As UK businesses grow and look beyond domestic markets, establishing an overseas presence becomes a strategic imperative. Whether it’s to access new customers, build supply chain resilience, or take advantage of local incentives, the move brings with it a set of corporate tax challenges and planning opportunities that deserve careful attention.
One of the first decisions a UK company faces when expanding abroad is whether to establish a branch or a subsidiary. At first glance, the difference might seem technical, but the corporate tax implications can be significant.
A branch is not a separate legal entity. It’s an extension of the UK company operating overseas, meaning profits (or losses) from the branch are generally included in the UK company’s tax return. Relief is typically available for foreign taxes paid, but the UK company remains fully exposed to overseas operational and tax risks. Where the branch is loss-making in its early years — as is often the case with new market entry — this structure may offer short-term tax relief in the UK, which can be commercially valuable.
By contrast, an overseas subsidiary is a legally distinct entity. The UK parent company will only be taxed in the UK on the subsidiary’s profits when they are repatriated, such as through dividends — and these may well be exempt under the UK’s participation exemption regime. The downside is that any losses incurred overseas are generally trapped in the local entity and cannot be offset against UK profits. But in jurisdictions with strong regulatory or tax incentives for locally incorporated businesses, a subsidiary may be the better long-term route.
When weighing up the options, corporate tax is only part of the picture. But it remains critical. Double tax treaties, transfer pricing, withholding taxes on intra-group payments, and controlled foreign company (CFC) rules all come into play. For example, where intellectual property or management services are being provided cross-border, the pricing of those transactions must be arm’s length — or risk scrutiny from tax authorities in both jurisdictions.
Moreover, the introduction of global minimum tax rules under the OECD’s Pillar Two framework adds a new layer of complexity, particularly for larger UK groups. Minimum effective tax rates may make some jurisdictions less attractive, or at the very least, require robust modelling of overall group tax impact before entering new markets.
From a planning perspective, there are opportunities too. Holding company structures, hybrid instruments, or the use of financing vehicles in certain jurisdictions can be used to optimise group tax outcomes. But these need to be balanced against substance requirements and evolving global tax norms.
Ultimately, every overseas expansion requires a bespoke analysis. But getting the structure right at the outset — with a clear understanding of both UK and local tax consequences — is essential. Done properly, international expansion can unlock significant value for a UK business. Done hastily, it can create friction, inefficiencies and long-term tax exposure.
At Syon Tax, we regularly advise ambitious UK businesses on their international structuring — from initial scoping to post-establishment tax strategy. If you’re considering a move overseas, or already have international operations in place and want a second opinion, we’d be delighted to support.
