profits will be taxed at that lower rate.
The exemption is claimed by election by each individual company. Accordingly, each company within the same Group of companies may elect where to be taxed as is suitable for that company. However, a specific election will apply to all branches of that company and is irrevocable after the day of commencement of the company’s next corporation tax accounting period.
Double Taxation Relief
The prospect of paying tax on the same income in more than one country may well dissuade a company from conducting essential overseas business and this, of course, applies to companies of all nationalities seeking to engage in international trade.
Relieving double taxation removes barriers to international trade. Accordingly, many countries provide relief in a variety of ways and the UK engages in numerous ‘double taxation’ treaties with other countries.
Relief may be provided by Double Taxation Agreements or by a country’s own domestic legislation. The format of formal Agreements varies enormously but the basic intent is to provide relief when the same income falls to be taxed separately in more than one jurisdiction.
Relief may be granted in the form of:
Foreign Tax Credit relief
A UK company may claim a credit for the overseas tax incurred which may be offset against the UK charge to corporation tax.
Where the amount of the overseas tax exceeds the UK liability, the excess credit may be carried forward and set against future overseas income, although there may be the opportunity to carry the excess back one year.
The credit cannot be set off against income arising in the UK.
Credit is only available for the lower of the foreign tax or the UK liability and where the UK liability is the lower, full relief is not available. The consequence of this is that on some foreign income, double taxation may be unavoidable.
HMRC has power to allow unilateral tax credit relief against UK taxes for foreign taxes imposed in a country with which no double taxation arrangement exists. However, such credit is restricted to the amount that would be due if a treaty was in existence.
Deduction relief
This may be an effective alternative where credit relief does not provide full relief for the foreign tax paid as where the UK liability to corporation tax is lower than the foreign tax paid.
A company may choose to deduct the foreign tax paid from its profits, thereby reducing the amount of income subject to UK corporation tax, rather than offsetting the tax directly. Adopting this procedure may be appropriate when the UK company is loss-making, as it will increase the level of losses which may be carried forward in its accounts.
How Can We Help?
This article provides no more than an insight into taxation options available to UK companies contemplating conducting international trade of any nature. Before engaging in any such activity, it is absolutely essential that expert advice is taken.
Navigating the manner in which HMRC treats foreign profits of UK based businesses, along with the many Double Taxation Agreements the UK has negotiated with many other countries, requires up-to-date and expert knowledge.
The taxation relationships with foreign countries are fluid and present a moving playing field requiring constant and vigilant observation.
The team at KANGS has acquired a wealth of knowledge accumulated in advising clients, both individual and corporate, in relation to tax disputes of every conceivable nature and is able to provide pro-active advice and guidance in relation to such disputes.
The solicitors at KANGS offers many years’ experience handling tax disputes of every nature involving HMRC and would be delighted to hear from you.
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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