The current restrictions on international travel has heavily affected the real estate sector. As the coronavirus lockdown was announced with very short notice in many jurisdictions, companies and groups may find that several employees and directors are in the ‘wrong’ jurisdictions. In addition, travelling for board meetings (especially where the local resident employee is a director of an overseas company) has been restricted.
This means that companies and groups need to consider the tax implications of the current situation on:
- corporate residence of the companies;
- permanent establishment; and
- certain individuals’ tax positions.
From a UK tax perspective, a company is considered UK tax resident if it is:
- incorporated in the UK; or
- non-UK incorporated and its central management and control (CMC) is exercised from the UK.
For real estate clients, it is not uncommon to see UK properties being held through offshore companies with one or two UK resident directors sitting on the board.
In the current climate, decisions by a board will need to be made quickly. For instance, both landlords and the tenants may have to conclude on any concessions required regarding the lease arrangements. With lockdown and travel restricted, it is near impossible for UK based board members to be physically present at board meetings outside the UK.
The only options available to such board members are to attend via a telephone conference or virtual meeting from the UK or limit the risk of a company being regarded as UK tax resident by not attending the meetings until the travel restrictions and other measures are lifted.
A sympathetic approach
HMRC have confirmed that they will not issue special rules to deal with the temporary disruptions caused by the coronavirus pandemic. They have however, said that they are ‘sympathetic’ to the situation and will take a ‘holistic view’ of the facts and circumstances of each case. Both this and the OECD’s guidance suggest that there may be some latitude from the tax authorities where management arrangements are temporarily disrupted due to the coronavirus.
Minimal disruption for offshore CMC
Given that UK property rental income and capital gains arising on sale of UK properties derived by offshore companies are now subject to UK corporation tax, you could argue that there should be minimal UK tax impact if the offshore UK property holding company is deemed to be CMC from the UK.
However, additional consideration will need to be given to the impact on:
- withholding tax position on interest payments;
- exit charge;
- group relief – dual tax residence;
- tax on other income/non-UK assets (on future disposals) within the company (to the extent that this is significant);
- taxing rights on directors’ fee, and
- the tax position in the local jurisdictions, including the application of the tie-breaker clause under the relevant Double Tax Agreement (subject to treaties amended by the MLI).
The same consideration will need to be applied to a UK incorporated company with non-UK resident directors so that it is not regarded as tax resident in another jurisdiction under its domestic law.
Having virtual board meetings may be the simplest solution in the current predicament. However, companies and groups need to assess the tax residence risk of non-UK incorporated companies by having non-UK resident directors attending from the UK.
The risk will depend on several factors including the composition of the board and historical governance (e.g. regular physical participation of UK resident directors at board meetings held outside the UK).
In practice, the companies could consider the following steps to mitigate the corporate tax residency risk.
- Change the composition of the board of directors such that the majority comprises local directors in the specific jurisdictions. This may present some challenges, for example where the operation is newly set-up and lacks industry/expertise specific directors in the local jurisdiction. In addition, any changes may require amendments to the articles of the company as well as its operational guidelines and/or documents or joint venture agreements. This may not be commercially desirable as it may be difficult to obtain appropriate agreement from stakeholders.
- Review existing parameters for type of authority given under a power of attorney to execute/agree an amendment to a pre-approved proposal or transaction by the board thus minimising the need to have board meetings for amendments falling within the pre-agreed parameters.
- Ensure all telephone conference and virtual calls are originated and chaired by a non-UK resident director.
- Consider changing the required level of quorum (subject to above) to constitute a fully quorate meeting.
- Defer critical strategic decisions until the full board can be convened in the appropriate jurisdiction.
- Ensure that the non-UK/UK resident directors do not participate in the telephone or video conference from the UK for overseas companies’ board meetings and vice versa.
These solutions are not ideal but they do provide alternatives in the current environment for protecting residence status of the companies and ensure companies and groups meet their corporate governance requirements.
Where a company is deemed to have a permanent establishment in the UK, the proportion of profits which relate to the UK permanent establishment will be subject to UK corporation tax.
For offshore UK property holding companies, this may not be a significant issue as the UK property rental income is already subject to UK corporation tax.
However, where the non-UK resident director or senior employee carries out other roles within the wider group or non-UK resident companies while they are in the UK, companies and groups will need to consider whether this will result in a UK permanent establishment.
Considering the degree of permanence
A fixed place of business in that country is the most relevant for a non-UK company to have a UK permanent establishment. This requires the non-UK company to have a UK premises at its disposal. The question is whether this condition will be met by virtue of the senior employee or director working from home while in the UK or whether this could be treated as purely incidental or ancillary.
HMRC’s view is that a non-UK resident company will not have a permanent establishment after a short period of time as a degree of permanence is required. OECD’s guidance also states individuals currently work from home as a result of government directives rather than on an enterprise’s requirements. It considers that, generally, these arrangements lack permanence and businesses would normally provide an office for the employee to work from.
Longer term risks
Care needs to be taken if working from home becomes the new norm and this would be over a prolonged period, as this would affect the analysis. Although the UK legislation does not give a specific period, tax treaties tend to identify six months to a year as long enough to create permanence.
Changing the approval process, allocating the right to execute contracts and sign documents to another person in the appropriate jurisdiction, may be an option to mitigate the risk. Companies also need to consider the potential level of activity in the UK and its value to assess whether this could result in material tax exposure.
HMRC has stating that the days spent in the UK due can be treated as ‘exceptional circumstances’ (and therefore could be ignored with regards to the Statutory Residence Test) where this is due to:
- the individual is quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus;
- there is official government advice not to travel from the UK as a result of the virus;
- the individual is unable to leave the UK as a result of the closure of international borders, or
- the individual is asked by their employer to return to the UK temporarily as a result of the virus.
The maximum total number of days spent in the UK in any tax year that may be ignored due to exceptional circumstances is 60 days, so further analysis will be required to assess the tax implications if this limit is exceeded.
What you should do next
From a practical point of view, current operating procedures must be reviewed and alterations made to reduce the tax exposure which has arisen from travel restrictions.
Records should be maintained to demonstrate:
- that procedures are being adhered to;
- location of key individuals;
- where decisions are being made and by whom, and
- the day count.
Where there has been a change in residence or a PE established, relevant disclosure will need to be made to the appropriate tax authority.