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Out-Law Guide | 04 Oct 2022 | 11:16 am | 6 min. read
Determining a company’s tax residence may involve considering tax rules across different jurisdictions.
Non-UK companies sometimes want to maintain their non-UK tax residence status for tax purposes and, therefore, will need to follow the UK's tax rules on corporate residence.
A company that is UK resident for tax purposes is liable for UK corporation tax on its worldwide income and gains. A non-UK tax resident company may still be liable for UK corporation tax if it is trading in the UK through a UK permanent establishment, such as a branch or agency. In such circumstances, the non-UK resident company would be liable for UK tax on the worldwide income and gains related to that permanent establishment.
A non-UK tax resident company that is not trading in the UK through a permanent establishment may still be liable for UK tax on some UK source income, including rental income. Most other UK income is taxable only to the extent that UK tax is withheld at source, such as on certain interest payments.
Broadly, a company is UK tax resident if it is either incorporated in the UK, or despite being non-UK incorporated, the business of the company is centrally managed and controlled in the UK.
Where a company is UK tax resident under either of these tests and is also resident in another jurisdiction by virtue of the terms of a tax treaty between the UK and that jurisdiction, the terms of any residence tie-breaker clause in the treaty must be considered. This is known as the 'treaty override' rule. This guide does not consider this rule further and focuses on the 'central management and control' test.
If a company claims to be tax resident offshore when it is not, the company will be liable for UK tax on its worldwide profits and gains and may also have to pay interest and penalties on any unpaid tax. If the directors or investors have acted dishonestly or fraudulently when trying to assert that a UK company is resident offshore, they may have committed a criminal offence for which they could be prosecuted.
The concept of central management and control has been developed by case law and involves considering the location where the highest level of decision-making in the company takes place.
The central management and control test is based on the facts and substance of how a company is managed. HMRC and the courts will consider all records, correspondence and surrounding facts and circumstances when reaching a decision.
Central management and control is not the same as the day-to-day management of the business. Broadly, the place where a company is centrally managed and controlled will be the location where the final decisions that bind the company are made. It will be the place where matters of general policy and strategy for the company are made.
Such matters would include:
Generally, the constitution of a company will identify who has the authority to manage the business of the company. Normally, a company's constitution will give the directors the authority to control the company's business.
Any fettering of the directors' discretion in favour of the shareholders may suggest that shareholders control the company and, therefore, that their location could dictate where the company is deemed to be centrally managed and controlled. If central management and control of a company is exercised outside board meetings by other parties, or at other times and places, the locations of these events may also determine the tax residence of the company.
The directors can delegate administrative or other day-to-day tasks associated with running the business without risking relinquishing central management and control of the company. However, any delegated functions should be subject to adequate supervision and review by the directors.
To maintain non-UK tax residency, if an offshore company is unable to find appropriate non-UK resident individuals to act as directors it may procure the use of overseas professional directors. The courts have held that a company can be centrally managed and controlled by professional directors where those directors properly considered their decisions and took advice where appropriate.
If a company is considered to be controlled by its directors, the place of central management and control will often be the place where directors meet to manage the company's business. Generally, this is the place where board meetings are conducted.
However, the place where the directors meet is only relevant if central management and control is factually exercised through those meetings - so only if the people making those decisions taken at those meetings can cause those decisions to be implemented. It is essential that the directors have authority and make independent and informed decisions concerning the central business policy of the company.
For example, if the highest level of control rests with a particular chairman or managing director and the board simply 'rubber stamps' the decisions of that individual, the central management and control of the company will be the place where the individual or group usurps the position of the board and exercises control of the company.
Case law differentiates between situations where the decisions of the directors are usurped or dictated by a third party and, alternatively, where the directors retain central management and control irrespective of the fact that a third party may influence their decisions or may desire a certain outcome. Where a third party, such as a professional adviser, is merely exercising influence over the directors without controlling the directors, the location of central management and control should remain the place where the directors exercise their control.
The shareholders of the company may retain the right to dismiss the directors in certain circumstances. However, it will be important that the directors are seen to exercise control of the company.
It is accepted that shareholders will have plans for what they want the company to do and that the directors are ordinarily willing to go along with their shareholders' wishes. However, there is a very fine dividing line between the board acting on the proposals and recommendations of the shareholders but still exercising their authority as directors, and the board being directed by the shareholders in a way which means that the shareholders are usurping the function of the board and removing the authority of the board.
If the board simply rubber stamps shareholder decisions, the board will not be regarded as exercising central management and control of the company; rather, the company will be tax resident where the control is in fact exercised, which is likely to be where the shareholders are located.
Particular care should be taken where an offshore company is brought into existence as part of a tax planning scheme and the transactions it undertakes are uncommercial, or would benefit a UK parent and/or wider group and not the offshore company. In such circumstances, even if the directors are based offshore and make decisions offshore, it would be difficult to demonstrate that the directors have exercised their discretion and that central management and control remained offshore. In the Development Securities case in 2020 the Court of Appeal, reinstating a previous decision of the first tier tax tribunal, held that although the directors of Jersey companies had approved transactions at board meetings in Jersey and taken company law advice, it was the UK parent company which decided to undertake the planning and engaged the board to perform these specific actions, and was in effect exercising central management and control of the Jersey companies.
Following the decision in the Development Securities case, an offshore company can still be found to be centrally managed and controlled in the UK, notwithstanding that it has a board comprising a majority of experienced non-UK tax resident directors who make informed decisions and approve resolutions whilst at board meetings held outside the UK in the offshore jurisdiction, if:
UK government plans to revamp holiday pay calculation for part-year workers