27 January 2022

London Calling? Government Proposes Overseas Companies Re-Domicile to the U.K.

Elizabeth Small, Partner in our Tax team, looks at the U.K. government’s proposed scheme for international companies to re-domicile to the U.K., and assesses the processes and potential tax implications for businesses that contemplate doing so.

Reproduced with permission from Copyright [2022] The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. The original article can be located here.

There is no doubt that “U.K. PLC” is open for business post-Brexit and Covid-19. Access to a skilled and technical workforce and world-leading capital markets, coupled with a transparent and robust corporate law and governance framework, have long been draws for international groups to establish “U.K. Headquarters Co.”

There is also a key tax incentive as, unlike some other notable headquarters jurisdictions, the U.K. does not impose withholding tax (WHT) on dividend payments, meaning that no complex structuring has to be inserted between the U.K. Headquarters Co and its shareholders.

Why is the U.K. Government Proposing a Re-Domiciliation Scheme?

A perceived bar to entry has been the need for an overseas company’s shareholders to, for example, establish a new U.K. headquarters company, transfer the shares of the existing company to the newco by way of a share-for-share exchange, and then potentially have to transfer some or all of the assets and liabilities of the existing company to the newco.

This may trigger unnecessary and “dry” tax charges at the level of the shareholders, who have simply engaged in a share swap (i.e. no cash/liquidity has entered the structure), as well as possible transfer tax charges on the disposal of the existing company shares (and assets), as well as liabilities for the existing company when it transfers its assets to newco.

In addition, lenders’ permission may be required, with the result that existing debt/financing arrangements may have to be resecured and, one fears, renegotiated. Other contracts held by the existing company may need to be novated, employees and their share incentive arrangements may have to be moved (subject to potential renegotiation with unions or employee representatives), and litigation (both current and future) may be prejudiced if, for example, the assets/liabilities of the existing company are transferred to newco.

Further, hours of management time will be expended on reviewing the implications of, and processing, all of this.

What is Re-Domiciliation?

By contrast, once a decision has been taken to move to the U.K., a simple re-domiciliation process—whereby the existing company remains the same entity throughout but moves its place of incorporation to the U.K.—would, as the U.K. government’s consultation paper says, “give companies maximum continuity over business operations and substantially reduce administrative complexity compared to other routes of relocating to and incorporating in the U.K.”

The U.K. government’s intention is that re-domiciled companies will generally retain their corporate history, management structure, assets, intellectual and other property rights, contracts and regulatory approvals (paragraph 2.2 of the consultation paper).

Who Will be Able to Re-Domicile?

In contrast to certain other jurisdictions, the U.K. government currently does not intend to impose any economic or substance-based thresholds before a company may take advantage of re-domiciliation to the U.K. Singapore, for example, has two main tests:

  • Size: The foreign corporate entity must meet any two of the below:
    • total asset value in excess of S$10 million ($7.4 million);
    • annual revenue in excess of S$10 million;
    • more than 50 employees.
  • Solvency/good standing.

According to the consultation paper, the U.K. government is only considering adopting the second of these tests. As such, to re-domicile to the U.K., a company must be able to pay its debts, and the application should be made in good faith and not intended to defraud existing creditors.

A response to the consultation by, among others, the Law Society of England and Wales, posits that questions of shareholder, creditor and stakeholder protection should be matters for the departing jurisdiction and that the U.K. should not seek to impose its own regime in these areas. In addition, the consultation paper refers to other key criteria, such as no national security risk and the consent of the exiting jurisdiction, and indicates that re-domiciliation will only be permitted for entities that are comparable to U.K. forms of company.

Other jurisdictions (such as Hong Kong) have, we understand, limited re-domiciliation to investment funds so that they may take advantage of a particular fund regime which hitherto only related to Hong Kong established funds. However, the U.K. government doesn’t currently intend to be so industry/sector specific.

