Expanding operations into the UK – branching out
As more and more non-UK resident companies look to expand their business operations into the UK, one of the key decisions they face is how to structure their new venture. Many companies choose to establish a branch in the UK, rather than incorporating a subsidiary. Here, we explore the benefits of establishing a branch, the key factors to consider when making this choice and some of the immediate tax implications.
In short, a branch is a place of business that is established by a non-UK resident company in the UK. A branch is considered an extension of the foreign parent company, so is not a separate legal entity. This means that the foreign company is responsible for the actions and liabilities of the UK branch.
Establishing a branch in the UK may provide certain benefits over incorporating a subsidiary, for example:
Simplicity and cost efficiency: Setting up a branch can be a simpler and less expensive process compared to incorporating a new subsidiary, which involves registering with Companies House, appointing directors and complying with UK company law. It is also easier to cease operations of a branch, in case the activities are unsuccessful.
Access to local market: A branch may be better suited for companies that want to operate in the UK for a short period of time and do not want to establish a permanent presence in the country. It may also be easier to access the local market with a branch.
Established brand recognition: It may be that the foreign company already has an established brand and reputation in the UK and prefers to operate under the same name, rather than introducing a different name.
Simplified taxation and easy repatriation of profits: While activities in the UK remain preparatory or auxiliary to the business of the foreign company or if they are being conducted by an agent operating independently, there should be no exposure to UK tax nor any obligation to register with HMRC. However, these benefits depend on the tax status of the branch and whether a permanent establishment is created. If a branch is deemed to create a permanent establishment in the UK, it will be subject to UK tax laws and regulations. This can result in additional administrative and compliance requirements, as well as potential tax liabilities.
What is a UK permanent establishment (PE)?
For corporation tax purposes, the determination of whether a branch has a PE in the UK is a complex issue. Factors requiring careful consideration include the nature of the activities carried out by the branch, the level of autonomy it has in conducting those activities and the terms of any tax treaty between the UK and the overseas jurisdiction.
Broadly speaking, a taxable PE can be created if there is a fixed place of business in the UK through which the business of the foreign company is wholly or mainly carried on. This can be an office, a branch, a warehouse or any other physical presence. A PE can also be created if the foreign company appoints a dependant agent or an employee to work in the UK on its behalf and this person has the authority to bind the company through activities, such as concluding contracts and negotiating terms.
If a PE is created, it is important to consider how to attribute profits to the PE. The profits of a branch are typically attributed to the PE based on its activities and functions. This can be complex and may require the use of transfer pricing methodologies to ensure that profits are accurately attributed.
In addition to corporation tax, a foreign company with a presence in the UK may be liable for other taxes, such as VAT and employment tax. The threshold for a company gaining a presence for tax purposes varies between taxes. These more detailed tax aspects of operating in the UK via a PE will be explored further in a future article.
Other factors to consider
Liability: One of the main drawbacks of establishing a branch is that the foreign company will be liable for the actions of the UK branch. A subsidiary, on the other hand, is a separate legal entity, so the company’s liability is limited to its investment in the subsidiary.
Perception: A branch may be perceived as a temporary arrangement or a lower level of investment which can impact relationships with customers, suppliers, and other stakeholders. A subsidiary may be seen as a more serious commitment to the UK market.
Complexity: While a branch may be simpler to set up and maintain, the potential duplication involved in complying with the UK’s tax, employment, and other regulatory requirements as well as those of its home country may in fact be more challenging than complying with the regulations of a single country, which would be the case with a subsidiary.
Privacy: Overseas companies with a UK establishment are required to register at Companies House which brings with it the obligation to file the overseas company’s accounts annually. Although there are some exemptions from this requirement, this can be unattractive for overseas companies that are not otherwise required to publicly file their accounts.
Help from the experts
The decision to operate in the UK via a branch depends on a range of factors, including the company’s goals and financial situation. It is crucial to seek expert advice to ensure that a branch (and how it is structured) is suitable and complies with all legal and regulatory requirements.
At Moore Kingston Smith, our team of experts can provide comprehensive advice on establishing a branch in the UK, including tax implications, regulatory compliance and legal requirements. Contact us today to learn more about how we can help your business expand into the UK market.