Can a non-UK foreign company raise investment pursuant to SEIS and/or EIS?
What do HMRC say on this topic?
One of the main requirements for companies wishing to raise investment pursuant to SEIS and EIS is that they must have a ‘permanent establishment’ in the UK (as detailed in HMRC’s guidance manuals VCM34050 and VCM13020). This means that an essential or substantial part of the company’s business must be wholly or partly carried on through a fixed place of business in the UK. This means that the business activities that are carried out in the UK can’t be of a preparatory or auxiliary character. HMRC provides examples in VCM34050 of what constitutes preparatory or auxiliary activities, for example, the storage or display of goods or merchandise belonging to the company; the maintenance of stock owned by the company for storage, display or delivery; the maintenance of stock owned by the company for the purpose of processing by another person; purchasing goods or merchandise or collecting information for the company. The guidance manual states that this list is not intended to be exhaustive and whether activities are considered to be preparatory or auxiliary will depend on the nature of the company’s business as a whole. What is critical is the extent to which the activities of the fixed place of business form an essential and substantial part of the whole business.
HMRC do not provide an exact definition of what constitutes auxiliary or preparatory activities on purpose, and will therefore review every application from non-UK companies on a case by case basis. This means that, when completing your SEIS and/or EIS advance assurance or compliance statement application, you will need to provide HMRC with persuasive reasons as to why you believe a substantial part of your company’s overall business activities will be (or are) carried out in the UK.
Note further that the company must maintain their UK permanent establishment for the whole of the three-year period from the date it commenced trading or from the date the SEIS and/or EIS shares were issued.
The fact that the permanent establishment condition needs to be satisfied in order for companies to qualify for SEIS/EIS may lead you to the conclusion that non-UK foreign companies are unable to raise investment pursuant to these regimes. However, this is not necessarily the case, as explained in the remainder of this blog post.
What are the options?
As a non-UK foreign company seeking to raise investment pursuant to SEIS and/or EIS, you have two options:
- You could set up a permanent establishment within the UK. As mentioned above, this means that the company must have a fixed place of business in the UK through which that company’s business is wholly or partly carried out.
- If you do not wish to physically set up a fixed place of business in the UK, alternatively you can appoint an agent who is situated in the UK on your behalf. Placing an agent that represents your company in the UK will mean that your company will still be deemed to have a ‘permanent establishment’ in the UK for the purposes of SEIS and EIS.
For option one, please see the next section of this blog post (titled “What does a ‘fixed place of business’ in the UK mean”). Note that you could bolster your chances of satisfying the permanent establishment condition by adopting both options outlined above and setting up a fixed place of business in the UK and appointing an agent as well. In relation to this point, please note the wording contained within VCM34050 which provides as follows: “The legislation also allows a company to be treated as having a permanent establishment in the UK where an agent has and exercises authority in the UK to enter into contracts on behalf of the company. This test is offered as an alternative to the ‘fixed place of business’ test and the company need only meet one of the tests to qualify”.
Note that, for option two above, the agent must:
- Be based in the UK;
- Have authority to enter into contracts on behalf of your company;
- Frequently use that authority to enter your company into binding agreements; and
- The contracts that the agent enters into on your company’s behalf must relate to the substantive business of your company and not merely to matters/activities which would be considered preparatory or auxiliary (as discussed above).
The following will not count as your company’s agent in the UK for the purposes of the permanent establishment condition:
- Employees who don’t have or use the authority to enter your company into contracts; and
- Independent agents – this includes commission agents and brokers who are offering their agency services to you in pursuit of their own business.
Merely maintaining an employee in the UK will not itself be sufficient to guarantee permanent establishment status. The key point is that the agent (which may be an individual or a company) must have and must repeatedly use the authority to enter into contracts on behalf of the company or which are otherwise binding on the company.
What does a ‘fixed place of business’ in the UK mean?
The fundamental point in relation to having a fixed place of business in the UK is that the business carried out at that fixed place must form an essential and substantial part of your overall business. If you can prove that you have a fixed place of business in the UK and the business carried out forms an essential and substantial part of your business, this will most likely lead HMRC to conclude that your company has a permanent establishment in the UK.
