Government consults on new regime for corporate redomiciliations into the UK
The Government has asked for responses by 7 January 2022.
The key aspects of the consultation are set out below.
What is “redomiciliation”?
The term “redomiciliation” can describe a number of processes and transitions. Here, it describes the process by which a company or other legal entity incorporated in a particular jurisdiction moves its place of incorporation of registration (that is, it “redomiciles”) to a different jurisdiction. This process is also often described as “migration” or “continuation”.
Redomiciliation is already possible in many jurisdictions, including Australia, Belgium, the British Virgin Islands (BVI), Canada, Cyprus, Guernsey, Jersey, Luxembourg, Malta, New Zealand, Portugal, Singapore, Switzerland, and several states within the United States. Alongside this, a business that incorporates as a European company (a “societas europaea”) can seamlessly migrate between different European Economic Area (EEA) countries (including, up until 31 December 2020, the UK).
However, it is currently not possible for a non-UK entity to redomicile in the UK, nor for a UK entity to redomicile outside the UK. Instead, to move a business to the UK, it is necessary to establish a new UK entity, which then acquires either the business and assets of the non-UK entity. This is not a true redomiciliation, but rather a migration of the business through an asset sale.
Critically, this involves transferring ownership of assets, contracts and other business relationships from one entity to another. This can be time-consuming, as transferring title to certain assets (such as real estate, intellectual property and securities) can require specific procedural steps. It can also be difficult to transfer contracts and licences where third party consent is required. Because the migrating business will be run by a new legal person, it may be necessary to apply for brand-new approvals and authorisations from regulators. And the transfer, being in essence a sale and purchase, can have negative tax consequences if not structured carefully and correctly. These problems can all hinder a successful “migration”.
Until recently, UK companies and limited liability partnerships (LLPs) were able to migrate to an EEA country, and similar entities in EEA countries were able to migrate into the UK, using a potentially simpler procedure under the EU cross-border merger regime. However, this again involved a transfer of assets to a new entity and, in any event, since 1 January 2021, is no longer available for migrations into or out of the UK.
Another method of “migrating” an entity to or out of the UK is to insert a new holding company established in the destination jurisdiction. However, this is effectively a “share exchange” and not a true migration. The business remains with the original legal entity, which continues to be registered in the origin jurisdiction and simply becomes controlled by a person in the destination jurisdiction.
By contrast, the main advantage of redomiciliation is that it allows an entity to migrate to the destination jurisdiction but retain the same legal personality. Because no property or contracts need to be transferred, customer and supplier relationships remain relatively undisturbed and the procedure can be quicker and more tax-efficient. It may also be quicker to obtain a new regulatory authorisations.
As a general rule, an entity can redomicile from one jurisdiction to another only if both jurisdictions in question permit it. This is because the law of the origin jurisdiction needs to recognise the “departure” and deregistration of the entity, and the law of the destination jurisdiction needs to be able to accommodate the legal form of the migrating entity and be comfortable that no “duplicate” entity remains in the origin jurisdiction. This is the primary reason why true redomiciliation in and out of the UK has not been possible to date: the UK has no regime permitting it.
What is the Government proposing?
The Government is proposing a new regime under which non-UK entities would be able to redomicile in the UK. The Government believes this will increase the UK’s attractiveness as a destination to locate business, bring increased investment and skilled jobs into the UK, increase demand for professional services within the UK, enhance the UK’s innovation base, develop the UK’s capital markets and improve corporate governance and transparency within the UK.
A non-UK entity wishing to redomicile in the UK would need to meet certain eligibility criteria. The proposed criteria are as follows.
- Authorisation from departing country. The law of the origin jurisdiction must allow the redomiciliation and all formalities in that jurisdiction must be satisfied. These formalities might relate to overdue obligations, creditor and shareholder approval and de-registration.
The consultation suggests that this requirement would be met by obtaining “consent” from the competent authority in the origin jurisdiction. This is similar to how the EU cross-border merger regime operates, where a certificate is required from the appropriate authority in each “transferor company’s” jurisdiction of incorporation.
- Corporate form. The entity looking to migrate must be comparable in form to a type of legal entity within the UK. Although the consultation is clearly framed around companies and similar corporate vehicles, this would seem to contemplate entities such as limited liability partnerships (LLPs) being able to redomicile in the UK. However, it might not extend to types of entity not typically recognised in the UK, such as incorporated trusts.
- Directors must be of “good standing”. The entity’s directors (if it has any) must be eligible to serve as directors in the origin jurisdiction and there must be no legal or enforcement action against them.
The entity’s directors would also need to “meet the requirements of UK company law”. The consultation does not elaborate on this, but certain obvious points arise. For example, an entity may not be able to redomicile if all of its directors are corporate entities, as UK law currently requires a UK company to have at least one natural person as a director. Indeed, in the future, a corporate entity will be able to serve as director of a UK company only in limited circumstances (see our previous Corporate Law Update).
Moreover, an entity with a director under the age of 16 or who is disqualified from serving as a director in the UK would presumably need to remove that director before redomiciling.
- “Good faith”. The UK authorities will need to be satisfied that the redomiciliation is being made for “good faith” purposes. In particular, the redomiciliation must not pose a risk to the UK’s national security and there must be no other public policy reasons to refuse it. The consultation gives the example of an entity applying to redomicile in order to evade its creditors.
The consultation suggests that this criterion would be satisfied “at HMG’s [i.e. the Government’s] discretion”. This will require further thought and explanation. It is difficult to see the UK Government becoming involved in each and every proposed redomiciliation: this would act as a barrier to streamlined migration and require considerable government resource. A more elegant solution might be to include redomiciliations within the types of transaction that can be reviewed under the UK’s existing national security screening and public interest intervention regimes.
