HMRC Tax setup

[Tamas]

Please could you help me with the following, I will keep it as briefly as possible.

1. I am an EU citizen, living in the UK 183+ days, being a tax resident in the UK. I want to be self-employed and charge my time through my company and pay a corporate tax instead of a self-employed tax.
2. The company will be set up in Romania or Cyprus where the corporate tax is low (not in Seychelles or anywhere else that can raise the red flag). I will have yearly audits for my company and paying the corporate taxes in the respective country.
3. I will open a transferwise bank account for my company and will keep all the money from my business activity there. I will not use the money at all, it will be accumulating.
4. I am not going to pay myself dividends or salary or anything, thus my personal income will be 0.
5. After 5 years I will move to a country and live there (staying there 183+ days) where the dividend tax is 0% and pay myself the profits accumulated during the 5 years of my company.

Question:
The company's business profile is to provide IT consultancy services in the EU and UK (mostly in the UK, 90-100%).

"The HMRC site states:
The general rule is that a company that is not resident in the UK has to pay UK Corporation Tax only if:

• it has a permanent establishment in the UK
• the economic activity that generates its profits is carried out in the UK"

I will not have a permanent establishment in the UK, but as stated above my profits are going to be generated in the UK, maybe even 100%.

In this case, do I have to pay my corporate tax in the UK? If I am paying in the other country, where my company is based, doing yearly audits etc, will it raise any red flags by HMRC is it considered to be illegal?

Thank you in advance.

 

[Martin Everson]

"The HMRC site states:
The general rule is that a company that is not resident in the UK has to pay UK Corporation Tax only if:

• it has a permanent establishment in the UK
• the economic activity that generates its profits is carried out in the UK"

It's PE will be in UK as that is where your a*s sit and so do customers. You will pay tax in UK unless you can establish a PE in other country. Point 4 is irrelevant as the company with a PE in UK will be transparent for tax purposes. Meaning you will pay tax as if you earned it yourself and company did not exist. So not paying dividends or salary is irrelevant to HMRC being able to tax the company income.

In this case, do I have to pay my corporate tax in the UK?

Yes

If I am paying in the other country, where my company is based, doing yearly audits etc, will it raise any red flags by HMRC is it considered to be illegal?

If a DTA agreement exist between that country and UK it will be decided in their where the tax is paid. So read the DTA if it exists and find out where you will pay tax.


P.S Bottom line is either establish a UK company, relocate or setup a fully staffed and managed abroad company with a true PE there.

 

[Tamas]

It's PE will be in UK as that is where your a*s sit and so do customers. You will pay tax in UK unless you can establish a PE in other country. Point 4 is irrelevant as the company with a PE in UK will be transparent for tax purposes. Meaning you will pay tax as if you earned it yourself and company did not exist. So not paying dividends or salary is irrelevant to HMRC being able to tax the company income.



Yes



If a DTA agreement exist between that country and UK it will be decided in their where the tax is paid. So read the DTA if it exists and find out where you will pay tax.


P.S Bottom line is either establish a UK company, relocate or setup a fully staffed and managed abroad company with a true PE there.

Thank you very much Martin Everson for your help. At this stage, I have to be in the UK physically and can conduct my business only from here. I will set up a UK company and pay UK corporate taxes.
Did I get it right, if I would be able to manage my UK business from Cyprus I will have to pay my corporate taxes in Cyprus, not in the UK?

Regarding points 4. and 5:
I understand that my company, does not need to pay additional dividend tax if my company decides to pay dividends to the shareholders, which is me (0% both in the UK and in Cyprus) after paying corporation tax, but as an individual when getting an income from dividends from my company, I am subject to pay taxes on my personal income, which is realized in a form of dividends. Can you please confirm if my scenario with accumulating 5 years profit in the company and then paying it in a form of dividends to myself in a country where (I would be living for 183+days) the dividend tax on individuals (Cyprus) is 0% is completely legitimate and legal?

Thank you again for your help!

