UK changes ‘will outdo Luxembourg’

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

‘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

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

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.

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