So this is not theory, it is something you already did with success, right? Have you always used a UK LTD company? Are there any countries where it's more advantageous having this kind of structure? Also lets say that you open stripe for the head company because the branch is located in a country where stripe is not supported and you collect the income generated from the sale with a transferwise account for the branch. Would this work? I'm super interested in a setup like this!
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Yes I have experience running a company like this for more than 10 years. I have only used a UK Ltd.
This is quite advantageous in EU and actually in most countries.
The reason is, most DTA agreements include a non-discrimination clause which means that a foreign company should not be treated worse than a local company. In a lot of cases, complying to this means the country opts for LESS requirements on a branch than on a local company. A reason for this is also that there are lots of types of entities that don't necessarily fit 1:1 with the existing types of entities in the jurisdiction. If we go back to the LLP case, if the LLP doesn't exist locally, then through the DTA, it will have to be treated more lenient in the various types of legislation, meaning it can avoid a lot of requirements. This can be less requirements on paid-up share capital, less requirements on loans to/from the company, less filing requirements etc. Because of all the DTA requirements, this can typically spill over to UK Ltd companies.
I think your setup could work. It's not a setup I have tried, but it is the sort of setup that I want to be able to move to when needed.
Another advantage I see is that for a holding company, using a UK Ltd is advantageous as it makes it possible to escape from a country and setting up business somewhere else without being stuck with a holding company in a jurisdiction you have no connection to anymore. By moving funds from a branch to the head office, and later maybe re-establishing the treaty non-resident status in another country, you have effectively re-domiciled your holding company without tearing down the whole structure.
There is no witholding tax on dividends. What you pay next is up to your own jurisdiction.
Why though? If the company is not a UK resident, why would that change only because you have customers in the UK?
US LLCs with non-resident members seem very similar (diregarded entities for tax purposes) - and they don't become tax resident only because there are US customers. What's different with UK Ltd.'s?
US LLCs with non-resident members seem very similar (diregarded entities for tax purposes) - and they don't become tax resident only because there are US customers. What's different with UK Ltd.'s?
I wouldn't call a LLC similar to this setup. The UK Ltd is not disregarded for tax purposes, but pays no taxes only because the tie-breaker clause in the DTA assigns another country the taxation rights. If you then start doing business in the UK, you might be tax resident in both countries. A normal DTA specifies that tax is paid in the country decided by the tie-breaker clause, but not for profits arising from the other state (i.e. UK). I'd say the two setups have very different legal basis.
The OECD model convention article 7: Business Profits is where we need to look. If the company has a permanent establishment in UK, then profits arising from the UK should be taxed there. We know that a UK company must have a UK address, and must be able to receive mail etc. Is it a PE? Maybe not, but I would be careful doing business in the UK using this setup. If you read the OECD commentary on article 7, they have probably said something about this particular setup, so it should be possible to get clarity on that. I won't take the time to read that now, but please do and report back!
Also, I'm not an expert on HMRC. There might be court cases in the UK regarding this.
Granted, a US disregarded entity is taxed on the member level. But if the member is a non-resident alien and there is no US permanent establishment (dependent agent/nexus), they would only pay US tax on work carried out in the US. So in essence, I think it is very similar.
"UK incorporated companies are generally treated as UK resident. However, companies resident in the United Kingdom under domestic law, but treated as solely resident in a different country under that country's DTT with the United Kingdom, are not treated as UK resident for the purposes of UK domestic tax law.
[...]
For non-resident companies, the liability to corporation tax depends on the existence of any kind of PE through which a trade is carried on (except where the trading profits are attributable to a trade of dealing in or developing UK land, when a PE is not needed). The meaning of PE for UK tax purposes is set out in statute; it is largely based on the OECD Model Tax Convention definition, but is not identical in all respects. Subject to the terms of the relevant DTT, a non-resident company will have a PE in the United Kingdom if:
- it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on, or
- an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in the United Kingdom."
https://taxsummaries.pwc.com/united-kingdom/corporate/corporate-residence
Actually, that sounds almost EXACTLY like the rules for US LLC's, including the "dependent agent" wording.
Let's look at the UK-CY tax treaty itself... Actually its latest revision from 2018 has already adopted the new rubbery BEPS wording (Article 4):
"4. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of a mutual agreement by the competent authorities of the Contracting States, the person shall not be considered a resident of either Contracting State for the purposes of claiming any benefits provided by the Convention, except those provided by Articles 22, 24 and 25."
https://www.gov.uk/government/publications/cyprus-tax-treaties
The previous wording from the 1974 treaty was much clearer:
"(3) Where by reason of the provisions of paragraph (1) of this article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated."
Let's look at the PE rules (Article 5) from the 2018 treaty:
"1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
[...]
4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
[...]
e) the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity of a preparatory or
auxiliary character;
[...]
6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business."
