Company residence in a nutshell
Corporation tax is chargeable on the worldwide profits of any company that is resident in the UK. For this purpose, the UK means Great Britain (England, Wales and Scotland) and Northern Ireland. It does not include the Isle of Man or the Channel Islands.
In some cases, it will be fairly clear that a company is resident in the UK, such as those incorporated in the UK. This is known as the statutory test. A case law test has also evolved, which treats companies that are centrally managed and controlled in the UK as UK resident, even though they are incorporated in another territory.
How is the place of central management and controlled determined?
The phrase ‘central management and control’ came from the De Beers Consolidated Mines case. Many more cases have subsequently considered company residence and several tests have been developed since. In practice, the meaning of central management and control is a question of fact, ie where it is actually found, rather than the place where it ought to be exercised.
Can a company be resident in more than one territory?
Yes, it is possible for a company to be dual resident. For example, a UK incorporated company may be managed and controlled in another country, resulting in the company being resident in that territory. Equally, a company that is incorporated outside of the UK, may be managed and controlled in the UK.
In which territory will a dual resident company be taxed?
Many double tax treaties provide that a company which is otherwise dual resident will only be treated as resident in the country where its place of effective management (POEM) is situated. This provision is commonly referred to as a tie-breaker provision.
Effective management is similar to but not the same as central management and control. Effective management will normally be located where the day-to-day activities of the head office are undertaken, for example where the managing director, finance director and sales director are located.
Some treaties do not have an effective management tie breaker, such as that between the UK and the US. In this case, the tax residence of the company involved will be determined by agreement between the relevant tax authorities.
How is the ‘mutual agreement procedure’ (MAP) relevant?
Treaty policies are moving away from the POEM tie breaker clauses and towards a mutual agreement procedure (MAP) following the publication of the OECD's Action Plan on Base Erosion and Profit Shifting in 2015. The instrument effecting these amendments is the Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also known as the multilateral instrument (MLI). The MLI seeks to amend existing treaties without requiring negotiations between the two relevant territories in respect of every treaty.
The MLI only applies to a treaty if both contracting states have nominated that treaty as one to which they wish the MLI to apply. This can be a complex area and particular care will need to be taken to establish the impact of the MLI on particular treaty provisions, such as those impacting the taxation status of dual resident companies.