On 15 April 2008 Shire plc, the UK’s third largest pharmaceutical group, announced its intention to reorganise its group structure under a new Jersey incorporated and Irish tax resident holding company, with the effect that its group parent company will no longer be UK tax resident. Since then, United Business Media - the media, conferences and exhibitions group - has announced that it is also going to move to Ireland and several other companies are rumoured to be considering their options.
Large companies - such as Shell and various insurance companies - have in the past shifted their tax residency away from the UK, but this has been typically part of a wider restructuring exercise. The Shire proposal is significant as it appears it was not triggered by other plans.
This note summarises the reasons why a UK-based multinational may wish to move its tax residency from the UK, and how this can be achieved.
Reasons for moving offshore
The UK headline rate of corporation tax is 28 per cent, but it is lower in other jurisdictions, such as Ireland where the headline rate is 12.5 per cent for trading income and 25 per cent for non-trading income. If a company is based in the UK, it will pay 28 per cent corporation tax on its worldwide profits; this would include dividends and other income derived from non-UK companies.
A lower headline corporation tax rate may not necessarily give rise to significant tax savings: the group will still have to pay UK tax on its UK profits. As such, this exercise is likely to be of principal interest to multinational groups, with subsidiaries located in low tax jurisdictions. The tax that could potentially be saved by a move offshore would be the UK tax that the group would otherwise bear on non-UK profits, such as UK tax paid:
a) on dividends received from companies in low tax jurisdictions. The UK has a credit regime for taxing dividends from non-UK companies. Tax is due on the dividend but with credit for tax paid in the payer’s country. There could therefore be a significant charge if dividends are paid to shareholders through a UK parent and the profits out of which the dividend is paid have borne no tax or tax at a rate of less than 28 per cent; or
b) following an apportionment, under the UK controlled foreign company (CFC) rules, of profits earned outside the UK in low-tax jurisdictions. In certain circumstances, the UK parent is deemed to have the profits of its low-tax subsidiaries distributed to it, even if not actually done so.
Such tax saving may be achieved by moving to a jurisdiction - such as the Netherlands or Luxembourg - that has an exemption (participation exemption) for tax on foreign dividends, or by moving to a jurisdiction with a lower headline rate of corporation tax, such as Ireland, or another jurisdiction that has a less tough CFC regime than the UK.
In looking at this issue, any company has to consider both the current regime and also any changes to it. The UK has been looking at the treatment of non-UK subsidiaries, largely in response to EU tax changes. One idea mooted is not to tax dividends received from non-UK companies but to tax passive income as it arises both onshore and offshore. While some groups may benefit from this, others would not. This would particularly include groups with intangibles owned by subsidiaries outside the UK, as royalty income would be deemed to be passive income and therefore taxable. This would potentially leave them in a worse position than currently, as they may have been able to structure their operations, so that their profits are outside the CFC regime and therefore not subject to UK tax unless actually paid to them.
The uncertainty over such proposals is accompanied by a perception that the UK is an increasingly hostile environment from a tax perspective: the increasing complexity of its tax system, the new residence and domicile rules (and the way in which they were introduced), and the move towards principles-based anti-avoidance rules, coupled with a more hostile compliance regime, are often cited as examples of this.
A UK parent can simply choose to migrate without the need for a group reorganisation, for example by moving its place of effective management outside the UK and relying on a double tax treaty to determine that its tax residency is outside the UK. However, there are a number of reasons why this may not be desirable:
a) it is necessary to notify the UK tax authorities before doing this;
b) there would be an ongoing risk that the UK Revenue would question whether residence had in fact moved;
c) there is a risk that a tax charge may arise on migration. This is because of the UK exit charge regime, which deems a company to dispose of its assets on emigrating and potentially making a capital gain on such a disposal, although the UK’s exemption for the disposal of substantial shareholdings may alleviate this concern; and
d) the move of residence of an existing parent company is not likely to take the parent outside the UK CFC regime.
In view of the difficulties associated with migration, it is likely to be beneficial to effect an offshore holding company structure by interposing a new non-UK resident holding company between the existing UK parent company and its shareholders. This company will be established as a non-UK tax resident company.
This can be done pursuant to a scheme of arrangement under sections 895-899 Companies Act 2006. The scheme would take the form of a cancellation scheme; the existing shares in the UK parent (Oldco) would be cancelled and each shareholder in Oldco would be allotted shares in a new holding company (New Holdco). Following the cancellation of the existing shares in Oldco, the issued share capital of Oldco would be restored to its former amount by the issue of shares of an equivalent nominal amount to New Holdco. These shares would be issued and paid up out of the capital redemption reserve created upon the cancellation of the existing share capital.
