The United Kingdom (UK) is a top global destination for foreign direct investment (FDI) and imposes few impediments to foreign ownership. The United States is the largest source of direct investment into the UK. Thousands of U.S. companies have operations in the UK. The UK also hosts more than half of the European, Middle Eastern, and African corporate headquarters of American-owned firms. The UK government provides comprehensive statistics on FDI in its annual inward investment report: https://www.gov.uk/government/statistics/department-for-international-trade-inward-investment-results-2019-to-2020.
Following a drop in inward investment each year since 2016 that mirrored global declines, and amidst a historically sharp but temporary recession related to the COVID-19 pandemic, the UK government established the Office for Investment in November 2020. The Office is focused on attracting high-value investment opportunities into the UK which “align with key government priorities, such as reaching net zero [carbon emissions], investing in infrastructure, and advancing research and development. It also aims to drive inward investment into “all corners of the UK through a ‘single front door.’”
The UK’s National Security and Investment Act, which came into effect in May 2021, significantly strengthened the UK’s existing investment screening powers. Investments resulting in foreign control generally exceeding 15 percent of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government’s Investment Security Unit
The UK formally withdrew from the EU’s political institutions on January 31, 2020, and from the bloc’s economic and trading institutions on December 31, 2020. The UK and the EU concluded a Trade and Cooperation Agreement (TCA) on December 24, 2020, setting out the terms of their future economic relationship. The TCA maintains tariff-free trade between the UK and the EU but introduced a number of new non-tariff, administrative barriers. On January 1, 2021, the UK began reviewing cross-border activities with a UK-EU nexus in parallel to the European Commission.
The United States and the UK launched free trade agreement negotiations in May 2020, which were paused with the change in U.S. Administration. The United States and UK have enjoyed a “Commerce and Navigation” Treaty since 1815 which guarantees national treatment of U.S. investors. A Bilateral Tax Treaty specifically protects U.S. and UK investors from double taxation.
On April 8, 2021, the UK established the Digital Markets Unit, a new regulatory body that will be responsible for implementing upcoming changes to competition rules in digital markets. The Competition and Markets Authority (CMA), the UK’s competition regulator, has indicated that it intends to scrutinize and police the digital sector more thoroughly going forward. The EU’s General Data Protection Regulation (GDPR) no longer applies to the UK. Entities based in the UK must comply with the Data Protection Act (DPA) 2018, which incorporated provisions of the EU GDPR directly into UK law
In April 2020 a two percent digital services tax (DST) came into force that targets certain types of digital activity attributable to UK users. The in-scope digital services activities are: social media services; Internet search engines; and online marketplaces. If an activity is ancillary or incidental to an in-scope digital services activity, its revenues may also be subject to the DST.
In March 2021, The UK government identified eight sites as post-Brexit freeports to spur trade, investment, innovation and economic recovery. The eight sites are: East Midlands Airport, Felixstowe and Harwich, Humber region, Liverpool City Region, Plymouth, Solent, Thames, and Teesside. The designated areas will offer special customs and tax arrangements and additional infrastructure funding to improve transport links.
HMG brought forward new immigration rules on January 1, 2021. The new rules have wide-ranging implications for foreign employees, students, and EU citizens. The new rules are points-based, meaning immigrants need to attain a certain number of points in order to be awarded a visa. The previous cap on visas has been abolished. EU citizens who arrived before December 31, 2020, will not have to apply for a visa, but instead are eligible to apply for “settled” or “pre-settled” status, which allows them to live and work in the UK much the same as they were before the UK left the EU. EU citizens arriving to the UK after January 1, 2021, must apply for the relevant visa.
|TI Corruption Perceptions Index||2020||11 of 180||www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report “Ease of Doing Business”||2020||8 of 190||www.doingbusiness.org/rankings|
|Global Innovation Index||2020||4 of 131||https://www.globalinnovationindex.org/analysis-economy|
|U.S. FDI in partner country (M USD, stock positions)||2019||$851,400||www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||$49,040||data.worldbank.org/indicator/NY.GNP.PCAP.CD|
Currency conversions have been done using XE and Bank of England data.
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Market entry for U.S. firms is facilitated by a common language, legal heritage, and similar business institutions and practices. The UK is well supported by sophisticated financial and professional services industries and has a transparent tax system in which local and foreign-owned companies are taxed alike. The pound sterling is a free-floating currency with no restrictions on its transfer or conversion. There are no exchange controls restricting the transfer of funds associated with an investment into or out of the UK.
UK legal, regulatory, and accounting systems are transparent and consistent with international standards. The UK legal system provides a high level of investor protections. Private ownership is protected by law and monitored for competition-restricting behavior. U.S. exporters and investors generally will find little difference between the United States and the UK in the conduct of business, and common law prevails as the basis for commercial transactions in the UK.
The UK actively encourages inward FDI. The Department for International Trade, including through its newly created Office for Investment, actively promotes inward investment and prepares market information for a variety of industries. U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders. Once established in the UK, foreign-owned companies are treated no differently from UK firms. The UK government is a strong defender of the rights of any British-registered company, irrespective of its nationality of ownership.
