Cross-border companies may need to determine if their tax residency is affected by Brexit and/or the COVID-19 pandemic, says Siobhan McCreesh from FPM’s Brexit Consulting Team.
Cross-border companies who restructured their business operations due to Brexit or whose decision-making structures are affected by travel restrictions due to the COVID-19 pandemic, may need to consider whether their tax residency status has changed. This is important as getting a company’s tax residency wrong can lead to unnecessary taxes, interest, and penalties.
What is a cross-border company?
Cross-border companies are companies that carry out trading or business activities in two or more different countries where they may have an entity, a fixed place of business or a deemed permanent establishment, for example, an Irish Company operating in the UK via a branch. For businesses operating on the Island of Ireland, there are two different tax jurisdictions, i.e. Northern Ireland (part of the UK tax system – HMRC) and the Republic of Ireland (part of the Irish tax system- Revenue Commissioners).
How do cross-border companies determine their corporate tax residency?
When determining tax residency, the general rule is that a company is a resident in the jurisdiction where it is incorporated or where acts of central management and control are exercised. However, it is important to check each tax jurisdiction. This is because different tax authorities have different rules. Where double taxation agreements exist, these may contain clauses that affect tax residency.
Where is the place of central management and control?
The place of central management and control is the location where the highest level of decision making takes place. This is where senior personnel such as the CEO, the MD, senior management team and board of directors make all the strategic and financial decisions that affect the company. It is not necessarily the same as the location where day to day management of the company’s business takes place.
When considering the place of central management and control, the relevant tax authorities critically assess relevant facts, such as:
- What is stipulated in the Articles of Association?
- Where is company policy decided?
- Where are investment decisions made?
- Where are major contracts defined?
- Where is the company’s headquarters located?
- Where do the majority of directors live and habitually perform their duties?
Companies must have a paper trail process in place to show where their decision making takes place. At a minimum, meetings of the board of directors should be held and attended in the country of desired tax residency. Meetings must be properly documented and must involve sufficient discussion to propose, debate and approve policies. It is not sufficient merely to rule on decisions made elsewhere.
What is a permanent establishment for tax purposes?
Generally, a permanent establishment exists where a company has a presence and performs trading activities in another jurisdiction. This can be represented by a fixed place of business. Alternatively, there may be a ‘deemed’ permanent establishment—for example, where an agent habitually concludes contracts on behalf of the company in another jurisdiction.
A fixed place of business is generally defined as a building such as a place of management, branch, workshop, office, or factory. There are specific rules for construction sites—these vary depending on the jurisdiction.
It is important to note that activities that are preparatory or auxiliary in character do not constitute a fixed place of business.
Tax residency and paying tax
A company pays tax on its worldwide profits where it is tax resident. If a company has a permanent establishment in another jurisdiction, it must also pay tax on the branch profits in the jurisdiction where the branch is located.
If there is a double taxation agreement in place with the country where the branch is located, double taxation relief may be available. Some countries have a branch exemption allowing a company to elect to have branch profits taxed in the jurisdiction where the branch is located.
COVID-19 impact on tax residency
The COVID-19 pandemic forced Governments around the world to take unprecedented measures to restrict travel and implement quarantine procedures. This severely disrupted global business and led both HMRC and the OECD to issue guidance regarding the impact of the pandemic on tax residency and permanent establishment rules:
- UK Guidance: HMRC, noting that they were sympathetic to the disruption caused by COVID-19 and endured by businesses, stated that a company would not necessarily be considered resident in the UK just because a few board meetings were held there, or because some decisions were taken in the UK over a short period of time. HMRC guidance made it clear that they would take a holistic view of the facts and circumstances of each case.
- OECD Guidance: In the extraordinary circumstances brought about by the COVID-19 pandemic, the OECD indicated that a temporary change of location of any members of a company’s senior management should not trigger a change in residency. OECD issued similar guidance for permanent establishments.
However, as the pandemic has continued over a pro-longed period of time, companies may need to consider whether their tax residency has changed. To determine this, each company will need to examine its individual circumstances. Key questions to ask include:
- Have you changed the structure of your business?
- If yes, is the change temporary or could it be permanent?
- Is your business now operating from different countries/jurisdictions?
- Has the place of central management and control changed?
Brexit impact on tax residency
Post-Brexit, companies that restructured their businesses, driven by factors such as legal contractual obligations, customer requirements, trading requirements, compliance with regulatory requirements, or the operation of in-house customs duties, may find that they are now trading in a different jurisdiction, perhaps via a new entity such as a subsidiary, a branch or a deemed permanent establishment. Where a new entity has been incorporated, the first step in complying with tax obligations is determining where the company is resident. Likewise, where a branch has been created, permanent establishment rules need to be considered.