Both HMRC and the OECD have published guidance on corporate tax residence and permanent establishments in light of COVID-19.
The travel restrictions resulting from COVID 19 have made it difficult for many businesses to adhere to governance and procedural frameworks intended to prevent accidental shifts of corporate tax residence or creation of permanent establishments. To address this, both HMRC and the OECD released statements on how to apply the existing rules in these unprecedented circumstances. However, despite this guidance, for many companies a significant amount of uncertainty will remain and careful consideration will be needed by reference to the specific facts.
Corporate Tax residence
Under UK tax rules, except where a treaty tie-breaker applies, a company is resident in the UK if either it is UK- incorporated or it has some or all of its ‘central management and control’ (CMC) in the UK. CMC means the top-level decision making in the company’s business, and is usually exercised by the directors at board meetings. For this reason, companies’ governance frameworks generally prohibit, or strictly limit, board meetings of non-UK resident companies being held in the UK or participation in board meetings of such companies by telephone/video-conferencing from the UK.
HMRC’s statement explains that they consider their existing approach to residence already provides sufficient flexibility to deal with the impact of the travel restrictions, and no specific concession is needed for the COVID-19 situation. HMRC refer to their existing guidance which states that the holding of occasional board meetings in the UK does not necessarily mean that some of the company’s CMC is in the UK. Finally, HMRC emphasise that the location of CMC should be established based on the facts, and wider circumstances are taken into consideration beyond where board meetings are held.
The OECD statement concerns residence for the purposes of double tax treaties, and so is about a different test from the UK domestic law test of CMC. The statement touches both on ‘place of effective management’ (POEM) which is the pre-BEPS treaty tie-breaker (and which is still the tie-breaker in many treaties around the world), and on the post-BEPS treaty tie-breaker based on determination by the respective competent authorities.
In summary, the OECD indicates that a temporary change in the location of the Chief Executive Officer and other senior board members resulting from what it calls “the extraordinary and temporary situation due to the COVID 19 crisis” should not of itself trigger a change in POEM or in the place determined as the place of residence by the competent authorities.
Where does this leave taxpayers?
The OECD pronouncement is relevant where the normal residence tie-breaker under treaties is applicable, whether based on POEM or competent authority. Where instead the tie-breaker is based on a different test, or where no treaty applies, companies must determine residence under UK domestic law based on existing case law and HMRC guidance.
Where a treaty applies, in general, a non-UK resident company is liable to UK tax on its business profits only to the extent they are attributable to a UK permanent establishment (PE). Where no treaty applies, however, a non-UK resident company is taxable in the UK if any part of its trade is carried on in the UK. If it has a PE as defined in domestic law, the company is liable to corporation tax, otherwise it is liable to income tax. The COVID-19 travel restrictions have meant that some individuals have had to carry out work from the UK which they would normally have carried out while abroad.
HMRC’s approach is that their existing guidance is sufficient and that no special concession is necessary for COVID-19. In particular, HMRC refer to the need for a fixed place of business to have a sufficient degree of permanence in order to constitute a PE, and for the conclusion of contracts to be ‘habitual’ in order for it to lead to a PE under the ‘dependent agent’ heading. HMRC consider this already provides sufficient flexibility to deal with the impact of the travel restrictions, adding that, even if a PE does arise, this does not necessarily mean that significant profits would be attributable to it.
The OECD statement takes the position that home working during COVID-19 due to travel restrictions is unlikely to create a PE under the ‘fixed place of business’ heading. Similarly, the temporary conclusion of contracts from the individual’s home instead of their usual place of work should not of itself create a PE under the dependent agent heading. The OECD says these conclusions hold provided the working from home is as a result of government directives (rather than being the company’s requirement) and does not become the new norm over time.
Where does this leave taxpayers?
For many companies, the OECD statement goes a long way towards removing the PE concern (for now) where a treaty applies. Where no treaty is applicable, given the low threshold of ‘carrying on part of the trade in the UK’, the risk is likely to be higher and prompt examination of the facts will be necessary.
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