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HMRC internal manual

International Manual

Company residence: the incorporation rule - commencement and transitional provisions

Introduction

The incorporation rule was introduced by FA88/S66 and became effective from 15 March 1988, and is now at CTA09/S14 and SCH2. Before that date, the only rule was that of central management and control - see INTM120060.

An important consequence of the incorporation rule is that in the period from 15 March 1988 to 29 November 1993, a UK incorporated company could not migrate. The only exceptions were those few companies which migrated shortly after the commencement date under a Special Treasury Consent applied for before that date and any company which transferred its place of incorporation abroad under a Private Act of Parliament.

From 30 November 1993, a UK incorporated company will migrate when the treaty non-resident rules in CTA09/S18 apply (see INTM120070).

If a UK incorporated company transfers its central management and control to the UK at any time, it immediately becomes also resident in the UK by reason of the incorporation rule and so cannot migrate again (except by Private Act of Parliament), unless CTA09/S18 applies.

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Incorporation on or after 15 March 1988

Companies incorporated in the UK on or after 15 March 1988 are subject to the incorporation rule straight away and, subject to CTA09/S18, are automatically resident in the UK.

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Incorporation before 15 March 1988

Companies incorporated in the UK before 15 March 1988 fall into one of three categories:

  • subject to the incorporation rule from 15 March 1988
  • qualifying for an indefinite exception from the incorporation rule
  • qualifying for a five year exception from the incorporation rule, becoming UK resident on 15 March 1993

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Companies subject to the incorporation rule from 15 March 1988

The UK incorporated companies resident here under the incorporation rule from 15 March 1988 are those which

  • have not carried on business at any time before the commencement date
  • were resident here under the case law rule (see INTM120060) immediately before 15 March 1988. This doesn’t apply if they migrated shortly after the commencement date with special Treasury consent, in which case they qualify for five year or indefinite exception - see further discussion of exceptions below. These cases are quite rare.

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Companies qualifying for an indefinite exception from the incorporation rule

Companies which qualify for indefinite exception from the incorporation rule are companies which migrated

  • with special Treasury consent after 15 March 1988 and which carried on business at any time before and immediately after migration and continue to carry on business
  • with Treasury consent (general or special) before 15 March 1988 and were carrying on business immediately before 15 March 1988 and continue to carry on business. Additionally, if the consent was a general consent, the company must have been liable to tax in a territory outside the UK immediately before the commencement date and continue to be so liable.

Most companies which have migrated will have applied for and received special Treasury consent.

Some companies migrated before 15 March 1988, under the former first Treasury general consent. That consent ceased to be valid on 15 March 1988.

Some companies migrated without Treasury consent. Instead, they may have received a letter saying that the Treasury will not raise an objection to the migration. The letter was not a consent but merely notified the company that the criminal sanctions in ICTA88/S766 would not be invoked. Such companies cannot qualify for indefinite exception.

If the company ceases to carry on business, or to be liable to tax in an overseas territory, then unless CTA09/S18 applies, it becomes resident under the incorporation rule immediately or on 15 March 1988, if later.

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Companies qualifying for five year exception to the incorporation rule, becoming UK resident on 15 March 1993

Companies which qualify for five year exception from the incorporation rule are companies which

  • migrated with general or special consent before 15 March 1988 but do not qualify for indefinite exception
  • migrated with special consent after 15 March 1988 but do not qualify for indefinite exception
  • migrated without consent, including those companies which migrated before 1 August 1951, that is, before consent was required
  • although UK incorporated, were never resident here under the case law rule. Nowhere companies are included in this category.

These companies became resident in the UK on 15 March 1993 and should be treated no differently from a company becoming resident through bringing its central management and control to the UK.

Many of the companies which became resident at the end of the transitional period are affected by CTA09/S18 and undergo a forced migration on 30 November 1993 (see INTM120070).

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UK incorporated companies which were managed and controlled overseas and were active before 15 March 1988

Companies which were incorporated in the UK before 15 March 1988 but were not resident in the UK because they were managed and controlled overseas became resident on 15 March 1993 unless they continued to qualify for exception from the incorporation rule.

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UK incorporated companies which were liable to corporation tax before 15 March 1988

Most UK incorporated companies liable to corporation tax before 15 March 1988 will be subject to the incorporation rule from that date because they were already resident in the UK. It will not have been necessary to question their residence status.

If, exceptionally, a company incorporated in the UK before 15 March 1988 (other than a shelf company - see below) claims retrospectively that it was never resident in the UK or that it migrated before 15 March 1988, ascertain the facts and submit to Business International.

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Shelf companies

Shelf companies are normally companies formed by a company registration agent or professional firm and registered at their address. They are held by them for sale to purchasers. A few companies may have been set up by UK groups but not so far used by them.

Companies which are shelf companies on 15 March 1988 will not have carried on business at any time before that date and are resident under the incorporation rule from its inception.

If a company which appears to have been a shelf company on 15 March 1988 persists in a claim that it carried on business before that date, submit the claim to Business International.

If a company has not carried on business before 15 March 1988, its residence position under the central management and control test is immaterial for the incorporation rule. However, our view on the residence of shelf companies under that test is that they have no residence because they have not yet established central management and control of their business anywhere.

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Dormant companies

Dormant companies will have carried on business at some time and will normally have been resident. They should be regarded as having remained resident up to 15 March 1988. Treat any claim to the contrary on the same lines, so far as appropriate, as a claim to be non-resident by a live company - see discussion above regarding UK incorporated companies which were managed and controlled overseas and were active before 15 March 1988. If, exceptionally, the company had been non-resident whilst it was live, it will have remained non-resident and will not become resident until 15 March 1988 unless its central management and control is transferred to the UK before that date.

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Nowhere companies

‘Nowhere’ companies are UK incorporated companies which claim to be owned by non-residents, to be managed and controlled outside the UK and so not resident in the UK under the case law rule. They do not carry on any taxable activity in the UK and have arranged not to be liable to tax in any other country. They are subject to the incorporation rule and, assuming that they have been active, they will become resident on 15 March 1993.

If, however, the company was still on the shelf at the commencement date, then see the guidance on shelf companies above.

It will normally be reasonably clear whether the company was off the shelf and had carried on business. But some companies may try to disguise the date on which they became active by, for example, producing accounts which start before 15 March 1988 and show some activity which does not in fact take place until after that date. In appropriate cases, ask for evidence that the company had carried on business before 15 March 1988. There will be a grey area for companies which were in the process of being taken off the shelf on 15 March 1988. Submit doubtful cases to Business International.

A nowhere company which has been active may request confirmation of its non-residence status immediately before 15 March 1988 in order that it does not come onshore until 15 March 1993. It will not generally be worthwhile spending much time on reviewing the file and the confirmation may normally be given, subject to any procedures established in the office for dealing with nowhere companies. When such information is received, the response should be to say that, on the information given, the company is being treated as having been non-resident immediately before 15 March 1988. This will not prevent a later challenge if new information suggests that central management and control may have been brought onshore in the transitional period. In cases of doubt, or suspected avoidance by UK residents, refer to Business International.

Note that the Treasury Consent rules were themselves repealed with effect from 1 July 2009 - see FA09/S37 and FA09/SCH17.