HMRC approach to UK corporate residence of foreign companies during lock down: impact and considerations
Non-UK companies such as fund management companies established in Guernsey, Jersey and the Cayman Islands, foreign investment holding companies and non-UK general partners of limited partnership funds are generally treated as non-UK tax resident, so long as their “central management and control” (the strategic decision making typically exercised by the company’s board) is conducted outside the UK. Relevant board procedures will include a majority of the directors being non-UK residents, and any UK based directors only participating in meetings while physically present outside the UK.
Impact of Covid-19
The Covid-19 related UK-wide (and international) lock-down and related travel restrictions mean that UK-based directors are currently unable to leave the UK for such board meetings. A principal question is whether any director therefore participating from the UK, e.g., via zoom or phone, risks the foreign company becoming UK tax resident and, if so, what preventative measures should be taken.
HM Revenue and Customs (HMRC) Response
HMRC has now released its corporate residence approach to Covid-19 – setting a sympathetic tone without offering a blanket carve-out or binding safe harbours. This is understandable, to some degree, given the highly fact-specific nature of central management and control. Instead, HMRC draws heavily on its existing guidance, setting out helpful examples and confirming that it will generally take a holistic view in analysing corporate residence during the Covid-19 pandemic. For example, it states that participation by directors from the UK in isolated board meetings, where the majority of other directors are outside the UK, does not necessarily result in central management and control being conducted from the UK. However, key elements of the existing HMRC guidance only apply to certain categories of company, such as those located in a jurisdiction which has a double tax agreement with the UK that includes a residence tie-breaker and which also meet certain other conditions. A Guernsey or Jersey GP of a private equity fund or a Cayman Islands asset holding company may not benefit from some of the concessions, for example.
Disappointingly, HMRC did not extend its published practice to all companies here. However, given the positive tone of the Covid-19 release and the extreme circumstances of the pandemic, it would seem counterproductive (and indeed very unlikely) for HMRC to initiate company residence enquiries solely as a result of directors participating from the UK, during Covid-19, particularly if a company otherwise has a good governance history.
Where does this leave UK-based fund managers?
Clearly, for foreign companies squarely within the existing guidance or otherwise with good governance history and established residence procedures, the lock-down may not be particularly problematic, from a UK tax perspective. For example, subject to the constitutional framework of the foreign company, the board may be able to be convened by directors and board meetings conducted, without participation by the UK director. Alternatively, a UK director may be able to participate in meetings, in person, on a restricted basis or by proxy (through the appointment of a non- an alternate). However, care must be taken that any changes to normal operating procedures are in line with the tax legislation and and the constitutional framework of the relevant company.
The concern is perhaps greater where:
- the foreign company does not have a strong governance background;
- it has an insufficient number of non-UK based directors to constitute a quorum in the relevant non-UK jurisdiction; or
- those directors lack sufficient knowledge, experience or specific expertise to genuinely exercise central management and control offshore.
While central management and control is essentially a question of fact, the following measures could be considered (bearing in mind that, in all cases, the overall picture will need to be considered and specific advice will should be taken):
- The foreign company could choose, where possible, to delay relevant board meetings.
- The company could appoint an alternate director based in the relevant non-UK jurisdiction.
- The foreign company could appoint a committee of non-UK directors.
- It will be important to document the difficulties encountered and why operating practices have had to change, in order to demonstrate that the measures are commensurate. For example, any director participating from the UK should make clear that he or she is prevented from leaving the UK only as a result of Covid-19 and would, in fact, have been otherwise willing and able to travel abroad for the meeting.
Three potential complications
- The constitutional documents of the relevant non-UK company will need to be reviewed and verified; for example, some may prohibit any participation by UK resident directors and/or stipulate certain corporate governance practices and procedures that ought to be followed in order to ensure safe participation in some capacity.
- In addition to UK tax residence, participation by a UK resident director may, in certain circumstances, cause the creation of a UK taxable permanent establishment.
- Some jurisdictions such as the Cayman Islands, Guernsey and Jersey require certain companies to meet an economic substance test, which includes a requirement for such affected entities to be “directed and managed” (among others) in an appropriate manner in the jurisdiction. What is appropriate for a given entity is also highly fact-specific, but generally would include, inter alia, a requirement that the board of directors has appropriate knowledge and expertise and that board meetings be held in the jurisdiction with both a quorum and majority of those voting present in the jurisdiction. In light of Covid-19, these jurisdictions have temporarily relaxed the board rules, permitting an expanded role for director participation from outside the jurisdiction, but nevertheless still mandating that such meetings take place. This potentially puts the UK tax rules, on the one hand, in conflict with the Cayman Islands, Guernsey and Jersey tax rules, on the other hand.
MJH Tax, Legal and Director Services
If you would like to discuss specific Covid-19 measures or your general governance affairs in the UK, Channel Islands and Luxembourg we would be delighted to assist. MJ Hudson also provides experienced fund directors through our offices in Luxembourg and the Channel Islands who are able to help with short and long-term solutions. Our teams in London, the Channel Islands and Luxembourg can be contacted using the details, below.