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Financial Times: Shell saved millions with a pearl of a solution

By Vanessa Houlder

Published: June 20 2006 03:00 | Last updated: June 20 2006 03:00

No company wants to risk a serious blow to its share price. So one of the main concerns for a big company considering moving its headquarters overseas is how to avoid the risk of falling out of the widely-tracked FTSE 100 index.

This issue shaped the decision of Royal Dutch Shell to opt for a parent company that was incorporated in the UK but had Dutch headquarters and tax residency when it embarked on its radical restructuring to create a single parent company in 2004. It informed shareholders: “The steering group was advised the use of a UK-incorporated entity should allow its shares to be in the FTSE All-Share and FTSE 100 indices.”

But the necessity of incorporating in the UK created a problem. Shell had previously escaped stringent “controlled foreign companies” rules, which impose extra tax on income earned in low-tax countries because its UK arm owned just 40 per cent of the group. As a UK-incorporated company it would now feel the full force of the rules, which could cost it hundreds of millions of pounds.

Shell found a way round this problem by reversing into a “shell” company that was exempt from the CFC rules for a highly technical reason: under the terms of a double taxation treaty, it had become non-resident before April 2002.

It was an ingenious solution. But Revenue & Customs became concerned the trickle of companies using this loophole could turn into a flood. So in this year’s Budget, it made a pre-emptive strike to stop any more using this route.

But the new rules may not prove insurmountable. Party Gaming, the online poker company, last year showed it was possible to join the FTSE 100 index despite being incorporated in Gibraltar.

Copyright The Financial Times Limited 2006

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