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Freshfields Risk & Compliance

| 6 minutes read

UK tax focus: will COVID-19 travel restrictions affect corporate tax residence?

[Updated for HMRC guidance released on 3 April 2020]

Businesses are currently dealing with a multitude of issues as a result of the measures taken to stop the global spread of the coronavirus (COVID-19). 

One that might not currently feature at the top of the list is the maintenance of corporate tax residency. This has the potential to fall through the cracks when faced with bigger and more urgent issues. But it is an issue tax and legal teams need to be alive to and monitor over the coming weeks and months.

Corporate tax residency dictates where a company will be taxed on its worldwide profits (subject to any available exemptions). A company is generally tax resident in the country where it is incorporated or where it has its place of management. 

Place of management is typically the deciding factor where a company would otherwise be dual resident by virtue of being incorporated in one country and managed in another, because either: 

  • a double tax treaty makes place of effective management the deciding factor; or 
  • it is the most important factor taken into account by tax authorities when they have to agree who gets taxing rights under a double tax treaty mutual agreement procedure. 

The UK’s version of the management test looks at where a company is 'centrally managed and controlled' – often referred to as the 'CMC test'. This looks at the highest level of control of a business and is invariably equated with the control exercised by the board of directors through decision-making at board meetings.

Many groups will be concerned to ensure that a non-UK incorporated company stays tax resident in its country of incorporation, or at any rate outside the UK, and will have procedures in place for any UK-based directors to travel to the local jurisdiction to attend board meetings in person and otherwise to prevent CMC being exercised in the UK. 

Protocols will typically exclude participation in board meetings by telephone or other electronic means from a location within the UK, save in exceptional circumstances. Sometimes residence protocols are embedded within the relevant company’s articles of association themselves.

Other groups will want actively to demonstrate that the CMC and therefore tax residence of a non-UK-incorporated company is in the UK, often with a view to that company being able to use the tax relief generated by interest deductions to shelter taxable profits elsewhere in the UK group. 

In this sort of case, all the protocols will apply in reverse: non-UK-based directors will be expected to travel to the UK for board meetings and avoid participation from elsewhere.

Impact of COVID-19 travel restrictions

COVID-19 is making adherence to the necessary protocols almost impossible in the short term and there is the very real possibility that current travel restrictions and business disruption will continue for a number of weeks or months to come. 

This means companies having to grapple with issues such as whether board decisions are ultra vires because they are taken at board meetings convened otherwise than in accordance with the company’s articles, whether an 'exceptional circumstances' let-out applies (in the articles or a separate protocol) and whether the place of management and therefore tax residence is in fact at risk of shifting from one country to another as a result of prolonged non-compliance with a protocol.

Ultimately a company with its CMC in the UK is likely to be regarded as tax resident in the UK, and it is not strictly relevant that this was not the intended result or that the directors were prevented by circumstances outside their control from exercising CMC outside the UK. The same applies conversely to non-UK incorporated companies that are supposed to be UK tax resident.

CMC, and therefore tax residence, is a pure question of fact. Because determining tax residence involves viewing the facts in the holistic sense, a one-off board meeting convened in the 'wrong' country or with majority remote participation from the 'wrong' country – relying on an exceptional circumstances let-out – is unlikely to prejudice the intended tax residence of the company. And the current position with COVID-19 is almost certainly exceptional. 

But a number of exceptions may well add up to a rule and tip resident status towards the 'wrong' country. In other words, exceptional circumstances do not give companies a 'get out of jail free' card; limiting departures from normal board protocols to exceptional circumstances is intended to ensure that those departures will be one-offs, but it does not help if those exceptional circumstances and departures become the norm.

HMRC have recently released guidance at least acknowledging and expressing sympathy for the 'corporate residence challenges posed by COVID-19'. While the guidance does little more than reiterate that HMRC take the holistic view and that they do 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',  it signals a commitment to pragmatism in the current circumstances. 

It is worth noting that the guidance is directed at foreign companies whose intention is to avoid UK tax residence. It is unclear to what extent HMRC would regard establishing and maintaining UK CMC for a non-UK incorporated company, as opposed to avoiding it, as a higher hurdle to clear.

A number of other jurisdictions have gone further. Jersey and Guernsey, for example, have issued guidance (see here and here) confirming that companies will not fail the economic substance tests in these jurisdictions where their normal operating practices are temporarily not possible, for example by holding board meetings virtually rather than physically in Jersey/Guernsey, because individuals are unable to travel or are self-isolating as a result of COVID-19. 

In addition, the Australian Tax Office (ATO) has indicated that where a foreign incorporated company holds board meetings in Australia, or directors attend board meetings from Australia, and the only reason for this is because of the effects of COVID-19, the ATO will not apply compliance resources to determine if central control and management is in Australia (see here). The Irish Revenue Commissioners have also published guidance confirming that, subject to certain conditions being satisfied, they are willing to disregard a company director's absence from, or presence in, Ireland as a result of COVID-19 related travel restrictions for Irish corporation tax purposes (see here). 

Inadvertent change of tax residence

The worst-case scenario from a tax perspective is a possible shift in the location of the tax residence. 

This means the company in question could unintentionally become subject to a different country’s tax rules and therefore face unexpected tax or increased tax on corporate income and gains (as well as new filing obligations), or possibly lose the ability to use interest deductions to shelter group taxable profits in the intended jurisdiction of tax residence or cease to meet the qualifying conditions for benefiting from a special tax regime in that jurisdiction. 

The shift in tax residence could also result in exit tax charges inadvertently being crystallised.

Practical next steps

Where the planned board meeting is due to cover routine business, the best approach may be to delay the meeting until the relevant individuals are able to travel as normal. But there may be regulatory or commercial reasons why a board meeting cannot be delayed, or the current restrictions may just prevail for too long to make deferral an option. 

Groups should at least be giving consideration to the possible need – should COVID-19 restrictions last beyond what HMRC have in mind as a 'short period' – to change the composition of boards so as ensure there are enough local directors in situ to attend and make decisions at board meetings. These directors may need to be local professional directors. 

Whether from within or outside the group, the local directors need to be suitably qualified professionals capable of making their own decisions in the best interests of the company. They can be briefed by UK-based executives or other employees within the relevant organisation – including by having UK-based individuals join the board meeting (in a non-decision making capacity) by telephone, Skype or Zoom to talk through a briefing paper or presentation – but the local directors' decision-making needs to be genuine and take place at the relevant board meetings. 

The same applies to any alternate or similar directors.

UK-incorporated companies

On a final note, a UK-incorporated company will automatically be UK resident unless it is managed in another jurisdiction that asserts taxing rights by virtue of the company being managed in that other jurisdiction and the UK loses the double tax treaty contest. 

This requires a critical mass of decision-making demonstrably to take place in that other jurisdiction and so a pattern of directors dialling in from multiple jurisdictions (with no majority in any other single jurisdiction) is unlikely to displace UK tax residence. 

A majority of directors joining board meetings from a single other jurisdiction (with a corporate tax residence test that takes into account location of management and which continues to be strictly applied) for a sustained period of time as a result of travel restrictions may, however, risk prejudicing UK tax residence and should be monitored.


tax, covid-19, europe