Contracting overseas using your UK limited company: a definitive guide for contractors

It’s an age-old query but in the past, to answer it, we have cautioned contractors against whether they should use a UK-registered limited company abroad, writes Kevin Austin, managing director of overseas contracting advisory Access Financial.

This is because without localisation of the company and its workers, the UK-registered ‘Ltd’ (also known as a Personal Service Company) would almost certainly be operating non-compliantly.

Where it is possible to localise the company and the worker, then this changes matters drastically, as a limited company can be a good way for a contractor to work abroad in the most tax-efficient way while ensuring continuity from a legal and accounting perspective on return to the UK. In fact, it could be argued that from the UK Criminal Finances Act 2017 perspective, the PSC route is the best way to go.

Immigration

The first point we need to consider, rather obviously, is whether or not the director has the legal right to work. If he has not, then it is most unusual that his company, as a foreign company, will be able to sponsor a work permit. In this case, the use of a limited company to work abroad will fail the first test.

Registering the company

The rule of thumb for compliance is that the company should be recorded as a foreign employer, so that it can operate a payroll in compliance with the laws in the country of work with regard to income that has arisen there. The limited company, as a separate legal entity from its director (usually the worker), must be legalised in its own right in the work country. The ways naturally vary country-by-country.

Registering the individual

Similarly, the worker (the director of the company in this case) is regularised in a similar to how any other employee working in that country would be regularised. This would include matters such as registration at the local Town Hall, being enrolled in the social security system of the host country and obtaining a personal tax number.

Permanent Establishments

Different countries have different attitudes towards when a Permanent Establishment (PE) is created, although the rules in the Double Tax Treaties look much the same. In some states you can be almost sure that a PE will be created; in others that it will be created after a given period in-country, -- and in others, a PE will be created after a considerable time. What this means in practice is that where there is a PE, local corporation tax will be due and credit given against the corporation tax back home which implies that the higher rate is the effective one.

The formation of a PE will also have ramifications for the need to register locally for VAT.

Top destinations where using a UK-registered PSC can pay dividends

In the 12 bullets below you can see the countries where using a PSC is well-established, together with the tax and social security rates. From these and knowing what salary you need to draw to live on and your overall income, you can determine what your effective tax and social security costs will be in each of these countries.

Belgium

Corporation tax rate

29% plus a 2% crisis tax, which is a surtax, implying an effective rate of 29.58%.

As of tax year 2019 (financial years ending 31.12.2018 and later), SMEs will be able to benefit from a decreased rate of 20% plus a 2% crisis tax, implying an effective rate of 20.40% on the first bracket of EUR 100,000 profit.

Dividend tax rate

Resident taxpayers are taxable on dividend income from a Belgian or foreign-source. However, it is not compulsory for individual resident taxpayers to report dividend income provided it has been subject to Belgian withholding tax, which in most cases is 30%.

Social Security Rates

Employer: Approximately 27.50% of total income.

Employee: 13.07% (average rate)

Is it a country where dividends attract social security?

Denmark

Corporation tax rate

The CIT rate is 22%.

Dividend tax rate

Dividends are taxed separately at fixed rates of 27% (up to a limit of DKK 52,900) or 42% (for income above DKK 52,900) (2018).

For married couples, a double threshold applies.

Social Security Rates

Employer: Employer contributions include contributions to a number of funds; total contributions amount to approx. DKK 8-10,000 per year.

Employee: The employee social security rate is a monthly lump-sum contribution of DKK 94.65 (DKK 1,135.80 per year). It is not calculated as a percentage.

Is it a country where dividends attract social security?

Finland

Corporation tax rate

The CIT rate is 20%.

Dividend tax rate

Investment, including dividend income, is taxed at rates of 30% and 34% (34% is applicable when the annual taxable capital income exceeds EUR 30,000).

Social Security Rates

Employer: 22.08% (average rate)

Employee: 9.78% (average rate)

Is it a country where dividends attract social security?

France

Corporation tax rate

For tax years beginning on or after 1.1.2019, the standard CIT rate is 28% on taxable income up to EUR 500,000, and 31% on taxable income in excess.

Dividend tax rate

In general, investment income, including dividends and interest, is taxed at ordinary progressive tax rates, subject to tax treaty provisions.

Total income is split according to family status (i.e. 'the more children you have, the less tax you pay’). Under income-splitting rules, total taxable income is divided by the number of shares awarded to the taxpayer: one share for a single person, two shares for a married taxpayer without children, half a share for each of the first two dependent children, and one full share for the third and each subsequent child. Thus, the income of a married taxpayer with three children is split into four.

