An Independent Expert Panel (the Panel) convened by the Department of Business and Trade published a report on 1 October 2024 setting out a proposed framework for implementing a corporate re-domiciliation regime in the UK (the Report).
Re-domiciliation
Re-domiciliation is the process by which a company incorporated in one jurisdiction moves its place of incorporation or registration to another jurisdiction while maintaining its legal personality. This allows businesses to move their place of incorporation without needing to dissolve and re-incorporate, thereby retaining their corporate history and relationships.
Currently, re-domiciliation is not available under UK law. Instead, companies must 'migrate' their business. This may involve setting up new entities or merging with an entity incorporated in the desired jurisdiction, and transferring their assets, contracts and other business relationships. This can be complex and time-consuming, often involving legal intricacies in transferring title to certain assets such as real estate or intellectual property, tax implications, creditor protections, and compliance with local regulations.
The introduction of a re-domiciliation regime in the UK would simplify the relocation process, reduce associated costs and increase flexibility by allowing seamless transitions for businesses considering moving their operations into or out of the UK.
Key highlights of the Report
The Report supports establishing a dual re-domiciliation regime, allowing companies to both 'move' into and out of the UK. This flexibility is expected to enhance the UK's appeal as a prime business location.
Eligibility
The Panel recommends inward re-domiciliation should be open to companies that are duly authorised under their existing jurisdiction's laws, are solvent and intend to continue business in the UK after re-domiciling. Companies therefore should not be able to apply if they are in liquidation or unable to pay debts, among other restrictions. This restriction is intended to extend to companies which have pending processes in place constituting compromises with creditors.
Any company incorporated under the Companies Act 2006 (the CA 2006) can apply for outward re-domiciliation, provided it is also solvent and complies with conditions set by both UK law and target jurisdiction regulations.
Application process
The Report provides that applications should be managed by Companies House, which will play a crucial role in coordinating with registries from other jurisdictions and ensuring compliance with UK re-domiciliation requirements.
As far as possible, the Panel has based its proposals on the same principles applicable to new company incorporations in the UK. This is to ensure there is comparable information available to the public and that the re-domiciling entity meets substantially the same requirements as a company originally incorporated in the UK. For example, applicants should be required to provide:
- confirmation that future activities are lawful
- a proposed name and registered office address
- details regarding liability of members, whether private or public, and share capital information.
For outward re-domiciliation, the Panel suggests robust measures such as providing solvency statements just before applying and details of a UK representative and UK address that is to be maintained for 10 years post-re-domiciliation out of the UK to ensure stakeholder protection for ongoing liabilities and contracts.
Changes to legislation
Upon inward re-domiciliation, companies will be treated as if they were initially incorporated under the CA 2006. The report suggests several amendments to the CA 2006 to accommodate these changes effectively, including:
- Section 20: default application of Model Articles to apply to the entity if no articles are submitted upon re-domiciliation to the UK.
- Sections 29 & 30: resolutions or agreements to be binding post-re-domiciliation must be disclosed within application forms.
- Section 156A et seq.: ensuring directors comply with natural person requirements upon re-domiciling.
Changes required for tax legislation
Section 6 of the Report discusses the tax treatment of redomiciled companies. As an overarching principle, the Panel recommends that any tax framework for re-domiciled companies should (i) leverage existing UK tax legislation as far as possible and (ii) avoid creating a separate tier of tax system for these companies. If a body corporate that has re-domiciled to the UK is deemed to become a company incorporated under the CA 2006, existing UK tax laws applicable to UK-incorporated companies should automatically extend to these re-domiciled entities. While some new legislation may be necessary to address specific tax issues related to entering and exiting the UK tax system, the Panel believes that, where possible, adjustments to existing legislation and HMRC guidance should be made to integrate these re-domiciled entities into the current UK tax framework. The document highlights the importance of protecting the UK tax base and suggests that existing anti-avoidance rules should apply to re-domiciled companies, with additional measures considered if necessary. Some particular points discussed in the report are set out below.
