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Companies resident in the United Kingdom are subject to taxes on their total profits worldwide. These total benefits are calculated by adding up:
The main sources of income include:
For the first four categories, revenues are calculated primarily based on the company's financial accounts, adjusted for specific tax rules. Instead, income from non-exempt dividends and other earnings are determined based on the actual amounts received.
The rules for calculating gross income vary by category, and there are important differences in the rules about what deductions are allowed and how earnings are calculated. Because taxation is done by considering each source separately, income determination and deductions are interrelated and cannot be analyzed as completely separate issues.
A company's main source of income is usually its business activity. Business benefits are calculated from the total profit before taxes that appear in the company's financial accounts, with certain adjustments. For example, non-business income such as dividends from other companies or property income is excluded, and non-deductible expenses, such as capital expenses, are eliminated. Tax depreciation, known as the capital investment deduction, replaces accounting depreciation.
Other important settings include:
Similar principles apply to calculating benefits from real estate activities.
As for financial gains from loans and other related instruments, they are generally calculated based on accounts, adding up all related income and expenses to determine net gain or loss. Certain statutory limits apply, such as restrictions on the deduction of interest.
For businesses with business activities, profits or losses derived from loans and intangibles are often considered part of business benefits. If there is no business activity, these gains or losses are treated as an independent source of income.
When a company records a loss in a specific source of income, there are detailed rules that regulate how and when these losses can be compensated.
In general, it is possible to offset losses against benefits from previous and subsequent years, within certain limits. For example, losses may apply to previous years and do not prescribe. However, as of April 1, 2017, the maximum compensation for losses against previous years is limited to 5 million pounds sterling plus 50% of current year profits that exceed that figure. In addition, losses can be used by other companies within the same group, in accordance with group taxation rules.
a) Business losses
They can be offset against any other source of income in the same year, transferred up to three years ago (after the cessation of activity) or transferred without a time limit to future benefits. Compensation for future benefits varies depending on the date the losses accrued (before or after April 1, 2017).
b) Losses in real estate businesses
They are first offset by other income from the same year. The remaining losses can be transferred without limit to future benefits, but they cannot be applied to previous years.
c) Non-trade deficits (such as interest and financing losses):
They can be offset against other non-business revenues in the same year, carried over a year ago, or transferred without a time limit to total benefits or only to non-commercial benefits, depending on when they were generated.
d) Investment management expenses
Non-commercial companies can deduct management expenses that are not related to capital. Any unused expense can be carried over to future years without limit.
It is important to note that, although income losses can be offset by capital gains from the same year, capital losses cannot be offset by any type of income.
In addition, there are complex anti-circumvention rules that limit the use of losses when business ownership changes. There may also be specific restrictions for deductions based on anticipated or potential losses under certain conditions.
Generally, accounting and tax methods for valuing inventories are aligned. In practice, for tax purposes, inventories are valued at the lowest value between their cost and their net realizable value.
The FIFO method (first inputs, first outputs) is accepted to determine the cost when it is not possible to identify specific items. However, the use of the base stock method or the LIFO method (last entries, first outputs) is not allowed.
Capital gains derived from the sale of capital assets are taxed at the usual corporate tax rate. The taxable capital gain is calculated by subtracting from gross income the acquisition cost, subsequent improvements, sales costs and the applicable indexation deduction up to December 2017. This indexation deduction compensates for inflation up to that date and cannot generate or increase capital losses.
Gains and losses should generally be calculated in British pounds, and any exchange rate changes are taxed or deducted at the time of sale. Gains or losses on an asset can be allocated to another company in the group, facilitating internal tax compensation.
Asset transactions between companies in the same group are usually considered at historical cost, unless they are carried out under market conditions, in which case they are valued at fair market value.
Capital losses can only be offset against capital gains. The excess can be carried over to future years without limit, but with restrictions starting in April 2020, including an annual limit of 5 million pounds plus 50% of profits above that threshold.
Anti-circumvention legislation is in place to prevent profit or loss manipulation through intragroup transactions or simulated acquisitions.
It is possible to defer the taxation of profits by reinvesting in similar assets (usually land and commercial buildings) within a specific time frame, usually three years.
Most profits from the sale of significant shares (10% or more) are exempt, with exceptions such as non-commercial subsidiaries or recently acquired companies. Profits derived from goodwill and other intangibles acquired after 2002 are taxed as income.
The United Kingdom taxes capital gains derived from the direct or indirect sale of real estate in its territory by non-residents.
Rules apply when you sell an entity with at least a 25% interest and whose 75% or more of its assets are land in the United Kingdom. There are also exemptions for commercial uses.
Non-resident companies and certain investment funds are subject to corporate income tax instead of capital gains tax.
Capital losses for non-residents can be offset by limits similar to those applicable to residents, including the limit of 5 million pounds and compensation of 50%.
It is allowed to choose between using the original purchase cost or the value at the beginning of the regulations in April 2019, although losses due to indirect disposal are not allowed if the original cost is used.
The UK government is reviewing rules to align income taxation with OECD principles and to facilitate attribution to permanent establishments (EPs). These changes seek to simplify and clarify the earnings connection with EP in the United Kingdom and are expected to be implemented starting in 2026.
Since 2016, UK corporate tax has applied to companies not resident in the United Kingdom that carry out land purchase or development transactions in the United Kingdom (regardless of whether the transaction is carried out through a permanent establishment in the United Kingdom). The objective is to tax all non-British traders operating on land in the UK on the entirety of their profits, regardless of where they are generated.
