It has become increasingly common in recent months for UK-headquartered groups with international businesses to move their tax base outside the country, usually retaining a UK listing and FTSE inclusion. Recent re-locators include Shire, United Business Media and Henderson Group. A number of other companies are said to be considering a move. But why and how are they doing this?At 28%, the UK corporation tax rate is not especially low nowadays, and many multinationals would seek to benefit from a better effective rate. However, the UK system is based on worldwide taxation of resident companies, and is designed so that UK tax will often still be relevant to the profits generated where UK-based groups operate through subsidiaries in lower-tax jurisdictions. This is achieved through a combination of transfer pricing rules, controlled foreign company (CFC) apportionment rules and the taxation of distributions to the UK. Recent anti-avoidance measures have also made it more difficult to use group treasury and CFC planning as a way of managing down an effective tax rate.
By David Taylor|October 22, 2008 at 10:06 PM
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A growing number of companies are seeking to escape the UK’s tax regime in favour of offshore jurisdictions. David Taylor looks at how it’s done
It has become increasingly common in recent months for UK-headquartered groups with international businesses to move their tax base outside the country, usually retaining a UK listing and FTSE inclusion. Recent re-locators include Shire, United Business Media and Henderson Group. A number of other companies are said to be considering a move. But why and how are they doing this?
At 28%, the UK corporation tax rate is not especially low nowadays, and many multinationals would seek to benefit from a better effective rate. However, the UK system is based on worldwide taxation of resident companies, and is designed so that UK tax will often still be relevant to the profits generated where UK-based groups operate through subsidiaries in lower-tax jurisdictions. This is achieved through a combination of transfer pricing rules, controlled foreign company (CFC) apportionment rules and the taxation of distributions to the UK. Recent anti-avoidance measures have also made it more difficult to use group treasury and CFC planning as a way of managing down an effective tax rate.
The UK system is under pressure, both from countries which are less concerned about collecting tax on profits that are not generated locally, and from the emerging case law on European Union (EU) freedoms as applied in the tax context (especially in relation to the CFC rules). The Treasury responded to concerns last year with a consultation on the taxation of foreign profits. This resulted in proposals for exempting foreign dividends, but also (remarkably, given the European cases) a proposed new controlled companies regime that is perceived as potentially harsher than the CFC regime. The proposals were said to be designed for overall fiscal neutrality, and it was recognised that there would be winners and losers among corporate groups.
A problem with such an approach is that it can lead to the winners taking their winnings and the potential losers avoiding their losses.
While instructive, this background does not explain all the recent interest in ‘inversions’ that involve a switch to a non-UK tax resident parent company. A general atmosphere of uncertainty on tax matters – and a possibility that things may get worse – has created a sense that it may be better to leave the UK sooner rather than later, in case rules are introduced that make a departure more difficult. The US, for example, moved against corporate inversions in 2004. EU constraints would no doubt be relevant if the UK sought to do likewise.
How to leave the UK
As to the question of how to achieve a departure, one approach is simply to move the place of central management and control to another tax friendlier country with an appropriate double tax treaty with the UK. This would have the effect of establishing corporate tax residence overseas. Although, subject to EU law considerations, a capital gains tax (CGT) exit charge can arise. The CGT substantial shareholdings exemption (introduced in 2002) will often be available in respect of any gains on a deemed disposal by a holding company of its subsidiaries.
FTSE inclusion considerations may encourage this approach, but it remains relatively rare in practice, owing in part to a curious rule that is designed to leave the holding company vulnerable to the application of the CFC regime. Taken with other concerns, such as practical management implications, the use of a new holding company is usually encouraged instead.
One approach that has become common involves placing a new Irish resident holding company (usually Jersey-incorporated, so as to produce benefits such as stamp duty savings) on top of the existing listed company. This is achieved using a Companies Act 2006 cancellation scheme, and typically involves a CGT rollover (based on relief for reconstructions) for shareholders.
The Irish structure is not always adopted: Luxembourg (for example, Regus Group) and Bermuda (for example, Signet Group) have also been used. Emigrating insurers also tend to favour Bermuda.
A common additional feature is the use of income access shares, usually held in trust, which enable shareholders to continue to receive dividends from a UK-resident company, rather than, for example, the new Irish holding company. It is not immediately clear what is achieved by income access shares nowadays. They have usually been seen as designed for shareholders wishing to receive the tax credit attaching to UK dividends.
But following changes to the tax treatment of individual shareholders in the Finance Act 2008, providing most of them with equivalent credits on foreign dividends, there is now little in this point. Where income access shares may still be of benefit is when dealing with local withholding tax issues where an Irish (or Luxembourg) company is used, and UK dividends are preferred by UK corporate shareholders and authorised investment funds.
It is important to appreciate that the introduction of the new overseas holding company of itself achieves absolutely nothing. The former UK-holding company (now a sub-holding company) still carries on its business and controls all the overseas entities that it previously did. What the new structure does bring, however, is the flexibility to take steps that will have an effect on tax in the future. For example, non UK resident subsidiaries of the UK company can be transferred under the new non UK holding company. Also, group central services, such as treasury, and perhaps even intellectual property ownership, can be moved gradually into entities that are not UK-controlled.
There are many other tax and non-tax issues to consider. Tax points include:
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