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Collaborated effort between two companies

Collaborated effort between two companies

Hello all

Suppose two companies A and B are separate but closely connected, e.g., run by the same director(s), collaborate in a new product where

  • A is responsible for procurement, manufacturing, logistics, etc.
  • B takes care of customer support and marketing.

So B is customer facing. Now, for the sales receipts generated, how would HMRC view the split of the sales receipts since each company plays a part in generating sales? Is it purely dependent on the amount each company puts in their bank account? Since A and B are closely connected, if A so happens to be resident in a tax-favourable jurisdiction, B could take a minimal "fee" for providing the CS and branding services and shifts profits to A.

The fair value of B's services would be relatively low compared to the services A provides (manufacturing, logistics, etc.). So, even with the arm's length principle, B could still shift most of the profits away - correct?

Any thought appreciated.

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01st Mar 2016 07:48

I think you are assuming that A is resident for tax purposes in the country in which it is incorporated, which will not necessarily be the case. I suggest you sort that one out first, as that may straighten out a lot of your ideas.

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By mun35
01st Mar 2016 17:21

A has all operations in the country of incorporation, so it is indeed tax-resident in that country.

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01st Mar 2016 17:27

The question is not where it carries out its operations but where it is managed and controlled from.

As you tell us its director(s) (why the brackets by the way - don't you know how many there are?) are the same as those of the UK company he, she or they must do a lot of travelling if they manage and control each company only in the jurisdiction in which it is incorporated.

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By mun35
01st Mar 2016 17:37

Hi John,

I used brackets just to generalise the scenario. The case in question involves just a single director, i.e. both A and B are managed by the same, sole director.

Company A is also managed and controlled from the country of incorporation. Company B is managed and controlled by the same director, but incorporated in a less tax-efficient country.

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02nd Mar 2016 10:18

I think you will struggle to show that one individual manages and controls two companies only in their respective jurisdictions.

Presumably he has his home in one of the countries and is a visitor in the other?

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By mun35
02nd Mar 2016 10:45

B is incorporated in a tax-inefficient country, but is managed from A's jurisdiction. So both A and B are controlled from A's jurisdiction (the tax efficient one).

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02nd Mar 2016 11:04

So the director's home is in A's jurisdiction? Is he also a citizen of that country?

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By mun35
02nd Mar 2016 11:25

Yes, that is correct. The director manages B from A's jurisdiction without being a resident or a citizen of B's jurisdiction.

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