Non-UK companies may be at risk of becoming UK tax resident if travel restrictions prevent key decision makers from leaving the UK. Other companies may find it difficult to sustain their intended place of tax residence if directors are unable to travel to meetings. HMRC and the OECD have indicated that Covid-19 related disruption does not necessarily change a company’s tax residence. However, as travel restrictions may last for some time, companies should consider now what practical steps they can take to manage the risks.
Experts at Macfarlanes examine the latest pronouncements from HMRC and the OECD on the impact of Covid-19 on company tax residence.
With business travel constrained by the Covid-19 pandemic, many groups have been considering how to manage the tax residence position of companies whose directors are unable to travel to attend board meetings. There is a tension between some of the practical solutions to travel disruption (such as virtual meetings) and managing the risk that directors attending meetings remotely could be exercising central management and control from the ‘wrong’ jurisdiction
The UK central management and control test (for establishing the tax residence of companies), developed through case law, seeks to identify where the key strategic decisions regarding the business of the company are taken. For a company operating under normal governance procedures, central management and control will usually be located where the board habitually meets to make those decisions. This is not a ‘snapshot’ test: you need to consider the decision-making procedures of the company over a period.
Whilst this article focuses on non-UK companies which may become UK resident, similar issues will apply to companies that wish to sustain their intended place of tax residence in the UK or another jurisdiction (e.g. for treaty purposes) if directors are unable to travel to meetings.
Virtual board meetings
Where directors are unable to travel, one practical option is to hold video or telephone board meetings. However, such meetings may call into question the residence status of a non-UK incorporated company if directors participate remotely from the UK. The level of risk depends on factors including:
the composition of the board: the risk should be lower if UK based directors are a minority and their importance to the decision-making process is not disproportionate to the other directors;
the period over which the practice continues: an isolated incident in which directors participate from the UK, when set against a history of regular non-UK meetings, may not disturb the residence status of the company;
the company’s governance history: whether directors have regularly participated in decision-making processes from the UK in the recent past may affect the ability to take a pragmatic view of UK participation during the Covid-19 crisis; and
the type and level of decisions being taken by the board during the period: the risks are inevitably greater where key commercial and strategic decisions need to be taken.
It is important to note that this is a fact-based test, dependent on all the circumstances of the case.
Tax authority responses
Following a number of tax authorities that had quickly issued helpful guidance on this topic (such as Ireland and Australia), HMRC and the OECD have now published their views on the impact of Covid-19 on company tax residence. In both cases, the tone is arguably more important than the content.
HMRC is ‘sympathetic’ to the disruption caused by the Covid-19 pandemic (see HMRC’s International Manual at INTM120185). That does not mean that it will apply special rules; but by emphasising that HMRC will take a ‘holistic view of the facts and circumstances of each case’, HMRC does seem to be intent on reassuring businesses that a temporary period of managing companies from the UK is unlikely to result in those companies becoming UK tax resident.
The OECD note goes further, contrasting the ‘exceptional’ and ‘temporary’ period in which management may be exercised outside a company’s home jurisdiction (during the Covid-19 pandemic), with the ‘usual’ and ‘ordinary’ conduct of the entity’s business. The OECD guidance is on the concept of ‘place of effective management’, which is used both in tax treaties and also by a number of jurisdictions to test corporate tax residence under their domestic law. The OECD stresses in its guidance that the place of effective management means the ‘usual’ or ‘ordinary’ place rather than a temporary place of management elsewhere.
Taken together, these two guidance notes suggest that companies can expect some latitude from tax authorities if their management arrangements are disrupted on a temporary basis by the Covid-19 outbreak.
Practical steps
Given the uncertainty over the period for which the current travel restrictions may be necessary, possible strategies for managing corporate residence risk could include:
reconstituting the board by taking UK based members off the board, or adding non-UK based members;
ensuring UK board members do not participate; or
deferring major strategic decisions to later meetings or postponing the board meeting entirely until the full board can attend.
During a period of crisis, none of these options may be ideal. In addition, it may simply not be credible for some groups that particular UK-based individuals do not have input in major strategic decisions, which may lead to an inference that key decisions are being taken elsewhere and not through the normal governance procedures.
