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Flashcards in P6 Overseas Aspects Deck (36):
1

Tax Status

of Individual

Determined by Domicile and Residence

Domicile - inheriting the homeland of father. Person can only have 1 domicile at any one time

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Residence

(applies to whole tax year)

Resident if in tax year
1) do not meet 1 of the Auto NON UK Res tests
2) meet 1 of the Auto UK Res tests
3) meet ≥ 1 of Sufficient Ties test

3


Automatic NON UK Residency Tests

Non resident if 1 match...

In UK less than:
- 16 days
- 46 days + non res in all of the 3 previous tax years
- 90 days + works o/s full time

In UK at midnight

4


Automatic UK Residency Test

Resident if 1 match...

- in UK for ≥ 183 days in tax year
- within a period of 91 consecutive days, spend ≥ 30 days in tax year in UK home and if have O/S home they spend < 30 days in the tax year in that overseas home
- 365 days continuously working FT, some of which fall in the tax year

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Sufficient Ties Test (need to assess then use a table)

If individual does not satisfy any auto res tests then need the sufficient ties test...


1) family - has close family in UK (spouse / children)
2) accommodation - has house in UK made use of during tax year & available ≥ 91 days
3) work - does substantive work in the UK ≥ 40 days
4) days in UK - spent > 90 days in either (or both) 2 previous tax years
5) country - spends more time in UK than in any other country in the tax year

Work out how many days in UK and then look at table

UK LEAVER: all 5 ties used

UK ARRIVER: 1st four ties

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Splitting a Tax Year

Tax status normally fixed for tax year BUT split year if

  • UK res in previous yr AND current yr AND
  • not UK res in following year, and
  • leaves UK part way through current TY  BECAUSE
  1. Ceases to have a UK home
  2. Begins work abroad
  3. Accompanies or later joins partner abroad to continue to live with them

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Date when overseas part starts (Leaving UK)

DATE: ceased to have a UK home

DATE: overseas work starts

DATe o/s part starts on later of: (1) partner starts work (2) joins partner

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Date when UK Part starts - arrivers

DATE: acqd UK home

DATE: work started in UK

DATE: overseas work ceased

DATE: overseas part starts on later of: (1) partner stops work (2) joins partner

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Basis of assessment for IT

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UK IT Comp: Overseas Rental Income, Interest, Dividends

Income grossed up for overseas tax suffered
Dividends grossed up 100/90
DTR may be available

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UK IT Comp: Overseas Trading income from business wholly abroad

Calculate trading income as in the UK
Special rules apply for travelling expenses
Income grossed up for overseas tax suffered
DTR may be available

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UK IT Comp: Overseas Pensions

If assessed on an arising basis
= 90% of pension is taxable


If assessed on a remittance basis
= 100% of pension remitted

Income grossed up for overseas tax suffered
DTR may be available

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UK IT Comp: Overseas Employment Income

• Assessment rules are same as for "other O/S income"
• Exception to the rule :

– if individual is UK RES, but non-UK domiciled
– works for O/S ER and
– performs all of duties of employment abroad.

14

Tax Basis Matrix

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Remittance Basis

Decide each year whether you want to elect for this

All overseas income taxed as Other Income

DTR available

If > £2000 and elect, PA not available

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Arising Basis

UK res default

DTR available

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Remittance Basis Charge

Aims to penalise LT "UK RES not UK Dom"

Levied if taxpayers has O/S unremitted income & gains > £2000 and elects for remittance basis

Must have been UK RES for at least 7 of the last 9 tax years

  • Res 7 of 9 tax years, charge £30,000
  • Res 12 of 14 tax years, charge £50,000

Charge added to Tax Liability

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DTR

Lower of Foreign tax suffered and UK tax on that bit of income based on the top rate slice of income for that taxpayer

19

CT

UK status

Company is UK RES if

• incorporated in UK, or
• has central mgmt and control in UK.

HMRC will look at factors:

• location of board meetings
• where effective day-to-day mgmt decisions made, and
• residence status of directors

20

CT

Implications of UK Res

UK RES company is chargeable to CT on its worldwide profits. This includes:

  • all UK profits
  • O/S branch profits (unless exemption election made – section 3)
  • other O/S income (e.g. rental & interest income), and
  • capital gains.

21

CT

OECD (DTR)

The normal provision in tax treaties (based on the OECD model treaty) is that a foreign country will usually only tax income arising in its country from the commercial operation of a UK resident company if:

(a) trade is carried on within its boundaries; and
(b) profits are derived from a permanent establishment set up for that purpose.

'within a country’s boundaries' trading with, as opposed to within, another country will avoid any liability to overseas profits taxes

22

CT

DTR - Tax Planning

It may not be beneficial to make the election if:

(i) DTR means that there is little or no UK CT payable, and/or
(ii) losses are possible or anticipated in an O/S branch in the future.

