Tax issues for Australian companies expanding into the UK

Many Australian companies expand into the UK without a full understanding of the tax issues and advantages of effective tax and finance structuring between the Australian and UK operations.

Here are some of the issues and factors to consider:

– Choosing the right business structure
– Taxation of profits
– Profit repatriation
– Residency issues
– Transfer pricing and thin capitalisation
– CGT concessions.

Choosing the right business structure

Generally speaking, there are two main ways an overseas company can establish business operations in the UK:

1. Incorporating a private limited company, or
2. Setting up a branch (referred to as a UK “permanent establishment”).

What are the pros and cons of each?

A company has the benefit of being a separate legal entity. This means that the Australian head company, generally, cannot be held liable for the debts accruing to the UK subsidiary.

A permanent establishment is when the business is carried on via a fixed site or office. It can include an agent who is authorised to do business on behalf of the overseas parent.

The right business structure for your operations will depend on tax considerations, the proposed activities of the UK business and financing considerations.

Taxation of profits

Both business structures above are subject to UK tax on profits at the current UK corporate tax rate of 20%. It is proposed to fall to 17% by 2020.

Under Australian tax law, any profits of the UK branch are generally not taxable in Australia under the Branch Profits Exemption.

Repatriation of profits

Generally, the repatriation of profits (via dividends) from a UK company to the Australian head company can be done in a tax-efficient manner. Generally, there is no withholding tax on dividends from the UK. Furthermore, where the Australian company has a greater than 10% voting shareholding in the UK entity, the dividend is generally not taxable to the Australian company in Australia.

In relation to the UK branch, generally inter-office remittances between the UK and Australia are not taxable.

Residency and decision-making

An Australian head-quartered company decides to incorporate a UK company. All the Directors of the UK company live in Australia, and key decisions in respect of the UK company are also made in the Australian board meetings. In this situation, there is a risk that the ATO may deem the UK company to be tax resident in Australia, rather than the UK. To help mitigate the risk of potentially being subject to tax in Australia (as well as the UK), it is important to consider appointing UK directors and ensure board meetings and key decisions are made outside of Australia.

Transfer pricing and thin capitalisation

Transactions between Australia and the UK will be subject to transfer pricing rules of both countries. Apart from the purchase and sale of goods, transactions covered include financial transactions (including loans), transfers of rights and licences and letting of property. It is important that advice is obtained from both a UK and Australian tax perspective.

Furthermore, the UK thin capitalisation provisions operate to ensure the UK entity does not claim interest deductions where the UK operations have excessive debt above the safe harbour limit. Advice should be obtained prior to funding the UK operations to ensure the financing is optimal from both an Australian and UK tax perspective.

UK CGT concessions – entrepreneur’s relief

The UK also offers generous CGT concessions, including “entrepreneur’s relief” in respect of “qualifying business disposals”. Gains qualifying for entrepreneur’s relief are subject to a reduced rate of CGT at 10%. It is crucial that advice is received at the time of structuring the UK business to ensure that the concessional rate of CGT will be available.

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This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication