Time For a New Home?

by Allen & Overy LLP

The high number of companies, mostly U.S., eyeing acquisitions or ventures that will allow them to redomicile their business in the UK and Ireland is a major theme of this report. Mostly, it is about tax. But there is quite a bit more to it than that.

Flick through the pages of this report and a recurrent theme will immediately leap out at you – the growing number of U.S. companies trying to buy UK or Irish competitors so that they can achieve a so-called inversion, cutting their corporate tax bills significantly.

The last 18 months has seen a growing stream of businesses, across a variety of sectors, trying to redomicile their operations to take advantage of lower tax rates.

Liberty Global’s USD23bn merger with Virgin Media last year had a clear commercial logic, but tax planning was also reportedly at the heart of it. The deal allowed it to set up a new corporate structure, with a ‘topco’ based in the UK (although its headquarters remain in the U.S.), and enabled it to take advantage of a raft of recent, targeted, UK tax reforms.

Life sciences companies have been at the forefront of the trend. Inversion is a manoeuvre that suits companies with large stockpiles of foreign earnings, as many global pharma businesses have.

So it is not surprising that, in the last few months, this sort of tax planning was a fundamental part of a large number of life sciences deals, including Pfizer’s attempted USD69bn takeover of AstraZeneca, AbbVie’s unsuccessful approach to Shire, and Medtronic’s current USD43bn bid for Ireland’s Covidien.

But relocations of this sort appeal to non-U.S. companies, too. Fiat – the Italian carmaker that now controls Chrysler – has courted controversy at home and in the U.S. by announcing that it will headquarter its operations in the UK, for example.

Four or five years ago, it was unthinkable that the UK would become the destination of choice for corporations looking for tax efficiencies.

At that time, we were witnessing the process in reverse. Think, for instance, of advertising giant WPP moving its tax domicile to Ireland in 2008, if only temporarily – it was back in the UK by 2013 once those tax reforms had been introduced.

Making sense of the trend – the U.S. angle

On the surface, it is easy to see why this trend has developed. The U.S. corporate tax rate, at 35%, is one of the highest in the industrialised world. By contrast, the UK rate – now set at 21% and soon to fall to 20% – is the lowest in the G20; Ireland’s rate is much lower still.

By accident rather than design, the U.S. system is facilitating the trend in two ways.

It encourages businesses to raise money at home for foreign acquisitions, with interest costs fully deductible against domestic profits. At the same time, it encourages companies to keep overseas earnings offshore – they are only taxed when repatriated (and then, as we have noted, at punitive rates). This is further compounded by accounting provisions, which mean profits built up abroad can boost the earnings per share of the U.S. parent company without taking account of the tax costs involved if the profits were actually paid back to shareholders.

It is reported that trillions of dollars are held offshore by U.S. companies – because they are caught in a kind of tax-deferral treadmill.

But there comes a time when storing cash up in this way no longer makes sense. It needs to be put to use, or shareholders will certainly start to demand it is brought back onshore and used to fund better dividends or share buybacks.

Given that background, it may seem surprising that more U.S. companies have not simply relocated abroad, as UK companies have done in the past. The reason is that U.S. tax rules make that quite difficult to do – U.S. law does not have a concept of ‘residence’ that can be moved to a different jurisdiction, and companies organised under U.S. law will always be regarded as U.S. taxpayers. CS1406_CDD-39433 infocus 02.jpg

But mergers offer a way out. Done in the right way, a merger can remove the U.S. company as the parent of the combined group, without adverse tax consequences – although to avoid other penalties, the new holding company may need to be based in a jurisdiction where the combined group books a substantial amount of business.

This gives the group an opportunity to repatriate overseas profits to shareholders without incurring significant tax cost.

A wide range of substantial merger partners and a relatively benign tax environment for holding companies, are, therefore, key attractions of the UK to U.S. companies looking to achieve an inversion.

The UK – why else?

Raw tax advantage is very rarely a justification in itself for an M&A transaction, especially one of the scale and complexity of recently attempted megadeals. Inversion is only part of the strategy. And inversions are not the only situation where the UK is an attractive option for a holding company location. For example, it is used as a (sometimes neutral) jurisdiction for joint venture companies or even for regional holding companies within a group structure.

The UK has one of the largest double tax treaty networks, covering more than 100 countries. There is no dividend withholding tax on outbound dividends, wherever shareholders are located, and inbound dividends will usually qualify for exemption from corporation tax. A new territorial controlled foreign companies (CFC) regime is also a spur, making it easier, among other things, to do intra-group financing. Furthermore, a new system of tax reliefs on profits from exploiting intellectual property, the so-called Patent Box, also applies. The list goes on.

But other cultural and legal issues also hold sway. It matters that the UK is part of the EU and a founder member of the OECD; that it is English-speaking; that London is a leading financial centre sitting in a central time zone between the U.S. and Asia, with good global transport links.

It is important, too, that the UK has an established, common law legal system with an efficient Companies Court; that there are no restrictions on where shareholder meetings are held; and that executive remuneration requirements are flexible (a tightening of Swiss rules here has led to several global companies relocating their parent company recently – once again, to the UK and Ireland).

Lifestyle issues might also play a role. The UK in general and London in particular are attractive to company executives who need to relocate or travel here.

A loophole closed?

The U.S. inversion rules are already something of a minefield, and there is widespread speculation that the U.S. may soon seek to tighten the rules on inversion still further.

Certainly, some businesses expect the inversion window to be relatively narrow, which might explain the growing rush of recent transactions even in the face of continuing public disquiet about corporate tax avoidance.

It may be a short-lived phenomenon. But while it lasts, it is proof once again of another important fact.

Governments, looking to create tax environments that will attract investment, can be as competitive as business. Despite public disquiet, they are likely to remain so.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen & Overy LLP | Attorney Advertising

Written by:

Allen & Overy LLP

Allen & Overy LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.