U.S. venture capitalists investing at the early stages (Seed and Series A) in a UK (or other non-U.S.) company often require that the company “flips” its corporate structure and establishes a U.S. (most commonly Delaware) holding company.[1]
The mechanics for a UK company to flip to the U.S. typically involve a contractual share-for-share exchange; all existing shareholders of the UK company transfer their shares to the U.S. holding company in exchange for the issue to them of stock by the U.S. holding company. The UK does not have a merger statute, so the share exchange is generally the only approach available in practice.
This article explores the key UK tax implications of a flip to the U.S.
Will UK tax resident shareholders have to pay UK capital gains tax?
A flip involves the UK company’s shareholders transferring their shares to the U.S. holding company in exchange for stock in the U.S. holding company. His Majesty’s Revenue and Customs (HMRC) will generally treat these exchanges as not involving any disposal of the UK company shares or any acquisition of the U.S. company stock for UK capital gains tax purposes. Instead, HMRC would typically consider that the U.S. company stock essentially “stands in the shoes” of the UK company shares, with the U.S. stock inheriting the shareholder’s base cost in the UK company shares and not triggering a realization event.
For shareholders holding more than five percent of, or of any class of, shares in the UK company, this deferral treatment is, however, only available if the exchange is for bona fide commercial reasons and does not form part of a scheme or arrangements of which the (or a) main purpose is avoidance of capital gains tax or corporation tax. In general, so long as the flip to the U.S. is for the purpose of raising U.S. investment or to make the business more attractive to U.S. employees or commercial partners—and not for the purpose of avoiding UK tax—this purpose test should be satisfied.
Advance clearance can be sought from HMRC that the purpose test will be satisfied. UK companies typically seek this to protect the personal tax position of key UK tax resident shareholders, such as founders and early-stage investors. HMRC have 30 days to respond to a clearance request, and parties should consider that timeline in the flip timetable. HMRC can consider the clearance application using the draft documents, but parties should take care not to deviate materially from the plan presented to HMRC.
Note that the foregoing only applies to UK tax resident shareholders. If the UK company has shareholders resident in other jurisdictions, the tax laws of the other jurisdictions in which shareholders are resident will also need to be considered.
Can venture capital tax reliefs be preserved?
Many UK companies looking to flip will have issued shares qualifying for the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS). This brings additional complexity to structuring the flip but, with careful planning and implementation, the UK company’s existing SEIS and/or EIS shareholders can often continue to enjoy SEIS and/or EIS treatment in respect of stock held in the U.S. holding company after the flip.
The key considerations in maintaining SEIS and/or EIS treatment and ensuring no tax charges are crystallized on the flip for SEIS or EIS investors are as follows.
(i) Pre-clearance from HMRC
Obtaining pre-clearance from HMRC that the purpose test described above for capital gains purposes will be satisfied is essential if SEIS and/or EIS shares have been issued. SEIS and EIS continuity of treatment post-flip will not be available unless advance clearance is obtained.
(ii) Mirror share register and share rights
After the flip, the former shareholders of the UK company become stockholders of the new U.S. holding company. The consideration for the acquisition of the UK company must consist wholly of the issue of stock in the U.S. company. The shareholders of the UK company must be issued stock in the U.S. company that exactly “mirrors” the rights of the shares in the UK company that they are exchanging in the flip transaction. The U.S. company’s stock must also be issued to the shareholders in exactly the proportions that were held in the UK company.
(iii) UK permanent establishment
The U.S. holding company must maintain a UK “permanent establishment” throughout the period from the flip to the later of (i) the third anniversary of the last date on which share intended to qualify for SEIS/EIS relief were issued and (ii) the third anniversary of the date that the trade that was funded by that share issue first commenced. The fact that other group companies, including the former UK top company, have a UK permanent establishment is not sufficient. The U.S. company must directly demonstrate a UK permanent establishment.
There are two ways for the U.S. company to satisfy the permanent establishment requirement, by having either:
- a “fixed place of business” (such as an office) in the UK through which the business of the U.S. company is wholly or partly carried; or
- an agent in the UK who has and habitually exercises authority to enter into contracts on behalf of the U.S. holding company.
The U.S. company’s permanent establishment should be in place at the time of the flip (and maintained throughout the period described above). It will be important that this can be evidenced to HMRC upon request.
The U.S. company should then act consistently with having a UK permanent establishment: registering the permanent establishment at the UK’s Companies House, filing UK corporation tax returns in respect of the permanent establishment (and allocating an appropriate return to it) and operating UK payroll taxes where required.
What will happen to any outstanding options or advance subscription agreements?
If the UK company has granted options over its shares, the implementation of the flip will need to take these into account. Typically, options are released in exchange for the grant of options over stock in the U.S. company such that the aggregate market value, and the aggregate exercise price of the options, before and after the option exchange remains the same. Where the company has granted tax qualifying options such as enterprise management incentive (EMI) options, company share plan options (CSOP) or U.S. qualifying Incentive Stock Options (ISOs), it is possible to preserve the tax beneficial treatment applicable from the date of grant of the existing options when they are exchanged for the new options provided the exchange meets the detailed requirements of the relevant legislation. Advice should always be taken to ensure tax favorable treatment is not lost.
If the UK company has entered into any advance subscription agreements which have not yet converted into shares, careful thought will need to be given to what should happen with these, having regard to whether the holders are looking to obtain SEIS or EIS treatment and the timeframe in which the flip needs to be completed.
Will stamp duty relief be available?
The transfer of the UK company shares to the U.S. holding company will be subject to stamp duty at a rate of 0.5 percent unless stamp duty relief applies. HMRC state in their Stamp Taxes on Shares Manual that the conditions for stamp duty relief “are stringent and are strictly enforced.”
