A company’s tax residence has been the subject of conversation for many years with different tax jurisdictions claiming rights.
The experiences of COVID-19 and Brexit have the potential to dislodge the traditional view for some companies. So, the question is what will happen to the residence of companies in a ‘post COVID-19, post Brexit’ world?
The UK rules on where a company is resident for tax purposes are similar to the rules in many other tax jurisdictions. A company is tax resident in the UK if it is incorporated in the UK. This is very factual. A company is also considered to be a tax resident in the UK if it is a company incorporated outside the UK but its central management and control is carried out in the UK.
The UK has double tax treaties agreed with many tax jurisdictions. The treaties seek to eliminate taxing the same income or capital receipt twice and for dealing with situations where the domestic rules of each territory conclude that the individual or company should pay tax in its territory. If the domestic rules of two countries conclude that the company is resident in both countries, the treaty’s tie-breaker clause determines where the company is actually a tax resident.
In the Organisation for Economic Cooperation and Development’s (OECD) model tax treaty, the tie breaker for company residence focuses on the place of effective management. This is the place where key management and commercial decisions necessary for the conduct of the business as a whole are made.
HMRC has confirmed that ‘central management and control’ focuses on the highest level of control as opposed to where the main operations are carried out. This is different to the test of ‘place of effective management’ and typically focuses on the place where the board of directors meet, assuming they carry out the control of the company.
Often a company that is not incorporated in the UK but with UK directors may decide to hold its board meetings outside of the UK to show that control of the company resides in that overseas territory.
One of the practical implications for international businesses of COVID-19 is the restriction on travel. This could impact both the tests of central management and control and that of place of effective management.
Both tests presume that people will physically carry out work in the territory in which the company is a tax resident. So, if a director always travelled to an overseas location to attend a board meeting and this supported the claim that control of the company was taking place in that overseas location, the inability to travel places throws doubt on where control is actually taking place.
Similar provisions apply with Brexit. As outlined in our article focusing on permanent establishments and Brexit, one of the key reasons for making changes to a business’s operations as a result of Brexit is in relation to supply chain and indirect taxes such as duties and VAT. Planning is common among multi-national groups to keep their exposure to additional Customs Duty and VAT charges to a minimum and this often involves a change to their structuring and supply chain management. If this change involves moving key people and decision makers into different tax jurisdictions this can place some doubt over the tax residence of the company concerned.
Where a company ceases to be tax resident in one territory and moves to a different territory this can have adverse consequences as it can trigger expensive tax exit charges.
The OECD has issued guidance that in its opinion, focusing solely on the travel restrictions placed upon directors by the COVID-19 pandemic, these should not change a company’s tax resident status. This is because the travel restriction is considered to be an extraordinary and temporary change as a result of COVID-19 and does not constitute a permanent position.
It is important to note that while this is the view of OECD, each territory has its own domestic rules which should be considered before reaching a conclusion. The Australian and Irish tax authorities are two territories that had declared they would follow a similar line. It is important as part of any planning and well in advance of implementation to check the current rules of the territories in which any business operates to understand how they are treating this.
While this is helpful in the short term, the question is what will the new world look like? How will companies conduct business internationally in a ‘post-Brexit, post COVID’ world?
During the pandemic, many people have taken the opportunity to revisit lifestyle choices. What will the impact be on companies that have directors and senior executives who previously travelled extensively but have recognised that remote working has advantages? How will that affect the corporate tax residence status of those companies?
This same is true for those directors and senior executives who are required to move location as a result of a decision to make changes to group structures and supply chain management due to Brexit; where are those companies now managed and controlled? Could that result in a shift in the tax residence of the company? If so what is the cost of any exit charges?
As we look ahead it is important to plan as early as possible; to understand the impact Brexit and COVID-19 will have on the way a business is run, managed and controlled and to pay close attention to the impact taxation will have on the strategic and operational plans.
For more information on how this could impact your company, contact Stuart Weekes or your usual Crowe contact.