Zero-tax UK Companies

Those who live in the United Kingdom do not think of themselves as inhabiting an offshore centre.   Quite the contrary.   But those who do not live in the United Kingdom can to a surprising degree use the country as if it were an offshore centre.  Some readers will no doubt remember the happy days when the zero-tax non-resident English company was a popular offshore vehicle for non-UK residents.  The English company managed and controlled in Monaco was particularly beloved by the Australians, whose regulations in those days blacklisted companies incorporated in any of a list of specified jurisdictions, among which England was not included.   

The company was not liable to UK tax on non-UK income, because it was not resident in the United Kingdom.   This was based upon the rule that a company is resident where its business is managed and controlled.  It made no difference where it was incorporated, so it could still be tax-free even if it was incorporated in England – or, for that matter, in Scotland or Northern Ireland.  These happy days came to an end on the 15^th March 1988, since when a company incorporated in any part of the United Kingdom is resident here for tax purposes. But the old non-resident company was re-invented in 1994, in consequence – and it was probably an unintended consequence – of the provisions contained in s.249 of that year’s Finance Act (now to be found in s.18 of the Corporation Tax Act 2009) by which a company incorporated in the United Kingdom, but qualifying as a resident of some other country for treaty purposes, is to be treated for domestic purposes as not resident in the United Kingdom.

At first blush, it does not look like a very interesting provision.  Who would want to avoid tax in the United Kingdom in order to have the pleasure of paying tax in some other country? But that line of thought does not take into account the fact that some countries do not tax – or do not fully tax – the foreign income of their residents, and the United Kingdom has treaties with several of them.  A company incorporated in the United Kingdom but resident in Mauritius will pay as little as 1.5% local tax on its foreign income.  The foreign income of such a company resident in Singapore may pay no tax at all, and most kinds of foreign income are similarly exempt in Malaysia.  And if the company is resident in Barbados, it will pay local tax on its foreign income only to the extent – if at all – that such income is remitted to Barbados.  None of these countries levies any tax on capital gains.  

If, however, the company needs a local office and will therefore have local income, the jurisdiction to choose is Barbados.  If, for example, it has an office in Barbados and carries on business there, it may do so as a trustee.  The trust may provide for the business income to be payable to an Exempt Trust. The payments to the Exempt Trust are deductible in computing the profits of the business trust for tax purposes, and the effect of this can be to reduce the taxable profit of the business trust to a trifling amount.  The payment is not taxable in the hands of the Exempt Trust, because the Barbados Exempt Trust, unlike its opposite number in Cyprus and elsewhere, is exempt from tax on all income, regardless of its source.  One has to remember that shares in all UK-incorporated companies – whether they are resident or not – are liable to UK inheritance tax, and it may be desirable for the UK company to have a parent company, incorporated elsewhere.

If tax rates in Singapore, Mauritius and so on are so much more favourable, why doesn’t the non-resident simply forget about the United Kingdom and incorporate in one of those places? The answer is something I think comes under the heading of “cosmetics”, and concerns the image of the United Kingdom as a high-tax country.  Our tax rates may not be quite so high as people imagine, and our level of tax morality may not be quite so high as we pretend, but we are on nobody’s blacklist, and did not feature in the harmful competition list of the OECD.  A company incorporated in an offshore jurisdiction is a red light to tax inspectors in most countries – notoriously in Spain.  But if a UK entity figures in a transaction, that does not carry any suggestion of avoidance of tax.

Milton Grundy was born and brought up in St. Helens, Lancashire (now Merseyside); at Sedbergh School, he learned to play Rugby football and the piano - and acquired some well-pronounced French, German and Italian (not all of which he remembers); he emerged from military service in the Middle East with presentable basic modern Hebrew and quite unpresentable soldier's Arabic; he studied at Cambridge under F.R. Leavis; he taught in the preparatory department of RADA while he passed his Bar exams; he was called in 1954; he first practised in the chambers of Sir John Foster, and in 1965 he founded Gray’s Inn Tax Chambers.

He has always maintained a foothold in the world of the arts. He is author of Venice: an Anthology Guide and co-author of Mediterranean Vernacular, and he is chairman of the Warwick Arts Trust.

He has written books on tax - most recently, his Six Fiscal Fables (ITPA 2010). His interest, and his practice lie in the tax aspects of cross-border transactions and the planning opportunities they offer. He does not appear in Court, but he does chair (and very occasionally speaks at) meetings of the International Tax Planning Association, of which he is President.

Two of his former pupils are members of the chambers, (one having gone on to higher things).

Milton can be contacted on +44 (0)20 7242 2642 or at mg@taxbar.com.