The UK will be as attractive as Luxembourg to foreign companies looking to set up European headquarters if the Treasury realises plans in its foreign company profits consultation, senior advisers said.

The long-awaited consultation outlines radical reforms to the taxation of international groups. Foreign company dividends paid into the UK are to be exempted from tax, and interest relief will remain virtually unchanged.

These changes, coupled with other tax rules, could see the UK topple popular headquartering venues such as Luxembourg for foreign groups seeking a European base, but may also attract further accusations that the UK constitutes a tax haven.

‘The reforms in the consultation will create a headquartering regime in the UK that is just as attractive as Luxembourg,’ said Bill Dodwell, head of tax policy at Deloitte.

He said: ‘There will be no tax dividends, there is a lower corporate tax rate in the UK, there is no dividend withholding tax, there is capital duty exemption and no capital gains tax on substantial shareholdings. We have all the advantages.’

Under the proposals in the consultation, a foreign company could set up a UK sub-holding group that has subsidiaries across Europe and can enjoy all the tax benefits on offer in the UK.

The picture for UK-based multi-nationals is not as attractive, as they will have to comply with tight and possibly complex rules for the use of controlled foreign companies that international groups will not have to be concerned about.

‘UK multinationals that use CFCs will have to show that these subsidiaries are appropriately capitalised. The definition of this is still to be defined, which is of concern as most CFCs are funded completely with equity,’ Dodwell said.

Chris Morgan, head of international tax at KPMG, said there was also concern over how broadly the Treasury would define what amounts to active income and passive or mobile income.

‘There are two pillars to this consultation. Active income that comes into the UK will not be taxed again, but passive or mobile income will be taxed at the UK rate, no matter where it is earned,’ he said.

Morgan said if the definition of passive income was widely drafted, then income from Treasury functions or shared service centres could be taxed at the full UK corporate rate.