Below you will find a non-exhaustive list of examples that will demonstrate that your company has a permanent establishment in the UK. These include having a factory or an office in the UK or otherwise:
- A registered branch;
- A building site (this could be established to run an installation project or for normal construction functions);
- A mine, gas well or quarry;
- A place of management; or
- A workshop.
Clearly, it will depend on the nature of your business and what it does that will determine what sort of premises or facilities need to be set up in order to meet the permanent establishment condition.
What is HMRC’s attitude towards group companies?
For the purposes of this part of the SEIS/EIS legislation, VCM34050 states that the following points are worth noting:
- It is the business of the issuing or relevant company which is to be considered, and not the business of the group as a whole if the company is the member of a group. So, where the issuing company is the parent company of a group and that company acts mainly as a holding company, there is no requirement that the business of one or more of its trading subsidiaries be carried on from the place of business in question. It will be sufficient that the administrative and management functions of the holding/parent company be carried on there.
- The legislation makes clear that an overseas registered holding/parent company will not be regarded as having a permanent establishment in the UK merely by virtue of the fact that it has a subsidiary which is resident in the UK, or which carries on its business there. An overseas holding/parent company must itself have a permanent establishment in the UK for it to qualify.
- In addition, the issuing or relevant company must meet the requirements of the ‘independence’ test as set out in VCM34080.
What about a UK registered holding/parent company with non-UK foreign subsidiaries?
Clearly, being a company registered in the UK will mean you satisfy the permanent establishment condition which in turn means your company’s investors may be eligible for SEIS/EIS tax reliefs provided that your company can meet the other qualifying criteria.
A UK-registered holding/parent company, which carried out the necessary functions of a holding/parent company from a fixed place of business within the UK, is likely to be considered to have a permanent establishment within the UK regardless of where the activities of any trading subsidiaries are carried on.
But what about the scenario where the UK registered holding/parent company wishes to distribute money raised pursuant to SEIS/EIS to a non-UK foreign subsidiary (or subsidiaries)?
The answer to the above is that, provided the UK registered holding/parent company owns 90% or more in the subsidiary (or subsidiaries) in question (i.e. it is a “qualifying 90 percent subsidiary” as outlined in VCM34040), the holding/parent company will be permitted to transfer the money raised to the non-UK foreign subsidiary. An important point here is that the non-UK foreign subsidiary can only use the money so transferred if it will be used for the qualifying business activity for which the SEIS/EIS monies were raised by the holding/parent company. Note further that the investment must be taken by the holding/parent company.
Both the UK registered holding/parent company and the non-UK foreign subsidiary must satisfy the SEIS/EIS qualifying criteria – for example they must both carry out a qualifying trade (i.e. a trade that is not an excluded activity) and must have less than £200,000 in gross assets for SEIS and less than £15 million worth of gross assets (before the shares are issued) or less than £16 million worth of gross assets (immediately after the shares are issued) for EIS. A further requirement for SEIS is that both the UK holding/parent company and non-UK foreign subsidiary must not have been trading for longer than 2 years, and for EIS the basic age condition is that both companies must not have been trading for longer than 7 years.
As you will have seen, being a non-UK foreign company does not mark the end of the road when you are seeking to raise investment pursuant to SEIS and/or EIS.
The main hurdle you’ll have to surmount from HMRC’s perspective is the permanent establishment condition. The best way to navigate this condition would be to set up a fixed place of business in the UK or to appoint a UK-based agent that has authority to (and frequently does) enter your company into binding agreements which relate to the substantive business carried on by your company.
If you really want to maximise your chances of satisfying the permanent establishment condition and give yourself the best opportunity to be able to raise investment pursuant to SEIS and/or EIS, then you could establish a fixed place of business in the UK as well as appointing a UK-based agent.
In order to qualify for SEIS and/or EIS as a non-UK foreign company you will need to register as an overseas company in the UK and fill in an OS IN01 form – please click here for more information.
If you would like to discuss submitting an SEIS and/or EIS advance assurance application, or if you would like to know more about the process and our fees, we offer a 20-minute no cost, no obligation call as a starting point. If this is of interest, please get in touch via the firstname.lastname@example.org email address to schedule a call with one of our fee earners.