A company resident in the UK is subject to Corporation Tax on its worldwide income. An overseas branch is an extension of the UK business. A branch is where a company has a presence in another jurisdiction. There must be some minimal element of an establishment to the other jurisdiction in order to constitute a branch.
All of the branch profits will be taxable in the UK. They will be taxed as part of the UK trading profits. UK capital allowances are available on the branch’s assets. The branch trading losses are eligible for UK loss relief including group relief. UK trading losses can be overset against overseas branch profits.
In contrast, a UK company may decide to set up a subsidiary overseas. This is a separate legal entity. Dividends paid to the UK company are liable to tax in the UK. No UK capital allowances on the overseas assets are allowed. No relief is allowed for UK losses.
Profits from an overseas branch are normally taxed as UK trading profits. Dividends from an overseas company are included in the Corporation Tax computation as overseas dividend income.
Overseas income may be subject to tax in the foreign jurisdiction and UK Corporation Tax. Relief is given by means of a tax credit to the UK resident company. Relief is given against overseas tax is offered in the following way. In the case of a branch, the overseas income is included gross of overseas tax in the Corporation Tax computation. Double tax relief is given for the overseas tax suffered by way of credit against a Corporation Tax liability. The amount of double taxation relief is limited to the lower of the amount of overseas tax on the overseas income or the UK Corporation Tax payable on the overseas income.
There are two forms of overseas tax which may arise on subsidiaries overseas. A withholding tax may apply at source in the overseas country e.g. on dividends, interest, rent. Double taxation relief is always available for withholding tax.
In addition, overseas tax will usually have been paid on the profits of the overseas company out of which dividends are paid. Relief for the underlying tax is only available where the UK resident company receiving the dividend controls more than 10% of the voting power of the overseas company.
The underlying tax is the overseas tax paid on the profits of the overseas resident company out of which the dividend is paid. Where relief for the underlying tax is available, the underlying tax is added to the gross amount of the overseas dividend and UK Corporation Tax is then charged on the total.
If a UK resident company has a controlling interest on an overseas subsidiary then certain UK rules apply to counter so-called transfer pricing. Transfer pricing is where goods or services are supplied at an undervalue or overvalue in order to manipulate the profits which should arise.
The transfer price rules prevent UK companies from charging artificial prices in order to gain a tax advantage. Transactions should be at arms’ length. Where transactions are not made at arms’ length, adjustments to substitute arm’s length prices should be made by the UK resident company in its Corporation Tax returns. There are detailed rules for establishing which companies are within the scope of the transfer price and rules. The basic test is one of control. HMRC have introduced advance pricing arrangements to enable companies to agree in advance whether and if its transfer pricing policy is available.
