UK tax considerations for international investors

Mark:
Hello and welcome to TLT’s international tax video series, Five Essential Questions, where we explore key tax issues for businesses operating across borders in just 10 minutes.

I’m Mark Braude, Head of TLT’s corporate tax and real estate tax team.

I’m delighted to be joined again by Peter van Velthoven, Senior Associate at Holla, specialising in tax and real estate, who’ll be asking me some questions today about the UK tax market.

Peter:
Thanks, Mark. It’s great to be speaking with you again.

I’ll be putting five key questions to Mark on the UK tax jurisdiction. Mark has extensive experience advising businesses on tax structuring and complex international tax matters across multiple sectors and jurisdictions.

We’re going to discuss why the UK continues to be an important destination for international investment, the practical tax considerations for businesses entering the UK market and the developments organisations should be watching.

Okay, Mark, let’s start with the first question. The UK has long been regarded as an attractive destination for international investment. Why does the UK continue to appeal to overseas businesses, and what makes it such an attractive place to invest?

Mark:
Thanks, Peter.

Yeah. So, even notwithstanding Brexit, the UK remains a seriously attractive option for international groups seeking to get a foothold in Europe. For example, the UK benefits from a skilled English-speaking workforce, a world-class professional services sector, proximity to key European markets and, of course, a mature capital market centred on the City of London.

Its time zone also facilitates business with both the US and Asia, and that’s an advantage which is often underestimated.

From a legal perspective as well, the UK benefits from a well-established legal system which is widely recognised and respected by international communities. Contracts governed by English law are routinely used in cross-border transactions worldwide, and this provides a degree of certainty and predictability that many international businesses value really highly.

And, of course, from a tax perspective, the UK has one of the most extensive networks of double tax treaties in the world, covering more than 130 jurisdictions. This network serves to reduce withholding taxes on dividends, interest and royalties flowing in and out of the UK, which makes it an efficient and desirable location to set up a regional holding company in Europe.

There are two key features of the UK tax regime which make the UK genuinely competitive as a holding company location. Firstly, dividends received by UK companies from overseas subsidiaries, in most cases, are exempt from UK corporation tax.

Secondly, capital gains on the disposal of qualifying shareholdings may also be exempt from UK corporation tax through what we call the substantial shareholding exemption.

Finally, the UK Government has continued to signal its commitment to remaining an attractive destination for international investment through other tax measures, such as the Patent Box, generous research and development reliefs, and permanent full expensing for capital investment. We can discuss some of that a bit later on.

So, taken together, these factors sustain the UK’s position as a leading entry point for international groups.

Peter:
Thank you, Mark. It sounds really good.

We’ve heard a bit already about the tax system, but turning a bit deeper into the tax system, what should international businesses understand about the UK tax landscape before investing or establishing operations in the UK?

Mark:
Yeah. So, the UK corporate tax system has several important features that foreign investors need to understand before setting up a presence here.

Companies that are tax resident in the UK are subject to corporation tax on the profits they make. The tax rate is currently 25%. It has gone up over the last decade, I’d say, but remains competitive.

That 25% rate applies for companies with profits exceeding £250,000. There is a reduced rate of 19% for profits below £50,000 and marginal relief for companies with profits between £50,000 and £250,000.

These thresholds are divided amongst all associated companies, so groups with multiple entities need to consider this carefully.

If the overseas company has a UK permanent establishment, that taxable presence will be subject to the same corporation tax rates as a UK subsidiary. However, the UK double tax treaty and the application of treaty relief mean that the overseas company won’t usually be taxed twice on the same profits.

As I mentioned earlier, the UK doesn’t withhold corporation tax on dividends paid to overseas parents. Also, a UK subsidiary may be entitled to tax relief on certain interest payments and other funding costs that are paid on debt funding, like loans from overseas parent companies.

However, specific UK tax rules, like in many other jurisdictions, have regimes such as transfer pricing, which limit what a UK subsidiary company can deduct from its profits for things like finance costs, royalties and service fees.

I’ve mentioned already what we call SSE. This is the UK substantial shareholding exemption, and this can eliminate corporation tax on capital gains arising on the disposal of shares by a UK company in its qualifying trading subsidiaries. This is a valuable feature for groups that wish to restructure over time.

Another key feature, as I touched on earlier, is the UK Patent Box regime. This regime taxes income derived from qualifying intellectual property at an effective rate of 10%. This is particularly relevant for groups with significant IP assets that are considering where to locate those assets.

Moving on to the UK’s start-up and scale-up ecosystem, there are some well-established tax reliefs which are designed to incentivise investment. In particular, you’ve got what we call the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme. These provide significant income tax and capital gains tax reliefs to qualifying investors.

A number of the company eligibility requirements have been recently relaxed, which further enhances the attractiveness of these regimes.

Then you’ve also got the enterprise management incentive share options, which are known as EMI. This is a tax-efficient mechanism for attracting and incentivising talent in growing companies. They’re a distinctive feature of the UK landscape.

So, these tax reliefs we see and advise on quite regularly. You can see a number of different ways in which the UK tax regime seeks to incentivise people.

Peter:
Thank you, Mark.

I think the UK tax regime sounds very attractive for international businesses, but of course, once a business is established, tax compliance also becomes an important consideration.

What are the key tax compliance and reporting obligations for international businesses in the UK, and what should they be aware of when operating in the UK?

