Coronavirus: virtual board meetings and the tax residence implications

Whilst the COVID-19 lockdown continues, many companies have turned to phone and video conferencing to allow their directors to hold board meetings. Where the participants are located in a country other than the country where the company was incorporated, these virtual board meetings can affect the company’s tax residence.

The Consequences

UK resident companies are subject to UK corporation tax. Where a non-UK incorporated company, by virtue of its central management and control being exercised in the UK, becomes UK tax resident, it may be subject to UK corporation tax and reporting requirements that it was never expecting to deal with.

If a company is treated as tax resident in two countries, it will be necessary to review the relevant double taxation agreement. Double taxation agreements (where they exist) dictate which country has the primary right to tax the activities of the company. Without a double tax agreement, tax may be imposed in both jurisdictions, resulting in a double charge.

A company may therefore become liable for tax at different rates than it was ever expecting to pay, or it may be subject to reporting requirements not previously anticipated (and fines and penalties for failing to meet these requirements). Identifying this risk allows steps to be taken to mitigate it.

The Test

“Central management and control” is not defined by UK legislation. The question of central management and control is a question of fact, determined with reference to all the circumstances. 

Central management and control should be distinguished from the place where the main operations of the business are to be found.

Essentially, the central management and control is exercised where the key strategic decision making takes place. The physical location(s) of the participants in the board meeting is therefore an important factor in determining where central management and control has been exercised.

The Advice

The place where central management and control is exercised is readily identifiable where the participants of the board meeting attend one location. However, where participants attend board meetings by phone or online this is less clear cut.

In these cases, the board minutes of any virtual meeting should note the location of each of the participants as evidence of where the central management and control of the company is being exercised. 

Where a person is temporarily located in another jurisdiction as a result of travel restrictions imposed by the COVID-19 pandemic, it would be recommended to record this in the board minutes, so that this factor can be taken into account if there is ever an enquiry into the company’s tax residence. This approach may also be helpful where a physical board meeting takes place in a different jurisdiction due to such travel restrictions, for example where directors are abroad in lockdown together.

As of 6 April 2020, HMRC has confirmed that its existing approach to company residence and permanent establishments will be upheld during the pandemic, and that each case turns on its own facts and circumstances. In particular, HMRC considers that a company will not necessarily become UK resident because a few board meetings are held in the UK or because some decisions are taken in the UK over a short period of time. 

By keeping evidence of the circumstances of the board meetings (location of participants and details of travel restrictions) companies can put themselves in the best position in case of an argument with HMRC.