COVID-19: UK Tax Residence Risks for Offshore Funds and Related Entities – HMRC Update

Following on from our recent OnPoint (COVID-19: UK Tax Residence Risks for Offshore Funds and Related Entities), HMRC has now published guidance on the corporate residence issues posed by COVID-19. The guidance can be found at INTM120185. 

In summary:

• HMRC is “very sympathetic” to the disruption that is being caused by the travel restrictions imposed as a consequence of the COVID-19 pandemic.
• HMRC has not announced any changes or relaxations in the law but has indicated that in its view, the existing law permits some degree of latitude for UK directors of offshore funds to participate in, or even hold board meetings in, the UK without causing UK residence concerns if this is necessary as a result of the COVID-19 pandemic.
• In HMRC’s view, a company will not necessarily become resident in the UK 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. HMRC takes the view that whilst the site of board meetings may be important in determining the residence of a company, it is not determinative and HMRC will take a holistic view of the facts and circumstances of each case.

While HMRC’s guidance is helpful, given the absence of bright lines in determining corporate residence, our view remains that to the extent commercially practicable UK directors should avoid participating in, or attending, board meetings of an offshore fund from the UK, and that the guidance (and alternative solutions) outlined in our earlier OnPoint should, wherever possible, be adhered to in order to maintain robust operational governance.

To recap our previous OnPoint, possible alternative solutions to participating in board meetings from the UK include:

• Appointing non-UK substitute directors to replace those in the UK.
• Appointing additional non-UK directors to ensure a majority of directors remain outside the UK.
• Appointing a committee of non-UK directors and delegating the required authority to them until travel restrictions ease.
• If appropriate and subject to reasonable parameters, formally delegating additional authority in respect of certain decisions to the UK manager.

Where it remains essential for directors to participate in board meetings from the UK, some comfort can be taken from the HMRC guidance. Nonetheless, participation from the UK should be limited to those circumstances where necessary by reason of COVID-19 and companies should revert to best practice as soon as circumstances permit. Where applicable, it would be advisable for the board minutes to formally record that a UK board member is attending from the UK purely because of COVID-19 travel restrictions.

HMRC’s guidance also contains similar helpful views in relation to temporary or limited actions taken in the UK by representatives of non-UK companies who are unable to leave the UK in the context of whether a UK permanent establishment is created for UK tax purposes.

In addition, whilst not directly applicable to an offshore fund, the OECD Secretariat has also released its analysis of the impact of COVID-19 on corporate residence under tax treaties. Its view is that a temporary change in location of the chief executive officers and other senior executives of a company due to the COVID-19 crisis is an extraordinary and temporary situation and such a change of location should not trigger a change in residency, especially once the tie breaker rule contained in tax treaties is applied. The OECD has emphasised that the focus should be on the “usual” and “ordinary” place of effective management of a company.