If a UK limited company carries out business operations overseas (e.g. runs an international office, shop or factory) any profits made abroad will generally need to be added to the overall company profit for the purposes of corporation tax. However, the company may also be subject to foreign taxes.
We will explore how they can claim relief on so-called ‘double taxation’ below.
What taxes does a company with overseas branches have to pay?
There are different taxes which may need to be paid in each individual jurisdiction where a company trades or has a presence.
Aside from country-specific taxation, sometimes states, regions or cities levy their own additional taxes. Certain taxes will be applied at the point of sale (e.g. tax from profits made overseas in addition to UK corporation tax).
However, they can apply for double taxation relief (DTR) which is designed to prevent profits being taxed twice, once by the overseas tax office and again by HMRC.
Alternatively, a UK company can elect for profits of foreign branches to be exempt from UK corporation tax. Under this arrangement, all branches based abroad will be exempt from UK corporation tax. Any losses made by foreign branches will not be able to be offset against profits of the UK company.
How do the double taxation rules work?
The UK has treaties with many countries to avoid the issue of double taxation. If a UK company has a presence in a foreign jurisdiction which has a double taxation treaty with the UK, the company can apply for relief on any tax which would otherwise need to be paid twice (i.e. first in the foreign jurisdiction and again in the UK).
The claim for tax relief will generally need to be made to the foreign tax authority. If tax has already been paid on foreign income, it is possible to apply to HMRC for Foreign Tax Credit Relief.
See GOV.UK for further information.
What tax do I need to pay for international profits made online?
In general, companies which make money online (e.g. by selling goods or services over the internet) only need to pay tax in the jurisdiction where they are based. However, this has led to some large technology corporations, which make significant revenues worldwide, paying minimal tax by basing themselves in a low tax country.
In an effort to extract taxes from these types of companies, the UK has created a digital services tax which places “a new 2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users.” This must be paid to HMRC – no matter where the company is based.
France has its own version, known by some as the GAFA tax, which levies a 3 per cent tax on digital services gross revenue.
As the concept of digital services tax develops, companies which conduct business online should check their liabilities regarding any international transactions.
Company directors and shareholders generally only need to pay tax on salary and dividends in their home country – whether this income derives from the UK or abroad.
However, if they spend time overseas (e.g. have a second home and live there part of the year), they may need to pay tax in a different jurisdiction. But this will also be subject to double taxation rules.