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Should the UK company pay corporation tax

Directors based in US

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I have a client UK company but directors based in US.  They have no employees in the UK and there is no permanent establishment in the UK under Article 5 of the US and UK DTA.

The invoicing happens from the UK company and monies paid in the UK bank account.

I looked at the US and UK double tax treaty

ARTICLE 4 Residence 1. Except as provided in paragraphs 2 and 3 of this Article, the term "resident of a Contracting State" means, for the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State.

ARTICLE 7 The business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as are attributable to that permanent establishment.

Normally under Article 4 in other double tax treaties there is a clause of Place of Effective management and we would cite this to HMRC to get our client exempt from UK Corporation Tax 

How can my client get exempt from UK corporation tax under the US and UK double tax treaty ? 

Replies (21)

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By Paul Crowley
27th Oct 2020 17:47

Why UK company?

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By sash100
27th Oct 2020 18:01

They find it easier to conduct business through a UK company and UK bank account. Their UK clients had requested they setup a UK company before trading with them.

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Replying to sash100:
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By Paul Crowley
27th Oct 2020 18:10

So would that not be a little bit misleading?

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Psycho
By Wilson Philips
27th Oct 2020 18:05

"How can my client get exempt from UK corporation tax under the US and UK double tax treaty ? "

With extreme difficulty.

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By Wanderer
27th Oct 2020 18:20

Isn't it the case that a company is UK resident if it is incorporated here? And the management and control / PE criteria is all about non UK incorporated companies?

Of have I missed something?

Edit, just read:-

taxation.co.uk wrote:
Companies incorporated in the UK are automatically treated as resident for tax purposes in the UK by virtue of FA 1988, s 66(1). The exception to the incorporation rule is where a UK-incorporated company is regarded for the purposes of any double taxation treaty as resident in a territory outside the UK and not resident in the UK (tie-breaker clause). A company satisfying this condition is treated for the purposes of the Taxes Acts as resident outside the UK (FA 1994, s 249(1)).

Many of the UK's tax treaties include a tie-breaker clause to determine — for the purposes of the relevant treaty — the tax residence of a company which is resident in both the UK and the treaty partner state under their respective domestic laws. Such tie-breaker tests usually use the place of 'effective management' as their criterion. This concept is examined later in this article.

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Replying to Wanderer:
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By The Dullard
27th Oct 2020 18:18

You've missed the fact that if the company is found to be resident in the overseas territory under the treaty tie-breaker, if there is one, then the company is non-UK resident. The UK-US treaty has a tiebreaker, but it involves one of the countries giving up the first taxing rights, which ain't gonna happen. It doesn't have a management and control tiebreaker.

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Replying to The Dullard:
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By Wanderer
27th Oct 2020 18:28

Yeh, see that now and as per my edit, thanks.

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Replying to The Dullard:
Psycho
By Wilson Philips
27th Oct 2020 18:41

But no tie-breaker is required in this case. The company is resident in UK. End of. US don’t consider place of control etc, and are interested only in place of incorporation.

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Replying to Wanderer:
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By Paul Crowley
27th Oct 2020 18:28

So does that really mean volunteer for US tax, and prove it before UK will consider the tax residency.
If not then Silly HMRC

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By The Dullard
27th Oct 2020 18:15

Two words and the first one is cluster.

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Replying to The Dullard:
RLI
By lionofludesch
27th Oct 2020 18:17

Oooh - charades !!

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By Paul Crowley
27th Oct 2020 18:35

I seem to remember a lot of fuss over the big companies tax regime shopping.
Ireland shown in a very bad light on the basis of tiny% of a lot is still a lot.

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Replying to Paul Crowley:
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By Matrix
27th Oct 2020 19:46

Revised treaties introduced limitation of benefits clauses to deter treaty shopping.

In this case it does not look as if the US client took UK tax advice, it certainly does not look tax driven.

The UK profits would be taxable in the US and the UK tax would be creditable I expect. US residents normally elect to treat UK companies as disregarded entities.

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Replying to Matrix:
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By Paul Crowley
27th Oct 2020 19:54

Much appreciated
The only foreign stuff I am prepared to actually accept as a client is personal tax

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Replying to Paul Crowley:
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By Matrix
27th Oct 2020 20:01

Oh, nor me, I don’t do crossborder now. No way. I just worked in the tax department of US firms for a while so picked up some stuff, no doubt to be corrected when a US tax expert comes along.

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Replying to Matrix:
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By Paul Crowley
28th Oct 2020 04:23

Just did a google
USA appears to be like Switzerland Germany Etc in having national and local Corporate taxes
National higher than UK

ODD Original question
cheaper to stay taxed in UK

Seen several commentaries on UK being a corporate tax haven because cheap rate and no local tax, followed by Dividends from company are not taxed again in full.
The old imputation thing seemingly a rare UK idea

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By Matrix
27th Oct 2020 22:33

Is it this client where you advised them to set up a company?

https://www.accountingweb.co.uk/any-answers/us-branch-in-the-uk

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Replying to Matrix:
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By sash100
28th Oct 2020 00:05

Well spotted but its a different case. Basically since there is no tie breaker i.e Place of Effective Management in the US-UK DTA. The UK company is taxed based on place of incorporation being UK ?

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Replying to sash100:
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By Matrix
28th Oct 2020 00:33

Sorry, it came up in a search.

Go back to the treaty where it says this would be resolved by mutual agreement between the respective tax authorities.

If you weren’t the original adviser, then get a copy of the advice they received when they set up and obviously speak to their US accountant.

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Replying to sash100:
Psycho
By Wilson Philips
28th Oct 2020 07:54

As I said above, no tie-breaker is needed in this case. A tie-breaker is required only where the company is resident in both States. Since the company is not resident in US, no tie-breaker required. QED.

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Replying to Matrix:
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By Paul Crowley
28th Oct 2020 04:13

What a coincidence?
And the complaint that US tax so expensive makes this question so peculiar.
Why try to get taxed in the expensive country?
Unless trying to be taxed nowhere

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