The United Kingdom (UK) is a popular destination for foreign direct investment (FDI) and imposes few impediments to foreign ownership. In the past decade, the UK has been Europe’s top recipient of FDI. 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-2020-to-2021.
The COVID pandemic triggered a massive expansion of government support for households and businesses. The government focused on supporting business cashflow and underwriting over £200 billion ($261 billion) in loans from banks to firms. Although aggregate investment grew by 5.3 percent in 2021, levels remain below their pre-pandemic peak. Most analysts expect a rebound in investment growth in 2022, however, driven in part by the government’s investment tax super-deduction, which allows business to claim back 130 percent of the cost of an eligible capital investment on their taxable profits up until March 2023, a more stable post-Brexit regulatory framework, and the reduction of economic and mobility restrictions imposed to cope with the pandemic. Most of these measures were phased out by October 2021. Their fiscal impact has been large, however, and the budget deficit reached 8.5 percent of GDP. The government has committed to fiscal consolidation, and in September 2021 announced that it planned to increase the corporation tax rate from 19 percent to 25 percent by 2023 and national insurance contributions by 2.5 percent to fund additional health and social care spending.
In response to declining inward foreign investment each year since 2016, and amidst the sharp but temporary recession related to the 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, 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 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 generally maintains tariff-free trade between the UK and the EU but introduced several new non-tariff, administrative barriers. 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 protection. 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 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. The UK has, however, taken some steps that particularly affect U.S. companies in the technology sector. A unilateral digital services tax came into force in April 2020, taxing digital firms—such as social media platforms, search engines, and marketplaces—two percent on revenue generated in the UK. The Competition and Markets Authority (CMA), the UK’s competition regulator, has indicated that it intends to scrutinize and police the sector more thoroughly. From 2020-2021, the CMA investigated the acquisition of Giphy by Meta Platforms (formerly Facebook). The CMA found that the acquisition may impede competition in both the supply of display advertising in the UK, and in the supply of social media services worldwide (including in the UK) and ordered Meta to sell Giphy.
The United States is the largest source of direct investment into the UK on an ultimate parent basis. 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 multinational firms.
In October 2021, the UK government introduced its Net Zero Strategy, which comprehensively sets out UK government plans to cut emissions, seize green economic opportunities, and use private investment to achieve a net zero economy by 2050. The Net Zero Strategy allocates £7.8 billion ($10.5 billion) in new spending and aims to leverage up to £90 billion ($118 billion) of private investment by 2030. In its latest spending review, Her Majesty’s Treasury’s (HMT) estimated that net-zero spending between 2021-22 and 2024-25 would total £25.5 billion ($34.5 billion).
The UK government is endeavoring to position the UK as the first net-zero financial center and a global hub for sustainable financial activity. The UK Infrastructure Bank, established in 2021, is providing £22 billion ($29 billion) of infrastructure finance to tackle climate change. In 2021 HMT sold £16 billion ($20.8 billion) worth of the UK’s Green Gilt to help fund green projects across the UK. Through the Greening Finance Roadmap, HMT outlines the UK government’s intent to implement a detailed sovereign green taxonomy, which is expected to be published by the end of 2022, along with sustainable disclosure requirements that would serve as an integrated framework for sustainability throughout the UK economy.
Currency conversions have been done using XE and Bank of England data.
|TI Corruption Perception Index||2021||11 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2021||4 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||$890,086||https://www.bea.gov/data/intl-trade-investment/direct-investment-country-and-industry
|World Bank GNI per capita||2020||$45,870||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
The UK actively encourages inward FDI. With a few exceptions, the government does not discriminate between nationals and foreign individuals in the formation and operation of private companies. 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 UK-registered company, irrespective of its nationality of ownership.
Foreign ownership is limited in only a few strategic private sector companies, 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 National Security and Investment Act (NSIA) 2021 came into force on January 4, 2022. The NSIA created a new screening regime for transactions which might raise national security concerns in the UK called the Investment Security Unit (ISU). The ISU sits within the Department for Business, Energy and Industrial Strategy (BEIS). It is responsible for identifying, addressing and mitigating national security risks to the UK arising when a person gains control of a qualifying asset or qualifying entity.
The UK requires that at least one director of any company registered in the UK be ordinarily resident in the country. The UK, as a member of the Organization for Economic Cooperation and Development (OECD), subscribes to the OECD Codes of Liberalization and is committed to minimizing limits on foreign investment.
The Economist Intelligence Unit and the OECD’s Economic Forecast Summary have current investment policy reports for the United Kingdom:
The UK government has promoted administrative efficiency successfully 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. Since 2016, companies have had 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.
The British Overseas Territories (BOTs) comprise Anguilla, British Antarctic Territory, Bermuda, British Indian Ocean Territory, British Virgin Islands, Cayman Islands, Falkland Islands (Islas Malvinas), 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 responsibility 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 Office (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 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 are already exchanging 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. 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. These arrangements came into effect in June 2017.
Anguilla: Anguilla is a neutral tax jurisdiction. There are 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 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 that 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, while 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 ($360,237), and one and a half percent on mortgages of KYD 300,000 ($360,237) 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 (Islas Malvinas): Companies located in the Falkland Islands (Islas Malvinas) are charged corporation tax at 21 percent on the first £1 million ($1.4 million) and 26 percent for all amounts more than £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: The government of Gibraltar encourages foreign investment. 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 12.5 percent for all other companies. There are no capital or sales taxes. Gibraltar is not currently a part of the EU, and its post-Brexit relationship with the bloc is the subject of ongoing negotiations between London and Brussels. Under the terms of an agreement in principle reached between the UK and Spain on December 31, 2020, free movement of workers and goods across the land border between Gibraltar and Spain is temporarily continuing.
Montserrat: The government of Montserrat welcomes new private foreign investment. 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 island of St. Helena is open to foreign investment and welcomes expressions of interest from companies wanting to invest. Its government is able to offer tax-based incentives, which will be 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 safe harbor. Residents exist on fishing, subsistence farming, and handcrafts.
Turks and Caicos Islands: The islands operate an “open arms” investment policy. Through the 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” status, 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.
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 that 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 tax data above are current as of March 2022.
The UK is one of the largest outward investors in the world, often through bilateral investment treaties (BITs), which are used to promote and protect investment abroad and have been adopted by many countries. The UK’s international investment position abroad (outward investment) in 2020 was $2.1 trillion. 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 2020. Other key destinations include the Netherlands, Luxembourg, France, and Spain which, together with the United States, account for a little over half of the UK’s outward FDI stock. Europe and the Americas remain the dominant areas for UK international investment positions abroad.