1. UNITED KINGDOM

2. Speaker Name: Jay Sanghrajka Title: International Tax Partner
Company Shipleys LLP - London
Mobile:

3. Case study
US company (consumer business) is doing business in the United Kingdom.
The ultimate owner of the US company is a US individual.
The UK business operations create a net profit of US$ 7m and after deduction of an arm’s length US license fee for the use of the brand name (US$ 2m) a profit before tax remains of US$ 5m.
The US company can set-up a (1) company or a (2) limited liability partnership (LLP) in the UK.
What are the tax consequences?
What opportunities exist to mitigate the tax due?

4. Introduction: application of UK/USA tax treaty
US company sets-up a branch office in UK:
The US company will have a permanent establishment (PE) in the UK.
The taxing rights to tax the profits realised in the UK are allocated to UK based on the tax treaty.
The US should provide an exemption for the US profits allocated to UK. US sets-up a company in UK:
The UK company is a separate UK taxpayer of which the US is the shareholder. The US cannot tax the profits of this company (unless it is set up as an “check-the-box” company).
The US are able to tax dividend or royalty income paid by the UK company to the US as income.
Based on the tax treaty and UK domestic law, the withholding taxes withheld by UK on dividends or royalty payments can be reduced to nil.
US individual
US corporation US UK
- License fee
- Dividend PE OR
UK company 3

5. Tax consequences on US corporation and UK company
Corporation Tax (CT) due in UK:
Net result US$ 7,000 License fee US$ 2,000 Profit before tax US$ 5,000 UK CT (24%) US$ 1,200 Profit after tax US$ 3, Withholding tax (WHT) on license fee:
No WHT is levied by UK
Dividend withholding tax (DWT) on dividend:
(1) US company is subject to US tax: % DWT based on UK tax law
(2) US company is not subject to US tax (for instance a “S-corp”): % DWT (under UK domestic law)
US individual
100%
US corporation US UK
100%
- License fee
- Dividend
UK company 4

6. Tax consequences LLP(transparent in UK)
US individual
Corporate income tax (CT) due:
Partner 1 and partner 2 become a foreign taxpayer in UK (having a branch / PE in UK). They both have to register with the tax authorities and have to file a tax return (thus two tax registrations and tax returns are required).
Internal payments between PE and Head Office are ignored.
If it would be possible to allocate Head Office expenses, including the license fee to the UK activities with the overall net result being US$ 3.8 million as in the previous situation (but split over two tax returns).
Profit allocation instead of dividend payment (no DWT):
The result of the UK branch / PE is allocated to the US parent and no dividend payment is required to transfer the profit to the US (as a result no DWT due), effectively as “drawings”.
US corporation
Licence
100%
US corporation US
100%
US LLC
0.01%
99.99% UK PE PE 5

7. Tax opportunity 1: Cost Sharing Arrangement
US corporation
Loan “profits” to parent
Cost-sharing arrangement for IP
UK company
Licence fee US$ 2m
Irish company
CT: 24%
CT: 12.5%
DWT: 15% (to be avoided) 6

8. Tax opportunity 2: Debt Financing
Finance the UK activities with debt, bearing in mind the thin capitalisation rules.
Possible option to set up a Cyprus finance company, paying 10% on its profits with no withholding tax.
Watch US CFC rules.
Upstream loans to US parent. 7

9. Any questions?