 

[Martin Everson]

Did I get it right, if I would be able to manage my UK business from Cyprus I will have to pay my corporate taxes in Cyprus, not in the UK?

Yes if the place of operation and center of management and control is in Cyprus then that is where you would pay taxes allowing for any DTA saying otherwise.

I understand that my company, does not need to pay additional dividend tax if my company decides to pay dividends to the shareholders, which is me (0% both in the UK and in Cyprus) after paying corporation tax, but as an individual when getting an income from dividends from my company, I am subject to pay taxes on my personal income, which is realized in a form of dividends.

Yes that's correct. You personally only pay tax on dividend income from your company in UK. The tax rate depends on size of dividend. There is 0% on withholding tax on dividends which is not useful to you if you live in UK. No point talking about Cyprus as that's not a solution if you live and manage company from UK.

https://www.gov.uk/tax-on-dividends

Can you please confirm if my scenario with accumulating 5 years profit in the company and then paying it in a form of dividends to myself in a country where (I would be living for 183+days) the dividend tax on individuals (Cyprus) is 0% is completely legitimate and legal?

Not that simple. You need to show no connections to UK in future and no intention to return after leaving UK for a longer length of time. You can check this using the below statutory residency test below.

https://home.kpmg/content/dam/kpmg/pdf/2016/01/statutory-residence-test-flowchart.pdf
You are far better of looking at legally reducing your corporate tax liability in the UK. I discussed much of this in the mentor group.

 

[Tamas]

Yes if the place of operation and center of management and control is in Cyprus then that is where you would pay taxes allowing for any DTA saying otherwise.



Yes that's correct. You personally only pay tax on dividend income from your company in UK. The tax rate depends on size of dividend. There is 0% on withholding tax on dividends which is not useful to you if you live in UK. No point talking about Cyprus as that's not a solution if you live and manage company from UK.

https://www.gov.uk/tax-on-dividends


Not that simple. You need to show no connections to UK in future and no intention to return after leaving UK for a longer length of time. You can check this using the below statutory residency test below.

https://home.kpmg/content/dam/kpmg/pdf/2016/01/statutory-residence-test-flowchart.pdf
You are far better of looking at legally reducing your corporate tax liability in the UK. I discussed much of this in the mentor group.

Again, thank you very much for your help, Marin Everson! I am not able to access the mentor group content.

Yes, I am planning to do use the tax allowances given in the UK, paying myself a minimum salary, dividends, loans etc. It is quite favorable if you use all the allowances and pay yourself 50k. After that paying, 32.5% tax on dividends is a bit high.... so moving to a country as mentioned above with a better 0% option is quite favorable, if we think about 5 years of profit which is let's assume 60k on yearly basis, minimum of 300k and not paying dividend tax will spare me almost 100k.

I have checked the KPMG link and I do not have a family in the UK and in that case, in that specific tax year I will not be in the UK for more than 15 days, we are good to go then. The only three questions are:
1. Do I need to consider UK tax year (1st of April till 31st of March) or Cyprus Tax year (1st of January 31st of December)?
2. After living one year outside of the UK, can I still come back and work as I did before, the link does not provide any information about that?
3. Interesting thing is if I move to Cyprus in that specific year when I am planning to pay my dividends. If I am able to manage my company from Cyprus, not visiting the UK then my PE will in Cyprus, so that means for that year I will pay only Cyprus corporate tax for my company and 0 dividend tax for 5+1 years.

 

[Martin Everson]

1. Do I need to consider UK tax year (1st of April till 31st of March) or Cyprus Tax year (1st of January 31st of December)?

You need to consider UK tax year. If you spend majority of year in UK then that's where the tax is owed on the dividends.

2. After living one year outside of the UK, can I still come back and work as I did before, the link does not provide any information about that?

Yes you can. When you leave fill out your P85 form and all will be clear.

P.S None of what I said should be considered tax but rather gossip. You are best to seek out professional tax advice before taking any action .