UK companies move offshore to more favourable tax territories (May 2008)
In recent press coverage, a number of UK-headquartered groups have warned that they are considering moving overseas to countries offering more favourable tax regimes. Indeed, Shire Pharmaceuticals and United Business Media (UBM) have confirmed that they are already committed to such a ‘move’, by inserting a new holding company at the top of their structure. This company will be incorporated in Jersey, but resident in Ireland.
Why relocate?
Many companies have considered moving offshore, but have been reluctant to do so up to now. However, a number of changes to the UK controlled foreign company (CFC) rules, proposed in the Budget 2008, have tipped the balance more towards relocation. The original CFC rules have been in existence for many years and seek to tax UK groups on profits earned offshore, before they are repatriated by way of dividends. The areas targeted in the legislation include intellectual property licensing and financing carried on through companies located in low- tax territories.
The proposed changes would make it almost impossible for many groups to retain their offshore structures, and have been the catalyst for their reconsideration of a move away from the UK.
Concerns have also been raised that the discussion paper issued by HM Treasury and HM Revenue & Customs in 2007, proposing changes to the UK taxation of foreign profits, has not gone far enough in trying to make the UK a more attractive location for the head offices of international groups. Although there was a suggestion that overseas dividends would be exempt from UK corporation tax in certain circumstances, the paper also proposed the replacement of the CFC provisions with an even harsher regime. Restrictions on tax relief for interest on borrowings were also included.
How is relocation effected?
It is relatively straightforward to insert a new company, which is tax-resident outside the UK, at the top of an existing group. This can involve a share-for-share exchange where the existing shareholders transfer their shareholdings in the old plc to a new, overseas-resident plc. It is additionally possible to apply to the court and achieve the same objective by a Companies Act scheme of arrangement. The substantial shareholding exemption, allowing UK companies to make tax-free transfers of shares in (broadly) 10% trading companies, has made such a move easier.
The recent Shire and UBM proposals have served to underline the simplicity of such an exercise. However, it is worth noting that shareholders may suffer capital gains tax on the initial share-for-share exchange, which could discourage a move offshore in some cases.
What are the benefits?
In some cases, the financial gains will be major. Overseas relocation means that the UK CFC rules can be avoided, facilitating tax-efficient financing and location of intellectual property in low tax territories. Groups can therefore minimise both the effective overseas and UK tax rates in the future. In many cases, this reduction can only be achieved if the country of relocation offers a low headline rate of tax and a system that guarantees the overall tax liability is low through generous tax reliefs and allowances. Many will also benefit from significant savings on the cost of complying with complex UK anti-avoidance legislation
It is worth noting that, although it has so far been larger groups that have relocated their tax residence offshore, such a move could be of benefit to any company that has, or could have in the future, low-taxed profits outside the UK.
What are the ongoing issues?
The main issue is ensuring that the new company maintains its tax residence outside the UK. The key test of this is where the board of directors makes its strategic decisions. While it may not be necessary to move the whole head office function, there will need to be a change in boardlevel practice in many instances.
Where a business is already mainly international in nature, this requirement may not prove onerous. On the other hand, groups with a high proportion of UK operations and a UK-based board of directors may find this change challenging, but not necessarily impossible. It is clear that if the exodus of companies from the UK continues, HM Revenue & Customs is likely to examine ever more closely the tax residence of offshorebased companies.
There are other tax risks that need to be considered as well, such as transfer pricing and the risk that, even after the group has moved offshore, it continues to conduct business in the UK which gives rise to taxable profits here.
What happens next?
The long-awaited next stage of the consultation on the taxation of foreign profits is expected to be published in June 2008. In the meantime, the government has set up a new Tax Forum to consult with business following the Shire and UBM announcements. However, it seems certain there will be more such departures, and that the UK will fall further behind competitors such as the Netherlands, Luxembourg, Switzerland and now Ireland, when it comes to attracting new international holding companies.
The merits of any potential relocation of the tax residence of your company overseas are dependent on the particular facts and circumstances, and the law in this area is changing on a regular basis. Therefore please contact your independent financial adviser to discuss this subject in more detail.
© Baker Tilly UK Group LLP, all rights reserved, 03.08
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