UK: Redomiciliations: Should UK Multi-National Groups Move Offshore?

Last Updated: 30 March 2010
Article by Dominic Stuttaford and Ian Lopez

Introduction

In the last fifteen months or so, a number of high profile UK listed companies have redomiciled from the UK. Some of the companies to redomicile have included United Business Media Plc, WPP Plc and Beazley Group Plc1. This article explains why a company may choose to redomicile and explains how to effect this.

Why redomicile?

Under current UK tax rules, a group which has a UK incorporated tax resident holding company and has UK income and non-UK businesses, pays UK corporation tax on its UK profits and is taxed at the local rate on its non-UK profits. If the non-UK businesses' effective tax rate is less than three-quarters of the UK rate (ie, 21 per cent based on a UK 28 per cent corporation tax rate), the non-UK income could be deemed to be income of the UK parent, even if not received in the UK and therefore subject to UK tax on the difference between the UK rate and the local rate. This is under the so-called UK CFC rules, which can impose both an administrative and financial burden for groups with a UK parent.

A company is only subject to the UK CFC Rules if it is "centrally managed and controlled in the UK"; there is a presumption that any company incorporated in the UK is centrally managed and controlled in the UK. Accordingly, a holding company which is UK incorporated is likely to be subject to the UK CFC Rules. On the other hand, if the holding company in a multi-national group is a non-UK incorporated company and the non-UK assets generating the non-UK income are owned by non-UK incorporated companies, the group will not be subject to the UK CFC rules. Redomiciling may therefore be worthwhile for a UK company which derives a significant proportion of its revenues from outside the UK or is likely to expand its operations outside the UK. The net result of redomiciling should be that the group should pay less tax on its profits and, therefore, all other things being equal, a move should enhance earnings per share. The benefits of redomiciling are not only the potential to save tax but also the possibility of reduced tax compliance costs. Working out which non-UK operations are caught by the CFC rules can be a costly and time-consuming task.

How does a company redomicile?

Redomiciling involves a two stage process:

Stage 1:

At Stage 1, a non-UK company is incorporated and becomes the holding company of the group. This is usually achieved by means of a UK scheme of arrangement. Pursuant to the scheme of arrangement, the existing ordinary shares of the current holding company ("Oldco") are cancelled and the resulting reserve arising from such cancellation is applied in issuing new ordinary shares to the new holding company ("Newco"). In consideration for the issue of such ordinary shares, Newco allots and issues ordinary shares to the former shareholders of Oldco.

Step (i): Ordinary Shares in Oldco cancelled.
Step (ii): Reserve arising from cancellation in Step (i) used in applying and issuing new ordinary shares in Oldco to Newco.
Step (iii): In consideration for the share issue in Step (ii), Newco allots and issues ordinary shares to the former shareholders of Oldco.

The net result of the Scheme is that shareholders "swap" their existing shares in Oldco for ordinary shares in Newco. Newco is admitted to listing and to trading on the London Stock Exchange.

Stage 2:

To ensure that the group is not subject to UK CFC Rules on its foreign income, at Stage 2 the UK income/assets/liabilities are separated from the non-UK income/assets/liabilities. How this will be achieved will depend on the make-up of the group concerned and the extent of the re-organisation required to achieve this and in some instances on the type of business. This could involve the transfer of subsidiaries or other income-generating activities so that they are directly owned by the non-UK parent/non-UK subsidiaries. Care will have to be taken to ensure that this can be done without a tax charge arising.

What approvals are required to effect the redomiciliation?

To implement Stage 1, Oldco will require shareholder approval at Court and General meetings. To implement both Stage 1 and Stage 2, bank consent (and if appropriate bondholder consent) may be required to the "change of control" and/or reorganisation of assets. In the current market, Oldco will need to be mindful that banks/bondholders may rely on a request for consent as an excuse to renegotiate terms /seek some financial incentive for giving consent. Consents may also be required under key commercial contracts depending on the terms of such contracts.

Documentation

  • Shareholder Circular - sent to Oldco shareholders. Contains details of Scheme and Notice of General and Court Meetings to approve the scheme and related proposals.
  • Newco Prospectus - contains details of the group and is required to enable Newco to be listed. Published but not sent to Oldco shareholders.

What does redomiciliation mean in practice?

To maintain its new tax status, Newco must be "centrally managed and controlled" outside the UK.

