Dyson had recently announced that it will be moving its head office from the UK to Singapore. Whilst the exact manner of Dyson’s proposed move is not known, such cross-border relocations are not necessarily straightforward and can have significant UK taxation implications.
At its most complex, a relocation can involve the place of a company’s tax residency moving from the UK to an overseas territory and this is the scenario primarily explored in this blog. Certain high profile cross border movements of corporate residency were undertaken in the relatively recent past, often to make use of Ireland’s 12.5% corporate tax rate, and may become more common again dependent upon the nature and result of Brexit.
The expected outcome of a corporate migration is that a company that was incorporated in the UK would become subject to corporate taxes in the other country and unless the company retained some form of UK operation, it would have, in effect, left the UK for corporate tax purposes.
This is not as straightforward as it may seem, and in undertaking a migration it is necessary to consider UK tax law, the tax laws of the proposed country of residence and the terms of the residency “tie breaker” clause in the taxation treaty between that country and the UK. Under UK tax law, a UK incorporated company is tax resident in the UK unless it is deemed tax resident in another territory via the residency tie breaker clause in the tax treaty between the UK and that other territory. However, in order for the residency tie breaker clause to be relevant, the company would first need to be considered resident in the other territory under the local laws of that territory.
As an example, under German tax law, a company can be treated as tax resident in Germany if its main place of management is located in Germany. Therefore, if a UK incorporated company moves its main place of management to Germany, it potentially becomes German tax resident. It is necessary to then consider the tax treaty between the countries; the corporate residency tie breaker clause in the UK/Germany treaty states that a company which is tax resident in both countries under both sets of local law shall be deemed to be a resident only of the State in which its place of effective management is situated.
Based upon the above example, and in the most straightforward situation, if a UK company moves its operations to Germany including its management functions (and Germany is the place where the board of directors meets), then it is likely that its corporate residency would move to Germany. It would become subject to German corporate tax law and would be able to make use of tax treaties that Germany, but not the UK, had entered into.
However, unsurprisingly the situation is not that simple. UK tax law does not “like” companies moving tax residency and thus potentially moving future corporation tax receipts from the UK. Exit charges potentially apply; if a UK resident company moves its tax residence from the UK, then (for tax purposes only) it is treated as having disposed of (and immediately reacquired) its capital and intangible assets (such as goodwill) at market value at the date of the migration. Dependent upon the tax base cost, if any, that it has in such assets, this can lead to a significant, and potentially catastrophic, “dry” tax charge upon migration.
It is possible to postpone the exit charge referred to above in certain circumstances if, immediately post migration, the UK company is a 75% subsidiary of a company which remains UK resident, and any intangible assets that were used by the company immediately pre-migration in a trade carried on outside the UK through a permanent establishment. This means that the UK company may need to form a branch in the territory to which it wishes to migrate before migration and conduct its trade through that branch immediately prior to the migration.
Even if the conditions to achieve relief can be met, it is important to note that this only achieves a postponement of the exit tax arising. If the remaining UK parent company ever (with no time limit) sells its shareholding in the migrated company, or within 6 years of migration the migrated company sells the assets held at the time of migration, the exit tax will become payable by the UK parent company.
The requirement to quantify potential exit charges and then, if these a likely to material, put appropriate structuring in place to allow for the postponement of these, means that corporate migrations are not undertaken likely and may be very time consuming with extensive professional and advisory fees. Nevertheless, they do take place, and may again become more common in future years.
As an alternative to a migration, companies may look to relocate business activities outside of the UK and often may retain part of the existing business in the UK.
Such a transfer can involve the disposal for UK tax purposes of assets at market value thus creating similar tax charges that would have arisen on a migration and with potentially no postponement of the UK tax available. In such circumstances, dependent upon the nature of the business and the company’s assets, companies may, for instance, interpose an overseas holding company between the UK company and the shareholders by a share exchange. New and future activities could be commenced in the overseas “top” company and the UK activities could be wound down over time with no assets being transferred out of the UK and thus no UK tax charge on such a transfer; clearly this relies on a specific fact pattern and will not be appropriate for all companies wishing to leave the UK.
As can be seen, the migration of company, or its assets, from the UK is not straightforward and can impose significant taxation costs. Professional advice should always be taken in advance of any such action. For further assistance please contact Robert Leggett.