UK Taxation of Overseas Investment and Business Activities

Introduction to overseas aspects

A person, including a company, whose investment or business activities involve operations in more than one country will have to consider the tax rules of each country. Advisers in this field are often termed ‘international tax specialists’.

Although there is a tendency to think of international tax as one topic, the criteria by which each country levies taxes differ.
The UK levies income tax and capital gains tax (CGT) by reference to residence, ordinary residence or domicile for individuals. Residence and ordinary residence are not defined in the Taxes Acts. The meanings of these two terms are largely based on rulings of the courts. The meaning of ‘residence’ for tax purposes is the same as that which is found in the Oxford English Dictionary, where the word ‘reside’ has been defined as:

‘to dwell permanently or for a considerable time, to have one’s settled or usual abode, to live in or at a particular place.’

For companies, there is a statutory test of residence. If a company is incorporated in the UK it is resident here. However, even if a company is not incorporated in the UK it may still be resident in the UK by reference to older rules. These rules are also based on rulings of the courts. The court-based rules show that a company is resident where its central management and control are situated and, if this is the UK, the company will be resident in the UK for UK tax purposes.

Liability to inheritance tax (IHT) depends upon domicile. Even then there is a separate understanding of domicile for IHT and income tax or CGT. It is important to note that, although a person can be resident in the UK, an individual will have a domicile in one of its constituent countries, that is, England (meaning England and Wales), Scotland or Northern Ireland.

Furthermore, some countries have a different understanding of residence for both companies and individuals. Because of the different rules, it is possible for a person, including a company, to be resident in more than one country. Similarly, it is possible for a person to be resident in no country for taxation purposes.

In addition to any tax implications, there are some other, non-tax, implications. For example, Dubai has no tax system to speak of but there are restrictions on who can trade in that country. Most Dubai partnerships need a Dubai national as one of the partners. There are also restrictions on buying property in Jersey. The list could continue.

A person whose investment or business activities involve operations in a number of countries may be liable to tax in more than one of them. On the other hand, it may be possible to avoid tax in some of the countries concerned.

The criteria by which each country seeks to levy taxes are varied and will not necessarily correspond in any given case with the criteria used by another country. The UK levies tax by reference to residence and, for individuals, ordinary residence and domicile, and by reference to the location of the source of income. Its policy is broadly to tax the income and capital of persons domiciled and resident in the UK, regardless of the locality of their income or assets, but only to tax the UK income and capital of non-domiciled and non resident persons.

Some countries tax their citizens, wherever resident; others levy taxes only on local income and capital, regardless of the owner’s status. Others deliberately create tax-free statuses, such as offshore trading or exempt holding companies.