Stamp duty relief has similar requirements to SEIS/EIS continuity treatment discussed above in relation to a mirror share register and share rights, no other consideration, and a purpose test. There are, however, some subtle differences between the sets of rules. For example, if the UK company has issued any debt instruments which constitute longer-term capital financing that might be seen as a substitute for equity funding, these debt instruments will need to be flipped up to the U.S. corporation for stamp duty relief to be available.
The fact that a Delaware corporation can be incorporated without any stock needing to be issued makes it considerably easier to structure a flip in a way that qualifies for both SEIS/EIS continuity of treatment and stamp duty relief.
Stamp duty relief is not automatic; an application for relief must be submitted to HMRC (together with supporting evidence) after the flip.
What are some of the key ongoing (post-flip) UK tax implications?
Introducing a U.S. holding company brings UK tax complexity that needs to be monitored and addressed where appropriate on an ongoing basis post-flip. Some key areas to address are identified below.
(i) Dual tax residence
To prevent any double taxation at the U.S. company level (with the same profits subject to tax in both the U.S. and the UK) and any exit charges, it is generally advisable to ensure that the U.S. company is not treated for UK domestic tax purposes as a UK tax resident. This can happen if the “central management and control” (broadly the highest level of decision-making, often relating to strategic matters, not day-to-day running of the business) of the U.S. company takes place in the UK.
It will, therefore, be important to think carefully about the composition of the board of directors of the U.S. company (having regard to where individuals are physically located) and where strategic, board-level decisions in relation to the U.S. company will in practice be taken. The company should consider with its advisers any risk factors with respect to UK tax residence and how those factors can be mitigated and what documentation might sensibly be maintained.
(ii) Transfer pricing
The functions, assets, and risks of the U.S. holding company (and any UK permanent establishment) and the UK company will need to be monitored, as will the extent and nature of any transactions between them to ensure the right amount of tax is paid in the UK and the U.S. We recommend the company works with a start-up friendly tax accounting firm that is equipped to consider both the U.S. and the UK requirements to establish the most appropriate transfer pricing method, based on the nature of the relevant activity, to recognize the value provided by each activity on an arm’s length basis. This should ensure that the tax returns of the U.S. and UK companies (and the UK permanent establishment if relevant) reflect the appropriate taxable profits and hopefully avoid any tax penalties down the line.
(iii) Transfer of funds
Cash from any fundraising will typically be passed down from the U.S. holding company to the UK company. This could be done via a loan, a share subscription, or a mix of the two. Tax implications of the different alternatives will need to be considered. For instance, the UK imposes a 20 percent withholding tax on most interest payments unless an exemption is available and procedural formalities are satisfied.
What about U.S. tax?
While this article focuses on the UK tax implications of a Delaware flip, it is important to consider the U.S. tax pros and cons as well.
One important U.S. tax pro is that post flip the U.S. holding company may be able to offer shares that qualify for the U.S. tax code’s Qualified Small Business Stock (QSBS) exemption. This can be a valuable U.S. tax exemption for investors in certain emerging growth companies which we consider in greater detail here.[2] Note, however, that shares issued by the U.S. holding company as part of the flip do not generally qualify for the QSBS exemption.
Second, the flip generally can be structured in a manner that is tax-deferred for any shareholders of the UK company that are U.S. taxpayers.
Significant U.S. tax cons to take into account are that the flip will require the company to navigate the complexity of the U.S. tax code and could potentially subject global profits to U.S. tax. Further, once a company has undertaken a Delaware flip, it is very difficult to undo this and revert back to a UK holding company structure (a transaction often referred to as the “Delaware backflip”) without suffering long-term, adverse U.S. tax consequences due to the application of the U.S.’s anti-inversion rules.
However, if the company does not flip into the U.S., it should also be aware of the potential impact of the U.S.’s “controlled foreign corporation” (CFC) and “passive foreign investment company” (PFIC) taxation regimes on U.S. investors who invest in non-U.S. start-ups. This is covered in more detail here.[3]
Conclusion
If a UK company is considering a flip to the U.S. to attract U.S. venture capital, the tax implications will need to be worked through, but with careful planning and execution UK tax should not be a prohibiting factor.
There are, of course, various non-tax factors for a UK company to weigh up when faced with the question “to flip or not to flip.” We’ve addressed these in an earlier article.[4] These non-tax factors are likely to have greater influence on the ultimate decision as to whether a flip is in the best interests of the company and its shareholders.
[1] Delaware has historically been the unquestioned state of choice for non-U.S. companies looking to flip to the U.S. Over the last year or so, companies have started to ask whether that continues to be the case. We have explored some of the reasons behind Delaware’s prominence as the favored state of incorporation and why in our advisory, “Delaware’s Status as the Favored Corporate Home: Reflections and Considerations,” April 23, 2024. On March 25, 2025, the Delaware legislature and Governor also enacted landmark amendments to Delaware corporate law in response to market concerns [https://www.wsgr.com/en/insights/delaware-enacts-landmark-corporate-law-amendments.html]. As a general matter, we expect that Delaware will continue to be the preferred jurisdiction for U.S. incorporations going forward.
[2] Wilson Sonsini Advisory, Understanding Section 1202: The Qualified Small Business Stock Exemption, March 15, 2025.
[3] Wilson Sonsini Advisory, The Non-U.S. Start-Up’s Guide to Navigating the U.S. Tax Implications of U.S. VC Investment, March 31, 2025.
[4] Wilson Sonsini article, “Revisiting the Delaware Flip.”
