My VIP Tax Team question of the week: Corporation tax rates for non-resident landlords

My client is a Hong Kong resident company that runs a UK property business, and this is their only activity. Can my non-resident company client benefit from the small profits rates and marginal relief for corporation tax purposes? I have read some articles that suggest non-resident landlords pay corporation tax at 25% but some articles are saying that some non-resident landlords can access the small profits rates and marginal relief.

Corporate landlords that generate income from UK land and property have been brought within the scope of UK corporation tax from April 2020 (s5 CTA 2009). As a result, these entities will be impacted by the recent CT rate changes, an overview of which can be found here in a previous tax question of the week produced by my colleague.

One of the conditions for the small profits rate of 19% or for marginal relief to apply, is that the company in question would need to be UK resident in the accounting period (s18A(1)(a) and s18B(1)(a) CTA 2010). For your client, this would mean that it would be subject to the main rate of CT of 25% on its profits.

Where a double taxation treaty has a relevant non-discrimination clause, the non-resident company may be able to access the lower small profits rate or marginal relief.

The Hong Kong and UK tax treaty has a non-discrimination clause in Article 22. Consideration should be given to paragraphs 1 and 2 of the article which may be relevant.

Paraphrasing paragraph 1 of article 22, the Hong Kong incorporated company shall not be subject in the UK to any taxation which is other or more burdensome than the taxation to which a UK national, “in the same circumstances, in particular with respect to residence, are or may be subjected”. This may be interpreted to say that we would benchmark against how a UK national would be assessed given the same circumstances including the non-residency status.

Whilst a company might have a residency status for tax purposes, I am unaware whether a company can be a national of the UK, perhaps this is a question for a lawyer, although the nationality of a company is an irrelevant point for UK CT purposes, it is the residency status that is of interest. This might mean the Hong Kong company cannot rely on paragraph 1 to access the small profits rate or marginal relief.

Paragraph 2 of article 22 is relevant if the property business was run through a permanent establishment (PE) in the UK. Tax on the UK PE “shall not be less favourably levied” in the UK than what would be levied on enterprises of the UK carrying on the same activities. HMRC’s guidance at DT1954 (albeit referencing the old ICTA 88) suggests that the PE should be compared with how a UK resident company would be assessed if it was in the same circumstances. This may open up the door to the small profits rate and marginal relief.

Unless the Hong Kong company is operating through a PE in the UK, it seems unlikely that it will be able to rely on the non-discrimination clause in the double tax treaty to access the small profits rate or marginal relief.

The above is an overview of how a particular treaty might apply in the given circumstances. Each relevant tax treaty should be reviewed in detailed to determine the potential position for a particular case.

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Before joining the team, Vivienne had worked for small boutique tax firms which gave her exposure to a wide variety of tax. She dealt with tax issues mostly for owner-managed businesses and high net worth individuals. Vivienne is a member of the Association of Tax Technicians and is currently in the middle of studying to become a Chartered Tax Advisor.

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