Company residence: where are you really?

TaxTalk - May 2024

read timeRead time: 20 mins

The way we undertake business has substantially changed. Remote working creates numerous tax considerations and corporate residency is one of them. So how is corporate residency decided?

As technology allows businesses to operate from anywhere in the world, it’s increasingly vital to understand the taxing rights of jurisdictions. So how does local law interact with international agreements in determining tax residency of companies?

An important and basic rule is that companies are taxed where they are resident. Historically, the residence test for companies followed principles established under case law. But that changed in 1988 when legislation introduced the incorporation test, now found in the Corporation Tax Act 2009.

Control and management

A company that is UK resident is taxed in the UK on its worldwide income. There are some general rules to consider when determining a company’s tax residence:

  • Incorporation: a company incorporated in the UK is considered to be tax resident in the UK

  • Case law: a company which is centrally managed and controlled in the UK is considered to be tax resident in the UK.

It’s worth noting that the case law test is only relevant for companies that aren’t incorporated in the UK. The test to determine a company’s residence has been considered through numerous cases over the years. Two of the most famous are De Beers and Calcutta Jute Mills. In these, and other cases, the courts have established that a company resides where its real business is carried on. And the real business is where the central management and control (CMC) is based. 

In many cases the board of directors will meet where the company is resident, and where those meetings happen can be important in determining the place where the real business is carried on. But don’t forget that, if the directors are dialling in to meetings remotely, their location is where they are physically based. And what if the directors are simply exercising decisions made by another person or if decisions have already been made before the meeting?

So whilst the principle may seem straightforward, it’s true to say that CMC has been controversial in many cases. If there is uncertainty over a company’s CMC, the directors should consider all the facts in determining where it resides.

Place of effective management

Difficulties can arise when a company is deemed to be resident in the UK and also in another jurisdiction, under the laws of that country. For example, a company could be incorporated in the UK but centrally managed and controlled in a country where CMC is viewed as a test for residence. So that company could be considered resident in both countries: a dual resident.

Where this is the case, the company should consider if there is a double tax treaty between the UK and the other country. If so, the tie-breaker clause in the treaty explains how a dual resident company is only treated as tax resident in the country of its ‘place of effective management’ (sometimes known as POEM).

But beware. The place of effective management and the place of CMC are not the same.

That said, many treaties, are moving away from the place of effective management and instead implementing the mutual agreement procedure (MAP) clause. This requires that the competent authority in each country (HMRC in the UK) decides, by mutual agreement, which country will be the company’s ‘residence’. The concept of place of effective management is still relevant and is taken into account. But it’s just one factor.

The place of effective management is where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are made. 

When trying to determine POEM, it’s important to understand that the decisions being considered are those made at the highest level of management which steer the direction of the company. It is often where the managing director, finance director and sales director are located. And it would make no difference if the board held their meetings in a different jurisdiction.

The tax authorities would consider all relevant facts and circumstances to determine the place of effective management, including:

  • where the controlling shareholders are located and how much influence they exert on the decision-making process

  • where the day-to-day management decisions are made

  • where the board meetings (or equivalent) take place

  • where the key and senior management personnel are located

  • where are the commercial, strategic and policy decisions are made

What should you do now?

If your company inadvertently ceases to be UK tax resident, this may lead to significant unexpected tax issues and professional fees. So it’s vital to do a risk assessment, in good time, of any significant transaction such as an investment round or exit. Companies should adhere to strong corporate governance that monitors residency positions and mitigates risk.

If you would like further guidance on any of the issues raised in this article, our Corporate Tax team can provide tailored advice based on your business’s specific circumstances. Please contact Ketan Shah.