Indeed if, as the government is considering, re-domiciliation is coupled with an uplift to the market value base cost for the company’s capital assets (as at the date of the re-domiciliation), it may instead be single purpose property-owning vehicles that will benefit more from seeking re-domiciliation. They will achieve not only a stamp duty land tax (SDLT) saving for the buyer but also eliminate the “pregnant” corporation tax on chargeable gains liability which would arise on the latent gain on the U.K. property assets owned by the company. It is therefore likely that an uplift to market value will only apply to capital assets that are outside the scope of U.K. corporation tax immediately before the date of the re-domiciliation application.

U.K. Tax Implications

A key consideration for any foreign company considering re-domiciling to the U.K. will be the applicability of exit charges from its current jurisdiction, but various U.K. tax considerations will also arise as referred to in the consultation paper.

Will a Re-Domiciled Foreign Company Automatically be U.K. Tax Resident?

Currently, companies are U.K. tax resident and so subject to U.K. tax on their worldwide income (save where any relevant double taxation agreement applies) if they are either:

  • incorporated in the U.K; or
  • centrally managed and controlled (CMC) in the U.K.

If re-domiciliation deems a company to be incorporated in the U.K., then it would seem logical that such a company should be tax resident in the U.K. even if the board of directors (i.e., CMC) remains offshore. It also seems fundamental that companies originally incorporated in the U.K. should be treated no worse than companies that have re-domiciled to the U.K.

However, being U.K. tax resident may not be enough to take advantage of all tax breaks. For example, the enterprise investment scheme currently requires that the issuing company must have a permanent establishment in the U.K. for a three-year period commencing on the date of the issue of the shares.

Stamp Duty Reserve Tax

  • Very broadly, stamp duty reserve tax (SDRT) is chargeable on shares and securities issued by a company incorporated or registered in the U.K. So, the expected starting point could be that shares or securities by a company which re-domiciles to the U.K. would become chargeable securities for SDRT purposes.
  • SDRT is charged at the rate of 0.5% on transfers and 1.5% in respect of certain clearance services and also depositary receipts.
  • Currently, foreign companies list in the U.K. through a depositary interests (DI) structure, but presumably one of the key benefits of re-domiciliation will be that the shares of the company will be capable of direct listing and trading?
  • Under current rules, if a foreign company has listed DIs, those DIs are not subject to SDRT (where they represent foreign securities, i.e., not U.K. incorporated, shares not registered in the U.K. and the company’s CMC does not take place in the U.K.). Following re-domiciliation (even assuming that CMC stays offshore) presumably the existing DIs will become subject to SDRT?

Loss Importation?

There is a possible tension here between the U.K. tax authority, HM Revenue & Customs (HMRC) and the U.K. Treasury. HMRC will defensively want to ensure that losses generated abroad stay abroad, and do not reduce the U.K. tax take; while the Treasury may be keen to attract innovative start-ups, especially those with green credentials. For such companies, being unable to carry forward and use their existing losses could be a real bar to re-location.

Base Cost?

The consultation paper seeks views on whether there should be an uplift to market value. As discussed above, provided the assets are outside the scope of U.K. corporation tax, that would seem a sensible position to incentivize companies to move to the U.K. (especially as they may incur exit charges when they leave their current jurisdiction).

Personal Tax for Shareholders

The consultation paper gives away no clues regarding the government’s current thinking on how re-domiciliation will impact the tax treatment of the re-domiciled company’s shareholders—other than the ominous comment that anti-avoidance measures may be needed.

It is not entirely unreasonable to anticipate that the shares in a company which is now deemed to be a U.K. company for all other regulatory purposes may well be treated as being U.K. situs for inheritance tax purposes. A similar rule may also well apply for capital gains tax purposes. Since March 16, 2005, Section 275(1)(da) of the Taxation of Chargeable Gains Act 1992 has provided that “Shares or securities of a company incorporated in any part of the United Kingdom are situated in the United Kingdom.”

Value-Added Tax?

