Purchase of shares in UK resident company
Transfers of (or agreements to transfer) shares in a UK company are typically subject to UK stamp duty at a rate of 0.5% of the consideration.
UK tax residence
A company is typically treated as tax resident in the UK if it is incorporated in the UK or if it is "centrally managed and controlled" in the UK.
Under the UK-China double tax treaty (DTT), if a company is a resident of both the UK and China, then it is deemed to be a resident only of the state in which its place of effective management is situated.
Corporate income tax rate
The current main rate of corporation tax in the UK is 25%.
Equity financing from Chinese resident parent company to UK resident subsidiary
The tax treatment of a capital contribution to a UK resident company is unclear, and there is a risk it may be subject to UK corporation tax. A subscription for equity in a UK resident company is tax free for the UK resident company.
No stamp duty should arise on a share subscription.
Withholding tax on dividend payments to Chinese parent company
There is generally no withholding tax (WHT) on payments of dividends by a UK company.
However, Property Income Distributions (PIDs) paid by UK REITs are subject to WHT at 20% (subject to certain exemptions). The Chinese parent company may be entitled to reclaim some of this WHT under the UK-China DTT, which provides that WHT on PIDs paid by UK REITs shall not exceed 15% of the gross amount of the PIDs.
Debt financing from Chinese resident parent company to UK resident subsidiary – tax deductibility of interest payments
The UK resident subsidiary may be entitled to UK corporation tax deductions for interest that it pays in respect of a loan from the Chinese resident parent company.
However, the following UK rules may result in tax relief for the interest expense being denied or limited, depending on the circumstances:
- the loan relationship rules;
- the transfer pricing rules;
- the hybrid tax mismatch rules; and/or
- the corporate interest restriction.
Debt financing from Chinese resident parent company to UK resident subsidiary – withholding tax on interest payments
Payments of UK-source yearly interest are generally subject to UK WHT at 20%, unless an exemption applies.
Under the UK-China DTT, WHT on interest shall not exceed 10% of the gross amount of the interest. Where applicable, the Chinese resident parent company must apply to the UK’s tax authority (HMRC) for double taxation relief to reduce the WHT payable in respect of the interest payments.
Intellectual property – withholding tax on royalties paid to Chinese parent company
Subject to certain exceptions, UK WHT at 20% applies to royalty and other payments in respect of intellectual property including: copyright of literary, artistic or scientific work; any patent, trade mark, design, model, plan, or secret formula or process; and any information concerning industrial, commercial or scientific experience.
However, relief to reduce the UK WHT may be available under the UK-China DTT, which provides that WHT on royalties shall not exceed:
- 10% of the gross amount of the royalties; or
- in certain cases, where payments are consideration for the use of, or the right to use, industrial, commercial or scientific equipment, 10% of the adjusted amount of the royalties (meaning 60% of the gross amount of the royalties), i.e. 6%.
Intellectual property – tax treatment of licence granted by Chinese parent company to UK resident company
UK Value Added Tax (VAT) may apply to an intellectual property licence granted to a UK licensee.
Intellectual property – tax incentives
UK tax credits may be available for research and development (R&D) activities.
The UK’s patent box regime offers an optional reduced UK corporation tax rate of 10% on profits derived from patents and similar intellectual property.
Intra-group transactions – anti-avoidance rules including transfer pricing
Various UK anti-avoidance rules may be relevant to intra-group transactions (in addition to the anti-avoidance rules mentioned above in relation to the tax deductibility of interest payments). These include:
- the general anti-abuse rule (GAAR);
- the disclosure of tax avoidance schemes (DOTAS) rules; and
- the transfer pricing rules.
Sales tax/VAT
UK VAT may apply to goods and services provided and received by a UK-established business, depending on the type of supply.
Typically, a business can offset the VAT it pays on received supplies (input tax) against the VAT it charges on its own supplies (output tax), paying or reclaiming the difference.
Certain supplies, such as some financial services and some supplies of real property, are exempt from VAT. Input tax is not deductible if the relevant supplies are used by the business to make exempt supplies.