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign ownership is limited in only a few private sector companies for national security reasons, such as Rolls Royce (aerospace) and BAE Systems (aircraft and defense). No individual foreign shareholder may own more than 15 percent of these companies. Theoretically, the government can block the acquisition of manufacturing assets from abroad by invoking the Industry Act of 1975, but it has never done so. Investments in energy and power generation require environmental approvals. Certain service activities (like radio and land-based television broadcasting) are subject to licensing.
The UK requires that at least one director of any company registered in the UK be ordinarily resident in the country.
The UK’s National Security and Investment Act, which came into effect in May 2021, significantly strengthened the UK’s existing investment screening powers. Investments resulting in foreign control generally exceeding 15 percent of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government’s Investment Security Unit (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/965784/nsi-scope-of-mandatory-regime-gov-response.pdf for details). The regime operates separately from competition law. The bill provides authority to a newly created Investment Security Unit to review investments retroactively for a period of five years.
Other Investment Policy Reviews
The Economist Intelligence Unit, World Bank Group’s “Doing Business 2020,” and the OECD’s Economic Forecast Summary (December 2020) have current investment policy reports for the United Kingdom:
The UK government has promoted administrative efficiency to facilitate business creation and operation. The online business registration process is clearly defined, though some types of companies cannot register as an overseas firm in the UK, including partnerships and unincorporated bodies. Registration as an overseas company is only required when the company has some degree of physical presence in the UK. After registering their business with the UK governmental body Companies House, overseas firms must separately register to pay corporation tax within three months. On average, the process of setting up a business in the UK requires 13 days, compared to the European average of 32 days, putting the UK in first place in Europe and sixth in the world.
As of April 2016, companies have to declare all “persons of significant control.” This policy recognizes that individuals other than named directors can have significant influence on a company’s activity and that this information should be transparent. More information is available at this link: https://www.gov.uk/government/publications/guidance-to-the-people-with-significant-control-requirements-for-companies-and-limited-liability-partnerships. Companies House maintains a free, publicly searchable directory, available at https://www.gov.uk/get-information-about-a-company.
The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the World Bank’s Investing Across Sectors indicators.
Special Section on the British Overseas Territories and Crown Dependencies
The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands, Gibraltar, Montserrat, Pitcairn Islands, St. Helena, Ascension and Tristan da Cunha, Turks and Caicos Islands, South Georgia and South Sandwich Islands, and Sovereign Base Areas on Cyprus. The BOTs retain a substantial measure of authority for their own affairs. Local self-government is usually provided by an Executive Council and elected legislature. Governors or Commissioners are appointed by the Crown on the advice of the British Foreign Secretary, and retain responsibility for external affairs, defense, and internal security.
Many of the territories are now broadly self-sufficient. The UK’s Foreign, Commonwealth and Development Department (FCDO), however, maintains development assistance programs in St. Helena, Montserrat, and Pitcairn. This includes budgetary aid to meet the islands’ essential needs and development assistance to help encourage economic growth and social development in order to promote economic self-sustainability. In addition, all other BOTs receive small levels of assistance through “cross-territory” programs for issues such as environmental protection, disaster prevention, HIV/AIDS, and child protection.
Seven of the BOTs have financial centers: Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and the Turks and Caicos Islands. These territories have committed to the OECD’s Common Reporting Standard (CRS) for the automatic exchange of taxpayer financial account information. They have long exchanged information with the UK, and began exchanging information with other jurisdictions under the CRS from September 2017.
Of the BOTs, Anguilla is the only one to receive a “non-compliant” rating by the Global Forum for Exchange of Information on Request, putting it on the EU list of non-cooperative tax jurisdictions. The Global Forum has rated the other six territories as “largely compliant.” Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, and the Turks and Caicos Islands have committed in reciprocal bilateral arrangements with the UK to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with near real-time access to this information.
Anguilla: Anguilla has no income, capital gains, estate, profit or other forms of direct taxation on either individuals or corporations, for residents or non-residents of the jurisdiction. The territory has no exchange rate controls. Non-Anguillan nationals may purchase property, but the transfer of land to an alien includes a 12.5 percent tax on the assessed value of the property or the sales proceeds, whichever is greater.
British Virgin Islands: The government of the British Virgin Islands offers a series of tax incentive packages aimed at reducing the cost of doing business on the islands. This includes relief from corporation tax payments over specific periods, but companies must pay an initial registration fee and an annual license fee to the BVI Financial Services Commission. Crown land grants are not available to non-British Virgin Islanders, but private land can be leased or purchased following the approval of an Alien Land Holding License. Stamp duty is imposed on transfers of real estate and the transfer of shares in a BVI company owning real estate in the BVI at a rate of four percent for belongers (i.e., residents who have proven they meet a legal standard of close ties to the territory) and 12 percent for non-belongers. There is no corporate income tax, capital gains tax, branch tax, or withholding tax for companies incorporated under the BVI Business Companies Act. Payroll tax is imposed on every employer and self-employed person who conducts business in BVI. The tax is paid at a graduated rate depending upon the size of the employer. The current rates are 10 percent for small employers (those which have a payroll of less than $150,000, a turnover of less than $300,000 and fewer than seven employees) and 14 percent for larger employers. Eight percent of the total remuneration is deducted from the employee, the remainder of the liability is met by the employer. The first $10,000 of remuneration is free from payroll tax.
