• Tax residence risks for Natural Resources companies – looking beyond COVID-19
Industry issue:

Tax residence risks for Natural Resources companies – looking beyond COVID-19

22 September 2020

For many businesses all around the world, the COVID-19 pandemic has meant increased remote working and virtual meetings, including for senior personnel.

Even in the event of a definitive solution to the pandemic, this new way of working will likely change society and our work practices for the foreseeable future. 

In this new environment, multinational companies such as the majority of Natural Resources companies, will need to proactively manage their corporate tax residence positions and be alert to permanent establishment tax risks.

As residence-related tax risks tend to be particularly significant for Natural Resources companies, we will focus just on those in this article. 

Why should companies care?

Tax residence determines where a company is taxed. Moving tax residence can give rise to exit charges and penalties for failure to notify. The tax rules in a new territory may also be more onerous and treaty benefits previously relied upon may no longer be available (for example in relation to interest, royalties and dividends paid to or from the group company).

How do companies determine tax residence?

When considering corporate tax residence, the UK takes into consideration not only the territory where a company is incorporated but also the territory where central management and control of the company is exercised. This is different in other countries, and often tie breaker clauses in double tax treaties, where the place of effective management (similar test) is often considered as the key indicator to determine the jurisdiction that has taxing rights. 

What is defined as the place of “central management and control”?

The place of central management and control is usually where the board of directors meet or otherwise exercise strategic decision making. 

What is the impact of COVID-19 on central management and control?

Pre-COVID-19 the advice for any UK-based directors of a non-UK company was to travel overseas to attend board meetings and to avoid any other activities that could have involved strategic decision making. 

During the COVID-19 pandemic it has often not been possible for UK based directors to travel overseas to attend board meetings. In response, HMRC issued a statement confirming that “a company will not necessarily become UK tax resident because a few board meetings are held in the UK, or because some decisions are taken in the UK, over a short period of time as a result of COVID-19 related changes to business activities and travel”. The guidance gives some comfort if travel restrictions remain for a short period of time, but companies relying on this statement might soon find themselves in a situation where directors have dialled into every board meeting from the UK throughout a whole accounting period. 

What action should then be taken?

Companies should familiarise themselves with the corporate tax residence rules both in the country of purported tax residence and that of their directors. This should include any considerations regarding economic substance requirements which a number of countries, particularly in low or zero tax territories, have recently introduced - see here a previous article where we talked about this.  

Non-UK companies should continue to ensure that, where UK-based directors travel outside the UK to attend board meetings where strategic decisions are to be made, these are properly documented. If this now seems an impractical hurdle to meet, companies may wish to explore restructuring their boards, for example, to include more non-UK based directors or to restrict the rights of UK-based directors. Consideration could also be given to the merits and cost of shifting tax residence to the UK.

If you would like to discuss anything related to this or any other tax issues, please do get in touch.