For good reason, the UK is the No.1 destination in Europe for overseas companies to set up their European subsidiary. In an earlier blog why growing US technology companies choose the UK, we highlighted the major reasons for this.
Initially, an overseas company may ‘test the waters’ in the UK by operating from its home country, without taxable ramifications, but if successful a point will come when a more structured presence is required. A common question asked by our overseas clients is what is the most appropriate legal entity for the business? A UK subsidiary (UK limited company) or a UK branch (permanent establishment)?
Doing business in the UK is relatively pain-free, but the structure you choose can have significant consequences and requires careful consideration. Whilst there are similarities both require:
- registration at Companies House (how to register a UK company); and
- registration at HMRC (how to file accounts in the UK as an overseas company),
there are a couple of seemingly small but significant differences.
A subsidiary company (UK limited company)
- The most common method for an overseas company to set up a business in the UK
- A separate legal entity with its own legal personality (even though it is wholly owned by the overseas parent company), so the parent company is not liable for the subsidiary’s operation, debts and liabilities – although the directors of the subsidiary may be
- Many European customers and suppliers prefer dealing with a UK company rather than a branch as it feels more permanent
- Maybe easier to recruit key staff into a subsidiary company as this feels more permanent
- The UK subsidiary company must file the statutory financial statements of the UK subsidiary only at Companies House. If you satisfy two out of the following three criteria, this submission can be by way of Abridged Accounts (balance sheet and notes):
+ A turnover of £10.5 million or less
+ Have net assets of £5.1 million or less on its balance sheet
+ 50 employees or less
- A UK subsidiary is subject to UK corporation tax (currently 19%) on the UK subsidiary’s worldwide profits. Start-up trading losses can only be carried forward against future trading profits in the UK rather than being set against any parent company current year profits
A UK branch (permanent establishment)
- Marginally easier and cheaper to set up than a subsidiary company as it is an extension of the overseas parent company
- A branch can be converted to a subsidiary at a later date if required
- A branch is more easily wound-up in the event that the venture fails
- A UK branch is subject to UK corporation tax (currently 19%) on the profits of the overseas parent company which are attributable to the UK branch. Any start-up losses of the UK branch might be available to the overseas parent company to set against home profits; giving earlier loss relief than for a UK subsidiary (which can only carry the loss against future profits).
- A UK branch is the same legal entity as the overseas parent company so the overseas parent company has full responsibility for the operation, debts and liabilities of the UK branch
- A UK branch does not prepare its own financial statements, instead, it must file (and make public) the overseas parent company’s consolidated financial statements (at Companies House). These financial statements must be filed in a specific UK format and in the English language which may have resource and cost implications.
- There may be a restriction on the use of branch losses in later years or on incorporation to prevent tax relief being claimed twice over in home country and the UK
Ultimately, which type of legal entity, a UK branch or a UK subsidiary, is right for you will depend on your particular circumstances.
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Please Note: This blog should not be considered as advice from Isosceles. Always seek professional advice specific to your circumstances.