However, the tax saved from income splitting is limited depending on the net taxable income of the tax household. Figures vary for married taxpayers and for single and divorced taxpayers with dependent children.

Rates are progressive from 0% to 45%, plus a surtax of 3% on the portion of income that exceeds EUR 250,000 for a single person and EUR 500,000 for a married couple and of 4% for income that exceeds EUR 500,000 for a single person and EUR 1 million for a married couple.

Social Security Rates

Employer: 45% (average rate)

Employee: 23% (average rate)

Is it a country where dividends attract social security?

Yes

Contribution Sociale Généralisée (CSG) = 9.9%

Contribution au Remboursement de la Dette Sociale (CRDS) = 0.5%

Other levies = 6.8%

Germany

Corporation tax rate

Profits are subject to two taxes; corporation tax and trade tax.

CIT is levied at a uniform rate of 15% and is subject to a surcharge of 5.5% (solidarity surcharge). An effective total tax rate of 15.8%.

Trade tax rate is a combination of a uniform 3.5% tax rate and a municipal tax rate (which varies according to where the business is based). Municipalities with at least 80,000 inhabitants levy trade tax at a rate of 12.6% to 20.3%.

E.g. if the basis for the two taxes is identical the overall burden on corporate profits earned in Berlin would be 30.2% and Munich 33%.

Dividend tax rate

Worldwide investment income is subject to German income tax at 25 percent plus solidarity surcharge plus church tax (where applicable). The tax is generally withheld at source. The tax withheld is final unless one of the following applies.

The taxpayer's income tax rate is lower than 25%..
Not all investment income was subject to withholding (such as foreign investment income).
Church tax was not considered in the withholding although applicable.

A standard annual deduction of EUR801/EUR1,602 (single/married) is offset against the taxable part of worldwide investment income. Investment income includes interest, dividends, and gains from the sale of shares purchased after 31 December 2008.

Social Security Rates

Employer: 19.38% (average rate)

Employee: 20.63% (average rate)

Is it a country where dividends attract social security?

Hungary

Corporation tax rate

The CIT rate is 9% of a positive CIT base.

If a company’s CIT base or the pre-tax profit, whichever is higher, is < 2% of its total income reduced by the income of its foreign permanent establishments (PEs) (i.e. the ‘minimum tax base’), the company can choose to file a declaration and pay CIT according to the general provisions or to pay CIT on its minimum tax base.

Dividend tax rate

Dividend income is taxed at 15%.

Social Security Rates

Employer: 21% (average rate)

Employee: 18.5% (average rate)

Is it a country where dividends attract social security?

Ireland

Corporation tax rate

Standard rate 12.5%

Higher rate 25% on passive income: Non-trading (passive) income includes dividends from companies resident outside Ireland (with some exceptions), interest, rents, and royalties. The higher rate also applies to income from a business carried on wholly outside Ireland..

Dividend tax rate

Dividends are taxable as part of an individual’s total taxable income:

Filing status

2019 (EUR)

Tax at 20%

Tax at 40%

Single and widowed person: no dependent children

Income up to 35,300

Balance of income over 35,300

Married couple: one income

Income up to 44,300

Balance of income over 44,300

Married couple: two incomes

Income up to 70,600

Balance of income over 70,600

Social Security Rates

Employer: 10.85% (average rate)

Employee: 4%

Is it a country where dividends attract social security?

Luxembourg

Corporation tax rate

15% CIT for businesses with taxable income < EUR 25,000.

Businesses with taxable income between EUR 25,000 and EUR 30,001 are subject to CIT computed as follows: EUR 3,750 plus 33% of the tax base above EUR 25,000 (for 2018).

18% CIT for companies with taxable income in excess of EUR 30,000.

Solidarity surtax: A 7% solidarity surtax is imposed on the CIT amount.

the aggregate CIT rate is 19.26% for companies with taxable income in excess of EUR 30,000.

Municipal business tax: Municipal business tax is levied by the communes and varies from municipality to municipality. The municipal business tax for Luxembourg City is 6.75%.

The effective combined CIT rate (i.e. CIT, solidarity surtax &municipal business tax) for Luxembourg City is 26.01%.

Dividend tax rate

Dividend income is taxed under personal income tax.

Luxembourg income tax liability is based on the individual's personal situation (e.g. family status). For this purpose, individuals are granted a tax class. Three tax classes have been defined:

Class 1 for single persons.
Class 2 for married persons as well as civil partners (under certain conditions).
Class 1a for single persons with children as well as single taxpayers aged at least 65 on 1 January of the tax year.

