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Corporate tax residence in a post COVID-19 world

13 October 2020

For many businesses the COVID-19 pandemic has brought with it the realisation that they are able to operate almost as effectively remotely as in the office, given the ease with which remote working and virtual meetings are held and the savings on travel time and costs.  

Indicators are that in a post-COVID-19 world, remote working will become much more pervasive than was the case pre-pandemic.  This is not only the situation for employees but also senior management and directors who, in multinational companies, are often drawn from several different jurisdictions.  

The ease of operating and managing businesses more remotely with people working from home raises the concern that companies may overlook managing corporate tax residence and permanent establishment risks in a post-COVID-19 world. 

Please refer to our article here on permanent establishment risks in a post COVID-19 world. 

In considering corporate tax residence, many countries, including the UK, do not only look to the place where a company is incorporated but also where the highest level of decision making takes place. This is referred to in the UK as the place where the central management and control of a company is exercised. In the case of dual resident conflicts, many double tax treaties apply as a tie-breaker test a similar test, which looks to the place of effective management of a company, to determine which country has the right to claim exclusive tax residence over the company.  

A foreign company’s central management and control will usually be in the UK if its board of directors meet in the UK or otherwise exercise strategic decision making in the UK.  If this is the case, the foreign company will be regarded tax resident in the UK for corporation tax purposes (unless an applicable double tax treaty overrides this position).

Therefore, pre-COVID-19 the advice was always for UK based directors of a non-UK company to travel overseas when attending board meetings where strategic decisions are to be made, as opposed to meeting in the UK or dialling into the meeting from the UK and to avoid any other activity that might involve strategic decision making. 

For a detailed consideration of the central management and control test please refer to our article here.

Clearly during the COVID-19 pandemic it was not possible for UK based directors to travel overseas to attend board meetings. This issue was acknowledged by various tax authorities as well as The Organisation for Economic Co-operation and Development (OECD).

The OECD issued a Policy Response Document to COVID-19 and commented on concerns that travel restrictions as a result of COVID-19 may cause a change in the place of effective management of a company for tax treaty purposes. In this regard the OECD noted that is unlikely that COVID-19 will give rise to any changes to an entity’s residence status under a tax treaty as a result of a change in location of the CEO and other senior executives due to an extraordinary and temporary situation such as COVID-19. 

HMRC also issued some guidance, although it fell somewhat short of providing any definitive comfort. 

The guidance noted 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 gave some comfort if the emergency was to last for a short period of time, but what if COVID-19-related travel restrictions endure longer than expected? Companies relying on any supposed relaxation might well find themselves in a situation where their directors have dialled into every board meeting from the UK throughout a whole accounting period. 

Although tax authorities may have taken a more flexible approach early in the pandemic, we caution that once the pandemic has passed, or perhaps before, if the crisis is more protracted than first expected, and the remote way of doing business has become the norm, companies should not lose sight of the central management and control test in the UK or equivalent tests in other jurisdictions so that tax residence of UK companies are shifted elsewhere. 

Accordingly, in a post-COVID 19 world, the pandemic is sure to leave behind lasting effects on the way businesses are operated and managed, with many reducing unnecessary business travel and associated costs. Notwithstanding this, non-UK companies should continue to ensure that UK based directors travel outside the UK to attend board meetings where strategic decisions are to be made and that these are properly documented. Additionally, companies may wish to explore restructuring their boards, for example, to include more non-UK based directors or to restrict voting rights of UK based directors. 

In addition to consideration of corporate tax residence, organisations need to consider the implications of COVID-19 travel restrictions on those employees who work overseas. A huge number of globally mobile employees are now working from home under varied arrangements around the globe.

Read our recent article where we look at the international employment tax, social security and corporate tax considerations of employees’ varied working from home arrangements.