Scotland attracts many foreigners as a convenient place to start a new venture. From Edinburgh’s Charlotte Square financial district to the remote and rugged Highlands favoured as a playground by generations of Britain’s royalty and elite, today Scotland is seen as the most pro-Europe country of the United Kingdom.
Prestige and ease of incorporation make the jurisdiction an ideal hub from which to do business internationally – but the possibility to run a business tax-free through the famous Scottish Limited partnership seals the deal for many investors from overseas.
Of course, those are not the only reasons why businesses choose Scotland, but this article will focus on this form of low-cost, tax-free Scottish business registration for non-residents.
In recent years, the Scottish Limited Partnership has come to prominence as a zero-tax alternative to a traditional offshore company. Too much prominence some would say! See our list of the Disadvantages of Scottish LPs below. Our job is to tell the truth so you can make informed decisions.
So – what are the advantages and disadvantages of becoming an owner of this type of “offshore company” form in Scotland? And does it really work, or is it too good to be true?
What is a Scottish Limited Partnership and is it really exempt from UK taxes?
Most readers will be familiar with the concept of a Limited Partnership, but for those who are not, it is an unincorporated partnership where one or more General Partners (GPs) partners operate the business with unlimited personal liability, but there are also silent or “investor” partners called Limited Partners (LPs). As the name suggests, the LPs’ liability is limited to the value of their investments.
This legal form of doing business is common all over the world and is commonly used in structuring real estate investment trusts, professional firms and more.
According to tax law in the United Kingdom, partnerships (whether limited or unlimited) are ‘transparent’ entities for tax purposes. This means pass through taxation (also called “check the box taxation”in the USA) is applied and the profits are taxable directly in the hands of the members of the partnership.
For example, Mr A. and Mrs B. are in partnership, with A owning 40% and B owing 60%. IF the partnership makes a profit of GBP 1000, then A must declare GBP 400 on his personal tax return, and B must declare GBP 600 on hers.
To cut a long story short, the logical conclusion of this is that if there is no income within the UK, and none of the partners are resident in the UK, then there is no tax payable in the UK. (This same principle applies for example to LLCs in the USA, that are also transparent for tax purposes).
Now, UK tax law applies in the whole of the UK, but the UK is made up of four constituent countries: England, Scotland, Wales and Northern Ireland. Out of these, only Scottish law gives legal personality to Limited Partnerships. Legal personality means that the SCottish LP (unlike an English LP) is regarded as a legal entity completely separate from its owners. As such, it is “almost a company” but at the same time it can be structured to pay no UK taxes.
FREE EXPERT CONSULTATION
on which jurisdiction is best for
your business, preferred tax regime,
on which jurisdiction is best for your business, preferred tax regime, company structure.
Advantages starting a new LP in Scotland
- no taxation on worldwide income, if there is no UK income and no UK resident partner;
- low cost of registration
- minimum reporting requirements;
- prestige of the jurisdiction;
- minimal requirements for registration a legal entity;
- easy access to the EU and U.S. market;
- lack of currency control;
- Scotland is not on the FATF list of monitored offshore jurisdictions;
- fast registration – 1-2 weeks.
Please note that Scottish non-resident Limited Partnerships (LPs) are exempt from taxes and annual reporting if the beneficiaries are non-residents, the income is not generated in the UK, and the business is conducted outside the UK. However, if they establish any presence in the UK they will be subject to UK taxation.
Disadvantages of starting a new LP in Scotland
- increasingly severe reputational issues relating specifically to misuse of LPs by non-residents. Compliance or tax officers in the know will see a Scottish LP owned by non-residents and this can raise a red flag immediately, probably worse than a reputable offshore company such as Nevis, Marshall Islands or Panama.
- likelihood of new anti-abuse legislation being passed in near future;
- requirement for disclosure of beneficial ownership on a public register;
- Scottish LPs cannot be managed online, meaning hard copy paper forms sernt by mail or courier are required for all changes, updates etc;
- hard to qualify for a UK VAT number;
- no possibility to redomicile, not even to other parts of the UK;
- almost impossible to open UK bank accounts for Scottish LPs.
Differences between Companies in Scotland and England
The corporate legislation for English and Scottish companies is different, albeit broadly similar. Historically, the Scots system is a hybrid legal system containing civil law and common law elements, whereas the system in England and Wales is based entirely on common law. In the modern context, under legislation passed by the Scottish Parliament in 2020, Scots law is also required to keep in regulatory alignment with all future European Union law, whereas English law is not.
