The COVID-19 pandemic has resulted in significant disruption to international travel and business operations, including a restriction of movement for company directors, employees and other individuals. To offer support to taxpayers and taxing jurisdictions, both HMRC and the OECD have released guidance on the implications of the COVID-19 outbreak for businesses in terms of tax residency and permanent establishment (PE). HMRC believes its guidance is consistent with the guidance published by the OECD Secretariat.
Separate guidance has been issued on the personal income tax residence position – read more here.
HMRC guidance - Residence
HMRC considers that the existing UK tax legislation and guidance in relation to company residence already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic.
More importantly, HMRC does not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time. HMRC guidance makes it clear that the facts and circumstances of each case will be reviewed in the round. Likewise, HMRC does not believe that a company will necessarily become non-UK resident for UK tax purposes because a few board meetings are held, or some decisions are taken, outside the UK for a short period of time.
Read HMRC updated guidance on residence
HMRC guidance - Permanent Establishment (PE)
HMRC is very sympathetic to the disruption that is being endured, and it considers that existing guidance and legislation in this area provides sufficient flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic.
HMRC’s updated guidance notes that it does not consider that a non-resident company will automatically have a taxable presence by way of UK PE after a short period of time. Whilst the habitual conclusion of contracts in the UK could also create a taxable presence in the UK, this largely depends on the facts and circumstances of each case and whether the “habitual” condition is met, more generally. Further, HMRC goes on to note that the existence of a UK PE of a foreign enterprise does not in itself mean that a significant element of the profits of the non-resident company would be taxable in the UK.
Read HMRC guidance on PEs
Residence / place of effective management
According to the OECD, a temporary change in the location of senior management and other senior board members resulting from what it calls an “extraordinary and temporary” situation due to the COVID 19 crisis should not, on its own, trigger a change in tax residency or in the place determined as the place of residence by the competent authorities. The OECD considers it unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty.
In comparison to HMRC’s approach, the OECD guidance offers some additional comfort for affected businesses.
According to the OECD, home working during the current pandemic is unlikely to lead to a creation of a fixed place of business PE. For a PE to exist, it must have a certain degree of permanence and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on: this condition, the OECD believes, is unlikely to be met due to temporary home working arrangements.
Similarly, the temporary conclusion of contracts from the individual’s home country instead of their usual place of work should not, on its own, create a Dependant Agency PE - especially where these arrangements are merely transitory and of a temporary nature. This is true especially where the requirement for individuals to work from home has been prescribed under government directives and not those that have been mandated by the business itself.
Other tax authorities are now making helpful comments in this area. For example, Ireland has issued guidance to disregard the presence of an individual in Ireland if such presence is shown to result from travel restrictions related to COVID-19, and recommended that a record of the facts and circumstances should be maintained.
While HMRC has confirmed that it will not consider that a non-UK company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time, businesses should exercise a degree of caution. It may be helpful if proper records are kept detailing, in the board minutes, the reasons for the meetings being held remotely due to restrictions being placed on travel. If senior people happen to be locked down in the UK during this period, our guidance would be to tread carefully and maintain contemporaneous documentation to substantiate the reasons for attending or holding meetings in the UK. Companies may also explore options of restructuring their boards to include more local, non-UK based, directors.
Some jurisdictions, such as Jersey, have gone so far as confirming that where directors are unable to physically attend board meetings in Jersey due to issues associated with COVID-19, then the Jersey tax authorities would not argue that the relevant company has failed the economic substance test in Jersey.
Conversely, for businesses seeking to protect their UK tax resident status where directors are stuck in foreign jurisdictions that have similar rules as the UK’s central management and control test, businesses may look to appoint additional UK directors or delegate powers to UK-based personnel to ensure that the balance of central management and control does not shift elsewhere. Businesses may also consider restricting voting rights to those that are physically present in the UK whilst giving those directors that are stuck abroad a status of an ‘observer’. Alternatively, it may be appropriate to consider delaying Board meetings where possible (or at least those where major strategic decisions are to be made) until directors are able to travel as normal and attend the meetings,
For those countries with which the UK has a double tax treaty, the OECD guidance is helpful. However, the longer the travel restrictions remain in place, the greater the risk is likely to be in this area. Therefore, businesses should continue to monitor the situation and consider whether any operational changes are required at a group and entity level if the lockdown globally were to continue in the longer term.
Businesses should identify where they have potential risks on these issues, assess those risks and determine whether there are any mitigation strategies that can be put in place - including short-term operational change. Businesses should continue to monitor the situation carefully and maintain contemporaneous documentation of their position.
For those countries with which the UK does not have a double tax treaty (mainly low tax/haven jurisdictions), the risk of foreign companies having a taxable presence in the UK due to the presence of personnel in the UK is significantly higher: this requires a swift analysis of the surrounding facts and circumstances.
For any questions, help or advice on these issues, please get in touch with Julia McCullagh or Arjun Bhatia.
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