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© 2009 Hogan & Hartson LLP. All rights reserved. Rebecca Armour April 2009 UK Rules on Corporate Expatriations Washington DC
2 © 2009 Hogan & Hartson LLP. All rights reserved. Corporate Expatriation in the News Shire moves to Ireland to 'optimise' tax By Alistair Dawber Shire Pharmaceutical said yesterday that it intended to move its tax base from the UK to the Republic of Ireland, arguing that Dublin offered the group an "optimum" tax location. However, beyond the rather vague explanation that being domiciled in Ireland for tax purposes offered greater "opportunities," Shire declined to...
3 © 2009 Hogan & Hartson LLP. All rights reserved. UK Rules on Corporate Tax Residence A Company will be resident in the UK for the purposes of UK domestic tax law if either – It is incorporated in the UK; or – It is centrally managed and controlled in the UK. Whether a company is centrally managed and controlled is a question of fact – It is necessary to look where the highest level of control (as opposed to the day-to-day management) of the company is conducted. – Importance will be attached to where the company’s board of directors meets – Ideally the majority of the board should be non-UK residents Corporate expatriation from the UK will generally suit a UK corporate entity that receives significant profits from its operations offshore in low tax jurisdictions
4 © 2009 Hogan & Hartson LLP. All rights reserved. Potential Disadvantages of UK Tax Residency The UK tax system is perceived as becoming increasingly uncompetitive compared to regimes in other jurisdictions The dividend credit system can leave gaps between the local tax rate and the UK rate The Controlled Foreign Company (CFC) rules may apply to tax offshore profits at the UK tax rate, which otherwise would suffer low tax liability or not tax at all The 28% corporation tax headline rate is beginning to look on the higher side compared to competitor jurisdictions
5 © 2009 Hogan & Hartson LLP. All rights reserved. Corporate Expatriations from the UK (1) There are two alternative to relocating the parent company from the UK: Option One Change the tax residence of an existing parent company by migrating its place of effective management and control outside the UK for tax purposes – The advantages of this process are that it is structurally and practically straightforward. There will be no change-of-control or stamp-duty implications. – The disadvantages are that it may trigger an exit charge on the company and it may not achieve the main objective of placing the group outside the ambit of the CFC rules
6 © 2009 Hogan & Hartson LLP. All rights reserved. Corporate Expatriations from the UK (2) Option Two Establish an offshore holding company in Jersey which is tax resident in Ireland. This new parent company will be interposed above the existing UK group (‘plc’) The reorganisation will usually be implemented by a scheme of arrangement – A Scheme circular and Prospectus will be needed – The scheme must be approved by at least 75% of those voting – The shares in the existing holding company will then be cancelled and shares in the newly incorporated Jersey company will be issued to shareholders in place of the ‘old’ shares – stamp duty is unlikely to apply because it is a cancellation order – It is advisable that no clearance is sought from HMRC The new structure will allow the company to hold the foreign subsidiaries outside the UK and thus outside the ambit of the UK CFC rules
7 © 2009 Hogan & Hartson LLP. All rights reserved. Corporate Expatriations from the UK (2) Public Shareholders New Parent Company (Jersey) (Irish tax-resident) UK PLC New ordinary shares in capital of UK plc issued from reserve created by scheme of arrangement Share for share exchange in New Parent Company Shares cancelled x
8 © 2009 Hogan & Hartson LLP. All rights reserved. Benefits of Incorporating in Jersey Parent Company will be able to retain its listing on the FTSE A scheme of arrangement will be possible as the take-over code is applicable to Jersey Jersey possesses a flexible company law regime Any dealings in the new company will not attract either UK or Irish stamp duty
9 © 2009 Hogan & Hartson LLP. All rights reserved. Corporate Expatriation In order to demonstrate that the new parent company is resident for tax purposes in Ireland it must be managed and controlled there The subsidiaries that fall within the CFC regime would then be transferred to the new offshore holding company It will also be advisable to put in place ‘income access share arrangements’ so that the UK resident shareholders of the new company will be able to receive an after-tax return on dividends from a UK company – The UK subsidiary of the newly formed TopCo will usually issue a single income access share which is held by a specially formed trust – The terms of the trust will then provide either that the share is held on trust for the benefit of the shareholders in TopCo who wish to use this arrangement – or that the rights to dividends paid on that share (rather than the share itself) are held on trust
10 © 2009 Hogan & Hartson LLP. All rights reserved. Overview of Corporate Structure Pre- Expatriation Shareholders UK plc (listed in London with FTSE inclusion) UK operating group Non UK operating group
11 © 2009 Hogan & Hartson LLP. All rights reserved. Overview of Corporate Structure post Expatriation Shareholders New TopCo Incorporated in Jersey Irish tax resident (Listed in London) Non UK Companies Old UK plc Convert into a private limited Co UK operating group Non UK operating group Trust Dividend from member of UK group
12 © 2009 Hogan & Hartson LLP. All rights reserved. Benefits of being tax resident in Ireland Full exemption from Capital gains tax (CGT) in respect of disposal of qualifying shareholdings in subsidiaries Low tax rate on foreign dividends 12.5% so unlikely to be further charge to Irish tax after foreign tax credit. No relevant transfer pricing or CFC rules for foreign income Wide domestic exemptions from withholding tax on dividends and interest Ireland has a wide tax treaty network Like the UK and the US, Ireland is a common law jurisdiction so its legal concepts will be recognised by most investors Non-domicile status for individuals based on the previous UK tax system Corporation tax rate of 12.5% on any trading income generated in Ireland Practical issues such as the proximity to London, Ireland is English speaking and a member of the EU
13 © 2009 Hogan & Hartson LLP. All rights reserved. Other Jurisdictions Bermuda – Distance to the UK makes conducting board meetings difficult – If a Company makes a loss it cannot offset this against past or future years of profit as in the UK Luxembourg – Withholding tax of 15% applies to foreign corporate shareholders – Additional municipal business tax at the rate of 6.75% for companies resident inside Luxembourg city or 7.5% for companies resident outside – Additional 4% mandatory contribution to an employment fund raises the tax rate to above the headline UK level Switzerland – A 35% withholding tax is levied on dividends – If the tax authorities consider a company to be thinly capitalised, the corporate income tax deductibility of interest may be challenged and also the capital tax base may be increased.
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