Today is: 30 July 2010
Please note this article is for general information only. Tax law and company law are complex subjects and you should not take or refrain from taking action without specific professional advice on the facts of your case. Nothing in this article should be construed as financial advice.
Q: I am the sole shareholder of a private company in the UK and am planning to retire to France. I would like to extract money from the company but understand that if I take it as salary or dividend I will be subject to income tax.
A:Yes you are right. If you are in the UK it will be subject to income tax whether you receive it is a salary or as a dividend. If you wait until you are French resident you will pay income tax in France on any salary unless it relates to work carried out in the UK. Any dividend payment from a UK company will be taxable only in France where you will receive a credit for the basic-rate tax deducted at source in the UK.
Q: Is there any other way in which I could extract money?
A: One way of obtaining cash from a company is to sell your shares back to the company. The company may be able to buy the shares from funds in distributable profits. This will still require approval of the shareholders via a special resolution. If there are not sufficient funds in distributable profits, the purchase may need to be from capital. This requires a more complicated procedure involving statutory declarations of solvency by the directors and notice being given to creditors in the press.
Q: How will this be taxed in the UK?
A: Under section 209 of the Income and Corporations Tax Act 1988, the repayment of the original value invested will be treated as capital and anything above that is treated as a distribution from the company. The distribution element is taxed as income in the same way as a cash dividend. You are therefore subject to income tax rather than capital gains tax. For higher rate tax payers this will be disadvantageous.
Q: How does France tax on share buy-backs?
A: France has similar rules whereby part of the transfer will be taxed as capital and part as income.
Q: So does that mean I will face the same tax charge whether I am resident in France or the UK?
A: No there may be a large tax advantage if you dispose of your shares after becoming tax resident in France. This is because the current double tax treaty between the UK and France provides that disposals of more than 25% of the shares in a UK company will be taxed only in the UK if certain specified conditions apply. These conditions should be easily met in your situation. As the Treaty takes precedence over domestic laws the French authorities will not tax you on any disposal. The UK Revenue will view the transfer as a distribution which it will not impose tax on due to you being resident in France. You can obtain a written clearance from the French tax authorities that the receipt is tax free in France.
Q: Does this mean that I will be able to obtain payment completely free of tax?
A: Basic rate tax (10%) on the distribution from the company will have to be deducted at source. Usually in France it is possible to claim this back on dividends received but in this case it will not as the payment is not to be viewed as a dividend in France but as a disposal of more than 25% of shares in a UK company. The UK does not however, charge any withholding tax on distributions from UK companies to French residents so your tax exposure should be limited to 10% as opposed to the full dividend rate.
November 2008