The impact of COVID-19 on corporate residence

With the global lockdown to quell the COVID-19 pandemic set to continue, what does this mean for corporate residence?

Under UK law, a company incorporated overseas will be subject to UK taxation if it centrally managed and controlled from the UK.  Many other territories have a similar “central management and control” provision in their domestic legislation.  With so many displaced people at the current time, this throws up two potential issues:

• Decision-makers stranded overseas risk creating a dual residency for any UK entities they manage
• For structures which rely on certain group entities being outside of the UK tax net, e.g. Guernsey or Jersey companies, the inability to travel to these locations to hold board meetings jeopardises the offshore status of these companies. It could result in significant profits being subject to UK taxation.

Certain tax authorities (the UK, Ireland, Australia) have already stated their position, saying they will be lenient and acknowledging that these are exceptional times.  The Organisation for Economic Co-operation and Development (OECD), in its recently released guidance also highlights that it would be difficult for a state to assert taxing rights purely as a result of the short term impact of COVID-19 on the location of key individuals.    For territories whose double tax treaty is based on the model OECD treaty, guidance around the “tie-breaker” clause discusses where senior executives “usually” or “ordinarily” carry out their duties, which provides businesses with comfort that a short term change in such arrangements is unlikely to have consequences.

However, as the crisis continues, we may see revenue-hungry territories start to challenge residency more aggressively.  While the tax treaty network does provide a mechanism for attributing taxing rights and also dispute resolution, this is not a quick process.  Equally, the outcome may be that while there is not ultimately double taxation, profits may be taxable in a higher tax jurisdiction.  It is also worth noting that not all taxes are covered by tax treaties, and this is where local guidance is required.

For the time being,  to provide the best possible support for a company’s residence, businesses must ensure robust record-keeping – where decisions have been made and why, citing, for example, local government travel restrictions.

In the longer term, COVID-19 related travel restrictions are likely to persist for some time, and it is expected that there will future episodes of lockdown around the globe as countries continue to grapple with the pandemic.  With this in mind, businesses should give thought to the parts of their group structure that are particularly sensitive as far as residency is concerned. For example, those entities in territories where there are no permanent employees or UK companies whose directors are not physically in the UK all of the time because their family and permanent home is overseas.  This will enable businesses to consider what mitigating strategies might be put in place, for example, the appointment of a local director, to provide more certainty in a landscape where free international movement of people can no longer be taken for granted.

This post was written by Sarah Howarth, a tax specialist at Price Bailey. If you require any questions relating to corporate residence, please contact Sarah on the form below.