Properly configured, a UK LLP can operate tax-free while still enjoying the reputation advantage of being a full-fledged UK company with all that entails. In this article, I cover how the UK LLP works, present practical use cases and explain how to register one.

 

Detailed analysis

A UK LLP is a tax-neutral, pass-through entity. As such, the business generally has no tax burden of its own. Instead, its owners are responsible for their share of the profits, at the personal level.

To better illustrate how this works in practice, here are a few examples:

UK LLP + UK resident owner
John owns 20% of Jolly Ice Cream LLP, a business involved in the distribution of ice cream to convenience shops in the Leeds area. Jolly Ice Cream LLP generated a profit of 1000000 GBP during the last fiscal year. Because John owns 20% of the business, he is responsible for 20% of the profit. John must thus add 200000 GBP to his personal income tax return for that fiscal year. It does not matter if John actually received 200000 GBP from the business.

Simple right? Here is where things get interesting. In the UK, non-residents are only liable for UK taxation on their UK-sourced income. Foreign-sourced income is exempt. Because an LLP is a tax neutral entity, this exemption also applies to foreign-sourced income generated through one. This means that, in practice, it is possible to run an LLP without having to pay any UK taxes, provided that there is no UK-sourced income and that all partners are non-residents.

UK LLP + non-resident owner
Jerry owns 50% of Anna’s Bakery LLP, a business involved in the transport of uranium yellowcake. Jerry is a tax resident of the UAE. The business has only one other owner, Felix, who is a tax resident of the Cayman Islands. Because all of Anna’s Bakery LLP owners are non-residents and because the business has no UK operation, client or employee, none of its income is deemed UK-sourced. This means that while Anna’s Bakery LLP is a UK business, with all the benefits and the reputation advantage this entails, it (or Jerry and Felix) has no UK tax burden whatsoever.

What if Jerry and Felix were tax residents of France instead? Would this change things? The answer to that is yes but not in the way you would imagine. While the UK LLP is considered a tax neutral entity in the UK, the same may not be true in other countries. In this case, France would likely consider it a taxable entity AND a tax resident of France. As such, Anna’s Bakery LLP would be liable to French corporate taxation in the same way it would be if it was registered in France. Other countries, such as Australia, would recognise the tax neutral status of Anna’s Bakery LLP and would only tax Australian resident partners on their share of the business profits.

The example above highlights just how complex international taxation can be. Especially when a large number of jurisdictions are involved. It also highlights the need for each partner to structure their own circumstances in a way that minimises their personal tax burden.

But what if a partner simply cannot relocate to a tax haven or territorial taxation country? Cue in the holding companies, foundations and trusts.

Because of the complexity of the concepts at play here, I start with this example:

UK LLP + Holding company
Steve is a tax resident of Belgium. He owns 40% of Got Cha LLP, a business involved in the import / export of tea products. Other than being UK-registered, Got Cha LLP has no UK connection nor any resident partners. As such, it (and its owners) has no UK tax liability. While this certainly makes Steve happy, it does not solve his problem regarding Belgian taxation. As a tax resident, he is liable for taxation in Belgium on his share of the business profits and as you may imagine the rates are not very advantageous. Steve is quite happy to remain in his native Charleroi, however, and has no desire to relocate to a tax haven or territorial taxation country. This leaves him with only one practical solution, to transfer his 40% ownership in Got Cha LLP to a holding company. Considering the tax treaties signed by Belgium and the tax rules in the European Union, Steve chose to register his holding company in Estonia. The main advantage of Estonia is that non-distributed profits are not liable for taxation. As such, Steve gains flexibility in how and when he gets paid (and has to pay taxes). This flexibility allows him to keep his effective tax rate to a minimum. It also gives him the option to accumulate profits tax-free until he figures out how to distribute them in a more efficient way.

The two important points made by the example above is that using a holding company as a partner in an LLP may not always result in tax-free living but it will, almost in every cases, result in a major reduction in effective tax rates as well as a flexibility gain. This shows how useful the UK LLP is, even for those who cannot relocate to tax havens or territorial taxation countries.

There are of course a multitude of other subtleties involved when it comes to taxation. Many of them are covered in Zero Tax Nomad, Freedom Surfer’s flagship course.

For those who might be wondering about the practicalities of running a UK LLP, for all intent and purposes they are the same as with a UK LTD entity (Limited company). An LLP can bank in the UK or abroad, can use Stripe and PayPal Pro, can register for VAT, can hire employees, can conduct business within the UK and abroad, can be sold, can apply for credit etc. It also benefit from the same liability protection.

 

Registration

It is currently not possible to self-register a UK LLP online. You must either go through an agent or use an authorised software. Freedom Surfer offers an all-inclusive LLP registration package for non-UK residents, designed with location independence in mind. It includes everything needed to get running, including tax advice, and the whole process can be completed in minutes, remotely. To learn more, visit our Business Registration page.

 

Case scenarios

UK LLP for location independent businesses

A UK LLP is the ideal structure for a location independent business, at any stage of growth. Its low starting and compliance cost makes it gives it an edge over most other structures. It also benefits from access to a wide range of business services, including Stripe and PayPal Pro. Its tax neutral status means that its owners can make full use of their location independence by relocating their personal residency to countries where the company’s profits will not be subject to taxation, essentially allowing it to be run tax-free. Such countries include all the obvious tax havens but also Malaysia, Thailand, Philippines, Malta, New Zealand, Chile, Uruguay, Israel and more.

 

UK LLP for tax-free Stripe and PayPal

For those who own companies located in less advantageous locations (such as Bulgaria, Estonia, Panama etc), processing payments can be a frustrating experience due to the lack of support for services like Stripe and PayPal Pro. Using a UK LLP as a payment processing subsidiary solves this problem, at a reasonable cost and without creating an additional tax or compliance burden. An additional bonus is that your company can benefit from the UK’s higher VAT registration threshold (the UK has, by far, the highest threshold in the EEA) and excellent reputation.

 

UK LLP for tax-free Amazon FBA

Properly structured, a UK LLP allows for tax-free selling via Amazon’s FBA platform. Combined with a low compliance cost and the UK’s high VAT registration threshold, this offer sellers a major competitive advantage.

 

UK LLP for tax-free EEA access

Companies registered outside the EEA region can easily gain access to the single market via a UK LLP. Not only can they gain access but they can do so without incurring any additional tax or compliance burden. The tax neutral status of the LLP means that any income booked through it simply flows to its owners where it is then taxed (or not, depending on how the owners are structured).

 

Sources

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323787/hs380.pdf