Branch or Subsidiary
There is generally no UK tax on profits earned in the UK by an Irish resident individual or company, unless they are earned by a UK branch or UK resident subsidiary. Therefore it is possible to do a very considerable degree of business in UK without coming within the remit of UK tax on business profits. There will however be Irish tax on the profits for Irish residents
The general Irish corporation tax rate is 12.5%. The rate of 25% applies to the profits earned from a non- Irish establishment. This rate is now 12.5% since 2008.
If an Irish company or personal business goes further than doing business with United Kingdom and proceeds to set up a branch or so called “permanent establishment” in the United Kingdom, then UK taxation issues arise. In this context, the United Kingdom includes the six counties of Northern Ireland.
The setting up of a subsidiary which is controlled or is incorporated in the UK or the establishment of a branch “trigger” liability to UK Corporation Tax. This will be in addition to tax liability arising under Irish tax law. Similarly, if a sole trader or partners set up a branch or permanent establishment in the UK, then the income and gains of this branch will be potentially subject to UK Tax even though the individuals and/or partners concerned reside in Ireland.
There are strategic tax considerations when a business proposes to export or to establish a presence in another country. If it is decided to set up a business base within the UK, then tactical taxation considerations arise in the decision on whether a “branch” of the Irish company should be formed or, alternatively, whether a subsidiary should be formed.
Many of the Irish and UK rules in this area are broadly similar because of the common legal background and because of the influence of the OECD (the Organisation for Economic Co-operation and Development) which has promoted standard forms of double taxation agreements.
There is no right or wrong answer to the “branch or subsidiary?” question as everything will depend on the circumstances of the company, whether or not it is likely to make losses or profits in the early years, when and it they expect to dispose of the business, the preferences of the shareholders in terms of how and when they propose to use income both within the companies and in due course pay income out of the company to the shareholders.
When a new business is set up in another country and is expected to make losses in the early years, a branch may be preferable for the reason that the losses will be directly offset against profits of the home resident business. The creation of a subsidiary or the conversion of a branch to a subsidiary may be preferable where there are expected to be profits in the “new country”. This is because the profits of the subsidiary can usually be kept within that subsidiary and are not automatically taxed in the home country, (Ireland) unless remitted. This is a simplification but there are elements of truth which may apply in many circumstances.
UK subsidiary
Operating through a subsidiary in the UK involves the formation of a new company in England and Wales or in Scotland or Northern Ireland. This company could be owned directly by the shareholders of the Irish company. However, for company law, financing and taxation reasons it is often more advantageous to set up a subsidiary i.e. a new company owned by the Irish company.
UK Tax law also deems a UK incorporated company i.e. one formed under the laws of England and registered with Companies House in Cardiff to be English, resident irrespective of any other factor. Irish Tax law has a similar but slightly different rule.
A UK “resident” company is subject to UK tax. A company will be resident in the UK or tax purposes if it is managed and controlled from the UK or if it is incorporated (i.e. formed) in the UK. It is possible for a company to be deemed to be resident in two countries in which event Double Taxation Treaties will decide which country has the principal right to tax the profits of the company and which country must give a credit or allowance for tax paid in the other country.
If a company is a resident in the UK for tax purposes, it pays UK Corporation Tax on its worldwide profits and capital gains. This will include all UK profits, profits of overseas branches, dividends from overseas subsidiaries, investment income received and overseas capital, income and gains. See our separate guide on United Kingdom Taxation.
The general UK Corporation Tax rate is 28% but a “small company” rate of 19% applies on profits of less than £300,000. The full rate only applies on profits of more than £1,500,000. Between £300,000 and £1,500,000 there is a formula for calculating the rates which will vary between 28% (nearer £1,500,000) and 19% (nearer £500,000). See our separate guides to UK corporation tax.
Complicated rules can arise under UK tax law where UK companies try to harbour profits in foreign subsidiaries. There are certain rules which attribute the profits of the foreign subsidiary to the UK company, which have no direct equivalent in Ireland.
Provided that the subsidiary is a separate entity and is not controlled in Ireland, its profits are not taxed in Ireland.
Payment of Dividend
The payment of a dividend by a UK resident company usually carries a tax credit of 10% of the sum of the dividend and the credit i.e. 10% of (100/90) * the dividend. The tax credit is available to UK residents and many non-residents including most Irish residents. See our guide on UK Income tax in relation to how this taxation affects UK residents.
In the case of non UK resident the tax credit is reduced to 5%. The balance of tax due on the dividend is withheld by the company.
In the case of payment to non-UK residents there is generally a cap of 15% on the tax the UK can charge on the sum of the dividend and the credit. This is reduced to 5% for companies holding at least a 25% share in the company paying the dividend.
In the case of the payment of a dividend by a UK subsidiary to the Irish holding company (or a company holding at least a 25% shareholding) the UK tax is 5% which is equivalent to the tax credit. Therefore the Irish holding company receives the dividend free of UK tax. There are however Irish tax law consequences when a dividend is received.
Branch or Permanent Establishment
The profits of a UK branch or permanent establishment of an Irish company is taxable in the UK. The same corporation tax rates and rules as apply to a subsidiary apply to the branch profits and losses. Because a branch is the Irish company, its profits are also subject to Irish Corporation tax. Double taxation relief will also be available so that in broad terms the tax payable will be the higher of the UK or Irish tax applicable to the branch profits.
A permanent establishment means a place of management, a branch, an office, a factory or workshop. It also includes an agency where the agent has authority to conclude contracts in the name of the company unless those activities are limited to the purchase of goods. It is also deemed to include the building site, or construction or installation project which lasts more than six months.
None of the following would be deemed sufficient to be a permanent establishment:-
- the use of facilities for the purpose of storage, display and delivery of goods belonging to the business;
- the maintenance of a stock or merchandise belonging to the business for the purpose of processing by another enterprise;
- maintenance of a fixed place of business solely for the purpose of purchasing goods or collecting information;
- the maintenance of a fixed place of business solely for the purpose of advertising, supply of information or research;
A person acting in one country on behalf of a trader resident in the other country, other than an independent agent, will constitute a permanent establishment of the trader in the former country if the agent has, and habitually exercises, in the former country, the authority to conclude contracts in the name of the trader, unless his activities are limited to the purchase of goods or merchandise for the trader.
A trader resident in one country will not be deemed to have a permanent establishment in the other country merely because he carries on business in the latter through an independent agent, i.e. a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business.
