April 2022 Update
The Government has published a summary of responses to the consultation and confirmed that it will be introducing a corporate re-domiciliation regime in the UK in future. It says that there will be a further consultation on specific proposals before they are introduced but no timescale has been given for this.
Currently, a foreign incorporated company is not able to re-domicile and change its place of incorporation to the UK while maintaining its legal identity as a corporate body. A foreign company can still be UK resident for tax purposes (by being managed and controlled in the UK) but having a foot in two (or more) jurisdictions can significantly add to the administrative complexity of running the business. Therefore, the UK government is considering changing UK law so that companies can opt to move their legal identity to the UK entirely – the intention is to make the UK a more attractive location to do business.
An interesting corollary to this is that international tax trends towards increasing transparency, the BEPS reforms and, in particular, the new ‘substance’ requirements implemented by many jurisdictions, are removing many of the advantages that companies may have seen for basing themselves outside of major economies. If there is no longer much benefit to being domiciled in a tax haven, will companies choose to re-domicile to major trading centres like the UK?
Corporate re-domiciliation proposals from the UK government
In November 2021, the UK government published early-stage proposals for re-domiciliation principles for a future regime: these cover a wide number of legal, accounting and tax issues, and there is much still to be decided. However, the key areas being considered are:
1. Companies would be allowed to move their place of incorporation into the UK, provided a number of qualifying criteria are met – including:
- The company and its directors meet certain financial and legal tests (eg relating to the solvency of the company, the probity -of the directors, etc.)
- The company has up-to-date and credible accounts.
- Shareholder/stakeholders approve the move
2. Companies may be allowed to move their domicile out of the UK
3. Whether or not re-domiciling to the UK should automatically make the company resident in the UK for tax purposes.
4. Whether the assets of the company should be uplifted to market value for tax purposes on entry into the UK
5. What external barriers there are to companies re-domiciling to the UK (in law, and practical considerations).
6. What impact the re-domiciling of the company would have on its shareholders and for various tax purposes ranging from VAT and Capital Gains Tax to Stamp Duty Reserve Tax.
While the consultation is obviously at an early stage, there are some key points that we believe will determine whether this proposal is adopted and is successful in attracting businesses to the UK.
The government highlights that it has been the norm for jurisdictions to permit outbound re-domiciliation, although the consultation notes that “Other countries have recently introduced or plan to introduce regimes …” and that some have opted for inbound only re-domiciliation. It seems obvious that any arrangement to re-domicile a company from one jurisdiction to another is only likely to be of any practical advantage if both jurisdictions can agree how to treat the company for legal and tax purposes. Therefore, we believe that it is highly unlikely that any move to allow inbound re-domiciliation into the UK (or any other jurisdiction) is likely to be successful unless the UK also allows companies to move their domicile out of the UK: why would the other jurisdiction cooperate unless the rules could be made reciprocal? If re-domiciliation takes off as a global concept, we believe that increasing numbers of jurisdictions will opt to allow both inbound and outbound movement.
Company law – Apples and oranges?
The legal structure and requirements for companies vary across different jurisdictions. In practice, it is highly unlikely that UK company law will change markedly to accommodate all forms of corporate structures re-domiciling into the UK, so it may well be that the new rules are only really effective for companies currently in jurisdictions that have similar capital and structural requirements to the UK. It remains to be seen how prescriptive the final proposals will be.
There are also accounting issues to consider: will re-domiciling to the UK be practical if the foreign company does not already prepare its accounts under IFRS (very few will already be using a UK GAAP!). Will accounts have to be translated into IFRS (or UK GAAP) before re-domiciliation takes place, and how will accounting differences affect the company’s balance sheet and liabilities?
Alongside the corporate law and regulatory requirements, there are a number of tax considerations which would have to be worked through as part of any change. For example:
A company is UK tax resident if it is incorporated in the UK or its central management and control is in the UK, subject to being treated as non-UK tax resident by virtue of a double tax agreement. Would re-domiciling a foreign company to the UK automatically make the company UK tax resident, or would the central management and control of the company also need to be moved to the UK? Ensuring that the final re-domiciliation proposals will operate simply alongside these established rules will be important to make them practical for companies to use.
If the UK tax residence of a company is migrated to the UK, from re-domiciliation, what would be the capital gains and intangible tax base of the company’s assets? Currently, when a company migrates its tax residence to the UK from an EU jurisdiction, assets are brought in at their market value. The consultation considers whether this should be expanded to non-EU jurisdictions. If rebasing applies across the board, what impact will this have on exit taxes for the company in its current jurisdiction and even on non-UK domiciled shareholders already resident in the UK?
As with all new proposals, anti-avoidance legislation will be a major consideration, and specific rules covering loss importation can be expected, in addition to possible rules for Stamp Duty Reserve Tax and VAT – especially if an outward re-domiciliation regime is introduced.
These proposals are a welcome addition to the government’s post-Brexit strategy to make the UK a more attractive home for companies. There is much still to be debated before we get to final proposals, and BDO will be taking part in the process as the project progresses.
In the meantime, for help and advice on moving your business into the UK, please contact Tim Ferris, Dominic Pickard or Daisy Boughtflower.