Where a company is a resident of will determine where its income is taxable; a UK resident company is subject to corporation tax on its worldwide income and gains. We will be discussing the three types of company residency status a business can have.
Company Residency Status: UK Residency
Any company incorporated in the UK will be UK resident. UK means Great Britain and Northern Ireland.
A company incorporated outside of the UK may also be a UK resident if its central management and control is exercised within the UK.
Residency rules vary between jurisdictions so it is entirely possible that a company can be resident in more than one country. If the UK has a double taxation agreement with that other jurisdiction there is usually a tie-breaker provision by virtue of which residency is awarded to one state. In many cases this is where central management and control is exercised.
The central management and control test is not based on a prescribed list of criteria, but has instead been established through case law, chiefly De Beers Consolidated Mines. It is normally said to be at the location of the directors’ meetings, as long as the business of the company is genuinely considered there, and directors do not abdicate their responsibility.
Lord Justice Chadwick in Wood v Holden said:
“….In seeking to determine where central management and control of a company incorporated outside the United Kingdom lies, it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or general meetings) and cases where the functions of those constitutional organs are usurped – in the sense that management and control is exercised independently of, or without regard to, those constitutional organs.”
Two forms of usurpation are recognised:
- An outsider directly exercises the function of the board
- The board purports to function but is dictated to by the outsider
The second form is narrow, in Wood v Holden Park J explained:
“….If the directors of an overseas company sign documents mindlessly, without even thinking what the documents are, I accept that it would be difficult to say that the national jurisdiction in which the directors do that is the jurisdiction of residence of the company. But if they apply their minds to whether or not to sign the documents, the authorities…indicate that is a very different matter.”
A company’s residence is ultimately a question of fact, turning on where central management and control is in fact exercised. In disputed cases, HMRC will investigate the facts of how the company has operated, studying board minutes and other documents and, if available, interviewing witnesses. They try to ascertain whether the directors of the company in fact exercise management and control and determine where this is done. When the directors do not exercise management and control, they look to determine by whom it is exercised.
Where it appears that a major objective underlying the existence of certain factors is the obtaining of tax benefits from residence or non-UK residence HMRC will examine the facts closely.
Company Residency Status: Dual Residence
By virtue of the above it is possible that a company can be resident in more than one country at the same time either because it is incorporated in the UK and managed and controlled in another jurisdiction or because it is incorporated elsewhere, but managed and controlled in the UK.
A company which is incorporated in the UK will not be treated as a UK resident if it is resident outside the UK under the terms of a double tax agreement (DTA). Some (but not all) DTAs provide that a company which is otherwise a dual resident will only be treated as a resident in the jurisdiction in which its place of effective management is situated.
Effective management is distinct from central management and control in that it will normally be located where the day-to-day activities of the head office are undertaken. This would not be altered if the directors held board meetings in a different country, even though these board meetings may determine where central management and control was located.
Company Residency Status: Non-UK Residents
A non-UK resident company is liable to corporation tax on profits arising from a UK permanent establishment (PE) or income arising from that establishment. Under the corporation taxes act 2010 a company will have a PE in the UK if:
- it has a fixed place of business through which the business of the company is carried on
- an agent acting on behalf of the company has, and habitually exercises their authority to do business on behalf of the company
With effect from 1 January 2019 the definition has been updated by the Organisation for Economic Co-operation and Development (OECD) in order to prevent the artificial avoidance of PE status.
The OECD seeks to achieve this by clarifying that fragmenting a cohesive operating business into several small operations and arguing that each part is simply engaged in preparatory or auxiliary activities (thus benefitting from exceptions from PE status) will no longer be effective.
Under this new definition the profits attributed to a PE are those that the PE would have derived if it were a separate and independent enterprise performing the activities that cause it to be a PE.