Some groups may therefore need to consider reconfiguring their governance arrangements to permit greater decision making in the UK within UK group companies without prejudicing the residence position of group companies which are not UK resident. This may have a price in terms of transfer pricing for additional services being provided from UK companies, but it may protect the residence status of other group companies and reduce the strain on governance procedures
Non-UK companies may be at risk of becoming UK tax resident if travel restrictions prevent key decision makers from leaving the UK. Other companies may find it difficult to sustain their intended place of tax residence if directors are unable to travel to meetings. HMRC and the OECD have indicated that Covid-19 related disruption does not necessarily change a company’s tax residence. However, as travel restrictions may last for some time, companies should consider now what practical steps they can take to manage the risks.
Experts at Macfarlanes examine the latest pronouncements from HMRC and the OECD on the impact of Covid-19 on company tax residence.
With business travel constrained by the Covid-19 pandemic, many groups have been considering how to manage the tax residence position of companies whose directors are unable to travel to attend board meetings. There is a tension between some of the practical solutions to travel disruption (such as virtual meetings) and managing the risk that directors attending meetings remotely could be exercising central management and control from the ‘wrong’ jurisdiction
The UK central management and control test (for establishing the tax residence of companies), developed through case law, seeks to identify where the key strategic decisions regarding the business of the company are taken. For a company operating under normal governance procedures, central management and control will usually be located where the board habitually meets to make those decisions. This is not a ‘snapshot’ test: you need to consider the decision-making procedures of the company over a period.
Whilst this article focuses on non-UK companies which may become UK resident, similar issues will apply to companies that wish to sustain their intended place of tax residence in the UK or another jurisdiction (e.g. for treaty purposes) if directors are unable to travel to meetings.
Virtual board meetings
Where directors are unable to travel, one practical option is to hold video or telephone board meetings. However, such meetings may call into question the residence status of a non-UK incorporated company if directors participate remotely from the UK. The level of risk depends on factors including:
the composition of the board: the risk should be lower if UK based directors are a minority and their importance to the decision-making process is not disproportionate to the other directors;
the period over which the practice continues: an isolated incident in which directors participate from the UK, when set against a history of regular non-UK meetings, may not disturb the residence status of the company;
the company’s governance history: whether directors have regularly participated in decision-making processes from the UK in the recent past may affect the ability to take a pragmatic view of UK participation during the Covid-19 crisis; and
the type and level of decisions being taken by the board during the period: the risks are inevitably greater where key commercial and strategic decisions need to be taken.
It is important to note that this is a fact-based test, dependent on all the circumstances of the case.
Tax authority responses
Following a number of tax authorities that had quickly issued helpful guidance on this topic (such as Ireland and Australia), HMRC and the OECD have now published their views on the impact of Covid-19 on company tax residence. In both cases, the tone is arguably more important than the content.
HMRC is ‘sympathetic’ to the disruption caused by the Covid-19 pandemic (see HMRC’s International Manual at INTM120185). That does not mean that it will apply special rules; but by emphasising that HMRC will take a ‘holistic view of the facts and circumstances of each case’, HMRC does seem to be intent on reassuring businesses that a temporary period of managing companies from the UK is unlikely to result in those companies becoming UK tax resident.
The OECD note goes further, contrasting the ‘exceptional’ and ‘temporary’ period in which management may be exercised outside a company’s home jurisdiction (during the Covid-19 pandemic), with the ‘usual’ and ‘ordinary’ conduct of the entity’s business. The OECD guidance is on the concept of ‘place of effective management’, which is used both in tax treaties and also by a number of jurisdictions to test corporate tax residence under their domestic law. The OECD stresses in its guidance that the place of effective management means the ‘usual’ or ‘ordinary’ place rather than a temporary place of management elsewhere.
Taken together, these two guidance notes suggest that companies can expect some latitude from tax authorities if their management arrangements are disrupted on a temporary basis by the Covid-19 outbreak.
Practical steps
Given the uncertainty over the period for which the current travel restrictions may be necessary, possible strategies for managing corporate residence risk could include:
reconstituting the board by taking UK based members off the board, or adding non-UK based members;
ensuring UK board members do not participate; or
deferring major strategic decisions to later meetings or postponing the board meeting entirely until the full board can attend.
During a period of crisis, none of these options may be ideal. In addition, it may simply not be credible for some groups that particular UK-based individuals do not have input in major strategic decisions, which may lead to an inference that key decisions are being taken elsewhere and not through the normal governance procedures.
Some groups may therefore need to consider reconfiguring their governance arrangements to permit greater decision making in the UK within UK group companies without prejudicing the residence position of group companies which are not UK resident. This may have a price in terms of transfer pricing for additional services being provided from UK companies, but it may protect the residence status of other group companies and reduce the strain on governance procedures
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