Corporate tax residence

Nowadays, many businesses realise 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.

Remote working has 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 remotely with people working from home raises the concern that companies may overlook managing corporate tax residence and permanent establishment risks.

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 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. Historically, companies effectively self-assessed the tie breaker clause, however, the adoption of the OECD’s multilateral instrument by many jurisdictions has altered tax treaties to require the competent authorities of the respective jurisdictions to come to an agreement on the company’s residence.

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).

During the pandemic era, guidance was provided by HMRC and the OECD, that effectively said a company’s residence is unlikely to be impacted due to Directors being unable to travel due to restrictions.

More recently, however, it is important that companies do not ignore 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.

The way businesses are operated and managed may be that many reduce 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 the huge number of globally mobile employees who work from home under varied arrangements around the globe.

For help and advice on corporate tax residence issues please get in touch with your usual BDO contact or BDO’s International Corporate tax team.