23

CT

Overseas Branches

Methods of setting up a permanent place of business O/S are:

(i) setting up a branch (or division); or
(ii) incorporating a new subsidiary (i.e. setting up O/S RES CO)

• Branch or division will probably be regarded as a permanent establishment and hence may be subject to both UK and local taxes
• New subs will be incorporated O/S. Provided it is centrally managed and controlled in O/S country, it will be RES there for tax purposes and not in UK.

24

CT

Overseas Dividends

O/S dividends are treated in the same way as UK dividends:  

• Exempt from CT
• Included in FII, unless dividends received from associated companies, in which case they are ignored completely for CT purposes.

25

CT

Foreign Company Trading In UK

Non-UK RES CO can be liable to UK CT on trading profits if it trades within the UK, but not for trading with the UK.

• Trading within UK: either trading through a permanent establishment or concluding contracts in UK.
• Trading with UK: activities such as exporting goods to UK customers, storing goods in UK for customers and marketing activities in UK.

CT charged at the main rate unless there is a double taxation treaty specifying a lower rate.

If a UK PE (permanent establishment) owned by an EEA company makes a loss, loss can be group relieved in UK if it has not been relieved in another country (even if it could be).

26

CT

 

Calc of Tax Credit

All O/S income included in CT comp gross (incl O/S tax)

Relief available for O/S withholding tax (WHT) as follows:

  • WHT = any O/S tax deducted at source from foreign income.
  • If amount of WHT is given, add back to net income to give gross amount.

DTR is lower of:

(i) O/S tax suffered, and
(ii) UK CT attributable to O/S income (using effective rate).

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O/S Branch v Subsidiary

CT Profits & Divs

Can elect for B to be exempt, then none of this applies to B

B: IF Control from UK, π added to UK trading π

IF trade same as UK, incl in trading π and relief available for losses

DTR

S: π remitted to UK chargeable but DIVS not assessable and Int Income from Loan to O/S S is ASSESSABLE

 

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O/S Branch v Subsidiary

Loss Relief

Can elect for B to be exempt, then none of this applies to B

B: relief in UK unless can be relieved o/s

UK loss relief against O/S π

S: UK loss not surrender O/S

If O/S loss in 75% Subs in EEA can surrender to parent

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O/S Branch v Subsidiary

Capital Allowances

Can elect for B to be exempt, then none of this applies to B

B: Available

S: Not available

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O/S Branch v Subsidiary

CGT

Can elect for B to be exempt, then none of this applies to B

B: subject to and ROR available, losses utilised

S: not assessed

31

O/S Branch v Subsidiary

CT

 

B: no impact

S: Is an Associated Co  ⇒ limits for MR reduced

32

CT

 

CFC

If CO considering setting up O/S SUB, it will be attracted to countries with low tax rates
Anti avoidance legislation = known as Controlled Foreign Companies (CFCs)) for this purpose.

CFC: non UK RES CO controlled by UK RES CO and/or individuals, and has artificially diverted profits from UK

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CT

 

CFC CHARGE

 

Arises based on the chargeable profits of UK CO S/H if:

  • UK CO owns at least a 25% interest in CFC unless an exemption, or restriction on the profits apportioned, applies

No CFC charge arises on individual shareholders

Chargeable profits = income of CFC (but not chargeable gains) artificially diverted from UK, calculated using UK tax rules

34

CT

 

CFC - no profits

CFCs are regarded as having no chargeable profits (∴ no CFC charge) if any conditions satisfied:

– CFC does not hold any assets or bear any risks under any arrangements / tax planning schemes intended to reduce UK tax
– CFC does not hold any assets or bear any risks that are managed in UK
– CFC would continue in business if UK MGMT of its assets and risks ceased

35

CT

 

Exempt from CFC if...

(1) Exempt period - first 12m of O/S CO coming under control of UK RES if:

– continue to be a CFC in following actg period, and
– not subject to a CFC charge.

(2) Excluded territories - HMRC provide a list of approved territories where rates of tax are sufficiently high to avoid a CFC charge arising. If CFC is RES there, no CFC charge arises.

(3) Low profits - CFC’s TTP ≤ £500,000 where also ≤ £50,000 comprises non-trading profits.

(4) Low profit margin - CFC’s actg profits ≤ 10% of relevant operating exp.

(5) Tax exemption - Tax paid in O/S country ≥ 75% of UK CT which would be due if CFC were UK RES

36

CT

Overseas Companies and Groups

O/S Company is part of a gains group (over 75%) but cannot enjoy reliefs

All associated companies in a group are associates, even O/S