On 27 October 2021 the government launched its consultation on the introduction of a UK re-domiciliation regime. Such a process would make it possible for companies to re-domicile to the UK.
What is re-domiciliation?
Re-domiciliation enables a company incorporated in another jurisdiction to change its place of incorporation - in this case to the UK - while maintaining its legal identity as a corporate body. Such a process gives companies maximum continuity over their business operations, because the business continues in its existing form in the existing body corporate. The body corporate just changes its place of incorporation. Where re-domiciliation is not possible, as is currently the case in the UK, a business would need to incorporate a new company in the UK and then transfer its business and operations to that new entity. This breaks continuity and significantly increases administrative burden.
Why is the UK government looking at this now?
In its consultation paper, the government acknowledge that by allowing companies from other jurisdictions to shift their place of incorporation to the UK, it will increase the attractiveness and availability of the UK as a destination in which to locate a business and invest. It further acknowledges that by having such a re-domiciliation regime, it will modernise the UK’s legal framework, bringing it into line with around 50 countries and jurisdictions which also have re-domiciliation regimes.
The government also believes that by allowing companies from other jurisdictions to change their place of incorporation to the UK, it could:
- bring increased investment and skilled jobs as companies shift their headquarters to the UK;
- increase demand for the UK’s internationally respected professional services;
- enhance and expand the UK’s innovation base (should companies choose to co-locate R&D functions in the UK);
- develop the UK’s world-leading capital markets; and
- improve corporate governance and transparency in the UK (because a company registered in the UK will be required to follow the UK's standards and corporate transparency regime, whereas this is not necessarily the case for a company that is active in the UK but is registered abroad).
What is proposed?
The proposal is that companies from jurisdictions that allow outbound re-domiciliation will be able to re-domicile in the UK, regardless of their sector. In its proposal, the government has stated that it does not intend to introduce an economic substance test, because doing so may inadvertently exclude a range of companies that the government is seeking to attract.
However, there will be eligibility criteria that an incoming company is required to meet. The proposal is that these will include:
- authorisation from departing country;
- corporate form comparable with the UK;
- director(s) of good standing;
- the application poses no national security risk and is not contrary to the public interest;
- registration fee is paid;
- the entity must have passed its first financial period end and provide the relevant documentation, thus ensuring that the entity has some track record before re-domiciling to the UK;
- solvency; and
- a report from the entity that explains the full legal and economic impacts of the transfer (including the impact on creditors, shareholders and key stakeholders).
What about re-domiciliation from the UK to another jurisdiction?
In its consultation paper, the government has said that it is considering the merits of establishing an outward re-domiciliation regime for the UK alongside an inward re-domiciliation regime. However, from the paper, the government's main focus appears to be on inward re-domiciliation.
What are the likely tax consequences?
The government is considering whether specific legislation should be introduced, alongside any re-domiciliation regime, to clarify what the consequences of a re-domiciliation would be on a company's tax residence status.
At present, for corporation tax purposes, companies are treated as UK resident if:
- they are incorporated in the UK; or
- their central management and control is in the UK (subject to the provisions of any relevant double tax agreement).
The government is considering whether any such legislation should make it clear that (subject to any relevant double tax agreement), an entity would be treated as UK resident by virtue of the re-domiciliation or only be treated as UK resident if the central management and control is in the UK.
What are the results of the consultation?
The consultation only closed on 7 January 2022 and so it is a little early for the consolidated results of feedback received by the government to be published. However, if the response of the Company Law Committees of The City of London Law Society and the Law Society or the response from the Association of Accounting Technicians are anything to go by, it looks like the proposal will be a popular one.
There have long been calls for the UK to introduce a re-domiciliation regime, and it looks like the government may finally be listening. However, the success or failure of any such regime will depend on how it is implemented. By virtue of its very nature, the UK will need to create a regime that works alongside those regimes of other jurisdictions. If the regime is not compatible and comparable, it will not work, because the original jurisdiction would be unlikely to accept the re-domiciliation to the UK. However, once the finer details are finalised, and provided that other jurisdictions cooperate, the introduction of such a re-domiciliation regime will be a welcome addition to the UK's legal framework.
Association of Accounting Technicians