UK Corporation Tax Rates Are Rising – Implications for US-UK Cross-Border Enterprises

For at least some UK corporations, the UK corporation tax rate will soon increase. From April 2023, UK corporations with company profits over £250,000 will pay tax at the 25% rate, corporations with company profits under £50,000 will continue to pay tax at the 19% rate, and corporations with company profits between these two profit levels will pay a tapered rate somewhere between these two rates.

The current US federal corporation tax rate is 21%. Three US states (Nevada, South Dakota, and Wyoming) have no corporate tax whatsoever. Another three US states (Texas, Ohio, and Washington) have gross receipts taxes on sales sourced to their states, over certain exemption thresholds. In the 44 states with corporate income taxes, rates range from 2.5% (North Carolina) to 12% (Iowa).

When a US company pays dividends to a UK parent, those dividends will – subject to limited exceptions that must be considered – usually will be received by the UK parent free of UK tax. In addition, if the UK company owns at least 80% of the voting stock of the US company, the dividends can be paid free of US withholding tax.

Two implications follow from the above:

1. For at least some high profit UK companies, the UK tax rate could be higher than the combined federal and state US tax rates of their affiliates.

2. In some circumstances, strategic structuring of cross-border activities could reduce the taxable rate paid by the UK company, without reducing the transatlantic enterprise’s total after tax profits.

Before the announced increase in the UK corporation tax rate, cross-border corporations sought – within the bounds of transfer pricing laws – to generate more taxable income in the UK (where it would be taxed at a maximum rate of 19%) and less in the US (where it would be taxed at a minimum rate of 21%). Now, in certain circumstances, it may prove beneficial to:

1. Shift revenue generating activities to the US;

2. Incur more non-rechargeable costs in the UK; and

3. Take greater advantage of the annual UK investment allowance, in lieu of similar accelerated deductions offered in the US.

The change in rates further highlights the importance of carefully structuring US-UK cross border activities to reduce the enterprise’s total tax burden to the greatest extent permitted by law.