COVID-19 - corporate residence and PE issues

Travel restrictions and the general lockdown put in place by many governments as a result of the coronavirus pandemic has caused a degree of uncertainty and concern over the residence of companies and the possibility of the inadvertent location of a permanent establishment (PE) due to the presence of directors, employees or agents in the UK.

Following on from the example of other tax authorities that have issued revised policies taking a pragmatic approach to individuals being located in jurisdictions temporarily (eg Australia and Ireland), HMRC has now published guidance which seeks to provide a degree of comfort on these issues, without, however, providing any concessionary treatment or particular safe harbours for affected businesses. Accordingly, despite the guidance, it will remain important for businesses to recognise the risks in these areas and act accordingly.

Corporate residence

Under UK law, a foreign corporation will not be UK tax resident unless its central management and control takes place in the UK. In accordance with case law, a company is centrally managed and controlled in the place where the highest level of control of the company takes place (which will not include the day-to-day management of the business). This may be where its directors (or equivalent) meet and take strategic decisions.

Many foreign entities with senior UK directors rely on holding physical board meetings abroad in order to ensure that central management and control does not take place in the UK. But what if the UK directors are unable to travel to board meetings abroad?

With directors unable to leave the UK, or perhaps stranded in unhelpful jurisdictions, care should be taken to ensure that any contingency plans put into operation for their participation in a board meeting do not have the effect of making the foreign entity resident in the UK or elsewhere, with attendant tax consequences.

If the business of a planned board meeting is entirely routine, the best option may be to simply postpone the meeting until UK resident directors are able to travel abroad to attend as originally planned. However, in some cases there may be commercial reasons why a delay is not possible, and the board meeting will still need to be held. Issues to consider in such cases include whether the attendance of the UK resident directors is required. If the UK resident directors must attend, is there any scope for them to do so from a nearby jurisdiction outside the UK? Is there scope to appoint directors from other jurisdictions to take the place of the UK directors? (Note however that local advice should be sought to ensure that this would not result in the entity being deemed to be resident in that jurisdiction.) Could they attend as observers, but not provide their views or vote on the matters under consideration?

Where no other option exists, it should be generally possible for a minority of directors (as a one off occurrence) to participate in a board meeting from the UK by telephone or video conference call. The tax risk associated with this course of action will vary according to circumstances, including any history of board meeting participation from the UK, the relative weight of the expertise and experience possessed by the UK directors compared to the other directors and the physical locations of the chair of the meeting and the remainder of the board.

If a minority of directors are intending to participate from the UK, care should be taken to ensure that the meeting takes place in accordance with the articles of association (or equivalent) of the entity, that the meeting is quorate in the absence of the UK directors, that the chair of the meeting is outside the UK, that the call via which the meeting takes place is initiated from and terminated outside the UK (which might involve the “host” of the call or the person who sends the calendar invitation for a video meeting being outside the UK), and that the minutes of the meeting are taken and kept outside the UK. In addition, the minutes should record the specific circumstances which have prevented the UK resident directors from leaving the UK, and evidence should be retained to deal with any future tax authority query.

HMRC has released guidance at INTM120185 which emphasises that HMRC consider that a company will not 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. HMRC will take a holistic view of the facts and circumstances of each case. The guidance stops short of providing any particular concession or safe harbour, simply indicating that HMRC take the view that their existing powers provide sufficient flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic. However, since each case turns on its own facts and circumstances, the guidance recognises that it is difficult for HMRC to provide definitive guidance as to where central management and control may abide in cases where businesses are forced to make changes in response to the COVID-19 pandemic.

However, HMRC do point to a number of examples at INTM120150 where they would not usually seek to establish that a company is UK resident, including where a minority of UK based directors attending meetings becomes a majority on an isolated occasion due to the unforeseen unavailability of one or more of the overseas based directors.

For fund entities that are corporate UCITS or alternative investment funds established outside the UK, the tax residence safe harbour may be available to prevent any directors that are present in the UK from onshoring the relevant fund for UK tax purposes for UK corporation tax purposes. However, it should be noted that the safe harbour only applies for direct tax purposes, and therefore will not affect, for example, the VAT or payroll tax position. In addition, it does not apply to offshore management companies or general partners of funds structured as limited partnerships, so care may need to be taken concerning such entities.

Permanent establishments

In addition, it is possible that the enforced location of officers and other significant employers in a jurisdiction may give rise to permanent establishment (PE) risks for a non-resident company. There is currently an increased international interest in the PE rules as a result of the OECD BEPS project together with increasing mobility of international staff. The risk of inadvertently creating a PE is therefore a key risk area for MNEs. Where a PE exists, it may bring into tax the profits of the local activities of that foreign company. In general, a PE will exist if the foreign company has a fixed place of business in the jurisdiction or a dependent agent (one acts on behalf of the non-resident company and habitually exercises an authority to conclude contracts in its name).

In the UK, HMRC has released guidance at INTM261010 indicating that it is sympathetic to the business disruption taking place, but takes the view that it has sufficient flexibility with regard to the question whether a PE has been created in the UK. In particular, HMRC considers that a non-resident company will not have a UK fixed place of business PE after a short period of time as a degree of permanence is required. Similarly, whilst the habitual conclusion of contracts in the UK would also create a dependant agent PE in the UK, it is a matter of fact and degree as to whether that habitual condition is met. Furthermore, the existence of a UK PE does not in itself mean that a significant element of the profits of the non-resident company would be taxable in the UK. The guidance does not provide any particular concession or safe harbour, but reinforces the point that the creation of a PE requires a degree of permanence that may be lacking where persons are temporarily located in the UK.

Conclusion

It remains the case, therefore, that companies should continue to monitor all potential areas of risk that companies should consider as a result of the travel restrictions imposed. From a practical perspective, tracking, monitoring and documenting the facts of the situation will be important to understand where the risks may be and to demonstrate these are extenuating circumstances.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19