The UK, A Business Gateway to Europe

The UK, A Business Gateway to Europe Establishing A Corporate Structure

More and more US companies are now choosing the UK as a springboard for expansion into Europe, and indeed the rest of the world. However, it is important that the right corporate structure is put in place from day one. There are some important decisions that need to be made.

One of the first of these will be selecting the most suitable entity with which to operate in the UK. The fact that a US based company is carrying on business in the UK does not mean that it automatically has to register with the United Kingdom Registrar of Companies (the authority that regulates corporate entities). However, as soon as it establishes business premises in the UK, it will have one month in which to register with the Registrar, who will put the documents on public record at Companies House. The company will be required to register either under the place of business regime or the branch regime.

The branch regime applies where the overseas company organises its activities in the UK in such a way that its local representatives in the UK have some authority to bind the company, rather than referring all such matters abroad. The place of business regime applies where that is not the case or where the overseas company's activities in the UK are not sufficient to constitute a branch. Such activities might include computer processing, warehousing or simply a representative office for collating information. Alternatively, the overseas company could set up a UK subsidiary to trade in Great Britain.

Place of business

A place of business does not automatically constitute a permanent establishment for tax purposes but may do so under certain circumstances. The overseas company will have to file certain details at Companies House, including its address, type of business and the names and addresses of all persons authorised to accept in the UK notices served on the company. The registration form should be accompanied by a certified copy of the instrument constituting or defining the constitution of the company, including certified translation where applicable.

Such an overseas company is also required to file its own accounts each year with certified translation, the contents of which are set out in UK regulations. It is worth noting that these accounts do not need to be audited.

If the place of business or representative office has limited/ancillary activities as described above it will not be treated as a permanent establishment (PE) for tax purposes, and so will not be liable to corporation tax in the United Kingdom.

More substantive activities (even undertaken from an employee's home) could however result in its being deemed to have a PE and therefore be subject to UK tax. As this can be a grey area, advice should always be taken.

Branch of overseas company

A branch does not have limited liability in the UK, as it is not a separate legal entity from the overseas company.

The overseas company has to initially file certain details at Companies House, similar to those required under the place of business regime. It is also required to file a copy of its own accounts each year. If it is required under the law of its own country to prepare, have audited and disclose its accounts, it may file those. It must also file a copy of its most recent accounts, when it first registers at Companies House. If it has no domestic filing requirement, then the contents and format of the accounts to be filed here are set out in UK regulations, and it need not file a copy upon registration. Such accounts do not need to be audited.

A branch of an overseas company is taxable as a PE for UK corporation tax

purposes, as if it were a limited company. It will only qualify for the 19% tax rate if the profits of the company as a whole (not just those of the branch) fall within the specified profit limits. Losses incurred by a UK branch of an overseas company can (subject to that country's legislation) be surrendered against profits of the overseas company, as well as being carried back and forward in the UK.

Limited company

A company is required to have a minimum of two officers (one of whom needs to be the Company Secretary) and a minimum issued share capital of 1. The position of an officer may be filled by a company. The officers do not need to be resident in the UK.

A limited company has limited liability - it is a separate legal entity from the parent, which has no direct responsibility for the debts and liabilities of the subsidiary. A UK company is required to file its own directors' report and accounts.

In general terms, a UK company is usually taxed at between 19-30% on its taxable profits. If a company makes losses, these can be carried forward indefinitely or carried back for one year. These losses can also be surrendered to other companies in any qualifying domestic group.

A UK company is generally required to have its statutory accounts audited if its turnover (or worldwide group turnover, if a subsidiary of an overseas company) is more than 5.6 million if the group's total balance sheet assets exceed 2.8 million.

So now what?

There is no universal argument for preferring one entity to the other. Each case must be considered in its own right, although the decision usually comes down to what is most tax efficient for the business, or is most commercially acceptable.

A limited company is generally better understood than a branch. It is likely that a purchaser (a bank or landlord for example) will want to know that your business will have a long-term future in the UK. They may well review the documents filed at Companies House to establish how robust the UK operation is - a well capitalised UK limited company can show this.

Written by Mr. Nilesh Shah, head of Tax at London based firm of chartered accountants, Blick Rothenberg