How to Set Up a Subsidiary Company UK: Tax Considerations Explained

Expanding into the United Kingdom can be an exciting opportunity for international businesses. Many companies choose to create a subsidiary because it offers a clear structure, limited liability, and more independence than simply opening a branch. But one of the most important things to understand is the tax environment.

In this guide, Well-Tax explains how to set up a subsidiary company UK with a special focus on tax considerations. Well-Tax can support you from the first approach, through setting up a subsidiary company in the UK, and managing the deadlines.

Why Choose a Subsidiary Company in the UK?

Before diving into the tax side, let’s clarify why businesses prefer the subsidiary model:

• Limited liability: The parent company is shielded from direct legal and financial risks of the UK operation.
• Separate identity: A subsidiary is a distinct legal entity, which can build its own reputation in the UK market.
• Tax benefits: Depending on structure and treaties, subsidiaries can sometimes enjoy favourable tax treatment compared to branches.

Understanding how to set up a subsidiary company UK is not just about registration—it’s about knowing the tax obligations that follow.

How to Set Up a Subsidiary Company UK: Legal Basics

A UK subsidiary is usually registered as a private limited company (Ltd). Here are the main steps:

1. Choose a company name – It must be unique and comply with UK rules.
2. Appoint directors and shareholders – At least one director is required.
3. Register with Companies House – The official UK company registrar.
4. Prepare constitutional documents – Articles of association and memorandum.
5. Provide a registered office address – This must be a UK address.

Once this is complete, your subsidiary is a legal UK company. But setting up is only step one—understanding tax considerations is crucial to avoid compliance issues.

Tax Residence of a UK Subsidiary

A key tax point is that a UK subsidiary is treated as a UK resident company. That means:

• It is subject to UK corporation tax on worldwide profits (not just UK-based income).
• The parent company is usually shielded, but inter-company transactions will have tax implications.

This distinction is one of the most important aspects when considering how to set up a subsidiary company UK.

Corporation Tax for Subsidiary Companies

Current Rates

As of 2025, the UK corporation tax rate is:

• 19% for profits up to £50,000.
• 25% for profits above £250,000.
• Marginal relief applies between these thresholds.

This tiered system means the effective tax burden depends on your subsidiary’s profitability.

Filing Obligations

A UK subsidiary must:

• File an annual corporation tax return (CT600).
• Submit statutory accounts to Companies House.
• Pay corporation tax usually within 9 months and 1 day after the end of the accounting period.

Failing to meet these deadlines can lead to penalties, so part of learning how to set up a subsidiary company UK is ensuring you understand reporting duties.

Double Tax Treaties and Dividends

One major concern for parent companies is double taxation. The UK has an extensive network of double tax treaties. These treaties often:

• Reduce or eliminate withholding tax on dividends, interest, and royalties.
• Allow credits in the parent company’s jurisdiction for UK tax already paid.

For example, if the parent company is based in a country with a UK treaty, dividends from the subsidiary can usually be paid without additional UK tax.

When exploring how to set up a subsidiary company UK, always check the treaty position between the UK and the parent’s country.

VAT Considerations for UK Subsidiaries

If your UK subsidiary sells goods or services, you may need to register for Value Added Tax (VAT).

• The VAT registration threshold is £90,000 in UK sales per year (2025).
• Standard VAT rate is 20%, though some items have reduced or zero rates or are exempt.

A subsidiary must keep VAT records, issue VAT invoices, and file regular VAT returns. This is a practical tax step that should not be overlooked when learning how to set up a subsidiary company in the UK.

Transfer Pricing Rules

Because the subsidiary and parent are connected parties, the UK’s transfer pricing rules apply. That means:

• Any transactions (such as loans, management charges, or inter-company sales) must be at arm’s length prices.
• Documentation should justify how prices were calculated.

Failing to address transfer pricing can result in tax adjustments and penalties. So when deciding how to set up a subsidiary company UK, ensure transfer pricing policies are in place.

Employment Taxes

A UK subsidiary hiring staff will face Pay As You Earn (PAYE) obligations. This includes:

• Income tax deductions from employee wages.
• National Insurance contributions (NICs).
• Employer’s NICs, which are additional costs for the subsidiary.

Understanding employment tax is vital for operational planning, and it’s part of the bigger picture of how to set up a subsidiary company UK correctly.

Withholding Taxes on Payments Abroad

Although many treaties reduce withholding taxes, it’s important to know the rules:

• Dividends: Usually not subject to UK withholding tax.
• Interest and royalties: May attract withholding tax unless reduced by treaty.

This is a key tax consideration, especially if profits will flow back to the parent company.

Group Relief Opportunities

One advantage of setting up a subsidiary rather than a branch is access to group relief:

• Losses in one UK group company can sometimes be offset against profits of another.
• This can reduce overall corporation tax bills within the group.

This makes a subsidiary an attractive structure for international groups, and it’s another reason businesses study how to set up a subsidiary company UK.

Tax Compliance and Penalties

UK tax authorities (HMRC) take compliance seriously. Subsidiaries must:

• Keep accurate accounting records.
• File tax returns on time.
• Pay correct amounts of tax.

Penalties apply for late filing, late payment, or errors. Therefore, professional accounting support is often recommended when you consider how to set up a subsidiary company UK.

Comparing Subsidiary vs Branch from a Tax Angle

Many companies ask: why not just open a branch?

• Branch: Not a separate legal entity, profits are taxed in both the UK and home country.
• Subsidiary: Independent, more flexibility, better tax treaty benefits.

From a tax perspective, a subsidiary usually provides more certainty, which is why understanding how to set up a subsidiary company UK is essential before expansion.

Practical Tips for Setting Up a Subsidiary

• Seek local tax advice: Every business is different, and UK rules change regularly.
• Plan financing carefully: Whether you fund via equity or inter-company loans has tax implications.
• Keep group structure in mind: Tax reliefs may be available for multi-company groups.

When you begin to map out how to set up a subsidiary company UK, tax planning should be integrated from day one. Well-Tax is here to support you.

Conclusion: Tax Matters in Every Step

Setting up a UK subsidiary is more than just company registration. Taxes affect profits, cash flow, and compliance. Understanding corporation tax, VAT, transfer pricing, and treaties will help your business avoid costly mistakes.

In short, learning how to set up a subsidiary company UK is about building a sustainable foundation—not just legally, but also financially. With the right planning and advice, Well-Tax can support your UK expansion to be both compliant and profitable.