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bigduckontax
bigduckontax, Accountant
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What taxes would be payable in the following scenario

Customer Question

Hi,What taxes would be payable in the following scenario please?A UK domicile and resident natural person is the sole director of a Hong Kong Offshore company. The company does all it's business outside of Hong Kong (equally distributed amongst all the other countries of the world). The director repatriates 100% of the profits - lets say totalling £100,000 per annum - from the Hong Kong company in the form of dividend payments to himself. He has no other sources of income.What taxes would be applicable in this scenario?As far as i can tell, the Hong Kong company would pay 0% corporation tax, and the dividend would be subject to a 15% charge. The company would not be subject to the UK's CFC (controlled foreign company) rules because the profits are under £500,000 pa. But I've also read somewhere that HMRC (the UK tax collector) might see this as a 'transparent structure' for tax reasons and charge a different amount... what do you think?Thank you kindly for your support and insight.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

I am of the opinion that you will be taxed on these dividends as follows. The first 5K is tax free and the balance will be taxed:

100K - 5K - 11K [Personal Allowance] leaves 84K exposed to taxation. The first 32K at 7.5% [2.4K] and the balance at 37.5% [19.5K]; total tax due 21.9K ie a tad under 22K.

Any tax deducted by the HK authorities would, under the Double Taxation Treaty between the UK and HK, be allowed as a tax credit against the UK liability on the same income stream.

I do hope that you have found my reply of assistance.

Customer: replied 1 year ago.
Thank you Keith! Do you know if UK corporation tax would have to be paid as I've heard that an arrangement such as the one outlined above would be 'tax transparent' to HMRC.
Expert:  bigduckontax replied 1 year ago.

I cannot see how the activities of a company domiciled and operating from HK could be assessed for UK Corporation Tax (CT). That is a matter for the HK authorities. CT is only levied on companies not individual shareholders and directors. As an individual you will be paying UK Income Tax (IT) as I explained.

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Expert:  bigduckontax replied 1 year ago.

Thank you for your support.

Customer: replied 1 year ago.
Hi Keith, upon further reading, it seems the company would be a UK tax resident and therefore have to pay UK corporation tax if it is essentially controlled from the UK. Would you agree? Thanks. http://www.out-law.com/en/topics/tax/international-tax-/maintaining-non-uk-tax-residence/
Expert:  bigduckontax replied 1 year ago.

Good old Pinsent Mason. When I was at school one of my school friend's father was a partner in what was then Pinsents!

The key to this is not day to day control, but central control viz:

'Central management and control is not the same as the day-to-day management of the business. Ordinarily, the place where a company is centrally managed and controlled will be the location where the final decisions that bind the company are made. It will be the place where matters of general policy and strategy for the company are made.'

Naturally you will ensure that such decisions are taken outside the UK so the central management and control will not be UK located and thus the liability to UK taxation would not apply.