United Kingdom 2015 (English & Chinese)

Simon Weller

Freshfields Bruckhaus Deringer LLP

Section 1: China outbound investment (COI)

a. What are the key sectors in your jurisdiction that attract, or to which the government is seeking to attract, COI?

The UK government, through the UK Trade & Investment department, has detailed a wide range of sectors in which it is seeking to attract COI including aerospace, automotive, energy, information and communication technologies and life sciences. Notable COI in the UK includes:

(a) oil and gas, e.g. PetroChina’s oil refining and trading joint venture with INEOS;

(b) infrastructure, e.g. China Investment Corporation’s acquisition of a 10% stake in Heathrow Airport Holdings;

(c) real estate, e.g. Dalian Wanda’s acquisition of a development site on London’s South Bank; and

(d) nuclear, e.g. the proposed (and UK government approved) joint investment by China General Nuclear Power Group and China National Nuclear Corporation in a 30-40% stake in the consortium developing the Hinkley Point C nuclear reactor.

b. Is the government generally supportive of COI? Which government, and regional, bodies are responsible for driving COI in your jurisdiction?

The UK government expressly welcomes Chinese investors. At a speech to students at Peking University in 2013, George Osborne (the UK’s Chancellor of the Exchequer) stated “one of my principal goals this week is not just to increase British investment in China. But to increase Chinese investment in Britain… Indeed I would go as far as to say that there is no country in the west that is more open to investment – especially from China”.

In mid-2014, David Cameron and Premier Li Keqiang signed trade deals worth £14 billion and the China Development Bank signalled its intention to invest further in next generation nuclear plants, the High Speed 2 rail link and telecommunications in the UK.

UK Trade & Investment has the main responsibility for driving foreign direct investment (FDI) in the UK. For COI specifically, they work with the China-Britain Business Council, which has a presence in 13 cities across China.

Section 2: Investment vehicles

a. What are the most common legal entities and vehicles used for COI in your jurisdiction? How long do they take to become operational?

Foreign investors will generally use a legal entity that most suits their corporate and tax structuring goals (and it could be incorporated outside the UK, although UK regulators can occasionally be wary of the use of acquisition entities incorporated in jurisdictions perceived as offshore tax havens). The most common UK legal entity is a limited liability company (which could be private or public, with the key distinction being that only public limited companies may offer shares to the public). Other business vehicles include partnerships, limited liability partnerships and branches of overseas companies. All of these entities and vehicles may be established and become operational within a short period of time.

Joint ventures between Chinese companies and established UK companies are often used to gain experience of working in the UK, e.g. the Beijing Construction Engineering Group partnered with Carillion, the British construction company, on the £800 million development of Airport City Manchester.

b. What are the key requirements for establishment and operation of these vehicles which are relevant to COI (e.g. is there a requirement for local directors)?

Chinese investors may establish and operate any of these vehicles in the same manner as local investors and no regulatory approvals are required to set up these vehicles in the UK. There are no residency requirements for directors of a UK company, although there may be tax residency considerations which affect the location of management.

Section 3: Investment approval

a. For foreign investment approval (including any national security review) explain the approval process and timing.

Unlike in many other European jurisdictions, there are currently no general restrictions on foreign investment in the UK, although there may be a requirement for sector-specific regulatory approvals or competition approvals (see responses 3b and 3c below). The failed bid by Pfizer for AstraZeneca (in May 2014) triggered heated political debate about whether a public interest requirement should be introduced in the UK, and – whether or not this leads to any new regulation – it serves as a reminder of some of the broader issues that may need to be dealt with on high profile acquisitions, particularly in the run-up to the UK general elections in May 2015. Note also that UK businesses often have interests or customers abroad, which could mean that a UK investment triggers foreign investment approval requirements in other jurisdictions.

b. Briefly explain the investment restrictions for any specially regulated/restricted sectors (natural resources, financial services, telecoms and infrastructure, etc), including whether the government is entitled to any special rights (e.g. golden share) in those sectors.

