How to Avoid Double Taxation of Company Profits

UK-resident companies are subject to UK Corporation Tax on all taxable profits, regardless of whether that income arises in the UK or overseas. However, your company may be liable to double taxation on its foreign income if it trades through a fixed place of business outside the UK. Similarly, if your UK-registered company is deemed tax resident in another country.

In these situations, you can (usually) claim exemption or relief through a Double Taxation Treaty (DTT). Doing so will prevent your company from being taxed twice on the same income in different countries. Not all countries operate a DTT with the UK, but unilateral relief is typically still available.

Double taxation and company residency are complex areas, so we would urge you to seek professional advice from a tax specialist. This post provides an introductory overview for information purposes only.

Paying UK Corporation Tax on company profits

Typically, UK-resident companies pay Corporation Tax in the UK on their worldwide profits. This includes the following sources of income generated in the UK and abroad:

Trading profits from the sale of goods or services
Investment income, including dividends received
Capital gains (profits) made on the sale of business assets for more than they cost

Depending on your company’s total annual profits from all sources, it will be liable to UK Corporation Tax of between 19% and 25%. This tax is payable to His Majesty’s Revenue and Customs (HMRC), the UK tax authority.

Is my company resident in the UK?

Companies are normally regarded as resident in the United Kingdom for tax purposes if they are incorporated in the UK. Or, for companies incorporated abroad, if the central management and control of their business is based in the UK. This is the place where the company’s real business is carried on.

Generally, UK-resident companies are not liable to overseas corporate taxes on their foreign income, unless they trade through permanent establishments (fixed places of business) in the countries where that income arises.

This means that if you sell goods or services to overseas customers via a website, profits from those sales will usually be liable to Corporation Tax in the UK only – not in the countries where your customers are physically located. In this circumstance, there is no double taxation.

Whereas, if your UK-resident company sells goods or services through a permanent establishment (PE) in another country, the foreign profits arising through the PE may be taxable in both the UK and the overseas country. As a result, your company would suffer double taxation.

However, working out your company’s residence is not always straightforward when trading internationally or running the business from overseas as a non-UK resident individual. If your company’s place of central management and control is determined to be outside the UK, this alone could give rise to double taxation of foreign profits.

There are many factors to consider, so the situation must be examined on a case-by-case basis. We recommend reading HMRC’s internal manual on company residence for detailed guidance. It would also be wise to seek professional advice from an experienced tax specialist.

What is a permanent establishment?

Under UK law, a permanent establishment (PE) is where a business has a physical presence in a country through which it carries out some or all of its activities. It can be either:

a fixed place of business – generally a building or a site (e.g. office, store, factory, workshop) that the company’s personnel can use to carry out the activities of the business
a dependent agent – a person who is not independent of the company and regularly does business for the enterprise, usually by concluding contracts on its behalf

The majority of other countries take the same approach as the UK to corporate taxes and PEs. As a result, UK-resident companies are usually treated in a similar manner in overseas countries.

If you do carry out activities through a foreign (non-UK) permanent establishment and your profits are taxed twice, you may be able to claim tax relief or exemption through a Double Taxation Treaty. This is sometimes referred to as a ‘double tax agreement’ (DTA).

Tax relief and exemption under Double Taxation Treaties

A Double Taxation Treaty (DTT) is an agreement between two states (countries) that effectively overrides their respective domestic laws. It is designed to:

protect individuals and entities (e.g. companies) against the risk of double taxation, where the same sources of income are taxable in two states
provide certainty of tax treatment for cross-border trade and investment
prevent excessive foreign taxation and other types of discrimination against UK business interests abroad

Currently, there are more than 3,000 DTTs worldwide. The United Kingdom has the largest network of treaties, which covers around 120 countries.

GOV.UK provides information on the UK’s Double Taxation Treaties, including related taxation documents and multilateral agreements. More guidance by country is also available in HMRC’s Double Taxation Relief Manual.

The tax treaty mechanism ensures that taxpayers (individuals or entities) are not taxed twice on the same income or profits in two or more countries. The availability of tax relief under a DTT depends on its specific terms, but it generally sets out:

the types of income covered by the agreement
which of the two countries has taxing rights on different types of income
the tax rates that apply
the procedure for claiming exemption or tax relief

If some or all of your company’s foreign income is liable to double taxation, you must first ascertain whether the UK has a double tax agreement with the country in which the permanent establishment is situated.

