Non-UK resident shareholders & company taxes

UK limited liability companies with Non-UK resident shareholders and directors have often had to tip-toe through a range of taxation complexities.

Granville Turner, a director at Turner Little – the corporate services  provider – focuses on the tax and residential status implications for such companies; detailing for IMS StratNews just what impact this has on the tax liabilities for those companies and individuals involved.

Here information is presented in the form of a straightforward  guide. It provides clear details for Non-UK resident shareholders and directors just what requirements need to be met to ensure they are complying with UK government company – as well as individual – residential and taxation status rules!

Determining a company’s residential status

The general rule is that a company is a UK resident if either:

• It is incorporated in the UK, or 
• If the central management and control of its business is in the UK.

Therefore, a UK incorporated company will be defined as a UK resident, irrespective of having foreign directors and shareholders, says Turner. 

When special conditions apply to residency 

However, this resident status can be affected by a double tax treaty. 

A typical treaty provision provides that, for treaty purposes, a company can be treated as a tax resident dependent on where its effective management and control is located.

Turner directs attention to official commentary relating to the OECD model tax treaty (which will apply in most cases, and the Revenue and Courts will follow), which defines the place of effective management and control as:

‘The place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions; the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.

All companies incorporated in the UK or who have their central management and control in the UK are resident in the UK except treaty non-resident companies.

Non-UK resident shareholders and directors: residence status

The fact that individuals are either/and Non-UK resident shareholders and directors in a UK company will not have any specific impact on their residence status, due to the UK statutory residence test – introduced in April 2013 – relating to being an officer in a UK company or holding shares in a UK company.

Non-UK resident shareholders and directors: employment status

If shareholders and/or directors are also employees of a UK company there will be an impact on how much tax they are liable to pay, based on whether those shareholders or/and directors:

• Are in full time employment in the UK; in which case they are automatically defined as UK resident.
• Are involved in what is termed ‘substantive UK employment’, including being self-employed, (i.e. are working in the UK for 40 or more days in the tax year but not working in the UK full time); this form of substantive employment can be viewed as a UK tie that will need to reviewed by HMRC based on the number of days spent in the UK.
• Otherwise, Non-UK resident employees shouldn’t be subject to UK income tax on salary, as long as there are no UK duties; however, it is always best to check this point with HMRC.

• Dividends for the Non-UK resident shareholders  and directors are free of UK income tax.
• Dividends are paid with what is called a notional tax credit and may initially, to the uninformed, appear to be subject to UK tax, to the extent that tax is deducted at source. However and significantly – given there is no form of UK tax that is actually deducted at source, the tax credit remains purely notional, and doesn’t relate to any tax actually paid.