- Registration fee. There would be a fee for redomiciling in the UK. The consultation does not indicate what this would be.
- Track record. The migrating entity would need to have passed its “first financial period end” – broadly, its first accounting period – before redomiciling. It would need to submit accounts (audited, where required) to the Registrar of Companies. This would effectively preclude a business from setting up as a legal entity in an overseas jurisdiction, then immediately redomiciling in the UK.
- Solvency. The migrating entity would need to be solvent. Broadly, its assets would need to exceed its liabilities (including contingent liabilities), it would need to be a “going concern” (that is, able to pay its debts as they fall due for at least 12 months after redomiciling), and it could not be in or facing liquidation, administration or similar insolvency proceedings.
This criterion would be met by the entity’s directors swearing a declaration, which would then need to be independently audited in accordance with both origin jurisdiction and UK law.
The consultation also seeks views on measures to prevent a non-UK entity redomiciling in the UK and then immediately entering into liquidation to defeat existing creditor claims.
- Wider impact report. Finally, the entity would need to prepare a report explaining the full legal and economic impacts of the redomiciliation and the implications for creditors, shareholders and key stakeholders.
Alongside these formal eligibility criteria, the consultation notes that directors and persons with significant control (PSCs) of a migrating entity would need to undergo identity verification with Companies House in the same way as directors and PSCs of UK entities will (once the procedures for identity verification are up and running).
The consultation suggests that the process of vetting a redomiciliation with be run primarily by Companies House, which will have discretion to refuse an application if it receives insufficient or false information to support the redomiciliation.
What is the Government not proposing?
Notably, the Government is not currently proposing to allow entities to redomicile from the UK into a jurisdiction outside the UK. A UK entity that wishes to migrate offshore would need to undertake one of the traditional, more complex routes described above. This may seem slightly odd but should perhaps be viewed in light of the Government’s objective of attracting investment to the UK.
The Government recognises that many jurisdictions which allow “inward” redomiciliation also permit “outward” redomiciliation. However, the consultation also notes that countries which either have recently adopted or are intending to adopt a redomiciliation regime (such as Singapore, Ireland and Hong Kong) have opted to offer only “inward redomiciliation”.
The Government has, however, asked for views on whether outward redomiciliation from the UK should also be permitted. Any outward redomiciliation would likely come with “carefully considered conditions attached”. This would include “relatively high requirements for shareholder approval” and a “minimum length of operation in the UK”.
The regime will not allow companies to migrate between different parts of the UK. The UK consists of three separate legal jurisdictions: England and Wales (a single jurisdiction), Northern Ireland and Scotland. Once registered in one part of the UK, a company must remain there. (A company whose registered office is situated in Wales can change the description of its place of registration from “England and Wales” to “Wales” and vice versa, but this is not a redomiciliation. The company remains established in the same legal jurisdiction.) However, the Government welcomes views on whether the inability to migrate from one part of the UK to another might affect a decision by a non-UK entity to redomicile in the UK.
What are the tax implications of the proposals?
The Government recognises that redomiciliations will have an impact on tax and, in particular, could be used as a means of avoiding UK tax. It is therefore seeking views on a range of tax-related matters. Whilst these are focused on “inward” redomiciliation, the Government is also keen to hear views on how these might affect “outward” redomiciliation, should this also be permitted.
Tax issues on which the Government is seeking views include the following.
- Tax residence. What the consequences of any redomiciliation should be on an entity’s tax residence. Under UK law, an entity is treated as resident in the UK for tax purposes if it is incorporated in the UK or its central management and control is in the UK (although this may be modified by a double-tax treaty (DTT)).
The Government is seeking views on whether a non-UK entity should become UK tax-resident merely by virtue of redomiciling in the UK, or whether this should require the entity’s central management and control to move to the UK. It is also seeking views on when an entity should cease to be UK tax-resident were it able to redomicile out of the UK into another jurisdiction.
- Loss importation. The Government has asked whether the ability to redomicile in the UK might increase the existing risk of an entity seeking UK tax residence in order to set non-UK losses off against UK profits within its group.
- Base cost for imported assets. When an entity migrates its tax residence to the UK, assets that come within the UK corporation tax net from the EU are brought in at their market value. The Government is considering whether this should be expanded to migrations from non-EU jurisdictions. This is not limited to redomiciliations under the proposed regime but becomes more relevant if it were to be easier for non-EU entities to migrate their tax residence to the UK.
The Government is also seeking views on the impact of the proposals on the personal taxation of the owners of a migrating entity, on share transfer taxes and on value added tax (VAT).
What does this mean for me?
The absence of a redomiciliation regime in the UK is notable and there have long been calls to introduce one. The proposals are embryonic but, if developed and carried through, could plug a significant gap in the UK’s corporate framework.
Implementing a redomiciliation regime will not be easy. Critical to the success of such a regime is ensuring mutual recognition and compatibility with other jurisdictions. The UK cannot implement a redomiciliation regime unilaterally. Any framework will be redundant in practice unless the origin jurisdiction accepts a migration to the UK.
This will necessarily entail discussions between the UK Government and governments of other candidate origin jurisdictions to ensure the laws of the two jurisdictions mesh together properly. Some jurisdictions may even need to pass new laws to permit redomiciliation into the UK. The Government will need to choose carefully which jurisdictions are most likely to prompt redomiciliations into the UK.
Some countries (particularly those with “inward-only” redomiciliation regimes) may be reluctant to permit migrations to the UK for fear of gradual leakage of investment from their own territory. It would not be surprising if, faced with a request to allow its own businesses to redomicile in the UK, another country insists on the ability for UK entities to redomicile within its borders.
A fair amount of detail remains to be worked out but, in principle, the introduction of the ability to redomicile in the UK is a welcome step forward.