Where such an arrangement exists, you will need to refer to the treaty to determine where your company is tax resident for treaty purposes. In situations where the UK does not have a DTT with a particular country or jurisdiction, unilateral relief may be available instead.

If the company is considered to be a dual resident of the UK and the overseas country, it may be deemed to be a resident of the country where its place of effective management is based. This is normally in the same country as central management and control, but it may be located at the company’s ‘true centre of operations’, with central management and control exercised elsewhere.

Types of relief from double taxation

Double Taxation Treaties provide three types of relief to taxpayers, depending on the circumstances:

Credit relief allows you to claim a credit against the UK tax liability for foreign tax already paid
Deduction relief allows you to deduct the foreign tax you’ve paid from the taxable amount of foreign profits that are chargeable in the UK
Exemption allows you to apply for tax relief on overseas income or profit before it is taxed

Where a company resides in the UK, HMRC generally provides credit relief against the company’s UK Corporation Tax bill for foreign taxes already paid on overseas income. The credit then reduces the UK tax liability to provide relief.

Any credit is usually limited to the lower of the two countries’ applicable tax rates. This means that the company may have to pay additional UK Corporation Tax on its overseas profits if the foreign rate of tax already paid is lower than the UK rate.

However, a UK company with a foreign permanent establishment can elect for profits or losses attributable to that foreign branch to be exempt from Corporation Tax in the UK. Foreign branch exemption may be advantageous where the rate of overseas corporate tax is lower than the rate of UK Corporation Tax, since the taxation of those foreign profits will be limited to the overseas tax rate.

Claiming double taxation relief or exemption

There are different ways to claim tax relief or exemption from double taxation. It depends on whether your company’s foreign profits have been taxed already.

Applying for tax relief before your company is taxed on foreign income

Where overseas profits are exempt from foreign tax but are taxed in the UK, you need to apply for tax relief in the country where the income arises (i.e. the overseas country). Likewise, if this requirement is specified under the double taxation agreement between the UK and that country.

To do so, you need to request a form from the relevant overseas tax authority. Before applying, you must prove that your company is eligible for tax relief by either:

completing the form and sending it to HMRC – they will confirm whether the company is UK resident and then send the form back to you
including a UK certificate of residence for the company (if you are applying by letter)

Once you have the proof, you can send the form or letter to the overseas tax authority.

If your company has already paid tax on its foreign income

When applying for relief from UK tax, you claim credit relief by completing box 450 on the Company Tax Return (form CT600). Your computations should include a detailed calculation of the figure, as well as details of any underlying tax relief claim.

If you have supporting documentation that may be helpful or relevant to the claim, you can attach this to the tax return before submitting it to HMRC.

The amount of tax relief you receive depends on the particulars of the double taxation agreement between the UK and the country in which the foreign income arose.

You may not get back the full amount of foreign tax that you’ve paid. You’ll get back less if either:

a smaller amount is set by the country’s DTA
the foreign profits would have been taxed at a lower rate in the UK

You cannot claim this relief if the Double Taxation Treaty requires you to claim tax back from the foreign country where the income arose.

Claiming reduction relief

If you want to claim relief by deduction, you need to deduct the foreign tax you’ve already paid from the company’s overseas profits you declare to HMRC. You’ll show this in the relevant computation you provide with your Company Tax Return.

Claiming foreign branch exemption

To claim foreign branch exemption, you must make an election to HMRC at the Corporation Tax office that deals with your Company Tax Return.

You will find this information on any letters you’ve received from HMRC regarding company tax. Alternatively, contact the Corporation Tax helpline on 0300 200 3410 (or +44 151 268 0571 if you’re outside the UK).

You must ensure that HMRC receives the election before the start of the first accounting period to which it relates. There is no special form to complete and no prescribed wording.

Thanks for reading

Double taxation is an incredibly complex topic and there are many variables to consider. These include company residency, permanent establishments, and central management and control.

It’s not always possible to avoid double taxation if you trade internationally or run a UK company from overseas. However, where company profits are taxable in two or more countries, you can usually claim relief or exemption through Double Taxation Treaties.

Aside from Corporation Tax, there may be other types of double taxation liabilities to consider. This includes Value Added Tax (VAT) on business turnover, as well as tax on personal income if you’re a non-UK resident director and shareholder. We discuss these matters in the following blog post: How does double taxation work?

If you find yourself in a situation where your business or personal income is liable to tax in more than one country, we strongly advise that you seek expert guidance from a tax professional specialising in international tax matters.

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