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UK multinationals planning a move offshore may need to think twice, as changes under the looming Finance Bill and the state of the UK economy are likely to dictate the potential benefits

As we await further developments relating to the taxation of foreign profits – particularly in the Finance Bill 2009, which will introduce a new tax exemption for virtually all overseas source dividends – will the new rules have any effect on UK multinationals wishing to migrate their headquarters offshore, particularly to Ireland? In the meantime, the UK economy has gone into recession and shockwaves are still being felt in relation to the November 2008 High Court decision that the UK’s system of taxing dividends from European Union (EU) subsidiaries was incompatible with European Community law, potentially leaving the Treasury £5bn out of pocket. Therefore, companies that have not already made protective claims pursuant to the High Court decision should consider doing so as soon as possible.

In exploring the history of the debate on UK taxation of foreign profits, the European Court of Justice (ECJ) decision in December 2006 is an important milestone. The Franked Investment Income (FII) Group Litigation was established in October 2003 to test this issue. The claimants comprised members of the British American Tobacco group and other groups with UK resident parents with overseas subsidiaries, resident elsewhere in the EU and outside the EU.

The ECJ’s decision was that the UK’s advance corporation tax (ACT) and foreign income dividend (FID) regimes were in breach of EC principles of freedom of establishment and free movement of capital. However, the court held that the UK’s tax treatment of foreign source dividends did not contravene these principles, subject to certain conditions. It was then left to the UK courts to opine on whether those conditions were met by the UK tax system as well as to determine the remedies available to taxpayers who suffered loss as a result of breaches of EC law.

In the meantime, the debate in the UK raged on, but confusion triggered by the Government’s controversial discussion document on the taxation of foreign profits issued in June 2007 influenced the announcement of Shire, the UK’s largest pharmaceutical group, to effectively migrate its holding company structure to Ireland. In April 2008, the Government launched the ‘multinational business-government tax forum’, accepting that certain aspects of the June 2007 proposals were too far-reaching. On 21 July, 2008, the Government announced significant changes to its proposals but hesitated on the introduction of a tax exemption for foreign dividends, which was to be deferred until at least Finance Bill 2010, triggering yet more uncertainty. Unsurprisingly, further high-profile announcements followed, with WPP Group, Regus Group, Henderson Group and Charter all announcing their intentions to migrate in August 2008.

Furthermore, on 27 November, 2008, the High Court concluded that:

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