Setting up a holding company in Dubai can sound like an easy way to reduce UK tax. However, incorporating a business overseas does not automatically move its income outside the UK tax system. Where the owners, directors and decision makers remain in the UK, an offshore company may offer little or no tax advantage.
The location shown on the incorporation documents is only one factor. HMRC will consider how the company operates, where important decisions are made and who ultimately owns and controls the income.
(Reading Time: Approx. 5 minutes)
Topics Discussed:
- Why a Dubai holding company may fail when its owners, management and beneficial owners remain in the UK.
- How holding companies can still support succession planning, family ownership, investment and business protection.
The Proposed Dubai Structure
A meeting with the owners of a law firm highlighted a common misunderstanding about offshore companies.
The solicitors operated a law firm and also had a separate property company. The property company was owned by their wives and received rent from the law firm for the premises it occupied.
The owners were concerned about the amount of tax being paid across the businesses. Their liabilities included VAT, PAYE, Corporation Tax and personal tax. They had spoken to several accountants and were considering establishing a holding company.
There was nothing automatically wrong with using a holding company. The problem was that they wanted to incorporate it in Dubai while everyone involved continued to live and work in the UK.
Their proposal was for the rent paid by the law firm to be redirected to the Dubai holding company.
On paper, this appeared to move UK income into another jurisdiction. In reality, paying money to an overseas company does not necessarily remove that income from UK taxation.
Incorporation Is Only One Factor
The place where the company is managed and controlled can be highly relevant. HMRC may consider where relevant decisions are made, who exercises control and where the people responsible for the company are based.
In this example, the solicitors, their wives and the beneficial owners would all remain in the UK. The business activity producing the income would also remain connected with the UK.
Registering a holding company in Dubai would not change those facts.
If the owners continued making decisions from the UK, the offshore company could still have UK tax obligations. The individuals may also remain liable to UK tax on their worldwide income and gains, depending on their residence and personal circumstances.
Redirecting Rent Overseas
The rent arose because a UK law firm occupied a UK property connected with the owners and their families. Redirecting that rent to a Dubai company would not automatically turn it into non-UK income.
Several questions would need to be answered. Which company owned the property, which company was legally entitled to receive the rent and what did the Dubai company provide in return for the payment?
A business cannot normally reduce its tax merely by asking customers or connected companies to send money to an overseas bank account.
If the Dubai company had no employees, premises, independent management or genuine commercial activity in Dubai, HMRC could question whether it had any real purpose beyond reducing UK tax.
When an Overseas Holding Company May Work
An individual may leave the UK, establish a real business overseas and remain outside the UK while meeting the relevant residence requirements. The company may have local directors, employees, premises, customers and genuine decision making overseas.
Anyone considering leaving the UK must review the statutory residence rules carefully. Time spent abroad is not always enough. Family connections, accommodation, working arrangements and days spent in the UK may all affect tax residence.
Legitimate Uses of Holding Companies
A properly planned UK holding company may support succession planning, protect assets and separate risks across a business group.
A holding company may own shares in one or more trading companies. Profits may potentially be retained within the group for reinvestment, future acquisitions or other commercial purposes, subject to the relevant tax rules.
Group structures can also separate valuable assets from higher-risk trading activities. Property, intellectual property or accumulated funds may be held separately from the company dealing with customers, staff and commercial liabilities.
Family investment companies may also be useful in suitable circumstances. They can allow wealth to be managed across generations while giving founders a level of control over investments and future ownership.
Summary
An offshore holding company does not automatically reduce UK tax. Where the owners, beneficial owners and decision makers remain in the UK, incorporating a company in Dubai or another jurisdiction may not produce the expected result.
Overseas structures may work where the owners genuinely relocate and satisfy the relevant tax and residence conditions. They are not generally a substitute for proper UK tax planning while the individuals and business activities remain in the UK.
Holding companies and family investment companies can still provide valuable opportunities for succession planning, introducing family shareholders, reinvesting profits and protecting business assets.
If you are considering a holding company, family investment company or overseas business structure, contact us for specialist advice before taking action.
Fill out our form here, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
