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Dividends paid by overseas subsidary

I'm the accountant of a UK coy that provides technical training services. The coy also owns 40% of a coy registered in Dubai which provides training in the middle east. The other 60% is owned by a major training coy based in Jordan.The subsidiary recently won a contract which includes sending students to the UK for training. The subsidiary wanted to set up a coy in the UK to facilitate this. It is going to take up premises in the uk and will be more substantial than the existing UK coy itself. All working cap are to be provided by the 60% shareholder.

Say if newco in UK makes profits, it pays UK corp tax as normal and out of its retained profit pays dividends back to its parent in Dubai who in turn pays dividends to the existing UK coy (probably without withholding tax I think). Am I right in thinking there maybe a double tax here. Newco UK pays CT in UK. Newco pays div to Dubai who in turn pays div to the existing UK coy which will then have to pay tax on the dividend from Dubai?

If I'm correct in my thinking, does anyone has an idea on the best way to structure this inorder to avoid double taxation. The best way I thought was to set up newco with the same shareholding structure as the Dubai coy therefore divs from one UK coy to another is not taxed. Unfortunately this is not acceptable to the 60% shareholders as they wanted to build the Dubai coy into a substantial training coy.

Any help would be much appreciated..

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By afairpo
21st Dec 2012 12:08

Is it a small company?

Just checking - does the UK company actually count as a small company when you take all partner and linked enterprises into account (less than 50 employees and either turnover or balance sheet total of less than €10m?).  The Dubai company seems to be a partner enterprise, at a 40% shareholding, so the a proportion (probably 40%, depending on shareholder agreements etc) of the Dubai company figures would seem to need to be included in the assessment - and a similar proportion of the figures of the proposed new UK company and the 60% Jordan investor as both would seem to be linked enterprises of the Dubai company (again, depending on the structure and any shareholder agreement). There's no geographic limitation on partner/linked enterprises in assessing the size of a UK company.

If adding that lot together takes the UK company over the small company thresholds then the dividend exemption should apply to dividends from the Dubai company (unless there's something exotic going on with the shareholding) as it should be within the "not a small company exemption" which doesn't require the presence of a qualifying treaty for the exemption to apply.

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By AIMCON
22nd Dec 2012 08:23

Not big

The Jordanian company is a bit shy about releasing their company's data but I think regardless, the combined size would be just outside the 'not small' size. It might be in a couple of years time but I hesitate to say it now. I suppose divs can always be deferred until such time when it  becomes big but it would be difficult to ask the owners to wait for a couple of years before drawing any dividends.

Dont get me wrong, the existing UK company is not trying to avoid paying the tax on the dividends but if legislation says it dont have to pay tax the better. Unfortunately in this case it is the double tax that they are not keen on paying.

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