It is also possible to implement this by way of a share for share exchange, whereby Oldco’s shares are transferred to New Holdco in exchange for an issue of shares in New Holdco. It should be possible to claim a specific exemption from stamp duty for the transfer of the shares in Oldco.
The insertion of a new holding company is a relatively complex exercise and will require careful due diligence on financing documentation, pension arrangements, share schemes and change of control provisions, to ensure that no unexpected (usually) non-tax costs are triggered.
To ensure New Holdco is not treated as resident in the UK, New Holdco must be managed and controlled from outside the UK and therefore it will be necessary for New Holdco to hold its board meetings outside the UK, and for those board meetings to take the strategic decisions in relation to the group. In practice, this may not be a practical issue. Apart from the beneficial tax treatment, Ireland may have been chosen by the Shire group because of its proximity to the UK. However, the New Holdco group would not be generally required to change its day-to-day operations or to move staff from the UK, and New Holdco could also still be listed in the UK.
One factor that would need to be considered is whether there are any UK tax resident shareholders in Oldco who, together with other persons connected with them, own more than 5 per cent of, or any class of, shares in or debentures of Oldco. If so, consideration would need to be given as to whether these persons would be adversely affected if they were treated on the scheme, for UK tax purposes, as disposing of their shares or debentures in Oldco. It should be possible to structure the reorganisation in a way that should not be treated as giving rise to a disposal for such shareholders, but this is subject to an anti-avoidance provision that will mean that such shareholders will be treated as disposing of their shares in Oldco if the reorganisation is not effected for bona fide commercial reasons or forms part of a scheme or arrangement of which the main purpose, or one of the main purposes, is the avoidance of liability to capital gains tax or corporation tax. This provision would only adversely affect shareholders who own more than 5 per cent and who are not tax-exempt.
UK shareholders who, together with other persons connected with them, in very broad terms hold less than 5 per cent of Oldco should not be treated as making a disposal of their shares in Oldco, as the capital gains anti-avoidance provision would not apply to them.
Once New Holdco has been interposed between Oldco and its shareholders, it will be necessary to consider what further reorganisations are required, such as moving any non-UK companies up to New Holdco so that they are no longer indirectly owned by a UK resident parent (ie Oldco). The UK’s exemption for the disposal of substantial shareholdings may be relevant in this context, although its application can be restricted.
No stamp duty or SDRT should arise in respect of such arrangements.
Dividend Access Scheme
One consequence of the reorganisation is that Oldco’s UK resident shareholder base will receive dividends from a non-UK resident company. This could be detrimental for many UK resident shareholders as UK shareholders often receive a higher after-tax return on a dividend from a UK company rather than a non-UK company. There could be a number of reasons for this: dividends from a non-UK company may be subject to withholding tax in that jurisdiction and this will be an absolute cost for tax-exempt UK investors such as pension funds. The UK tax regime also gives UK dividends favourable tax treatment for certain categories of UK shareholder. Currently, this is being addressed in part, for example, by allowing tax credits for certain non-UK dividends received by UK individual shareholders and the possible exemption for non-UK dividends received by UK corporates who own 10 per cent or more of the issued share capital of the relevant non-UK company (which is proposed as part of the consultation on the taxation of foreign profits).
In order to address this concern, a dividend access scheme could be introduced. This provides for shareholders who wish to continue to receive a UK dividend to do so. This could be implemented in a number of ways, but an accepted route is for:
a) shareholders in New Holdco to elect whether they wish to receive dividends from New Holdco or from Oldco (who will remain UK tax-resident) (the Electing Shareholders);
b) Oldco to issue a dividend access share (DAS) to a trustee who will hold any dividends received on the DAS on trust for the Electing Shareholders; and
c) the articles of association for New Holdco to provide that, to the extent that the trustee receives dividends declared by Oldco on its DAS, the amount that the Electing Shareholders would otherwise have received from New Holdco by way of dividend will be reduced accordingly.
Provided that Oldco has sufficient profits to meet the requirements for UK dividends, this solution is feasible. If the UK profits fall by comparison with the non-UK profits, there is clearly the risk that they will be insufficient to pay the UK dividend, so that the shareholders are likely to be paid a dividend direct from the non-UK parent company, which may be less attractive.