While there are no general restrictions on investment, in certain cases investors may need sector-specific approval or the UK government may have the power to restrict investments or changes of control, for example:

• broadcasting and newspapers: the Secretary of State may intervene to ensure “plurality of the media”;

• water: mergers of licensed water companies are subject to a compulsory reference to the UK Competition and Markets Authority (CMA);

• defence and national security: the Secretary of State has the power to intervene to ensure that investments in these sectors promote the public interest;

• banks and insurance companies: parties need to have regulatory consent for any direct or indirect transfer of a controlling interest in such companies – usually 10% or more of the voting rights; and

• companies that hold oil or gas licences: a change of control could result in that licence being revoked if the change of control prejudices the company’s ability to meet its licence commitments, liabilities and obligations.

A small number of UK companies still have “golden” shares conferring special rights to the UK State, for example companies in the defence sector, but such rights are limited and may be unenforceable as a matter of EU law except in cases in which the golden share is necessary to maintain national security.

c. Which authority oversees competition clearance, when is notification mandatory, and what is the merger clearance process (including whether pre- or post-closing)?

The COI may trigger a filing requirement under either EU or UK merger control regimes, but not both. This is because the EU regime offers a one-stop shop for European merger control, meaning that if the filing thresholds under the EU Merger Regulation (EUMR) are met, a single merger control filing will need to be made to the European Commission and separate filings to the EU member state authorities will not be required.

An EUMR filing will be required where the transaction amounts to a concentration; and the parties meet certain global and EU-wide revenue thresholds. The application of the concentration test is quite complex, but in general terms, a concentration will arise where there is a pure merger between two or more firms or where one or more firms acquires control in another firm. A minority investment which does not confer any controlling rights will currently not meet the concentration threshold.

The EUMR regime is mandatory and suspensory, meaning that completion of the COI must be automatically suspended and no integration may begin until the COI has been reviewed and cleared by the European Commission. The European Commission has the power to impose financial penalties of up to 10% of the aggregate turnover of the relevant parties to the transaction and to invalidate to mergers if the parties do not file before closing.

If the COI does not meet the thresholds for an EUMR filing, it should then be considered whether a filing in the UK (and in any other relevant EU member state) should be made. As of April 1 2014, the CMA is the regulator responsible for merger control in the UK. A transaction will come under the CMA’s remit where two or more enterprises cease to be distinct, meaning that they are brought under common control; and either the target’s turnover in the UK exceeds £70 million or a combined share of supply or purchases of goods or services in the UK (or a substantial part of it) of 25% is created or enhanced by the transaction.

The UK runs a voluntary and non-suspensory merger control regime meaning that there are no penalties for failing to file or for implementing the transaction before clearance. A large number of deals are, however, in practice pre-notified to give the parties legal certainty since the CMA can investigate a deal whether or not the parties have filed and can impose hold-separates on completed deals.

d. Are there any unique processes that potentially could block a foreign investment, e.g. consent from labour unions?

While many employees in the UK are members of various trade unions, there is no general statutory requirement to consult with employees before undertaking an acquisition of shares in a company that has employees in the UK. However, asset deals – unlike share deals – are likely to require an employee consultation exercise where the employing entity of any employees will change or if the employment of any employees may be terminated as a result of the asset deal. A failure to carry out such a consultation exercise will not affect the validity of any transaction but could result in a significant award of damages against the seller and/or the purchaser.

Many UK companies have liabilities under defined benefit pension schemes. The UK Pensions Regulator has a broad power to require companies to financially support or contribute to under-funded pension schemes of companies in their corporate group. This can lead to large and unexpected liabilities for purchasers which acquire such companies. Accordingly, if there is a pension deficit in the target group, a purchaser would be advised to engage with the Pensions Regulator and the trustees of the target company’s pension scheme before undertaking the acquisition.

e. Are there approval requirements when a foreign investor increases or exits its investments?

There are no approval requirements that are specific to foreign investors increasing or exiting their investments.

Section 4: Tax and grants

a. Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for FDI into the country?