Registration of private companies is subject to the Companies Act 2006 or the Limited Partnership Act 1907. But there are some specific features of the above-mentioned legal entity types:
- in the United Kingdom, there is a unified online system of registration of legal entities and a unified public register, formally known as the Registrar of Companies but better known as “Companies House“. However, the Registrar of Companies of Scotland is different from the one covering England and Wales.
- the Scottish company registration number begins with SC (for a Limited company), SL (for a Scottish LImited Partnership) or SO (for a Scottish LLP), while the English or Welsh company registration number starts with OC (for LLP) or LP (for LP), followed by 6 digits.
Of course, besides LPs Scotland also allows for registration of normal private limited companies (with the suffix “Limited” or “Ltd”) and public companies (“PLC”). These workin a very similar way to their English, Welsh or Northern Irish counterparts. There is no particular attraction to registering a normal company in Scotland, unless you are a resident or aficionado of Scotland or have business connections there.
Take advantage of an off-the-shelf solution for entering international markets: a Scottish LP in the UK plus an account with an Irish payment system, and a direct named IBAN. For more details, please refer to our experts at the e-mail address given above.
How to register a company in Scotland?
If you are ready to get started with registering a company or LP in Scotland, you should consider many peculiarities of the local legislation. To do, so you will need to study the law or engage experienced lawyers. That is why we recommend that you should seek help from our experts.
The procedure for setting up a business entity in Scotland is as follows:
1. choose the business entity form (for example a Scottish LP or a Scottish company);
2. come up with a unique name
3. prepare and submit the set of documents to Edinburgh Authorities and to the Companies House (this is still done on paper if you choose an LP, but is usually carried out by the formation agent in the background)
4. obtain the certificate of registration of the company.
How to buy a ready-made LP in Scotland?
You can save time (at least by a week) and leap towards your international business if you buy a ready-made LP in Scotland.
The purchase procedure is quite simple:
1. contact to our experts with details of what you would like to buy;
2. we will get back to you with several off-the-shelf companies that would best meet your requirements;
3. send us the portfolio of KYC documents;
4. our lawyer will re-register the entity in your name;
5. we will send you all the incorporation documents for the shelf company.
You are welcome to rely on us in all matters concerning your purchase of a shelf company in Scotland.
Please note that the purchase of a shelf company in Scotland allows you to save time – it takes only 3-5 working days to re-register the legal entity to the new owner.
Summary of features of a Limited Partnership registered in Scotland
- It takes a minimum of 2 partners to register an LP. Usually, for non-residents, the general partner is a legal entity from a tax-free offshore country (Belize, Nevis, Marshall Islands);
- an LP is a business form with pass-through taxation – profits belong to the partners, not to the legal entity;
- a limited partnership agreement must be signed by the partners;
- it is not mandatory to hire any local staff – indeed, you cannot do so otherwise you will become liable to taxes in the UK;
- the founder can act as the General Partner, or nominate anyone else for this position (our partner lawyers in Scotland can provide suitably-qualified professional nominees);
- the partners’ liabilities are limited to the value of their share in the capital of the partnership, except for the general partner. The latter is personally liable for the obligations of the LP;
- every Scottish LP is required to file an Annual Return with Companies House every year;
- a Scottish partnership or private company may be required to file annual financial statements with HMRC, the UK tax authority, but can apply for exemptions if there is no relevant information to file;
- Company data in Scotland is freely available on the public register.
What documents are needed to buy or register an LP in Scotland?
To buy a business or start a new company as a Scottish LP or Scottish Private Limited Company, you will need to submit the following documents:
- a certified copy of the passport (of each owner);
- utility bill to confirm the residential address;
- a bank or professional reference (when requested).
If the partners or shareholders are legal entities, then please provide a full package of corporate documents. The due diligence documentation required varies based on the jurisdiction, so if you are not sure our friendly staff are available online to assist you.
Can I use a Scottish LP for import-export business with the European Union?
Yes, of course. Whilst Scottish entities are no longer EU entities post-Brexit, theystill have many advantages when engaging in trade with the EU. If you want a prestigious and profitable tool for export-import transactions that provides high-level asset protection, please contact us now and we will get back to you as soon as possible.
What is the utility bill of a company in Scotland?
A company in Scotland can arrange proof of address by signing up for, for example, a UK mobile phone contract in its name. This in itself should not affect the tax status.
How long does it take to register a legal entity in Scotland?
It takes 1-2 days to register a new company in Scotland as the process is completed 100% electronically. However LP registrations are still handled on paper, therefore it takes 2-3 weeks to register a new LP in Scotland. So if you need to get a ready-made Scottish LP faster we recommend buying a ready-made LP.
Is Scotland an offshore jurisdiction?
Scotland is not generally considered an offshore jurisdiction and is not on the offshore “black lists” of international organizations or other countries.