The following points should be noted:

  • Central management and control is normally identified with the control which a company's board of directors has over its business and affairs, so that a company is normally resident in the jurisdiction where its board of directors meets.
  • It is necessary to distinguish between "central management and control" and lower level day to day or operational management and implementation of the strategy determined by the board of directors of Newco. The board of Newco will retain ultimate authority for high level strategic and management decisions of the company and all major transactions, but it may (subject to comments below) delegate to committees or other boards of subsidiaries to manage certain aspects of the group's affairs and to implement strategy.
  • Certain matters are reserved for the Newco board for decision, reflecting the fact that the board exercises control over Newco's affairs. The principal focus should be decision taking on the overall strategic direction, development and control of the group. The company's board approves the group's values, overall policies, strategic plans, annual budget, investment budgets, shareholder relations, larger capital expenditure proposals and the group's overall system of internal controls, governance and compliance.

It is usual for the Newco group to adopt certain internal operational guidelines to ensure the above principles are adhered to.

The guidelines will usually provide:

  • All Newco board meetings must take place outside the UK and usually the vast majority will be in the country where Newco is intended to be tax resident.
  • All committee meetings of Newco (audit committee; remuneration committee; nomination committee etc) will follow this principle.
  • Directors participating in board/committee meetings of Newco cannot do so if physically present in the UK at any time during the board /committee meetings. Provisions are included in Newco's articles to provide that in such circumstances such directors will not be entitled to count towards the quorum or be entitled to vote at such meeting.
  • The board of Newco should have at least two directors who are tax resident in the jurisdiction in which the company is tax resident. The quorum for board meetings will be two of which at least one must be one of the directors tax resident in the jurisdiction in which Newco is tax resident.
  • Written board resolutions cannot be signed by a director who is present in the UK at the time he signs the resolution.
  • All general meetings of Newco shall be held in the place where Newco is tax resident.

Tax residency

The vast majority of the recent redomiciliations have been implemented with a Jersey incorporated but Irish tax resident holding company2. Some of the main reasons for this are as follows:

  • ease of operation. As mentioned above, it is vital that Newco is "centrally managed and controlled" from the relevant jurisdiction. Ireland is comparatively close to the UK and easy to get to;
  • comfort that the Irish tax regime is suitable for Newco and if it ceases to be Irish tax resident, comfort that Newco can be extracted without a tax cost based on current Irish legislation.

Where should Newco be incorporated?

As mentioned earlier, Newco will be a non-UK incorporated company, to avoid a presumption that it is UK tax resident. The vast majority of redomiciliations that have been done over the last two years have used a Jersey incorporated holding company. The reason for this is that companies wishing to redomicile have presented the transaction to their shareholders as "business as usual" - apart from the change of tax residency, shareholders will be entitled to the same protections as they had with a UK incorporated holding company.

The benefits of using a Jersey holding company are as follows:

  • Jersey law is broadly speaking similar to the UK Companies Act 1985 and therefore provides much of the same protections offered to shareholders as those that would apply if the holding company were a UK incorporated holding company. To the extent that additional protections are provided by the UK Companies Act 2006, these are usually included in the Company's articles, as these will not apply automatically.
  • The UK Takeover Code automatically applies to Jersey incorporated companies.

In addition to the above it is usual for a company to indicate in the circular to shareholders seeking consent to the transaction that it will voluntarily comply with the Combined Code, Listing Rules, Prospectus Rules, Disclosure Rules and institutional guidelines as if it were a UK company - some of these rules/provisions would otherwise impose less stricter requirements on non-UK companies.

Dividends

Under Irish law, any dividends paid by Newco will generally be subject to Irish dividend withholding tax at the standard rate of income tax (currently 20 per cent) unless the relevant shareholder falls within an exempt category. Under UK tax law, no withholding tax is imposed on UK dividends. Accordingly, to avoid being subject to Irish withholding tax, it is common for the Newco group to put in place a dividend access plan to enable shareholders to elect for a UK sourced dividend and therefore for such dividend not to be subject to Irish withholding tax. If Newco adopts a dividend access plan it will need to ensure that the relevant dividend access company has sufficient distributable reserves at the relevant time to satisfy elections for UK dividends.

Ian Lopez advised United Business Media Plc, WPP Plc and Beazley Group Plc on their respective redomiciliations to Ireland.

Footnotes
1 Other companies to redomicile have included Shire, Informa, Regus, Charter and Henderson
2 Most Companies that have redomiciled over the last 2 years have chosen to be Jersey incorporated but Irish tax resident. However Informa adopted a Jersey incorporated holding company and Swiss tax resident company and Regus is a Luxembourg tax resident but Jersey incorporated holding company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.