The current standard rate of VAT in the UK is 20%. Depending on the nature of the supply, a reduced rate of 5% and a 0% “zero rate” (which allow input tax recovery) may apply instead.
Pillar Two
The UK’s multinational top-up tax (MTT) and domestic top-up tax (DTT) form part of the UK’s implementation of the OECD’s global anti-base erosion (Pillar Two) rules, which ensure that the effective tax rate (ETR) of the largest multinational groups is at least 15% in each territory in which they operate. MTT and DTT, which constitute the UK’s adoption of a qualifying income inclusion rule and a qualifying domestic minimum top-up tax (respectively) under the Pillar Two rules, apply for accounting periods beginning on or after 31 December 2023.
MTT is payable in respect of members of a multinational group (which has at least one group member located in the UK) which are located outside the UK, whereas DTT is payable in respect of qualifying entities which are located in the UK. MTT and DTT apply, broadly, to groups or entities (as applicable) which have revenue in excess of €750m in at least two accounting periods within the previous four accounting periods.
The UK has introduced an undertaxed profits rule, with effect for accounting periods beginning on or after 31 December 2024. This measure brings into charge in the UK a share of top-up taxes that are not paid under another jurisdiction’s income inclusion rule or domestic minimum top-up tax rule.
Use of trading losses
A UK resident company that has incurred a trading loss in an accounting period (the relevant accounting period) can generally (subject to certain restrictions) use that loss to reduce its liability to corporation tax by:
- setting it against total profits from the relevant accounting period;
- setting it against total profits of the 12 months preceding the relevant accounting period; and
- carrying it forward to offset future total profits of later accounting periods.
Surrendering losses within group
If a UK resident company is part of a group, other group members may be able to surrender losses to it under the UK group relief rules. If other group members are UK resident companies or non-UK resident companies with UK permanent establishments, they may be able to receive losses from other group members.
Payroll taxes relating to employing staff in the UK
In general, the employees of a UK resident company who work in the UK will be subject to UK income tax and National Insurance contributions (NICs) on their employment income and benefits.
The UK resident company is responsible for deducting these amounts from employees’ pay and remitting them to HMRC under the pay as you earn (PAYE) system.
The UK resident company will also be liable to pay employer NICs in respect of its employees. Broadly, employers are liable to pay the following classes of NICs (at a rate of 15% from 6 April 2025):
- Class 1 secondary contributions, in relation to earnings from employment; and
- Class 1A and Class 1B NICs in respect of expenses and benefits they give to their employees.
Tax issues relating to secondees sent from China to UK resident company
In general, remuneration paid to a Chinese resident individual in respect of an employment exercised in the UK may be taxed in the UK. However, the remuneration is instead generally taxable only in China if:
- the secondee is not present in the UK for more than 183 days in any 12 month period commencing or ending in the relevant fiscal year;
- the secondee’s remuneration is paid by, or on behalf of, a non-UK resident employer; and
- the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the UK.
HMRC interpret the term ‘employer’ in this context to mean the ‘economic employer’ rather than the legal one. Therefore, they do not consider the exemption to apply when the UK resident company using the secondee’s services bears the cost of the secondee’s salary.
The UK does not have a reciprocal social security agreement with China and therefore the secondee’s earnings in the UK will be subject to UK NICs. However, there is a 52-week period during which no UK NICs are payable if the secondee is:
- not ordinarily resident in the UK;
- not ordinarily employed in the UK;
- assigned to the UK for an employment primarily based outside the UK;
- assigned by an employer with a place of business outside the UK (even if the employer also has a place of business within the UK); and
- employed for a time in the UK as an employed earner.
Tax on disposal of shares in UK resident company
Non-UK resident companies are subject to UK corporation tax on chargeable gains realised on disposals of holdings in companies that derive at least 75% of their value from UK land, where (broadly) the non-UK resident company has held a 25% interest in that company at any time in the two year period ending with the date of the disposal (subject to an exemption for trading companies).
The UK’s substantial shareholding exemption provides that a gain from the sale of shares by a company is not taxable in the UK if certain conditions are met. Broadly, this exemption applies when a company sells a trading company in which it has held at least a 10% equity interest for a continuous 12 month period within the six years prior to the disposal.
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