Tax is calculated in accordance with a progressive table, ranging from 8% on taxable income in excess of 11,265 euros (EUR) to 42% on income in excess of EUR 200,004 for 2018. A solidarity tax of 7% of taxes (9% for taxpayers earning more than EUR 150,000 in tax class 1 and 1a or more than EUR 300,000 in tax class 2) must also be paid.

Social Security Rates

Employer: 15.01% (average rate)

Employee: 12.45% (average rate)

Is it a country where dividends attract social security?

Netherlands

Corporation tax rate

Standard CIT rate is 25%.

A lower rate of 20% applies to the first income bracket up to EUR 200,000. 25% applies to the excess of taxable income.

Dividend tax rate

30% - taxed under ’Box 3’ income.

(Box 3 applies to taxable income from savings and investment)

Social Security Rates

Employer: 19% (maximum)

Employee: 27.65% (maximum)

Is it a country where dividends attract social security?

Norway

Corporation tax rate

CIT is, in general, assessed at a rate of 22%. Certain companies within the financial sector are assessed at a CIT rate of 25%.

Dividend tax rate

22% - taxed under general income tax rate.

(The general income tax base comprises all categories of taxable income (i.e. income from employment, business, and capital))

Social Security Rates

Employer: 14.1% (The employer contributes by paying 14.1% social security on behalf of the employee to the tax collector).

Employee: 8.2% (The contribution is included in the general tax assessment).

Is it a country where dividends attract social security?

Sweden

Corporation tax rate

As of 1.1.2019, the CIT rate is a flat rate of 21.4% (to be decreased to 20.6% in 2021). Until 31 December 2018 the corporate tax rate was 22%.

Dividend tax rate

30% (if resident in another Nordic country this may be reduced to 15%)

Social Security Rates

Employer: 31.42% (A reduced rate (20.7 percent) applies for foreign employers with no permanent establishment in Sweden

Employee: 7% (Collected with income tax)

Is it a country where dividends attract social security?

Corporation tax rate

The CIT is 19%

Dividend tax rate

Dividends are always treated as the top slice of income and will be taxed at an individual's highest marginal tax rate.

For 2018/19 a tax free allowance of GBP 2,000 applies.

Thereafter, dividends are taxed according to the tax slab in which they fall:

Basic rate: 7.5%

Higher rate: 32.5%

Additional rate: 38.1%

Social Security Rates

Employer: 13.8%

Employee: 12% (2% on all earnings above 892 GBP per week.)

Is it a country where dividends attract social security?

What about non-UK registered companies?

In principle, it does not matter where your company is registered so long as it is bona fide and not set up solely to achieve a tax or social security benefit which is called ‘treaty shopping’ and disliked by the authorities.

Double Tax Treaties and Social Security treaties

When using a limited company abroad, the Double Tax Treaties do and do not apply. If this sounds confusing, it is because while treaty law is supposed to trump domestic law, often the tax authorities can circumvent this! In several countries, for example, where the company is held to be labour-leasing, then taxes can be due from day one rather than the period allowed under the treaty. In most cases, trying to counter a tax authority’s decision can be fruitless. It is just easier and neater to pay local taxes from the contract start then, no matter how long you may spend there, one cannot suffer the pain of a carryback from the 183rd day to the first day, for taxes due where the stay exceeds 183 days.

In the case of Social Security, where your company can obtain an A1 or Certificate of Coverage from your home social security authorities, then you can remain in your home social security system, subject to conditions such as taking up private medical insurance. In the EU/EEA, this period is generally for up to 24 months, but other social security treaties can provide for much longer.

What is the route to highest retentions?

For most contractors, the overall retention is the key driver. The limited company may have many advantages, but it is not necessarily the most tax or social security-efficient way to work. The most financially-attractive means depends on the interplay of salary, dividends, social security costs and corporation taxes, so this is a complex decision and we never advise that a contractor embarks on this course without competent professional guidance. Oh, and if the bottom-line is your highest considertion, you need to factor in living costs on top of the above too!

In short, remember that, in some countries, it is not possible to use a limited company as a foreign worker. It’s a strict red light. In others, there are much better legal retentions to be had. So an amber light at best. And in others, the limited company is probably the way to go! The solid green light many have been hoping for. The only aspect unifying all three? The answer is to seek the best advice you can find.

Friday 15th Feb 2019