Horizon Scanning “Corporate” and “Tax” Migrations

Our Global Tax Team are seeing an increasing trend in both “corporate” and “tax” migrations, particularly in an M&A and restructuring context.

Background

This is being driven by factors including:

(a) sponsors seeking to rationalise costs of operating entities in multiple jurisdictions (e.g. via economies of scale with service providers in fewer jurisdictions);

(b) increasing requirements from certain investors (e.g. certain German and Scandinavian institutional investors) to avoid offshore structures (e.g. Channel Islands);

(c) increasing and improving “substance” by ensuring that all, or substantially all, portfolio companies are incorporated in, or managed and controlled from, a particular jurisdiction (e.g. Luxembourg);

(d) for some investors more than others, an ongoing ESG-related focus on minimising travel to multiple jurisdictions unless required;

(e) jurisdiction-specific nuances which can require certain entities to be resident for tax purposes in a particular jurisdiction in order to benefit from preferential tax regimes (e.g. the principal company of a UK REIT being required to be UK tax resident, or the Spanish Ceuta and Melilla special tax regime for online gaming operators); and

(f) regulatory reasons requiring certain groups to have a presence in the EU (e.g. the migration of entities into the EU post-Brexit).

“Corporate” Migrations – Overview

“Corporate” migrations are effected by transferring the “legal seat” and place of incorporation of an entity from one jurisdiction to another.

This is viable in jurisdictions which are colloquially referred to as “real seat” jurisdictions and which enable companies to be incorporated under a “continuance” incorporation regime (i.e. rather than requiring an entity to be incorporated as a brand new entity “from scratch”).

It is not possible to effect a “corporate” migration to the UK as the UK does not have such a continuance incorporation regime. However, common “corporate” migration destinations we frequently see in practice include:

(a) Luxembourg to Jersey (e.g. in the context of Propcos held within UK REIT structures);

(b) Jersey to Luxembourg (e.g. where many private capital funds are seeking to establish the majority of entities in the jurisdiction where their funds and AIFM are located);

(c) Germany to Luxembourg (e.g. in a broad variety of structuring involving German real estate); and

(d) Italy to the Netherlands (e.g. where Italian corporates may seek to benefit from the more flexible Dutch corporate law regime while maintaining tax residence in Italy).

“Corporate” Migrations – Practical Issues

A number of practical issues must be navigated in connection with any such migration (including obtaining appropriate lender consents in structures involving third party financing).

A jurisdiction-by-jurisdiction analysis is always required to ensure no unexpected tax costs arise in connection with “corporate” migrations. However, it can, for example, be possible to effect a “corporate” migration without triggering taxes where companies owning UK assets (including real estate) are migrated. Care is also needed to minimise the risks of “double taxation” following a migration (e.g. where a state of incorporation and state of tax residence, if different, may assert taxing rights in respect of dividend distributions).

We are seeing a growing trend in “corporate” migrations attracting increased scrutiny from certain tax authorities. For example, the German Federal Fiscal Court (BFH) I R 5/24 (I R 99/15) has recently confirmed that a “corporate” migration from Germany to Luxembourg may trigger a German corporate income tax charge in connection with the “hidden reserves” (i.e. akin to latent but uncrystallised gains) in the migrating entity.

“Tax” Migrations – Overview

By contrast, “tax” migrations involve changing the tax residence of an entity without altering the jurisdiction in which the entity is incorporated or established.  

We frequently see this in the context of changing a board of directors and holding board meetings in a new jurisdiction (i.e. such that the place of central management and control of the entity is altered).

In practical terms, this can be used frequently in an M&A context to ensure that a target entity (e.g. a Jersey incorporated and Jersey tax resident company) becomes UK tax resident on completion (e.g. to become Jersey incorporated but UK tax resident). This is frequently used to align with the broader governance and operational management of a wider group.

However, care is needed to ensure all parties are aware of the practical and granular mechanical steps involved with the change of migration as part of an M&A completion process. In addition, particular attention should be paid to potential exit tax implications in the original jurisdiction of tax residence, as well as potential permanent establishment risks after a migration.

Five predictions for the next 12 Months

In light of the above, we expect taxpayers will need to consider carefully the following issues in connection with any potential “corporate” and “tax” migrations in the next 12 months:

1. Increased use of specific tax insurance – we are increasingly seeing specific tax insurance used to mitigate risks with “corporate” migrations and expect this trend to increase further.
2. Increased focus from lenders – in light of scrutiny from certain tax authorities, we expect lenders and their counsel to request increasing amounts of information and analysis in connection with both “corporate” and “tax” migrations, including granular steps. Agreeing the scope of any additional reporting required at a term sheet stage should minimise costs, execution risks and delays.
3. Increased focus from investors and side letter protections – we are increasingly seeing side letters negotiated to include additional investor reporting obligations. It will become increasingly important for sponsors to avoid signing up to onerous side letter obligations to maximise flexibility to effect “corporate” and “tax” migrations where applicable within portfolio groups.
4. Increased information requests and audits – as part of an ongoing and broader trend, we expect global tax authorities to continue to focus on the commercial rationale for transactions and restructurings via the use of onerous and large-scale information requests. It will be increasingly important to maintain clear and contemporaneous records supporting the commercial rationale for “corporate” and “tax” migrations.
5. Increased focus on withholding taxes – additional care will be needed to ensure that any “corporate” or “tax” migrations do not inadvertently trigger withholding tax issues (e.g. by altering the “source” of interest payments for withholding tax purposes). We anticipate an increased focus on the practical, mechanical steps to change tax residence of target entities in a “corporate” M&A context to ensure there is no ambiguity in the sequencing of steps required to effect completions and to change tax residence.