Broadly, a company is UK tax resident if it is incorporated in the UK or if its central management and control ("CMC") is situated in the UK (provided it is not resident elsewhere for the purposes of a double tax treaty with the UK). Therefore, a non-UK incorporated company could become UK tax resident if it is determined that its CMC is in the UK and it is not resident in another jurisdiction under an applicable tax treaty.
The CMC test has developed through case law and the outcome depends on all the facts and circumstances. It looks at the highest level of control of a business and seeks to determine where key strategic decisions are taken. CMC will often be located where the Board of directors habitually meets to make such decisions. Importantly, the test has regard to the decision-making procedures of a company over a period of time. Therefore, occasional board meetings held in the UK or convened with UK-based directors dialling in would not necessarily result in CMC abiding in the UK.
In addition to avoiding the risk of becoming UK tax resident, non-UK resident companies will also be concerned to ensure that they remain tax resident in their country of current residence and maintain the required level of "substance" in that jurisdiction, which varies from country to country. This is often an area of particular sensitivity for holding companies or group finance companies, when located in a different jurisdiction from the core operating activities of the group.
Companies will typically have safeguards or protocols in place to ensure that, under normal business conditions, residence is maintained and the required levels of substance are met. Such safeguards may for example include directors who do not live in the company's intended country of tax residence travelling to such country to attend board meetings in person and a majority of the directors being based in the country of intended residence. Some companies may also exclude or limit participation in board meeting by telephone or other electronic means from different locations, except in exceptional circumstances.
The current travel restrictions imposed by governments (including the UK) as a result of the coronavirus make adhering to such protocols in order to maintain residence and substance in (and only in) the company's intended jurisdiction of tax residence considerably more challenging.
From a practical perspective, companies will need to continue to convene board meetings in accordance with their constitution (which they may need to change, where permitted by local law, for the current circumstances – for example, by allowing participation in board meetings by telephone or other electronic means) to ensure that board decisions are not taken ultra vires.
It is worth noting that some jurisdictions (including Luxembourg, Ireland, the Channel Islands and Australia) have recognised the impact that coronavirus could have on normal business practices and have relaxed their corporate residence practices and/or economic substance tests.
Given that HMRC considers that existing legislation and guidance is sufficiently flexible to deal with changes in business activities arising as a result of the COVID-19 pandemic and so is not planning similar COVID-19 dispensations in this area, the question is whether (and to what degree) it could be problematic if UK-based directors dial in to board meetings of non-UK resident companies, when they would usually travel in order to attend in person, or otherwise participate in the decision-making process, especially if such practice continues for a period of time.
Whether a company's CMC abides in the UK is a question of fact: where and by whom is the company actually managed and controlled? In order to answer this, it will be important to consider a number of different factors, including:
- The number of occasions on which board members based in the UK participate in decision-making, for example by dialling in to board meetings (and relatedly, whether or not there are regular instances of directors participating in board meetings from the UK in the past, prior to the coronavirus outbreak). HMRC's guidance notes that occasional instances of participation in board meetings from the UK would not necessarily result in CMC abiding in the UK. However, the risk is that an "exceptional circumstance" of UK-based directors dialling in to board meetings becomes the norm. An unpredictable factor here is how long the current travel restrictions remain in place.
- The composition of the Board. HMRC guidance notes that although the location of board meetings (or the location of those directors participating in such board meetings) is important in determining where CMC abides, it is not conclusive. HMRC is concerned in determining which individuals on the Board actually exercise control over the company and from where such individuals exercise control. Therefore, if there are relatively few UK directors on the company’s Board or if such UK directors are not determinative in making key strategic decisions, it is less likely that UK-based directors dialling in to board meetings from the UK would cause the company’s CMC to abide in the UK.
However, even if the CMC of a non-UK incorporated company does abide in the UK, this does not necessarily mean that the company will be UK tax resident. If the company is also considered to be tax resident in another territory with which the UK has a double tax treaty ("DTA") which includes a corporate residence tie breaker, the provisions of the DTA may result in the company being treated as non-UK resident. Most of the UK's DTAs include either a place of effective management ("POEM") or competent authority/mutual agreement based tie-breaker. The mutual agreement procedure tie-breaker is more prevalent following its adoption as the standard approach in the OECD BEPS Multilateral Instrument. It is generally less predictable than the traditional POEM tie-breaker, including by reason of the wider range of factors competent authorities are entitled to take into consideration to make their residence determination and because there is no certainty as to when (and if) the competent authorities will reach an agreement or the means for challenging any agreement (or failure to agree) between them: in the absence of an agreement, the company would be resident in both jurisdictions.
The OECD has recently published its analysis of the impact of COVID-19 on the tax treaty residence tests. The analysis stresses that in determining a company's residence under either a POEM or competent authority tie-breaker, tax authorities will consider all relevant facts and circumstances over the determination period to establish where board meetings are usually held and where the CEO and other senior executives usually carry on their activities, and not only those instances that pertain to an "exceptional and temporary period such as the COVID-19 crisis".