The UK has one of the largest networks of double tax treaties and agreements in the world, making the UK an attractive regime for holding companies and giving a high degree of flexibility in structuring FDI transactions.

The UK has relatively generous rules permitting tax relief for interest, including on loans to fund equity purchases and on shareholder debt. Investments into the UK will therefore generally be structured to maximise UK interest relief (i.e. investing through a mixture of debt and equity, having regard to transfer pricing issues and other anti-avoidance rules). UK withholding tax on interest then needs to be considered; where withholding would otherwise apply it may be possible to mitigate it under an applicable double tax treaty.

b. What are the applicable rates of corporate tax and withholding tax on dividends?

The UK government has committed itself to making the UK the most competitive tax regime in the G20. In line with that ambition, the full rate of UK corporation tax chargeable in respect of the profits of a UK-resident company has been progressively lowered over recent years, and as of April 1 2014 stands at 21%. The rate is scheduled to fall to 20% on April 1 2015.

The UK does not generally impose withholding tax on dividends or other distributions, irrespective of the location of the recipient. Withholding at a rate of 20% may in some circumstances apply to distributions by certain types of investment fund (including real estate investment trusts, property authorised investment funds and investment trusts) but may be capable of being mitigated under an applicable double tax treaty.

c. Does the government have any FDI tax incentive schemes in place?

Although the UK government does not have any tax incentive schemes in place that are specifically applicable to FDI, the UK government is committed to making the UK attractive to international business, including by maintaining a competitive tax regime.

The UK revenue authority also has a specific team devoted to supporting inward investment by providing written rulings to clarify the UK tax consequences of significant investments in the UK.

The UK has a number of incentive regimes that are applicable to all taxpayers, including a system of tax relief for expenditure on research and development and a patent box regime which applies a reduced rate of tax to profits that are attributable to qualifying patents and certain other intellectual property rights.

d. Other than through the tax system, does the government provide any other financial support to FDI investors? If so, please provide an overview.

Although the UK government does not offer any grants or other non-tax incentives that are specifically applicable to FDI investors, there are various forms of grants that might be available for FDI, including: Enterprise Zones; Regional Growth Fund; and the Grant for Business Investment Scheme.

e. Are there any reciprocal tax arrangements between your jurisdiction and China? If so, how can they aid investors?

There is a double taxation agreement in force between China and the UK. It was substantially renegotiated in 2011 and is largely consistent with the model double tax convention produced by the Office for Economic Co-ordination and Development (the OECD).

There is also a double taxation agreement in force between Hong Kong and the UK, dating from 2010. Again, this largely follows the OECD’s model treaty.

Both treaties provide for mitigation of withholding tax on interest payments. Under the China-UK treaty the rate of withholding on UK source interest paid to a resident of China may be reduced from 20% to 10% (or, in the case of certain government bodies, eliminated entirely). Under the Hong Kong-UK treaty, UK withholding on interest will generally be eliminated for payments to a Hong Kong resident.

Section 5: Forex controls and local operations

a. What foreign currency or exchange restrictions should foreign investors be aware of?

There are no foreign currency or exchange restrictions in the UK. It should be noted that the UK does have sophisticated anti-money laundering and anti-bribery regimes, which apply equally to both foreign and domestic investors and assist in increasing transparency for investors and reducing corruption.

b. Are there any legal restrictions on bringing in foreign workers and how difficult is it for foreign investors to secure expatriate visas for shareholder representatives, senior managers and workers in practice?

In his speech at Peking University in 2013 (see response 1b above), George Osborne made clear that there was no limit on the number of Chinese tourists who can visit the UK, no limit on the amount of business China can do with the UK and no limit on the number of Chinese people who can live as students in the UK. On the same trade trip, the Chancellor also announced a relaxation of the rules for visa applications for Chinese visitors to the UK.

Although the rules for Chinese visitors have been relaxed, there is no special regime for Chinese nationals who wish to move to the UK to live and work. Instead, these individuals must apply for immigration permission in the same way as all other individuals who are not from the European Economic Area or Switzerland. This generally requires the UK employer to be registered as a sponsor and to support the applicant’s visa application. Nationals of countries within the European Economic Area and Switzerland do not require permission to work in the UK.

