Principal and Agency contracts in the European Union

You can have a structure where a Principal company takes profits on a worldwide level, but there is a trading company in the European Union which trade and bank the profits on behalf of a principal company acting elsewhere. Historically the agency company has been in the UK, since the UK authorities accept the structure under certain circumstances. There may, however, be reasons not to choose the UK to site your agency company.

Which Principal Agency contracts are acceptable to the UK authorities?

The British tax authorities tolerates principal agency contact when the agency is a UK non-resident company, because:

• Although the UK company has no UK structure; by default, it has to pay UK corporation tax on its UK profits unless it is considered resident somewhere else
• It is not a UK incorporated and UK resident company in legislation, because it has no UK beneficiaries, no substantial UK trade and no UK property or employees

The agency company and the principal company can be deemed to be UK resident companies in legislation if:

• Their trade is substantially with the UK
• They have offices, warehousing, employees or the main seat of management in the UK
• or their principal in the company, who is usually the beneficiary, is a UK resident and tax payer.

If this is the reality, the structure needs to be set up in a different way:

What happens if you are a UK taxpayer and want to use the principal agency structure

If you are a UK taxpayer, you have an obligation to pay income tax on worldwide earnings, so clearly you do not want to pay substantial corporate taxes on trading profits, clearly you should not set up an agency structure, with the agency company being a UK company

If your company has no employees or business premises in the UK, you should set up an agency company in another European company, and the principal in an offshore jurisdiction.

If you have substantial business; this agency company needs a European VAT number, so should be in a country where a European VAT number can be obtained easily, and where you are likely to have very few clients: examples are the Cyprus, the Czech Republic, Romania or Portugal.

I require at least one European VAT number to implement the principal agency structure: Does this affect my choice of where to form the agency company?

Initially, you need to have the agency company in a country which gives a VAT number on the European VIES register to new companies very quickly.

You may then require VAT numbers for your company in different EU countries for your agency company. This is usually easy where:

• There is substantial trade in that country
• There is VAT to recover from the purchase of supplies in that country
• or there is a permanent establishment in that country.

Applying for VAT numbers in EU countries, where the company is not registered does not affect the tax residency of the agency company.