- Tax residence: The Panel sensibly recommends that a company should automatically become a UK tax resident upon re-domiciliation to the UK, effective from the date Companies House issues a certificate of re-domiciliation. Similarly, a company re-domiciling out of the UK should cease to be a UK tax resident from the date of re-domiciliation, subject to additional guidance. The Panel notes that there may be practical challenges in some cases, such as alignment with the previous jurisdiction's tax residency cessation and dual residence cases. The Panel's suggestion that such scenarios may best be addressed through HMRC Guidance and/or an amendment to existing HMRC Statement of Practice is unhelpful and may give rise to material issues being governed by non-binding tax authority guidance.
- Market value rebasing: The Panel recommends implementing a market value rebasing of assets for companies re-domiciling into the UK to promote simplicity and consistency within the UK tax system. This is a departure from the current tax rules for companies migrating to the UK. The application to loan relationships and derivatives is noted as complex (as the taxation of such assets and liabilities generally follows the accounting treatment) requiring further guidance.
- Exit taxation: To ensure alignment with its market value rebasing proposals for inward re-domiciliation, the Panel recommends imposing an exit charge on the capital assets of companies re-domiciling out of the UK. This charge would be subject to existing reliefs and exemptions (such as the foreign branch exemption regime or the substantial shareholding exemption) and would not apply if the re-domiciled company remains a UK tax resident.
- Withholding taxes: The Panel suggests that HMRC guidance should clarify that re-domiciliation in and of itself should not alter the source of a cross-border payment to the UK for the purposes of UK withholding tax. Whilst UK tax practitioners are accustomed to determining questions of UK "source" for withholding tax purposes, this could potentially give rise to surprising (and potentially multi-jurisdictional) withholding tax issues following a re-domiciliation.
- Loss importation: Noting that re-domiciliation to the UK is only available to solvent companies, the Panel recommends a specific provision stating that no relief should be available for any expenses or losses incurred prior to re-domiciliation and before becoming a UK tax resident (except where the body corporate is already regarded as a UK tax resident company) is enacted to address taxpayer concerns about potential anti-avoidance issues.
- Stamp duty: The Panel considers that the transfer of shares in a company that has re-domiciled to the UK should be chargeable to stamp duty and stamp duty reserve tax (SDRT) as it will be treated as a UK-incorporated company. To maintain proper symmetry in the tax system the Panel anticipates that a company should fall out of the charge to SDRT to the extent it has re-domiciled out of the UK (though the Panel does recommend that the definition of 'chargeable securities' is carefully considered to ensure this has effect). The Panel considers that the actual event of re-domiciliation should not itself cause a stamp duty or SDRT charge on the basis that the mechanics of the re-domiciliation does not involve a transfer of and/or a change in the ownership of shares. The applicability of UK stamp taxes may act as a disincentive to re-domiciliation, which the Panel only addresses in the context of companies that are already listed on a foreign stock exchange.
- Maintenance of legal personality: It is intended that a re-domiciled company will have the same legal personality before and after re-domiciliation. However, it is clear that entities that do not constitute bodies corporate or are not treated as having ordinary share capital for UK tax purposes may be involved in a re-domiciliation. This may give rise to unexpected outcomes for members, shareholders or re-domiciled entities when it comes to the application of certain UK tax rules that involve tests based on, for example, holdings of ordinary share capital.
Solvency and creditor protection
The report also outlines solvency and creditor protections including the requirement that applicants must be solvent, to prevent financially unstable entities relocating to the UK. Directors must therefore provide a solvency statement based on section 643 CA 2006, confirming solvency on reasonable grounds.
The Panel also recommends that members who believe the re-domiciliation may materially prejudice their rights, and creditors who believe it would result in an inability of the company to discharge debts when they fall due, should have the right to apply to court within 21 days of the application’s publication.
The Panel believes this is necessary to ensure the fair treatment of all stakeholders and avoid re-domiciliation being used to circumvent certain liabilities or obligations of the company.
Conclusion
The Panel recommends further consultation is undertaken on complex areas such as tax and accounting before finalising legislative changes. Nevertheless, the overall sentiment is that adopting a corporate re-domiciliation regime would mark a significant step forward in positioning the UK as an attractive business hub, by facilitating smooth transitions for businesses moving into or out of the UK, while maintaining stringent regulatory oversight ensuring robust stakeholder protections. This regime promises enhanced economic dynamism and competitiveness.
For more detailed insights into each aspect of the proposed regime, you can refer directly to the full report available here.
If you have any questions or require further information on how these changes may impact your business operations, please do not hesitate to contact us.