Section 6: Dispute resolution

a. Does your jurisdiction have a bilateral investment protection treaty with China or other jurisdictions commonly used for investing into the country?

The UK has bilateral investment protection treaties with both China and Hong Kong. These treaties aim to create favourable conditions for and to promote and protect investments made by investors in China and Hong Kong, respectively, into the UK and vice versa. The effect for investors in China and Hong Kong investing into the UK is that they enjoy, among other things:

• free admission of their investment into the UK;

• equal treatment of their investment to that of a UK national or a national of any other country;

• compensation for certain types of loss in relation to their investment;

• protection against expropriation of their investment; and

• freedom to transfer their investment and the return on such investment out of the UK.

b. How efficient are local courts’ enforcement and dispute resolution proceedings, and are there any procedural idiosyncrasies foreign investors must be aware of?

English law is one of a handful of preferred governing laws for international transactions. English courts are very experienced and reasonably efficient in determining commercial disputes.

London is also a preferred seat for international arbitration among commercial counterparties. This is due to its reputation as a neutral and impartial jurisdiction, the prevalence of English law as a governing law and the large pool of specialist barristers, solicitors and arbitrators available.

c. Do local courts respect foreign judgments and are international arbitration awards enforceable?

Different rules apply when assessing whether the English courts will enforce a foreign court judgment depending on the jurisdiction in which the foreign court judgment was given. If the judgment was given anywhere else (i.e. in a country that does not have an applicable bilateral or multilateral agreement with the UK on reciprocal enforcement of judgments, for instance China or Hong Kong), its enforceability will be governed by English common law. Under English common law, to be enforceable the foreign court judgment must be a money judgment for a fixed sum, final and conclusive in the court which pronounced it and it must have been given by a court regarded by English law as competent to do so. Further, under common law the judgment cannot simply be registered in England; rather, fresh proceedings must be issued in England to enforce the judgment as a debt. In the absence of accusations of fraud, it is unlikely, however, that the merits of the case decided before a competent foreign court would need to be reconsidered by the English courts and so summary judgment (i.e. a speedy and early hearing of a claim without the need for a full trial) is likely to be given in such circumstances.

The UK is a signatory of the New York Convention (which provides for the recognition and enforcement of foreign arbitral awards by contracting states) and has enacted the requisite domestic legislation to bring it into force. There are almost 150 signatories to the New York Convention, including China, whose territory for the purpose of the New York Convention includes Hong Kong.

d. Are local judgments and arbitration awards from your jurisdiction generally enforceable in other jurisdictions?

Different rules apply when assessing whether an English judgment will be enforceable in a foreign jurisdiction depending on the jurisdiction in which enforcement is sought. In determining the enforceability of an English judgment in any other country (including in China or Hong Kong), the local law of that country will apply.

Arbitral awards made in the UK will generally be enforceable in other states who are signatories to the New York Convention, subject to certain exceptions. Notably, China (whose territory for the purpose of the New York Convention includes Hong Kong) will only enforce arbitral awards made in the territory of another contracting state (such as the UK), and only where the issues arbitrated arose out of legal relationships that are considered commercial under local law.

AUTHOR BIOGRAPHY

Simon Weller

Simon Weller is a corporate partner in the Hong Kong office of Freshfields. His practice focuses on domestic and cross-border public and private M&A, joint ventures and private equity.

Simon graduated with a law degree from Clare College, Cambridge University, and joined Freshfields in London as a trainee in 1997. He became a partner in the firm’s London private equity practice in 2008 and relocated to Hong Kong in 2011.

Simon’s recent M&A experience includes advising Dalian Wanda Group on its acquisition of Sunseeker International, Cheung Kong Infrastructure on its takeover of Northumbrian Water Group, Tesco on the establishment of a joint venture with China Resources Enterprise and Hutchison Whampoa on its US$5.6bn strategic alliance between AS Watson and Temasek.