Yeah. Getting to grips with the compliance obligations of operating in the UK is really important for any inbound investor, and it’s important to understand and plan for these at the outset.

UK companies are subject to the self-assessment regime for corporation tax, and the UK’s tax authority, HM Revenue and Customs, must be notified of a company’s chargeability to corporation tax within three months of commencing business activities.

The company is going to file its corporation tax return, which is known as a CT600, with HMRC annually within 12 months of the end of its accounting period, and usually pay any corporation tax due within nine months after the end of the accounting period.

But UK tax compliance for companies in the UK goes beyond just corporation tax. UK companies will also be responsible for withholding tax and employee National Insurance contributions on salaries paid to UK-based staff, and for employer National Insurance contributions.

If a company makes, or intends to make, taxable supplies of goods and services, and those supplies exceed the UK registration threshold, which is currently £90,000, the company will need to register for VAT.

A VAT-registered company must generally submit VAT returns to HMRC every three months, although HMRC may request greater frequency.

So, those are the basic compliance obligations, but HMRC is also placing a greater emphasis not just on the technical correctness of a tax position and a tax return, but also how and why those positions were reached.

This means that businesses operating in the UK are increasingly being expected to demonstrate a clear and contemporaneous audit trail of their decision-making when it comes to tax.

HMRC will often expect taxpayers to be able to demonstrate why a position was taken, how uncertainty was identified and assessed, what advice was relied upon, how that advice was reflected in the tax return and what governance processes supported the decision.

So, as you can see, there are a number of things that need to be considered from a compliance perspective in the UK.

Peter:
Thank you, Mark.

Looking at recent developments, which tax changes or policy developments are currently having the greatest impact on businesses operating in the UK?

Mark:
Yeah. So, there are a number of current areas of policy development in the UK which I think are worth highlighting today.

It’s worth pointing out that UK tax policy is increasingly focused on encouraging business investment through a more generous capital allowances regime.

Back in 2023, the Government made full expensing permanent, and that enabled companies to deduct 100% of the cost of qualifying new plant and machinery in the year of purchase, rather than spreading relief over a number of years.

We’ve seen this expand further earlier this year with the introduction of a new first-year 40% capital allowances regime for expenditure, such as assets used for leasing, which weren’t covered by the first-year allowances.

Again, this is designed to further encourage investment. These are meaningful improvements for capital-intensive businesses and certainly a really positive signal about the UK’s approach to investment incentives.

Something that we see a lot of also is what we call employee ownership trusts. This is a special type of discretionary trust established to hold a controlling interest in a company for the benefit of its employees.

This is an area which continues to go from strength to strength as a credible and attractive exit for UK businesses.

We have seen recent changes to the tax treatment of employee ownership trusts, which have scaled back the capital gains tax relief available to selling shareholders. But this has, I think, just sharpened the focus on what really makes employee ownership compelling.

A sale to an employee ownership trust can offer families a tax-efficient way to exit their business while preserving the ethos, culture and values of their business, and rewarding those who have worked hard to make it a success.

Just a couple of other points to make as well. In July 2026, HMRC intends to launch an advance tax certainty service for major projects as part of the UK Government’s commitment to boosting long-term economic growth.

Provided that certain conditions are satisfied, the taxpayer will be able to apply for clearance from HMRC to confirm how HMRC will apply tax legislation to a particular project.

Both UK and non-UK resident entities investing in the UK may be able to apply for clearance if, broadly, it’s expected that UK expenditure over the lifetime of the project will be no less than £1 billion.

Finally, we’ve seen the recent implementation of Pillar Two in the UK, and this remains a live area of focus for many multinational groups.

Understanding how the UK rules interact with other jurisdictions, including the Netherlands, is an important practical consideration for any group with operations in both countries.

Peter:
Okay, Mark.

Finally, taking this all into account, if you could leave international businesses considering investment in the UK with one practical piece of advice, what would it be?

Mark:
I think my one piece of advice would be to engage specialist UK tax advice at the very earliest stage of your planning.

The UK tax system has plenty of attractions, as we’ve talked about today, such as the extensive treaty network, the corporation tax rates and the valuable reliefs that we’ve talked about.

But, like any mature tax system, it carries significant complexity. The rules governing interest deductibility, transfer pricing, controlled foreign company rules and hybrid mismatches all require careful analysis in the context of any international group structure.

Getting the structure right from the outset is almost always more straightforward and more cost-effective than attempting to restructure at a later stage.

In particular, we would encourage Netherlands-based groups to consider carefully how the UK fits within their wider European and global structure.

This means taking account not only of UK domestic law, but of the UK-Netherlands Double Tax Treaty, which remains an important instrument governing the tax treatment of dividends, interest, royalties and capital gains flowing between the two countries.

The UK is generally open to international investment, and the UK tax system can be navigated effectively and efficiently with the right advice.

The key message is not to leave tax planning as an afterthought. Decisions made at the point of entry, around things like corporate structure, financing and the location of intellectual property, will have long-term consequences. The value of early specialist engagement in this area simply can’t be overstated.

Peter:
Thank you. That’s very interesting for Dutch and international companies looking to invest in the UK. Thank you for sharing your insights on the UK market.

Mark:
Thanks, Peter. It was great speaking with you.

Peter:
For further insight and to watch upcoming episodes, please visit the TLT website. And, of course, you can also connect with Mark or myself on LinkedIn.

Thank you for watching.