Essential tax considerations for UK companies in multinational groups

A UK company may appear to be small with no complex tax issues when its financial statements are viewed in isolation. However, if it’s a member of a multinational group, there may be unexpected tax issues to consider. We briefly explore a few of these potential issues.

Transfer pricing

Transfer pricing legislation applies to UK companies where, taking all associated enterprises together, either the worldwide headcount is more than 250 or both turnover is €50 million or more and balance sheet assets are €43 million or more. Therefore, a small UK subsidiary with a handful of employees, can be caught by transfer pricing legislation, if part of a large group.

Transfer pricing could also apply to transactions with an enterprise located in a country that does not have a tax treaty with the UK containing an appropriate non-discrimination article.

Where transfer pricing applies, all transactions with connected parties must be recognised on an arm’s length basis. Documentation must be maintained to support the transfer pricing and must be prepared in advance of filing the affected tax return. HMRC can impose a penalty where documentation has not been kept. Typically, HMRC will request delivery of this documentation within 30 days of opening an enquiry.

Deduction of tax at source

A UK company may have to withhold tax (currently at 20%) on payments, including interest and royalties (but not dividends) to foreign companies and other persons. This can be easily overlooked, particularly where payments are made between group companies. The UK’s double taxation agreements may reduce the rate of withholding tax or remove the requirement entirely.

The payer may need HMRC clearance to apply the treaty rates, without which tax must be withheld at 20%.

A UK company may receive payments net of foreign tax, while being taxed in the UK on the gross amount, leading to double taxation. Tax treaties can mitigate overseas tax suffered, but the UK company may need to provide evidence to the payer that it’s eligible to benefit from a treaty, for example, a certificate of residence from HMRC or a country-specific form validated by HMRC. UK tax legislation provides for double taxation relief, but companies should take action to reduce the overseas liabilities, or the relief may be restricted.

Dual residency and permanent establishments

UK incorporated companies are resident in and chargeable to tax in the UK. They may also be chargeable to tax elsewhere if their effective management, or a permanent establishment, is situated in another country.

Many UK subsidiaries of multinational groups have non-UK resident directors, which can create an overseas taxable presence or dual residency for a company. Again, tax treaties and double taxation relief can help mitigate the global tax impact of this.

Once the consolidated revenues of a group exceed €750 million there are additional tax compliance requirements. Please get in touch if this affects your business.

The above is based on tax law and practice effective as of 6 August 2024.

If you’d like to discuss further, then please get in touch with Luke Hanratty.