In the below article, we examine a structure that enjoys the prestige and respectability of a UK company but at the same time is not liable to the high UK tax exposure.
As it is well known, UK is a prominent international business centre with a highly developed banking, legal and investment system. As a result of the high respectability of the country, UK registered companies enjoy an almost limitless amount of benefits when it comes to credibility, a valuable asset when dealing with potential clients globally.
None the less, a UK tax resident company is taxed at a rather high tax rate which currently is 20%. As an alternative, the UK Company can under specific circumstances, reduce its overall tax burden by transferring its tax residency from UK to another more tax friendly country, thus becoming a so called UK non-resident company.
By virtue of section 249 of the UK Finance Act of 1994, where a UK registered company has its “place of effective management” in a country with which the UK has signed a double tax treaty and is thus not managed and controlled in the UK, and where such treaty contains a “tie-breaker” clause for situations where the company could be considered as resident in both countries, then the company will be resident in the foreign country and not in the UK for tax purposes.
The double tax treaty between Cyprus and UK contains this clause (Article 4 of the treaty), meaning that a UK company managed and controlled from Cyprus will be resident in Cyprus for tax purposes.
Actually Cyprus is the most frequently used residence jurisdiction for a UK non – resident company. Not only it has been listed by the UK Inland Revenue as having a suitable Double Tax Treaty with UK and thus being a qualified location for a UK non-resident company, it is also a well-known incorporation destination with favourable tax system and financial infrastructure.
In practice, a UK company which has its “place of Effective Management” in Cyprus will be non-resident for UK tax purposes. Such a UK company will be liable to 12.5% corporate tax (the Cyprus corporate tax rate) on its net world-wide income and will only be liable to pay UK taxes if it receives UK sourced income, although even this income may be protected from UK tax as a result of the relevant Double Tax Treaty provisions.
The Cyprus residency of the UK non-resident company can be easily achieved through the registration of a Cyprus branch (under section 347 of the Cyprus Companies Law) of the UK Company.
In order to register the Cyprus Branch, the registration certificate of the UK Company is submitted to the Cypriot Income Tax Office. Once the Cyprus Branch is registered, a TIC Registration (Tax Identification Code) is obtained and submitted (along with other relevant documents) to the HM Revenue & Customs (HMRC) for obtaining a UK Tax Clearance Form.
For UK tax purposes, a company’s tax residence status is determined according to three separate tests:
The Treaty between Cyprus and the UK contains a tiebreaker provisions stating that a company that would otherwise be dual resident for the purposes of the treaty is deemed to be a resident only in the state in which its ʺplace of effective managementʺ is situated (Article 4 of the Treaty).
The place of effective management criterion is not concerned with the location of shareholdersʹ meetings; rather, it is concerned with answering the question of where key management and commercial decisions necessary for the conduct of a company’s business are made. An entity may have more than one place of management; however, it can only have one place of effective management at any one time.
To conclude, a company structured as described above not only gets the benefit of tax exemption in U.K. but being a resident of Cyprus it will be able to take advantage of the Cyprus double tax treaties as well as being taxed at the lowest EU corporate tax rate of 12.5% on its net profits.