North East business and airport leaders concerned region to be made guinea pig for tax reforms
SUCCESSFUL INTERNATIONAL STRUCTURES in most cases begin with choosing the right jurisdiction to host a company that will form part of an international business. Depending on the company’s activities, the choice will depend on the range of double taxation treaties and the availability of tax reliefs followed by a host of other tax and non-tax related factors.
However, circumstances might arise that make the original hosting country no longer acceptable. This could be due to changes in tax laws, practices or rulings, or perhaps a requirement to create securities which cannot be accommodated within the original country’s legal system, or indeed a myriad of other reasons.
In this situation the shareholder may of course liquidate the existing company and transfer its assets to a new entity in a different country. However, receiving liquidation proceeds may be an expensive option for such a restructuring. Alternatively, the shareholder may exchange the company’s shares for shares in a company located at a different jurisdiction, which will receive the assets of the former as dividends in specie or its liquidation proceeds.
What is not commonly understood, however, is that just like individuals are able to shift their tax residence to a different country, the relevant company might be able to migrate to another jurisdiction without the need to liquidate it. If the laws of its country of residence and the host country permit, the company can transfer the legal domicile without losing its corporate personality. As a result, it will cease to exist in one state without dissolution and continue in a different country as the same entity.
This method is not universally accepted, but where this is possible, significant benefits can be obtained for the shareholder without creating expensive personal or corporate tax liabilities. A company may also move its place of effective management and become tax resident in a different country. However, this will work only between the states that follow the so-called “incorporation theory”.
Broadly, the company alwasy remains a legal entity subject to the tax jurisdiction of the country of incorporation, but its “mobile” place of effective management can be situated abroad, thereby creating a tax presence there. If there is a double taxation treaty between the two states with a tiebreaker clause, the company will only be resident where it is effectively managed. In the absence of the treaty, the company may be liable to tax in both jurisdictions, but if the country of incorporation is a tax haven that does not tax corporate profits, then double taxation will be avoided in any event.
The incorporation theory is followed in most of the common law states and also in Malta, Switzerland and the Netherlands. The rest of the countries apply the “real seat” theory and include mostly civil law jurisdictions such as Belgium, Germany, Spain, Luxembourg, Russia and France. Their laws require the company’s centre of administration to remain in the country of incorporation, failing which the company will be considered dissolved with all the attendant tax costs of liquidation.
There is no single best method of corporate migration, and the final choice depends on a multitude of factors. These include exit taxes that might be levied when a company leaves a jurisdiction, existence of tax treaties, the time scale and finances available for re-domiciliation.
