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UK Corporate Tax Residency – An Overview

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UK Corporate Tax Residency – An OverviewWith certain exceptions, a UK incorporated company is resident in the UK for tax purposes. This feature of UK company residence is known as ‘the incorporation rule’.

In addition to the incorporation rule, the ‘case law rule’, which looks to the place of ‘central management and control’ as a test of residence, will be relevant in certain cases.

The case law rule was expressed in De Beers Consolidated Mines Ltd v Howe, 5TC213 as follows: a company resides.... where its real business is carried on.... and the real business is carried on where the central management and control actually abides’.

Place Of ‘Central Management and Control’

This concept is taken to mean the place where the high-level strategic decisions of a company are made. This will be a question of fact, to be established on a case by case basis.

In determining the place of central management and control, a number of decided cases have attached importance to where the company’s board of directors meets. However this is not always conclusive and it is deemed necessary to consider the overall decision making governance of the company when determining residence.

The location of directors’ meetings is significant, insofar as those meetings constitute the medium through which central management and control is exercised. This was re-affirmed in the case of Laerstate BV v HM Revenue & Customs (HMRC) [2009].

Reviewing Company Residence

A review of a company’s residence status under the case law rule will commence with a question of law i.e. ‘where and by whom should the company be managed and controlled’.

Under UK company legislation, company management is entrusted to the directors, and where a company’s residence status is in question, HMRC will typically:

  • try to ascertain whether the directors of the company in fact exercise central management and control;

  • if yes, they will seek to determine where the directors exercise this central management and control;

  • where the directors are held to not be exercising central management and control, HMRC will look to then establish where and by whom it is exercised.

Parent / Subsidiary Relationships

In a parent/subsidiary relationship, it is acknowledged that parent companies will exercise influence over the actions of their subsidiaries. However, it is important to ensure that the functions of the board of the subsidiary are not usurped, and that the board gives independent consideration to the parent company’s decisions, rather than merely ‘rubber stamping’ them.

When considering whether the subsidiary company’s board exercises central management and control of the subsidiary's business, HMRC will have regard to the degree of informed and independent thought which the directors apply in conducting the company's business.

See HMRC Statement of Practice INTM120200 for more detail in this area.

Dual Resident / Treaty Non-Resident

A company which is resident in the UK under either the incorporation or case law rule may also be tax resident in an overseas country, by reason of that other country’s domestic law. Where this occurs, the company in question will be referred to as being dual resident.

Where a company is dual resident and:-

  • there is a Double Taxation Agreement (‘DTA’) between the UK and the other country containing a residence ‘tie-breaker’ for companies; and

  • under that tie-breaker, residence is awarded to the other country. 

the company is called 'treaty non-resident' (‘TNR’).

Typically the 'tie-breaker' provision would apply an objective test, referring to the State in which the company’s place of “effective” management lies (i.e. ‘standard tie-breaker’) as the country of residence for the purposes of the DTA.

Location Of Corporate Tax Residency 

The location of corporate tax residency is an extremely important issue, and as evident from the Laerstate decision, inadvertently becoming tax resident in a jurisdiction other than that which was intended can have significant consequences.

Disclaimer: Please note that this overview is general in nature, and is not intended to represent formal advice. Appropriate advice should be taken in relation to all matters relating to company residence.

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