Cayman Islands: There are no direct taxes in the Cayman Islands. In most districts, the government charges stamp duty of 7.5 percent on the value of real estate at sale, but certain districts, including Seven Mile Beach, are subject to a rate of nine percent. There is a one percent fee payable on mortgages of less than KYD 300,000, and one and a half percent on mortgages of KYD 300,000 or higher. There are no controls on the foreign ownership of property and land. Investors can receive import duty waivers on equipment, building materials, machinery, manufacturing materials, and other tools.
Falkland Islands: Companies located in the Falkland Islands are charged corporation tax at 21 percent on the first £1 million ($1.4 million) and 26 percent for all amounts in excess of £1 million ($1.4 million). The individual income tax rate is 21 percent for earnings below £12,000 ($16,800) and 26 percent above this level.
Gibraltar: With BREXIT, Gibraltar is not currently a part of the EU, but under the terms of an agreement in principle reached between the UK and Spain on December 31, 2020, it is set to become a part of the EU’s passport-free Schengen travel area. The UK and EU are set to begin negotiations on a treaty on the movement of people and goods between Gibraltar and the bloc. Gibraltar has a buoyant economy with a stable currency and few restrictions on moving capital or repatriating dividends. The corporate income tax rate is 20 percent for utility, energy, and fuel supply companies, and 10 percent for all other companies. There are no capital or sales taxes.
Montserrat: Foreign investors are permitted to acquire real estate, subject to the acquisition of an Alien Land Holding license, which carries a fee of five percent of the purchase price. The government also imposes stamp and transfer fees of 2.6 percent of the property value on all real estate transactions. Foreign investment in Montserrat is subject to the same taxation rules as local investment and is eligible for tax holidays and other incentives. Montserrat has preferential trade agreements with the United States, Canada, and Australia. The government allows 100 percent foreign ownership of businesses, but the administration of public utilities remains wholly in the public sector.
St. Helena: The government offers tax-based incentives, which are considered on the merits of each project – particularly tourism projects. All applications are processed by Enterprise St. Helena, the business development agency.
Pitcairn Islands: The Pitcairn Islands have approximately 50 residents, with a workforce of approximately 29 employed in 10 full-time equivalent roles. The territory does not have an airstrip or a commercially viable harbor. Residents exist on fishing, subsistence farming, and handcrafts.
The Turks and Caicos Islands: Through an “open arms” investment policy, the government commits to a streamlined business licensing system, a responsive immigration policy to give investment security, access to government-owned land under long-term leases, and a variety of duty concessions to qualified investors. The islands have a “no tax” policy, but property purchasers must pay a stamp duty on purchases over $25,000. Depending on the island, the stamp duty rate may be up to 6.5 percent for purchases up to $250,000, eight percent for purchases $250,001 to $500,000, and 10 percent for purchases over $500,000.
The Crown Dependencies: The Crown Dependencies are the Bailiwick of Jersey, the Bailiwick of Guernsey, and the Isle of Man. The Crown Dependencies are not part of the UK but are self-governing dependencies of the Crown. This means they have their own directly elected legislative assemblies, administrative, fiscal and legal systems, and their own courts of law. The Crown Dependencies are not represented in the UK Parliament. The following tax data are current as of April 2021:
Jersey’s standard rate of corporate tax is zero percent. The exceptions to this standard rate are financial service companies, which are taxed at 10 percent; utility companies, which are taxed at 20 percent; and income specifically derived from Jersey property rentals or Jersey property development, taxed at 20 percent. A five percent VAT is applicable in Jersey.
Guernsey has a zero percent rate of corporate tax. Exceptions include some specific banking activities, taxed at 10 percent; utility companies, which are taxed at 20 percent; Guernsey residents’ assessable income is taxed at 20 percent; and income derived from land and buildings is taxed at 20 percent.
The Isle of Man’s corporate standard tax is zero percent. The exceptions to this standard rate are income received from banking business, which is taxed at 10 percent, and income received from land and property in the Isle of Man, which is taxed at 20 percent. In addition, a 10 percent tax rate also applies to companies which carry on a retail business in the Isle of Man and have taxable income in excess of £500,000 ($695,000) from that business. A 20 percent rate of VAT is applicable in the Isle of Man.
The UK is one of the largest outward investors in the world, undergirded by numerousbilateral investment treaties (BITs) . The UK’s international investment position abroad (outward investment) increased from £1,453 billion ($1,938) in 2018 to £1,498 ($1,912) by the end of 2019. The main destination for UK outward FDI is the United States, which accounted for approximately 25 percent of UK outward FDI stocks at the end of 2019. Other key destinations include the Netherlands, Luxembourg, France, and Spain which, together with the United States, account for a little under half of the UK’s outward FDI stock. Europe and the Americas remain the dominant areas for UK international investment positions abroad, accounting for eight of the top 10 destinations for total UK outward FDI.