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Setting up an overseas company to lend funds is an attractive proposition for many, particularly those looking to invest in properties or settle existing mortgages. However, navigating the complex world of tax implications and staying compliant with HM Revenue and Customs (HMRC) regulations can be challenging. In this article, we discuss the key considerations and provide essential guidance links from HMRC for anyone contemplating this route.
Overseas Company Management and Control
To establish an overseas company for lending funds, the first issue to tackle is the company’s residence. A foreign company is considered a UK resident if managed and controlled from UK. To ensure your overseas company’s status, an independent board of directors must exercise control over its management and business from outside the UK. More information on UK company residence can be found in HMRC’s guidance: Company Taxation Manual – CTM34000.
Anti-Avoidance Rules and Business Motive
UK resident shareholders or beneficiaries of the foreign company must be aware of the anti-avoidance rules that can attribute the company’s income to them personally. You must demonstrate a clear business motive for using the overseas company to avoid this. Failing to do so may lead to unintended tax implications. HMRC’s guidance on the General Anti-Abuse Rule (GAAR) is available here: General Anti-Abuse Rule – GAAR.
UK Tax Implications
If you can establish a clear business motive and proper management of the overseas company, it would be exempt from UK corporation tax on foreign income. This means any profits from lending activities carried out overseas, without a UK source, would be free of UK tax within the company. However, transferring funds to a UK resident shareholder would be subject to income tax. More information on UK tax implications can be found in HMRC’s guidance on Double Taxation Relief.
Jurisdiction and Bearer Shares
Choosing the best jurisdiction for setting up an overseas company depends on local taxation laws, political stability, and ease of doing business. Bearer shares, which don’t record the owner’s name, may seem advantageous for privacy reasons, but they are not recommended. Many jurisdictions have banned or restricted their use due to concerns about money laundering and tax evasion.
In conclusion, setting up an overseas company for lending funds is possible, but you must carefully consider the tax implications and adhere to HMRC guidelines. Ensuring proper management and control, demonstrating a clear business motive, and understanding the tax consequences are crucial to avoiding pitfalls and staying compliant with UK tax laws. You can contact our specialist tax advisors to review your case-specific facts and circumstances to ensure proper tax treatment and compliance with UK tax laws.