I'm not a lawyer, but this looks a LOT like the US LLC system - provided that you can get a ruling that the company is in fact "treaty non-resident" in the UK. Which probably will be relatively easy in the UK, given how many companies claim that status. Though the new BEPS wording might make it more difficult.
And I can imagine that it would be more difficult in Estonia as well, simply because it hasn't been done as often before.
"UK incorporated companies are generally treated as UK resident. However, companies resident in the United Kingdom under domestic law, but treated as solely resident in a different country under that country's DTT with the United Kingdom, are not treated as UK resident for the purposes of UK domestic tax law.
[...]
For non-resident companies, the liability to corporation tax depends on the existence of any kind of PE through which a trade is carried on (except where the trading profits are attributable to a trade of dealing in or developing UK land, when a PE is not needed). The meaning of PE for UK tax purposes is set out in statute; it is largely based on the OECD Model Tax Convention definition, but is not identical in all respects. Subject to the terms of the relevant DTT, a non-resident company will have a PE in the United Kingdom if:
- it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on, or
- an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in the United Kingdom."
https://taxsummaries.pwc.com/united-kingdom/corporate/corporate-residence
Actually, that sounds almost EXACTLY like the rules for US LLC's, including the "dependent agent" wording.
Let's look at the UK-CY tax treaty itself... Actually its latest revision from 2018 has already adopted the new rubbery BEPS wording (Article 4):
"4. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of a mutual agreement by the competent authorities of the Contracting States, the person shall not be considered a resident of either Contracting State for the purposes of claiming any benefits provided by the Convention, except those provided by Articles 22, 24 and 25."
https://www.gov.uk/government/publications/cyprus-tax-treaties
The previous wording from the 1974 treaty was much clearer:
"(3) Where by reason of the provisions of paragraph (1) of this article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated."
Let's look at the PE rules (Article 5) from the 2018 treaty:
"1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
[...]
4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery
of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
[...]
e) the maintenance of a fixed place of business solely for the purpose of
carrying on, for the enterprise, any other activity of a preparatory or
auxiliary character;
[...]
6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business."
I'm not a lawyer, but this looks a LOT like the US LLC system - provided that you can get a ruling that the company is in fact "treaty non-resident" in the UK. Which probably will be relatively easy in the UK, given how many companies claim that status. Though the new BEPS wording might make it more difficult.
And I can imagine that it would be more difficult in Estonia as well, simply because it hasn't been done as often before.
Do you have experience in what's is required by hmrc to establish that you are treaty non resident? Do you have to provide a tax resident certificate from the other country?
Good references, and you might very well be correct on paper. The PE issue arises for all companies though, wherever they are located. If you have a PE in the UK, you are taxed there for profits arising there. My thinking is that is given two companies that HMRC sees operating in the UK: One is some Hong Kong company dropshipping chocolate bars on amazon.co.uk, and another is a UK Ltd selling chocolate bars on amazon.co.uk that happens to be a treaty non-resident company. The UK ltd has an official address in the UK, and maybe a secretary in the UK.
Will HMRC treat them the same? I expect HMRC to react differently to the two companies. Given that the UK ltd has an address and is registered in the UK, why shouldn't HMRC go after the company to get it to prove that it has no PE in the UK? It seems like by simply having an address and being registered there, HMRC has a good case to assume that there is a PE if it wants to. Assuming the Hong Kong company has a PE is quite far fetched.
Someone with more knowledge about how the HMRC operates might step in and give their views, I know there are a few in this forum. I don't know whether HMRC strategically wants these treaty non-resident companies in the UK or not. If they somehow want to create issues, it seems like it would be easy to do so. In a lot of other countries, the tax office would love to be able to go after companies like this if they was an opportunity to establish a case for them having a PE in the country.
I feel the same way but it's better to be safe than sorry and go speak with a qualified accountant about this subject.
This would (probably) also mean moving sites from UK servers which i'm currently using and cut every possibile tie with UK.
If you sell via ecommerce worldwide with a .com domain i don't think HMRC will go after you because somebody from UK bought from you.
Regarding social security - it depends on whether in the jurisdiction where the company is incorporate, if it requires at least one employee (usually the director). If it requires one employee, even if it is a single man company and in the EU, you will have to pay social security.
UK companies and Estonian companies do not require an active company to have 1 employee, therefore, you can have them without paying social security.
Other EU countries like Bulgaria and Croatia require the company to have a director which counts as an employee, therefore you cannot escape from social security (if the company is actively trading).
Does anyone know this status for Cyprus?
UK companies and Estonian companies do not require an active company to have 1 employee, therefore, you can have them without paying social security.
Other EU countries like Bulgaria and Croatia require the company to have a director which counts as an employee, therefore you cannot escape from social security (if the company is actively trading).
Does anyone know this status for Cyprus?
So you either get a local nominee director who is already employed somewhere else or someone from abroad. Not really an issue tbh but kinda annoying.
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