UK holding company

Why the UK works as a holding location

Most European countries withhold tax on dividends paid to foreign shareholders, and getting it back under a treaty takes patience, forms and a holding with substance. The UK does it differently: UK companies pay dividends without deducting tax. The UK's deduction duties cover interest, royalties and some other payments, but not ordinary dividends. The one notable exception is property income distributions from REITs.

For you as a shareholder abroad that means nothing sticks on the UK side, there is nothing to reclaim, and you are taxed on the dividend where you live. For non-residents, UK law restricts tax on UK dividends to whatever was deducted at source. Which is nothing.

The other side of the holding looks good too. Dividends a UK holding receives from its subsidiaries are usually exempt from corporation tax. If the holding sells a subsidiary, the gain is exempt when it has held at least 10 percent for at least 12 months and the subsidiary is a trading company. That is the substantial shareholdings exemption.

What the subsidiaries give up on the way in

Whether a subsidiary in another country withholds tax on dividends it pays up to the UK holding is decided by that country's own law and its tax treaty with the UK. Many UK treaties cut the rate on dividends to a company holding a substantial stake, some to nil. Since the UK left the EU, the EU's directive for parent and subsidiary companies no longer covers payments to a UK parent, so the treaty does the work.

A treaty rate is an entitlement, not an automatic result. Many countries refuse relief where the people behind the holding would not be entitled to it themselves, or where the holding lacks its own substance and business activity. A letterbox holding above an existing company does not get the refund. We look at the treaty that applies to each of your subsidiaries in the structure memo; the principles are in our piece on the UK's tax treaties, and the UK side of dividends in UK dividend withholding tax.

The participation exemption at home

If a company in your home country sits above the UK holding, what matters is how that country treats the holding's dividends. Most European countries have a participation exemption that frees dividends and often gains from substantial holdings, but each sets its own thresholds: a minimum stake, a minimum holding period, sometimes a small taxable slice, sometimes a test of how heavily the foreign company is taxed.

If you hold the UK holding personally, your home country normally taxes its dividends like any other dividend. Because the UK withholds nothing, there is no UK tax to credit or reclaim. We set out the questions for your home adviser in the memo, so the answer comes from your country's rules rather than from a rule of thumb.

Place of management and substance

A UK holding is only a UK holding if it is run from the UK. If the decisions are taken in Antwerp, Oslo or Utrecht, your home country may treat the company as resident there, and when two countries both claim a company the treaty generally looks to where it is actually managed. Then the advantage is gone and the tax is due at home. So a board, resolutions and real administration in the UK are part of the design, not the small print.

Many countries also have controlled foreign company rules that bite when a foreign company is taxed lightly. With UK rates of 19 to 25 percent the holding is not a low-tax company in the usual sense, but whether particular income of the holding is caught depends on its nature and your country's thresholds. That goes into the structure memo too.

If you plan to list the holding later, it can be set up as a PLC; see our UK PLC section. If you are combining the holding with a trading company in the UK, start with UK company formation.