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Coronavirus - Guidance on corporate residence and permanent establishments – UK

  • United Kingdom
  • Coronavirus - Tax issues
  • Tax planning and consultancy


In the midst of the current COVID-19 pandemic, businesses have been faced with a series of international tax questions on residence, permanent establishments and taxing rights of employee income. The general ambiguity of some of these tests does not aid business certainty.

UK Guidance

However, over the last few weeks various revenue authorities have released guidance on the position that they would adopt (or are likely to adopt) in relation to these issues.

HMRC (the UK revenue authority) has recently published its view on some of these international tax issues. An overarching point to note is that HMRC does not provide any additional concessions (unlike some other tax authorities such as Ireland) in the wake of the COVID-19 pandemic. Instead, it refers to its existing guidance and suggests that the guidance already provides adequate flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic. Therefore, businesses should consider their individual facts and circumstances to ascertain risks in this area.

A summary of the guidance is set out below.

  • In relation to whether the presence of employees or directors in the UK could result in foreign companies becoming UK tax resident:
    • By way of background, in addition to acquiring corporate residence in the UK through incorporation of a company in the UK, companies can also acquire UK corporate residence if their central management and control (“CMC”) is in the UK. This is a question of fact and will generally depend on all the facts and circumstances.
    • Often the venue of board meetings is important in determining this (assuming directors are actually the people making decisions, and not just rubber stamping) – but this will not  be the only factor considered.
    • HMRC provides that in light of this and its existing guidance that “occasional UK board meetings, or participation in such meetings from the UK, does not necessarily result in CMC abiding in the UK”.
    • However, HMRC caveats this opinion providing that each case turns on its facts and circumstances and therefore, HMRC cannot provide definitive guidance, and whether CMC abides in the UK will depend on the specific facts of each company.

Eversheds Sutherland comment

While this guidance is helpful in that it provides some indication that occasional UK board meetings or directors participating in board meetings while stuck in the UK should not change the residence of the company (via CMC abiding in the UK), there is still some ambiguity in relation to whether this will always be the case. HMRC, unlike some other tax authorities, stops short of providing explicit guidance that:

  • directors participating in board meetings while in the UK or hosting board meetings in the UK as a consequence of COVID-19 will in all circumstances not result in CMC abiding in the UK,
  • if directors who would normally travel to the UK to participate in board meetings in the UK so that a company were considered to have its CMC abiding in the UK are not able to due to travel restrictions,  then their participation from jurisdictions outside the UK will be excused (e.g. this is a position that Ireland has helpfully adopted).

Therefore, the position in relation to UK residence is as before. Businesses should review their specific circumstances closely because HMRC would look at all the factors together. It is possible that HMRC may adopt different positions depending on the reason the directors are in the UK/not in the UK and the stage of containment. It is also important that businesses look at the other jurisdiction’s approach in case this might create a potential problem of dual-residence (discussed below).

  • In relation to a tie-breaker if it is found that CMC of a foreign company does abide in the UK
    • If a company is considered dual-resident (i.e. in the UK and another country) then a double tax treaty (“DTT”) tie-breaker test would operate to settle this. There are two possible tie-breakers depending on the treaty:
    • Place of effective management (e.g. the UK-Germany DTT) – This test will require consideration of all facts and circumstances and a company’s place of effective management can only be in one place at any one time.
    • Mutual agreement procedure (“MAP”) – This will be the test adopted in many of the DTTs amended by the OECD Multilateral Instrument (“MLI”). Residence will be decided by mutual agreement between the two tax authorities concerned. Various factors will be taken into account by the tax authorities – however, importantly the outcome of such a procedure cannot be predicted.

Eversheds Sutherland comment

This does not provide any concessions to taxpayers. Instead it refers to the existing DTT tests. Generally tie-breakers create an element of uncertainty. While the place of effective management can only be in one country, determination of this is not always entirely straightforward. The difficulties with tie-breaker tests can be especially acute when MAP is invoked, since this is typically a lengthy procedure and tax authorities may be unable to easily agree to a solution. While it is expected (and hoped) that revenue authorities would consider the backdrop of COVID-19 there will be various other factors that may be consider and therefore, outcomes will be difficult to predict.

As an option, it is preferable to manage residence issues at the outset to ensure that a company does not become dual-resident, rather than to let a company become dual-resident and then seek resolution of this later.

  • In relation to whether foreign companies could be seen to have a taxable permanent establishment in the UK through the presence of their employees or directors in the UK
    • Fixed place of business permanent establishment: HMRC consider that a non-resident company will not have a UK fixed place of business permanent establishment after a short period of time as a degree of permanence is required and they consider that under current circumstances there may not be permanence.
    • Dependant agent permanent establishment: For there to be a dependant agent permanent establishment, an agent acting on behalf of the permanent establishment would need to have and habitually exercise authority to carry out the company’s business in the UK. HMRC notes that whilst the habitual conclusion of contracts in the UK would create such a permanent establishment in the UK, it is a matter of fact and degree as to whether that habitual condition is met. It will be important to have one eye on past practice as well.

Eversheds Sutherland comment

Similar to the points noted above, the guidance states the general rule but does not provide an concessions. Businesses would need to consider past and ongoing activities to determine whether there would be a permanent establishment. Further, it will also depend on how long the lockdown and other restrictions persist because “temporary” remains undefined.

Interestingly, there is no mention of construction sites and installation projects (broadly defined to include even the installation of new equipment) and the impact that this will have on these. The reason this is important because under treaties such sites would usually constitute a permanent establishment if they last for a certain period of time – in UK treaties this is usually between 6 to 12 months (fixed place of business permanent establishments and dependant agent permanent establishments do not have a time threshold). Therefore, whether social isolation days count towards this time period are left unanswered by HMRC.

It should be noted that the OECD Commentary provides that a site should not be regarded as ceasing to exist when work is temporarily discontinued and it notes that seasonal or other temporary interruptions should be included in determining the life of a site. If this is the case, this might have unintended consequences for foreign developers/builders/equipment installers in the UK, who may be deemed to have a UK permanent establishment and pay taxes on attributed profit in the UK due to the containment measures. It is unclear how HMRC will view this and whether they will consider this a temporary interruption (and ignore it) or consider this a more permanent interruption.

OECD Secretariat Interpretation of Treaty Issues

The OECD Secretariat has also released its interpretation of some of the permanent establishment, residence and employment tax issues under double tax treaties. See here for an analysis of the OECD interpretation. It should be noted, that the OECD Secretariat’s publication is only an opinion and in practice, the interpretation of the treaties will depend on the treaties themselves and the individual jurisdictions interpreting the treaties.