Entity classification

By Tolley in association with Robert Langston of Saffery Champness
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The following Corporation Tax guidance note by Tolley in association with Robert Langston of Saffery Champness provides comprehensive and up to date tax information covering:

  • Entity classification
  • Implications of entity classification
  • Classification of a foreign entity
  • Classification of return from a foreign entity
  • Ordinary share capital in a foreign entity
  • Use of hybrid entities in international tax planning
  • Further reading

Implications of entity classification

If a subsidiary is established, it is important to determine how it will be treated for UK tax purposes as this will determine the basis on which it is taxed. A subsidiary may either be transparent (like a partnership, where the individual partners are taxed rather than the partnership as an entity itself) or opaque (like a company, which is taxed in its own right).

If a subsidiary is transparent then any UK members (who may be shareholders, beneficiaries, partners or something else) will be taxed on profits as they arise, regardless of whether or not they are distributed. It is also the members who must normally claim benefits under a double tax treaty, as the subsidiary itself is not usually entitled to treaty benefits.

CTA 2009, Part 17; INTM335510

See the following guidance notes:

  • Types of partnership and types of partner (subscription sensitive)
  • Foreign trading income

If a subsidiary is opaque then any UK members will not be subject to tax until the profits are distributed. It may then be necessary to determine how this dividend is classified for UK tax purposes (see ‘Classification of return from a foreign entity’ below). The exception to this is if the controlled foreign company (CFC) or transfer of assets abroad rules apply.

See the following guidance notes:

  • Controlled foreign companies (CFCs)
  • Shareholder tax issues

It may also be necessary to determine if the subsidiary has issued ordinary share capital for UK tax purposes. This will affect:

  • the

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