HM Revenue & Customs (“HMRC”) recently published guidance on how COVID-19 related travel restrictions will affect the test of central management and control (“CMC”), which may determine UK corporate tax residence. HMRC’s update states that they see the existing rules as flexible enough to deal with the consequences of travel restrictions and that a pragmatic analysis of the facts will remain the norm when assessing where a company’s home tax jurisdiction lies. Their update confirms that a company will not automatically become UK tax resident because a few board meetings or some decisions are made in the UK “over a short period of time”.
The new guidance refers to the fact that even if CMC of a particular company is shown to be in the UK, if that company is also resident in another jurisdiction with which the UK has a Double Taxation Agreement (“DTA”), the corporate residence tie-breaker provisions of the DTA may result in the company being treated as non-UK resident. Most of the UK’s DTAs include a place of effective management (“POEM”) or a competent authority based tie-breaker, and it is possible that the POEM may be found to be in the other jurisdiction.
In that regard, the Organisation for Economic Co-operation and Development (“OECD”) has also recently released guidance acknowledging that COVID-19 related travel restrictions might raise questions as regards a company’s tax residence. The OECD has emphasised that for the determination of a company’s tax residence, tax authorities should take into account all relevant facts and circumstances to determine the “usual” and “ordinary” POEM, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis. Similarly, where there is a competent authority based tie-breaker in a DTA, the OECD has emphasised that its guidance already indicates that tax authorities should consider where board meetings are usually held and where senior executives usually carry on their activities.
Companies can take some comfort that HMRC and the OECD’s published views indicate that tax authorities should be accommodating when assessing tax jurisdiction questions relating to COVID-19. However, companies should note that in the UK there is no proposed change of law related to corporate tax residence and COVID-19 (in contrast to, for example, the statutory residence test for individual tax residence). The examples that HMRC refers to in its published guidance are examples that do not directly refer to travel restrictions and do not add anything new in relation to COVID-19. Therefore, it remains best practice when seeking to establish or maintain corporate tax residence outside of the UK:
- Where possible (i.e. non-essential meetings) to delay the meeting until travel restrictions have been lifted;
- If the meeting is essential, the minutes should reflect that the meeting is being held via teleconference because of the COVID-19 travel restrictions; or
- In factually sensitive circumstances, to consider changing, or temporarily rebalancing, the composition of the board of directors.
UK Permanent EstablishmentsHMRC has also recently published its views as regards whether a non-UK tax resident company may inadvertently create a UK permanent establishment (“PE”) by reason of individuals subject to COVID-19 related travel restrictions carrying out their duties whilst in the UK. HMRC’s views are similar to those stated in relation to corporate tax residence – namely that existing law is sufficiently flexible to deal with changes in the location of business activities. HMRC indicates that a non-resident company should not have a UK fixed place of business PE after a short period of time, as a degree of permanence is required. Similarly, whilst the habitual exercise of authority to do business in the UK could create a dependant agent PE in the UK, it is a matter of fact and degree as to whether that habitual condition is met. The OECD guidance is also helpful in this regard, emphasising that (as regards habitual conclusion of contracts/doing business) activities should only be regarded as habitual where there is a degree of permanence and where they are not temporary measures. These views, whilst helpful, to some degree beg the question of what happens the longer the COVID-19 related travel restrictions remain in place.