The provisions on “land transactions” are designed to ensure that profits from primarily commercial activities are taxed as income and not as capital gains, and apply both to direct and indirect divestments of land (i.e., the disposal of shares or other assets whose value derives at least 50% of the land). The provisions on “direct alienations” provide a legal definition of land trading (very broadly, when one of the main objectives of the acquisition or development of land is to obtain a profit or profit). The provisions on “indirect alienations” will apply when the person carrying out the disposal is a party to an agreement relating to land development.
The anti-fragmentation rule can increase profits taxed by British tax by the value of any contribution to development made by an associated person who is not subject to British tax.
Anti-circumvention provisions are applied to counteract agreements that seek to circumvent any of the rules mentioned above.
Since 2016, non-resident companies that engage in land purchase or development activities in the United Kingdom have been subject to British corporate tax, regardless of whether they operate through a permanent establishment within the country. This regulation seeks to ensure that all foreign entities that generate profits through land in British territory are taxed on the total of those profits, regardless of their place of origin.
The rules on “land transactions” ensure that the profits earned in these activities, due to their commercial nature, are treated as taxable income, and not as capital gains. These provisions apply both to direct sales of land and to indirect transactions, such as the sale of shares or other assets whose value comes from at least 50% of properties located in the United Kingdom.
The legislation also includes an anti-fragmentation clause, which increases taxable profits when an associated entity, not subject to taxation in the United Kingdom, has contributed to land development.
Finally, specific rules against tax avoidance have been established, aimed at neutralizing any structure or agreement designed to avoid the application of these tax obligations.
Since April 6, 2020, non-resident companies that generate income from renting properties in the United Kingdom are subject to British corporate tax for the profits earned from that activity. Before that date, such income was taxed under income tax, unless the company operated through a permanent establishment in the country.
Although the applicable tax is now corporate tax, the Non-Resident Landlord regime is still in force. Under this system, real estate agents or tenants must withhold 20% at source, unless the landlord has obtained authorization to receive full payments.
It should be noted that, for corporate tax purposes, the profits of the real estate business do not include debts or credits derived from financial loans or derivatives. However, if these instruments are related to real estate activity, they are also taxed within the corporate tax regime.
This change has meant more than a simple difference in tax rates (20% in the old income tax compared to the current 25% in corporate tax). The regulations introduce new deadlines and requirements for filing returns and payments, in addition to incorporating additional restrictions, such as:
On the other hand, if a non-resident company belonging to a group also subject to corporate tax incurs admissible losses, these can be transferred to other entities in the same group to compensate them for tax purposes.
In addition, some tax relief is allowed for non-resident companies that were previously taxed under income tax for their real estate activities in the United Kingdom.
Most of the dividends, both from the United Kingdom and from abroad, that British companies receive are exempt from corporate tax. For this exemption to apply, at least one of several broad criteria must be met; for example, one of them is that the receiving company has control over the entity that pays the dividend.
In cases where foreign dividends are not exempt, a double taxation treaty is normally allowed to be applied on a case-by-case basis, that is, for each dividend received.
Due to the wide scope of the exemption, it is rare for companies to be subject to taxation for dividends from the United Kingdom. However, if they are taxed, there is no possibility of applying the double taxation treaty for these dividends.
On the other hand, income from the distribution of real estate income from a British REIT (Real Estate Investment Trust) is treated fiscally as profits obtained from a real estate activity in the United Kingdom, and are therefore subject to corporate tax.
Royalty income received by companies is generally taxed in the same way as other sources of income. If Royalties are linked to a commercial activity, they are considered part of the commercial benefits and are taxed as such.
In cases where Royalties derive from intellectual property rights that are not associated with a commercial activity, these revenues are taxed as income derived from intangible fixed assets.
Exchange differences, both realized and unrealized, can generate profits or losses that are integrated into a company's tax base. Generally, these arise from debts and derivative contracts, and are treated accountably like any other income or expense related to loan relationships.
In the case of accounts receivable or payable related to commercial or real estate activities, exchange rate changes are also considered part of the tax result. For a commercial company, these are included in the operating profit or loss. In other types of businesses, they are classified as non-business income or loss, depending on whether they represent credits or deficits.
On the other hand, if exchange differences are related to capital assets that have not yet been disposed of, these changes are usually not immediately taxed or deducted. Instead, they are integrated into the tax result when the asset is sold and the corresponding profit or loss is realized.
Companies that participate in UK partnerships (such as joint ventures, limited partnerships or limited liability companies) are taxed based on the flow of profits. This means that British corporate partners pay taxes on business, real estate or financial income reflected in the company's accounts, as well as on non-exempt dividends received.
When calculating the company's tax base, UK transfer pricing rules apply. In addition, there are specific provisions to prevent tax avoidance, which in certain cases can reallocate benefits from corporate partners to individuals when they can benefit indirectly. Rules are also envisaged to prevent the artificial transfer of income between individual partners and companies.
The tax classification of foreign entities is determined independently of their treatment in other countries. HMRC maintains a public list on the classification of certain non-British entities, but flexibility in the constitution of these entities may affect their tax treatment.
The United Kingdom taxes income globally. However, resident companies may choose to apply an exemption to profits generated by permanent establishments located outside the United Kingdom.
This choice applies to all of the company's foreign permanent establishments and to all accounting periods beginning after the filing date. It is irrevocable and excludes profits and losses attributable to these permanent establishments from British tax, although the right to deduct associated losses is also lost.
Exclusions and limitations:
Other important conditions:
If the exemption is not chosen, foreign profits are taxed as part of the company's global revenues, although a foreign tax credit may apply for taxes paid in the country of origin, either under agreement or through unilateral relief from the United Kingdom.
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