Relocation: going somewhere?

Every so often, a tax director of CFO will be asked whether their company
should change headquarters. A number of companies, WPP for example, have done so
over the last year or so. But is it always as beneficial as some suggest?

The answer is undoubtedly a resounding no. A very large proportion of the
UK’s corporate taxpayers can and should dismiss the idea relatively quickly. If
your company’s only market is the UK and your management and employees are all
based in the UK there is very little to be gained (and quite a lot to be lost,
in some cases) by trying to migrate your company abroad.

But what about companies who have substantial activities outside the UK or
who plan to start such activities?

Above all, most corporate taxpayers crave stability and certainty in the tax
system to which they are subject. The UK has not seen high levels of either in
the last few years. While there is no denying that some of the change has been
at the behest of taxpayers, there have been quite a few policy changes by the UK
government over the same period.

Witness, for example, the radical overhaul of the controlled foreign company
regime which was announced at the same time as the exemption for dividends
received. While this appears to have been shelved, some taxpayers will no doubt
see it as a warning that things could change ­ and not necessarily for the
better.

As far as certainty is concerned, the last few years have seen numerous
examples of rules which have been drafted more widely than they needed to on the
understanding that
HM Revenue &
Customs would issue guidance to taxpayers to tell them what the rules were
really getting at.

One can object that this is a result of the behaviour of taxpayers and their
advisers who seek to find loopholes in the system, but that alone does not
explain it.

It would be naïve to think that some companies do not emigrate simply to bene
fit from lower rates of tax.

That said, the freedom of operators to respond to market conditions (tax
levels being one of those) is a central tenet of the capitalist system. A form
of it is enshrined in the treaties establishing the European Union, in the form
of the right to free movement of capital and the ECJ has enforced it strictly.

Having looked at why one might consider it, let us say a few words about
whether it should be done.

The first fundamental misconception that has to be addressed is that
migration means no UK tax is paid.

That is simply not true. The UK (and most other jurisdictions besides) will
not allow taxpayers simply to declare that they are now non-resident and outside
the reach of UK tax. At the very least, exit charges may be incurred (and at
worst, the move will simply be impossible), but more likely activities which are
currently conducted through the UK will have to stay there.

Most company migrations witnessed in the last few years were really a first
step towards rebalancing corporate structures. If a large part of your activity
is outside the UK and large part of your shareholder base as well, why subject
yourself to UK tax?

One regular criticism of companies moving abroad is that they do not have
enough substance in their new home. But that cuts both ways ­ a UK company that
only operates outside the UK and has no employees here, will generally be
subject to full UK tax. We appear happy to tax companies with no substantial
presence but not exempt them.

In fact, the immediate tax savings on migration will in most cases be low.
This is not to dismiss it but simply to put in perspective. The benefits are
more likely to accrue over time ­ the company will be able to conduct activities
with no connection to the UK without having to consider whether a change of
policy in the UK will hinder activities abroad.

Consider the issues

• The UK taxes companies which are centrally managed and controlled in the UK.
  One of the first things to consider is whether, operationally, your company can
  be run abroad. Can you find suitable senior management?
• Why are you moving? Consider whether a move is necessary to attain your
  business objectives. A move may be disruptive and costly, is it really worth it?
• Most migrations have taken the form of the creation of a new holding company
  above an existing group. Will this cause problems (e.g. change of control
  clauses in major contracts and other important agreements)?. If the company’s
  shares are publicly traded, how much work is involved in creating the same
  arrangements for the new holding company?
• Consider the ‘PR’. Some major customers and suppliers may not be comfortable
  dealing with the subsidiary of a foreign company;
• Where should you go? The most popular location so far seems to be Ireland.
  It ticks all the right boxes in that: (i) it is in the EU; (ii) it has a large
  number of double tax treaties with other jurisdictions – the network of treaties
  is very important if the holding company is to house new foreign projects and
  (iii) its tax system has been relatively stable and the Irish government has
  made determined efforts to make it attractive for holding companies. However,
  Ireland is not the only suitable jurisdiction, consider others (e.g. Denmark).
  In general, it will be important to locate your headquarters in a jurisdiction
  which has a well developed infrastructure capable of supporting the needs of
  your business;
• quantify the costs. There will no doubt be some costs involved in any move.
  Some are easily quantifiable (e.g. the cost of securing new premises) others may
  be less so. There will also be some tax costs and it is important to understand
  these.

Blaise Marin-Curtoud is tax partner at the London office
of global law firm Jones Day