Re-routing could hold key to cutting tax bills

Re-routing could hold key to cutting tax bills

UK companies could significantly reduce their tax bills by re-routing the bulk of their group financing through Dutch holding companies.

The law, passed by the Dutch Parliament this week, still has to be ratified by the Senate in the coming weeks.

Barring last minute hitches, holding companies registered in Holland will be able to direct ‘qualifying income’, such as interest received from foreign subsidiaries, into a financial risk reserve (FRR). This would allow companies to pay a 7% tax rate on intergroup interest.

Under the law, holding companies can direct as much as 80% of the qualifying income into this account with the remaining 20% then being subject to Dutch corporation tax at 35% – giving an effective tax rate of 7%.

The Dutch Government’s introduction of the FRR is a way of competing with rival tax schemes operating in Belgium (Belgium Co-ordination Centre) and in the Republic of Ireland (The Financial Services Centre Companies).

Tony Hughes, an international tax partner at Coopers & Lybrand, said if UK companies set up under the FRR, they might be able to fall outside the scope of the current UK anti-avoidance provisions on the control of foreign companies. The Belgium and Irish schemes are still covered by the UK’s controlled foreign companies rules.

‘The Dutch scheme applies to holding companies with foreign subsidiaries, therefore the holding companies are exempt under the controlled foreign companies rules,’ said Hughes.

Accountants are warning of an imminent Contributions Agency crackdown on tax avoidance on bonuses paid to high-flying bankers and professionals.

Tax experts claim bonus payments, in the form of life policies, will be challenged, and that the Department of Social Security and the Contributions Agency have a dossier of material to fight with. Employers can avoid national insurance by paying staff in commodities apart from cash.

John Whiting of Price Waterhouse commented: ‘I would expect the Chancellor to announce in November that he was blocking a couple of loopholes.’

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