Re-domiciliation in and of itself may not be sufficient to change where a company “belongs” from a value-added tax (VAT) perspective. As HMRC note in HMRC Notice 741A para 3.2:

“You belong in the U.K. for the purposes of either making or receiving a supply of services when you have any of the following:

  • a business establishment in the U.K. and no fixed establishment elsewhere that’s more closely connected with the supply
  • a business establishment outside the U.K. and a fixed establishment in the U.K. that’s most directly connected with the supply
  • no business or fixed establishment anywhere, but your usual place of residence is the U.K.”

Typically, a business establishment is where the board of directors meet, while a fixed establishment means “any establishment … characterized by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs” and “to enable it to provide the services which it supplies.”

This point was emphasized in the recent Court of Justice of the European Union (CJEU) case of Titanium Ltd v Finanzamt Österreich (Case C-931/19) EU:C:2021:446 (June 2021) where the court was asked whether the passive letting of property in Austria (which did not require human and technical resources in Austria) could be regarded as a fixed establishment.

The CJEU confirmed that the Jersey company which owned the property (Titanium) would need to have had human and technical resources in Austria to create a fixed establishment. The fact that Titanium had appointed an independent real estate agent to manage the letting was not sufficient; Titanium needed to have its own staff in Austria to create a fixed establishment.

Belonging is an important concept for U.K. VAT, because it dictates the place of supply for services. The basic B2C (business-to-consumer) rule is that the supply is deemed to take place where the customer is, and so many legal fees may be invoiced to an offshore client without U.K. VAT.

A company which re-domiciles to the U.K. without bringing its business to the U.K. may nonetheless find that it is assumed to belong in the U.K. and will need good evidence to demonstrate that supplies to it are still outside the scope of U.K. VAT.

U.K. Source?

The U.K. typically imposes a 20% WHT on the payment of interest on a loan capable of lasting a year or more where the interest has a U.K. source and the lender is outside the U.K. There are many factors which determine whether the interest has a U.K. source, but it seems probable that HMRC may consider that a company which has re-domiciled to the U.K. may well have brought the interest into the U.K. WHT net.

Planning Points

It may seem obvious, but think carefully about why you want to re-domicile—for example, will it be easier to achieve an initial public offering (IPO)? The Financial Conduct Authority (FCA) will not admit shares to the premium or standard segment of the Main Board of London Stock Exchange (LSE) of a non-U.K. company that are not listed either in the company’s country of incorporation or in the country in which a majority of its shares are held, unless the FCA is satisfied that the absence of the listing is not due to the need to protect investors.

In addition, U.K. incorporated public companies listed on the London markets give shareholders the protections afforded by the U.K. Takeover Code. Shares in a listed U.K. company can be traded directly rather than using a DI structure for settlement which is required for non-U.K. and Channel Islands incorporated companies.

Once a “move” to the U.K. has been decided, then query whether re-domiciliation is the answer rather than incorporating a new U.K. holding company; historically it has been considered easier on certain markets of the LSE (i.e., that do not require a minimum trading and financial history) to list a new clean company rather than a company that has a long corporate history.

Having considered the advantages of re-domiciliation, also consider the downsides; for example, as referred to above, a U.K. tax resident company is typically subject to tax on its worldwide income. Re-domiciliation should be achieved without any real disposal of any shares or assets of the company, but will the jurisdiction you are leaving impose an exit charge? While the U.K. government’s intention is to respect existing approvals and intellectual property rights, ensure that your exiting jurisdiction shares that view and treatment.

Re-domiciliation is likely to necessitate disclosing the company’s constitutional documents, so be aware that any existing share incentive arrangements that are achieved through the drafting of share rights will need to be disclosed to HMRC.

A further obvious point is to ensure that you have accurate records and documents at the time of the re-domiciliation, as once the company has left its old jurisdiction it may become much more difficult to obtain these.

Finally, it may be that re-domiciliation could effectively be a one-way trip. The U.K. government does not seem keen to allow a two-way regime, and even if it does, there may be possible exit charges should the company change its mind about being located in the U.K.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Elizabeth Small is a Partner in our Tax team.

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