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My client has asked for advice regarding his son who is resident in Sweden and is self employed there. He lives in rented accommodation in Sweden and stays with his parents when he visits them in the UK; these visits do not exceed 90 days per year.
Should the son form a UK registered company to trade in Sweden and then draw income as an annual dividend in respect of the trading profit of the company?
My client has asked for advice regarding his son who is resident in Sweden and is self employed there. He lives in rented accommodation in Sweden and stays with his parents when he visits them in the UK; these visits do not exceed 90 days per year.
Should the son form a UK registered company to trade in Sweden and then draw income as an annual dividend in respect of the trading profit of the company?
Would this only involve a corporation tax liability and not National Insurance payable by the company and directors, and are there any other factors that should be taken into account?
(Query T16,561) — Gustavus.
At first sight this seems an odd proposal. The client is clearly not resident in the UK and has his livelihood in Sweden. So setting up a UK company for the Swedish business would seem unusual to say the least. I imagine that the reason for the proposal is that Scandinavian tax rates are very onerous, and so it is hoped that an advantage could be gained from lower UK tax rates.
Of course, if it were the reverse situation, namely a UK resident looking to form an offshore company to conduct a UK business, then a variety of anti-avoidance provisions would operate to prevent any advantage being gained, in particular TA 1988, s 739. And the Revenue would never accept that an offshore company owned by a UK resident individual is managed and controlled abroad so as to be non-resident. It will be for the client to investigate whether there are similar provisions in the Swedish tax system.
Assuming that there are no such anti-avoidance provisions in Sweden, a UK resident company trading overseas and controlled by a non-resident person would automatically be treated as resident in the UK by virtue of it being incorporated here. It will therefore be within the UK corporation tax régime. Dividends could of course be paid out and the client would have no UK tax liability in respect of them in view of his non-resident status. However, this would leave the corporation tax liability in place.
The alternative would be to pay out the profits as remuneration, thus reducing the corporation tax liability to nil. As a non-resident and non-domiciled employee, the client would have no UK tax liability in respect of the remuneration, so long as no duties are performed in this country. There would also be no liability to NICs. However, I find it hard to believe that the remuneration would escape tax liability in Sweden.
The double tax treaty with Sweden reserves taxing rights in Sweden as regards dividends received from the UK. All in all, the client should research the Swedish tax position very carefully. — Tower.
Generally, I advise my Swedish self-employed clients to form an ordinary 100 % owned Swedish company — aktiebolag (abbreviated as 'AB'). Self employment could, with some complicated paperwork, be arranged to give approximately the same tax results as an AB, but with the latter one will get a limited responsibility and a healthy borderline between money for private consumption and business. It is also much easier to have good control of your tax payments with an AB. One little advantage with being self employed is that, in principle, 30% of the tax bill may be postponed for six years without interest. In an AB it is also possible to postpone part of the tax payments, but only 25%, and from 2005 with a special interest charge.
In the situation at hand, the son is apparently resident in Sweden for tax purposes and I assume that the British company would be regarded as having a permanent establishment in Sweden. If this permanent establishment is the only source of income for the company, I see no immediate tax benefits compared to forming a Swedish AB. The company's Swedish taxation will, as far as I can see, be the same, and so will the taxation of the dividends to the son. However, when saying so I do not take the British tax rules combined with the double tax treaty into consideration. If the British rules combined with the double tax treaty would turn out well, it could still be a good idea to form a British company instead of a Swedish company as this might simplify matters if the son were to move back to Britain in the future. According to Swedish tax law, capital gains on Swedish shares (but not foreign) may be taxed in Sweden up to ten years after the move to another country. The double tax treaty gives some protection against this (see Article 13 para 2). Otherwise, and generally speaking, I think forming a Swedish AB rather than a British company would also avoid the additional administration work of dealing with two countries rather than one. But if he is interested in the maximum postponement of tax payments, it might be best to remain self employed.
