London Calling? – Government Proposes Corporate Re-Domiciliation to the UK
The UK government announced in its Autumn Budget that it is considering putting in place a new regime to allow overseas-incorporated companies to re-domicile to the UK and has published a consultation to this effect (the “Consultation”). If the plans go ahead, foreign companies will be able to change their place of incorporation to the UK while retaining their legal identity. The intention is to “strengthen the UK’s position as a global business hub” by bringing the UK into line with various other jurisdictions, such as Canada, Singapore and Australia, which already permit re-domiciliation.
Why allow corporate re-domiciliation?
Currently, the UK does not allow corporate re-domiciliation and any overseas business which wishes to have a UK entity must incorporate a UK entity from scratch and amalgamate it into its group structure. This can be costly and time-consuming and is likely to have significant tax consequences, although a simpler strategy of moving the tax residence of the non-UK entity could be adopted – if the desired commercial benefit can be achieved by this stratagem.
The new regime would allow a foreign body corporate to relocate and change its place of incorporation to the UK, so maintaining operational continuity and, according to the Consultation, in general being able to retain its “corporate history, management structure, assets, intellectual and other property rights, contracts, and regulatory approvals”. As would be expected, any entity which re-domiciles to the UK would need to comply with UK legislation, regulations and corporate governance standards in the same way as any other UK-incorporated entity. One cannot help but draw comparisons with the European Court of Justice’s (the “ECJ”) decision in the 2012 VALE case in which an Italian established company sought to convert to a Hungarian established company. Italian law permitted such a conversion, but Hungarian law only allowed Hungarian established companies to convert. The ECJ held that provided that an EU member state (the “Recipient”) had a conversion procedure in place, it could not prevent a company established in another member state from converting into a Recipient company. The proposed UK re-domiciliation regime will essentially be the UK’s conversion procedure albeit with no limitation being placed on the origins of the converting company.
There is, at present, no suggestion that re-domiciliation between the UK nations, e.g. from England and Wales to Scotland, will be a possibility.
Prior to our leaving the EU, similar regimes were available in the UK in the form of European Companies (Societas Europaea) (“SE”) and pursuant to the EU Cross-Border Merger Directive (the “CBMD”):
- An SE is a European public limited company and can be incorporated in any EU member state. The idea behind SEs is that businesses with entities across several EU member states can be unified and that transfer across member states is easier, with no requirement to incorporate a new legal entity in the transferee state.
- The intention behind the CBMD was to simplify the merging of companies across EU member states. The UK does not have a merger regime (instead companies seeking to “merge” have to transfer the shares or assets and business from the transferor company to the transferee company following which the transferor company can be wound up), but this regime enabled UK companies to merge with companies from different EU member states using a far more straightforward process.
Since the end of the Brexit transition period, neither of these options are now available within the UK (whether a company wishes to transfer into or out of the jurisdiction). The newly proposed UK corporate re-domiciliation regime arguably seeks to achieve a similar outcome on a global scale.
What does the Consultation cover?
The Consultation seeks respondents’ views on the advantages of, and demands for, such a re-domiciliation regime, the eligibility criteria for foreign entities to re-domicile (including solvency requirements) and the tax consequences of establishing such a regime.
The Consultation also requests opinions on an outward re-domiciliation regime whereby UK-incorporated companies could relocate to other jurisdictions. Although several jurisdictions allow this two-way relocation, other countries, such as Singapore, only permit an inward move. Arguably, preventing a company from re-domiciling out of the country at a later date may deter foreign companies from re-domiciling to the UK in the first place, although if it is decided that outward re-domiciliation will be permitted, care will need to be taken to ensure that re-domiciliation cannot be used for short-term gains. To this end, the Consultation asks for thoughts around an exit fee, shareholder approval requirements and settlement of any payments, disputes and overdue obligations. In addition, putting in place a minimum period of time before which an entity which has chosen to leave the UK could re-domicile back again is a distinct possibility.
Will there be conditions to re-domicile?
The Consultation seeks views on certain eligibility criteria which the government is proposing before an entity can re-domicile to the UK but makes clear that an economic substance test is not on the cards.
- Any body corporate will be able to use the new regime as long as there is a comparable form in the UK, its country of incorporation allows it to re-domicile and it complies with the necessary legal requirements to transfer. There will be no sector or industry restrictions.
- The directors of the body corporate will need to satisfy good standing conditions and not be subject to any legal or enforcement action against them.
- Re-domiciliation of the entity must not pose any national security risk or be contrary to public interest.
- The body corporate must have passed its first financial period, be solvent and able to provide certain documentation, including a report setting out the legal and economic effects of the transfer and any implications for its shareholders, creditors and key stakeholders.
Considerations for directors
Directors will need to consider the pull factors carefully, i.e. why do they need the company to be treated as being domiciled in the UK (does that mean that specific grants or tax reliefs may be accessed)? Instead, could the same result be achieved by simply moving the tax residency to the UK by appointing new UK directors and thus ensuring that central management and control (“CMC”) is in the UK? UK tax groups with their tax advantageous treatment typically do not look to the domicile of the company in determining membership of the group.
Moving the domicile to the UK is often likely to be accompanied by a change in CMC and local advice will be needed as to whether these factors will mean an exit or other tax charge in the other jurisdiction.
As ever, directors will need to weigh-up a number of perhaps competing factors when taking such a strategic decision.
Will the regime have any significant effect?
Although it’s far too early to say whether permitting re-domiciliation will have any appreciable effect on the UK’s economy and standing in the global market, such a regime will certainly need a carefully balanced application process. Maintaining the world’s trust and faith in the UK’s corporate and business sectors is paramount but could result in unwieldy and over-burdensome procedural requirements which negate the potential advantages of having such a regime in place.
As at 8 November 2021, there were 3,420 established SEs, suggesting that such a system does find advocates and is appreciated by certain businesses. That said, as at December 2015, the vast majority of SEs were registered in the Czech Republic. Recent figures are difficult to come by, but it shows that certain jurisdictions may be more inclined to utilise the regime than others.
UK take-up of the CBMD also shows significant use with 108 cross-border mergers involving a UK company announced in the year 1 November 2017 to 31 October 2018 (albeit that this was at the time when we were still unsure whether the regime would continue to be effective after 29 March 2019, when the UK was originally set to leave the EU). In the preceding year, this figure was 77.
SEs and cross-border mergers aside, other jurisdictions seem to have effected a workable process although admittedly it is difficult to find evidence or statistics as to how many entities take advantage of such regimes and actually re-locate to those countries. It will certainly be interesting to see the business world’s view once all responses to the Consultation have been received and then how the government chooses to proceed.
If you wish to read the Consultation in full or take part in the Consultation, it can be found here. Responses must be received by 7 January 2022.
This note reflects our opinion and views as of 25 November 2021 and is a general summary of the legal position in England and Wales. It does not constitute legal advice.