Recent changes to the UK's economic reforms and taxation of foreign profits have caused the holding companies of major US corporations (e.g., MacDonald's) to relocate their headquarters from the UK to other European countries (e.g., Switzerland)... [A] comparative analysis of the tax regimes in Switzerland with the one in the UK... explains why this move presents a very viable solution in terms of tax savings for US corporations.
Some of the large US companies who have recently made their moves to Switzerland are Yahoo, Google, Kraft, Proctor & Gamble and Colgate Palmolive. Some of the initial moves were kick-started around seven or eight years ago. The UK-based publishing company Informa also moved its tax residence from the UK to Switzerland in 2009. Informa's move from the UK mainly stemmed from the foreign profits reforms package announced by the UK government in that year's budget especially the changes in the taxation of foreign profits linked to intellectual property rights, including patents and trademarks.
The UK's 28% corporate tax rate is currently very prohibitive and discouraging to multinationals compared with the average 25% corporate tax rate in several European countries and is much higher than the very attractive rates of Switzerland and Ireland. Currently, the CFC rules in the UK impose many restrictions on the functionalities and management by the multinational companies of their financial operations and intellectual property. Originally when introduced, the CFC regulations were mainly intended to target only those entities which were routing incomes through tax efficient jurisdictions or tax havens. However, since their introduction, these regulations and rules have been successively tightened and made more stringent by the governments, the result of which has been that many multinational companies operating in the UK have been impacted adversely as they are now faced with additional restrictions on their operations. The changes to the CFC regulations also hamper free circulation and flow of finances and capital within companies belonging to the same group. This has led to many large multinational groups announcing their moves out of the UK to other more tax efficient jurisdictions.
The relocation of the European headquarters of these companies out of the UK has led to the relocation of jobs and also a shift of certain operations and management functions (including employees) to Switzerland... The move will mainly affect the residence of the group holding company and will not impact the functions of the European headquarters as these groups have mainly changed the residence of their parent company from the UK to another country in Europe. The best manner to avoid applicability of the UK CFC rules on any subsidiary company is to transfer the subsidiary to a new EU holding company as there is no capital gains charge on such a transfer provided the conditions required for a UK Substantial Shareholdings Exemption are fulfilled.
In the wake of the recent events and the changes to the UK Taxation of Foreign Profits and Economic Reforms Policy, multinational groups must ensure that they do not choose the UK as the country for their holding company's residence as to have a more tax-efficient structure, their holding companies must not have tax residence in the UK. For this purpose, the location where the directors meet, plan, and make strategic management decisions relating to the group is crucial. They must exercise caution to ensure that the companies do not hold their important Board meetings and pass resolutions in the UK because essentially a tax residence of a company also depends on the location where important and strategic business decisions in Board meetings of a company are made.
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