 Moving holding companies offshore in 2011?
The UK Government has taken significant measures in recent years to make the UK a more attractive tax environment in which to base the holding companies of multi-national groups:
- The corporation tax rate for large companies is being reduced gradually over the next few years to 23% by 2014
- A dividend exemption system now ensures that the vast majority of intra-group dividends are free from UK corporation tax
- A branch exemption regime introduced this year provides an opportunity for UK companies to claim exemption from UK tax on their overseas trading activities
- Exemptions from the UK’s controlled foreign companies (CFC) legislation are expected to be introduced in 2012 such that genuine economic activities carried on by foreign subsidiaries should not generally suffer UK tax under these rules.
Despite the work carried out to date, some groups may still see the UK as a less than ideal tax environment:
- There is currently a consultation process open considering the introduction of a general anti-avoidance rule (GAAR). The introduction of such a rule may increase uncertainty within groups regarding the treatment of tax planning arrangements.
- The proposed CFC rules only provide a partial exemption for group finance companies in some cases.
- The dividend exemption rules remain troublesome for small companies within subsidiaries in ‘non-qualifying territories’ (broadly those that do not have a double tax agreement with the UK or the relevant treaty does not include a non-discrimination article).
Some groups may, therefore, continue to monitor whether or not having a holding company offshore may be beneficial for them. In this summary, we consider the tax implications of setting up a holding company abroad and other commercial considerations that should be taken into account.
Tax implications of moving offshore
The transfer of shares from the UK holding company to an overseas entity will constitute capital disposals on which chargeable gains will arise if the shares disposed of have risen in value since acquisition or subscription. It is likely that the substantial shareholdings exemption will apply in most cases to exempt gains arising from the transfer of trading subsidiaries.
However, a problem will always arise where the holding company disposes of its ‘last trading subsidiary’. In that situation, the transferor will not be a member of a qualifying group immediately following the disposal, although the company may be able to make use of a subsidiary exemption if it is liquidated as soon as is practical after the final share disposal. The main exemption will apply if the company has retained some form of trading activity itself that it continues for a short period after selling the last subsidiary. Of course, it may simply be appropriate to reorganise the group trades so that all UK trades are held in one company retained by the original UK holding company under the new group structure. Failing this, it is good planning to leave the disposal on which the smallest gain will arise to be carried out last.
A potential alternative mechanism for moving offshore may be to retain the existing holding company and effect a change of tax residence of that company. If the company is UK incorporated, this may be possible if the UK has an appropriate tax treaty with the other territory involved and control and effective management of the company can be shifted to the other territory. However, this can be difficult to achieve and prove in practice unless all of the personnel and activities of the company are migrated to another territory. It will rarely be sufficient merely to move the location of board meetings outside the UK if the headquarters remain here.
Moving the tax residence of a holding company avoids the disposal of the underlying subsidiaries (and any resulting gains), but will instead result in exit charges based on a deemed disposal and reacquisition of the company’s assets including goodwill at the date of migration. In practical terms, the capital gains position is likely to be the same as if those assets had been sold or transferred to a new holding company.
There is some debate as to whether these exit charges can be justified by HM Revenue & Customs (HMRC) as an acceptable restriction on the fundamental freedom of establishment enshrined in the EC Treaty of Rome. The UK’s company migration rules were tested before the courts some years ago in the Daily Mail case and it was decided in that case that the movement of a company’s central management and control was not an exercise of its freedom of establishment.
EU tax law has moved on since then and more recent judgements by the European Court of Justice regarding individual exit charges have indicated that a blanket charge on migrating persons cannot be justified unless it specifically targets those persons migrating for tax avoidance purposes. However, the UK exit charges are here to stay until a brave soul challenges HMRC at the Courts.
Depending on the nature of the trade and activities of the company, it will be necessary to consider the tax regime of the new country. Although the idea of a common consolidated corporation tax base within the EU has recently appeared again on the agenda following the publication of a draft EU Commission Directive, it is not likely to be adopted for many years and so the relative tax rules and relief rates will need to be considered in detail. For example, if the trade is capital intensive, how do the rates of relief for capital investment compare to the rates of capital allowances available in the UK? If the trade is labour intensive, do total payroll taxes exceed those of the UK? Are there specific VAT or customs duty disadvantages that should be taken into account?
When a new location has been chosen, it is also necessary to advise HMRC in advance of a company’s intention to migrate and to obtain the Commissioners’ approval of arrangements for payment of the company’s outstanding corporate, PAYE and other tax liabilities. Details of the procedure and information to be provided are included in Statement of Practice 2/90.
Other commercial and practical considerations
It is important that the tax tail does not wag the commercial dog. Various commercial factors will determine whether it is appropriate to set up a holding company overseas and, if so, where the most suitable location is likely to be. All of these factors should be considered alongside the tax implications so that the right decision is reached. Some of the potential factors and issues are listed below.
Unless the UK holding company is to be retained as a vehicle for other group activities, it will be sensible to liquidate the company once all the subsidiaries have been migrated in order to avoid on-going compliance costs. However, this in itself will lead to one-off professional costs and company law reporting requirements.
The new holding company will be required to register for company law purposes in its own territory and submit annual returns etc. The burden imposed by such requirements will vary depending on the requirements of the territory concerned.
If key personnel employed by the UK holding company are to be retained, any prospective location for the new company must be agreeable to those individuals. If staff are to be hired locally, it is desirable that a location is sought where there is a ready supply of suitably qualified personnel.
If the UK holding company is listed on the UK Stock Exchange or AIM, consideration will need to be given as to whether the new holding company is listed in the UK or on the local stock exchange. A smaller exchange may not be desirable if the company wishes to raise additional equity finance in the future.
Finally, the usual practical requirements of setting up a company in a new territory will apply, such as the requirement to find new premises, suppliers, professional advisers etc.
In summary, the migration of a group’s holding company may achieve significant tax savings in the long-term but is likely to result in short to medium-term upheaval, along with additional short-term compliance and taxation costs. Compiling all the information to enable a board to make informed decisions on when, where and how its company is to migrate is a significant project in its own right. Perhaps this is the real reason why, despite a perceived decline in the competitiveness of the UK tax regime, few companies have left the UK in recent times.
|