There are a number of reasons why a corporate group may decide to relocate overseas. For example, the decision may result from market forces, from higher tax rates or as a result of changes in the political environment.
Corporate migration
One method of migration is for an existing holding company or company to cease to be tax resident in one country and become tax resident in another.
A UK incorporated company will usually be resident in the UK, unless it is also resident in another territory outside the UK under the domestic laws of that overseas territory and is treated as not resident in the UK for the purposes of the relevant double tax treaty (DTT).
UK incorporated companies are not able to re-register in another jurisdiction, so a UK incorporated company that is seeking to become tax resident in another jurisdiction will need to focus on the non-resident rule in the relevant double tax treaty.
Double tax treaties
UK DTTs usually contain a tie-breaker rule to determine the residence of a company which is resident in both the UK and the overseas state under their respective domestic laws. Historically, this rule has focused on the “place of effective management” as a test for determining the jurisdiction in which the company would be treated as resident for the purposes of the treaty.
More recently, there has been a trend for newer DTTs to move away from the place of effective management (‘POEM’), and to provide for the ‘Competent Authorities’ of the contracting states to resolve the question as to residence by ‘mutual agreement’. The number of UK treaties that incorporate a mutual agreement procedure (‘MAP’) as a tie-breaker is currently quite small, but is likely to increase significantly in the future.
This change is a result of the OECD/G20 BEPS (Base Erosion and Profit Shifting) project, the effect of which will be to replace the POEM test in UK treaties with a MAP-based tie-breaker.
The MAP tie breaker is unfortunately more cumbersome and less clear than the POEM test. The MAP involves an application to the competent authorities of both states for a determination of residence, and the process of obtaining a ruling under the MAP is likely to take some time.
If the competent authorities do not agree, the effect will be that the company will not be entitled to relief under the relevant DTT.
The tax implications of migration
Exit charges
When a company ceases to be a UK tax-resident, it will be subject to a variety of exit charges. These aim to tax gains accrued on capital assets whilst the company was resident in the UK, and any profits arising on disposal of intangible assets at market value at the date of exit, and gains on financial loan relationships and derivative contracts.
Whist these charges arise under separate rules, the mechanism is similar, consisting of a deemed disposal at market value immediately before migration to capture any untaxed movement in value up to that point.
If the company is trading, it will be treated as ceasing to trade when it ceases to be UK tax resident. This brings a tax accounting period to an end, and the company will be required to take into account the value of its trading stock, and assets on which it has claimed capital allowances, at their market value when calculating the profits of the trade. The company’s tax losses will also expire.
Notification
When a company intends to cease being UK tax resident it must notify HMRC of its intention and provide HMRC with a statement of its tax liabilities. The company will need to agree arrangements for paying any tax liability with HMRC. There is a penalty for failure to comply with these requirements.
Deferral of exit charges
A company will be able to enter into an exit charge payment plan if at the time of exit the person carries on business in an EEA member state and becomes resident in an EEA state other than the United Kingdom. There is an alternative plan referred to as the ‘realisation method’ where the exit charges are allocated on an item by item basis; in this case detailed information must be provided to HMRC and the maximum deferral period is 10 years.
The rules do not permit any postponement of exit charges on a migration by a UK company to a country which is not a relevant EEA state.
Penalties and recovery of tax
A company which fails to comply with the notification requirement may be liable to a penalty up to the amount of its outstanding tax liabilities at the date of migration. It may obviously prove difficult to recover penalties and outstanding tax from a company once it has lost its UK residence. HMRC does however have some protection to enable it to recover any tax due.
Corporate inversion
As an alternative to moving the tax residence of an existing UK company, a business may decide to place a new non-UK resident holding company above the existing UK resident company. This could be done via a share for share exchange, for example.
If structured correctly, the introduction of a non-UK holding company can be tax neutral for any UK resident shareholders. There are a number of tax issues that would need to be considered if an inversion is contemplated, however one benefit of this route is that it does not involve any exit charges that might apply on the migration of an existing company.
Residence, governance and substance
In any of these structures, it will be important to ensure that the company is clearly resident in the jurisdiction in which it is intended to be resident. Appropriate governance procedures will need to be put in place to ensure that the company is not resident in the UK, that the company meets the requirements to be treated as resident in the intended jurisdiction as a matter of its domestic laws, and that any treaty tie-breaker rule will operate in favour of the chosen jurisdiction.
Summary
Any change in the resident if a company or group will clearly require consideration of a multitude of issues, and detailed tax and legal advice will be required if a move is contemplated.
