Covid-19 and company tax residence: HMRC and the OECD speak up

With business travel constrained by the Covid-19 pandemic, many groups have been considering how to manage the tax residence position of companies whose directors are unable to travel to attend board meetings.

We explained in our earlier note that there is a tension between some of the practical solutions to travel disruption (such as virtual meetings) and managing the risk that directors attending meetings remotely could be exercising central management and control from the "wrong" jurisdiction.

Following a number of tax authorities that had issued helpful guidance on this topic (such as Ireland and Australia), HMRC and the OECD have now published their views on the impact of the Covid-19 pandemic on company tax residence.

In both cases, the tone is arguably more important than the content.

HMRC is "sympathetic" to the disruption caused by Covid-19. That does not mean that it will apply special rules during this time, but by emphasising that HMRC will take a “holistic view of the facts and circumstances of each case” the UK tax authority does seem to be intent on reassuring businesses that a temporary period of managing companies from the UK is unlikely to result in those companies becoming UK tax resident. The new guidance is now available.

The OECD note goes further, contrasting the "exceptional" and "temporary" period in which management may be exercised outside a company's home jurisdiction (during the Covid-19 pandemic), with the "usual" and "ordinary" conduct of the entity's business. In double tax treaties, the concept of "place of effective management" is used as a key indicator for determining the state in which a company is tax resident. And the same concept (place of effective management) is used by a number of jurisdictions to test corporate tax residence under their domestic law. The OECD stresses in this note that the place of effective management means the "usual" or "ordinary" place rather than a temporary place of management elsewhere.

The tone of the OECD's conclusion on this point is likely to reassure companies whose usual pattern of decision making has been disrupted by Covid-19: "all relevant facts and circumstances should be examined to determine the "usual" and "ordinary" place of effective management, and not only those that pertain to an  exceptional and temporary period such as the Covid-19 crisis."

Taken together, these two guidance notes suggest that companies can expect some latitude from tax authorities if their management arrangements are disrupted on a temporary basis by the Covid-19 outbreak.