Of course, the UK cannot be classified as a low-tax jurisdiction. The tax system in this country is quite complex, encompassing corporation tax, income tax, property taxes, social taxes, duties, and more. However, foreign businesses have the opportunity to utilize the British jurisdiction without paying most local taxes. This is achieved through partnerships.

The profits generated by a partnership are not taxed at the organizational level. Instead, they are included in the tax bases of each partner in proportion to their share. Partners essentially pay taxes based on their place of registration. This principle is known as tax transparency, and these organizations are referred to as “transparent” for tax purposes.

Scottish partnerships: Registration of Limited Partnerships

Limited Liability Partnerships (LLPs) are the most popular choice for this purpose. Recently, however, Scottish Limited Partnerships (LPs) have also been gaining popularity. Unlike in England, Wales, and Northern Ireland, partnerships in Scotland are considered legal entities. Their status is governed by the Limited Partnership Act 1907 and the Partnership Act 1890. A partnership must consist of at least one general partner with unlimited liability and one limited partner. Scottish LPs are registered with the Registrar of Limited Partnerships in Edinburgh.

Scottish partnerships can be offshore

Scottish LPs have gained popularity as trading companies. This is possible because the income of a foreign individual will only be taxed in the UK if it is derived from conducting business within the UK or from sources within the UK. Therefore, the activities of Scottish LPs, where all partners are not tax residents of the UK and do not receive the aforementioned income, will not trigger taxation in the UK.

Typically, participants include companies registered in traditional offshore locations, such as the British Virgin Islands or the Seychelles. Consequently, the tax treatment of offshore LPs is comparable to that of a regular offshore company. In public sources, these Scottish LPs have come to be referred to as “offshore LPs” or “tax-free LPs.”

Due to the specifics of taxation, offshore LPs are practically used as an alternative to classic offshore companies. However, claims from counterparties regarding the jurisdiction of registration usually do not arise, as the UK is a well-regarded country for conducting international business operations, and its legislation effectively tracks the financial activities of entities registered there.

As such, Scottish LPs can be found as companies involved in the resale of various goods, as well as agents or brokers for purchases or sales, or as companies providing various services.

For exporting from the EU (or participating in other customs procedures), it is possible for a Scottish LP to obtain an EU Economic Operators Registration and Identification (EORI) number. This allows the company to act as a direct exporter from the EU and to handle export declarations. However, as with any other company in the EU, it’s important to remember that if the Scottish LP engages in the sale of goods or services in the EU, it must register as a VAT taxpayer in one of the EU countries and maintain VAT accounting, as well as possibly pay VAT in the country of registration.

An offshore Scottish LP must maintain proper accounting records of primary documents, income, and expenses, and generate a profit indicator from its activities. This is perhaps the only requirement to legitimately avoid paying corporation tax in the UK while remaining within its legal framework.

However, it’s essential to consider that taxation may arise in the state where the activities are actually conducted (contracts are concluded, essential terms are discussed, etc.) according to local tax rules. In particular, the emergence of a Permanent Establishment in those states must be assessed.

In this context, it has become increasingly popular to establish branches of Scottish LPs in one of the free economic zones in the UAE and to set up offices there through which the LP’s activities are effectively managed. This allows for a company that is completely exempt from taxation while being registered in a reputable country—the UK. This approach is particularly important in light of the legislation on controlled foreign companies enacted in many countries. In any case, if you’re interested in registering a Scottish LP, it would be a good idea to get help from professionals. In this way, you will be able to make full use of the benefits that this opportunity offers.

“Transparency” complicates the use of LPs as holding companies

Since LPs are not subject to corporation tax, these organizations cannot be considered tax residents of the UK. Consequently, they cannot directly utilize double taxation agreements that the UK has with other countries. Additionally, the tax authority does not issue certificates confirming the permanent residence of LPs in the UK for the purposes of applying agreements. However, the benefits provided by these agreements concerning income received by the LP can be utilized directly by its participants.

Furthermore, the possibility and procedure for applying agreements depend on the regulation of the taxation of foreign “transparent” organizations in the specific country and relevant enforcement practices. Many countries have already developed their approaches to classifying foreign organizations, often expressed in a set of evaluation criteria used to determine whether a foreign organization is “transparent.”

In most cases, Scottish LPs are recognized as transparent for tax purposes, just as they are in the UK (for example, in the Netherlands, Germany, Spain, etc.). As a result, on the one hand, income payments to LPs must apply the agreement with the country of residence of its participants. On the other hand, LP profits can only be attributed to the tax base of the participants when they are generated at the LP and actually distributed. Since each country has its own understanding of how to tax “transparent” companies, it is crucial to carefully consider situations involving Scottish LPs where the involvement of tax residents from other countries is required. It is advisable to seek clarifications regarding the taxation procedures.

In conclusion, Scottish Limited Partnerships (LPs) present a unique opportunity for businesses seeking offshore advantages while benefiting from the legal framework of the UK. Their tax transparency allows for effective profit distribution without incurring corporation tax, making them an attractive option for international operations. However, it’s essential to navigate the complexities of local tax regulations and the potential for taxation in jurisdictions where activities are conducted. By carefully structuring and managing these partnerships, businesses can leverage the benefits of Scottish LPs while ensuring compliance with relevant tax laws, making them a viable alternative to traditional offshore companies.