Company migration from the UK – changing tax residence
Sarah Burns
by Sarah Burns
UK incorporated companies are generally treated as UK tax resident. There is an exception to this rule though, being if the company is treated as solely resident in a different country under that country's double taxation treaty (DTT) with the UK, then it is not treated as UK tax resident for the purposes of UK domestic tax law.
Additionally, subject to the above exception, companies incorporated overseas are also treated as UK resident if their central management and control is situated in the UK. This means the place of the highest form of control and direction over a company's affairs, as opposed to decisions on the day-to-day running of the business, is in the UK. No matter the size of a company and its team of directors or senior decision-makers, if control is in fact exercised by a single individual (often the case in large, privately-owned businesses), the place of residence of the company will be the place where that individual exercises their powers.
A UK tax resident company may decide that it wishes to relocate from the UK to an overseas territory. A company may decide to migrate for a variety of reasons. These may relate to its tax position in its jurisdiction of residence or its ability to claim tax reliefs under double tax treaties. Alternatively, changes in regulations, access to skilled talent, or changes in the business or management structures of a company may make it necessary or advantageous to change its tax residence.
Exit charge
Unsurprisingly, HM Revenue and Customs (HMRC) are not too keen on companies migrating from the UK. Migration gives rise to possible “exit charges” in relation to a number of tax provisions in the chargeable gains, loan relationships, derivative contracts, corporate intangibles, and trading stock fields.
These are:
Deemed disposal of assets
When a company ceases to be UK resident; or
When assets held for the purposes of a trade carried on by a UK permanent establishment cease to be in the UK; or
When the trade of a UK permanent establishment ceases.It should be noted that where the assets are shares qualifying for substantial shareholding exemption (SSE), no taxable gain will arise.
Deemed disposal of loan relationships and derivative contracts at fair value by a company that
Ceases to be UK resident; or
Ceases to hold assets or liabilities for the purposes of a UK trade.
Deemed realisation of intangible fixed assets at market value at the time a company
Ceases to hold assets for the purposes of a UK trade.
Revaluation of trading stock to open market value when a company
Ceases to be within the charge to corporation tax (when it migrates, unless stock is left in a UK permanent establishment).
Permanent establishment broadly means a branch, agency, or other fixed place of business through which the trade is carried on.
Subject to the tax base cost of said assets, this can lead to a significant, and potentially catastrophic, “dry” tax charge upon migration.
Effective January 2020, there is no option to postpone the exit charge; however, legislation was brought in to introduce an “exit charge payment plan” for eligible companies. Such companies may apply for an exit charge payment plan, deferring payment of exit charges. The amount of tax which may be deferred is the difference between the amount of corporate tax that the company is liable to pay for the migration period and the amount to which it would have been liable absent the various exit charges.
Eligible companies are those which have right to freedom of establishment. These are companies:
Incorporated in an EU or EEA member state,
Which are UK resident but cease to be so, and
Which become resident in another EU or EEA member state, and
Which are liable to pay corporation tax exit charges.
Conditions:
The company must make an application to HMRC for an exit charge payment plan within nine months of the end of the migration accounting period.
On ceasing to be resident in the UK, the company must carry on business in an EEA state.
On becoming resident in the other EEA state, the company is not treated as resident in a territory outside the EEA under any double taxation arrangements in force at that time.
There are also two alternative methods the company may use to determine the period over which tax payments may be deferred, the instalment method and the realisation method. These are not considered further in this article.
Procedure
The legislation requires a company, before it migrates, to:
Notify HMRC of its intention to cease to be resident, and migration time;
Provide a statement of its tax liabilities;
Make arrangements for the settlement of these liabilities in due course; and
Obtain HMRC's approval of the arrangements.
A disagreement on the estimated liabilities may be referred to the First Tier Tribunal.
If a company ceases to be resident without satisfying the requirement to give notice and to make arrangements, it is liable to a penalty up to the amount of its outstanding liabilities at the date of migration. The directors of the company and of its controlling companies and the controlling companies themselves may also each be liable to a similar penalty.
Summary
Companies must be very careful when considering whether to migrate from the UK. In some cases, a company may not have even planned to migrate; it may be that one individual has decided to take up residence outside of the UK which could result in an exit charge, based on their moving central management and control.
Needless to say, the migration of a company from the UK is a complex matter, not least because the company must ensure it meets the tax residency requirements of the new jurisdiction.
Whilst it may be unavoidable for some, others may wish to consider alternative options, for example, the establishment of a group company in the relevant overseas territory. Consideration still must be given to the tax impact of any intra-group transfers, and, notably, to ensuring the overseas company is not deemed UK tax resident.
Sarah manages a diverse portfolio of clients from high net worth individuals to large corporate groups. Her work mainly focuses on providing tax advice with a key goal being to help minimise their client’s exposure to a variety of taxes, including corporation tax, inheritance tax and income tax.
XLNC member firm Gerald EdelmanLondon, England, UKT: +44 20 7299 1424
Audit, Accounting, Tax, Corporate Finance, Strategy, Management Consulting
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