By Forsters LLP’s Stuart Hatcher and Lianne Baker
The Government is consulting on whether the UK should effect a corporate re-domiciliation regime, allowing non-UK businesses to relocate to the UK without affecting their legal identity.
The Government’s aim is to “strengthen the UK’s position as a global business hub” and one way to achieve this is to allow overseas entities to relocate to the UK easily and cheaply. Since Brexit, the UK has no “re-location” process and with other countries, including Canada, Singapore and Australia, permitting corporate re-domiciliation, the UK does not want to risk losing its position as a leading financial centre.
Currently, a foreign business wishing to have a UK presence must incorporate a UK entity and bring it within the business’ corporate group. This is often a complex process, with the attendant costs and management resources needed for a restructuring, as well as potential tax consequences.
A corporate re-domiciliation regime allows foreign entities to relocate to the UK without any change in their legal identity. The entity’s place of incorporation would change to the UK and it would have to abide by UK corporate and regulatory laws, but it would retain its assets and property, would not have to assign or enter into new contracts nor would it have to start from scratch in obtaining any regulatory approvals and no pending legal proceedings by or against the foreign entity would be prejudiced. According to the Government, such a regime will encourage and increase investment and employment opportunities in the UK.
The consultation seeks views on the need for such a regime, the eligibility criteria which should apply, the potential tax consequences and whether “outward” corporate re-domiciliation should be permitted.
Putting in place effective eligibility criteria will be key to the regime’s success. The current thinking is that no economic substance test will be required but other conditions must be met to ensure the reputation and high standing of the UK’s corporate regime. The consultation suggests that the directors of the re-domiciling entity must be of good standing and the entity must be solvent, have passed its first financial period and provide certain documentation. Public policy and national security concerns must also be satisfied.
The consultation also asks whether UK entities should be able to re-domicile to another jurisdiction or whether inward-only re-domiciliation should be permitted. Globally, there are precedents for both. Arguably, a one-way regime could cause reluctance on the part of foreign businesses to irreversibly re-domicile to the UK, while from a political perspective, countries may be unwilling to permit businesses to move to the UK without a quid pro quo. Conversely, allowing the migration of UK businesses overseas is antithetical to the aim of enhancing investment in the UK. In a two-way system, safety measures to prevent re-domiciliation to the UK being used for short-term gains will be necessary and potential methods are referenced in the consultation.
The tax position will, for many, be critical to a business’ decision whether to re-domicile to the UK. The consultation queries whether an entity’s central management and control (CMC) should be within the UK for UK tax residency or whether re-domiciliation alone is sufficient and seeks views about overseas losses and whether they can be imported and offset against UK profits, the base cost for imported assets and the situation regarding stamp taxes and VAT. Reams of UK anti-avoidance rules are sure to accompany the re-domiciliation legislation and perhaps are an unintended consequence.
There is also the question of whether there is an actual need for the regime from a corporation tax perspective? Non-UK incorporated companies can already typically achieve “corporation tax re-domiciliation” by moving their CMC to the UK. Becoming UK tax resident and thus subject to UK tax on its worldwide income is no minor step and so an entity should consider why it really wants to be based in the UK. Potential exit or other tax charges from an entity’s country of origin may also be a factor.
While the UK is renowned for its corporate governance regime and overseas shareholders will be able to benefit from that if their company re-domiciles, with enhanced corporate governance, potentially comes more regulation and less privacy. Obviously, this will depend on the country of origin but, for example, shareholders will be subject to the UK’s persons with significant control reporting requirements, and this could result in less privacy than they are used to.
Shareholders will also need to carefully consider their tax position in relation to the receipt of dividends from the company.
At this stage, any plans for a corporate re-domiciliation regime are still very much in the planning stages. What will be interesting is to see the responses from business’ and the financial services’ community in terms of the regime’s demand and how they see it working in practice.
The consultation is open for responses until 11.45pm on 7 January 2022.