This article like most, is a result of a conversation I had with a couple of clients during their respective meetings. The clients were representing an established oversees business looking to enter the UK market.
One of the questions asked during these discussions was, what options do we have in creating a business establishment in the UK?
There are a number of ways in which an overseas entity can establish a business or acquire business interests in the UK. The principal methods being:
- the incorporation of a limited company
- the setting up of a UK branch or place of business (referred to as a “UK establishment”)
- the establishment of a business by means of joint venture (including a partnership)
- the acquisition of an existing or any interest in an existing company or business
- the appointment of an independent agent or distributor.
The decision as to the most suitable type of business vehicle will depend upon a number of factors, including the nature of the intended activities in the UK, taxation and employment issues, and financing and funding considerations.
This article concentrates on the first two options.
Permanent Establishment (Branch) vs Subsidiary company
A UK branch and UK subsidiary are very diﬀerent, and therefore the two options require careful consideration. For the purposes of this article I have highlighted what are the main diﬀerences below.
A UK Branch is generally deﬁned as a ﬁxed site through which the business of the oversees company is wholly or partly carried on within the UK. It can include an Agent habitually exercising authority to do business on behalf of that company.
Other main points-
- Unlike a subsidiary company, a UK Branch is not a separate legal entity, so claims and liabilities in the Branch can be extended to the main overseas company of which it is services in the UK.
- The repatriation of proﬁts of a subsidiary company can take various forms and is therefore ﬂexible. Timing of the repatriation of the subsidiary proﬁts can be arranged to suit the group tax position.
- Relief for start-up costs and initial trading losses of the UK Branch can be set against the oversees parent company proﬁts for tax purposes. Corporation Tax would be due on any proﬁts made by the branch only.
- There will be a requirement for public disclosure of the subsidiary accounts. There is no cross-border consolidation, so administration can be more straightforward.
- A UK Branch can be easier to establish, and close down if unsuccessful. However, UK customers may prefer to deal with a UK company rather than the branch of an overseas company.
Choosing between a UK branch and a subsidiary
No short answer here.
There is little difference between setting up a UK branch and setting up a subsidiary company: both would require Companies House registration, and similar registration with HMRC for direct tax, VAT and PAYE, where applicable.
A UK branch is easier to wind up, if the UK venture proves unsuccessful, as it is automatically closed when the trade of the branch ceases. In contrast, closing a subsidiary requires a formal procedure (winding-up, striking off, or the appointment of a liquidator).
An overseas parent may prefer the relative anonymity of a subsidiary: a UK branch is required to file the financial statements of the oversees Parent company at Companies House. Where the Parent is not already required to prepare and disclose financial statements, then it will have to prepare accounts for submission to Companies House. In contrast, a UK subsidiary is only required to file its own financial statements.
Ultimately, the choice between a UK branch and a subsidiary will depend on the Parent company's position: for example, regulatory requirements may dictate that a branch is used. For example, certain financial activities require a minimum level of capital which is easier to maintain where the parent company capital is taken into account, instead of having to adequately capitalise a subsidiary.
The Parent company's tax position also needs to be considered. For example, it may be preferable to have a subsidiary in the UK where the UK operations will need to be funded by loans from the Parent company, a UK branch cannot generally have a tax deduction for interest paid to the Parent (where it is, effectively, internal interest), whereas a UK subsidiary will generally have a UK tax deduction for that interest.
There are a number of distinct differences between a branch and a subsidiary in the UK; the key difference from a tax perspective is that a UK branch will be subject to UK corporation tax on the profits of the Parent which are attributable to that branch. A UK subsidiary is subject to UK corporation tax on its worldwide profits.
This is because a UK subsidiary is a separate legal entity to the Parent, whereas a UK branch would have no separate legal existence from the Parent.
As part of this, any start-up losses of the branch should be available to the overseas parent to set against home profits (depending on the tax regime in the parent's jurisdiction); this can make it very attractive to begin operations in the UK through a branch, as this can enable loss relief for start-up costs to be obtained much sooner than if a UK subsidiary company is used, where the start-up losses will need to be carried forward against future profits in the UK.
I hope this outlines some basic advice when weighing up the merits of each of the options. If you require any further clarification, please contact Raffingers on 020 8551 7200.
Roy Butcher is a Partner at Raffingers.