03 Sep, 2020 01:47 PM
Admin Category: Corporation Tax,

The Impact of COVID-19 Travel Restrictions on Tax Residency

Travel restrictions may risk the permanent establishment by giving a raise.

Working practices in the United Kingdom (U.K.) are moving into aggressive suppression phases to halt the acceleration of the spread of COVID-19, including introducing lockdown measures and restrictions on international travel. With the ongoing COVID-19 crisis, travel restrictions may cause a rise to the tax residency risking some companies. 

Due to the coronavirus COVID-19 impact, travel restrictions are having an unprecedented impact on the way businesses operate. Under the current circumstances, it has become devastatingly important to monitor the approach taken to decision-making activities undertaken by businesses and their directors and employees in order to minimize the risk of unintentionally creating a taxable presence outside a company’s jurisdiction of tax residence. 

HM Revenue & Customs (HMRC) has implemented a number of initiatives in the light of the COVID-19 pandemic. The UK tax authority, HM Revenue & Customs, and the Organisation for Economic Co-operation and Development have published helpful guidance on this issue, but measures still need to be taken to ensure that travel restrictions do not result in unexpected tax liabilities. 

Corporate Tax Residency

Corporate tax residency determines where a company will be taxed on its worldwide profits (subject to any available exemptions). In the UK, a company is generally a tax resident in where it is incorporated or where it has its place of management. And depending on that, the company's board makes its key decisions which, in most instances, may be ascertained by looking at the location of the board meetings.

The place of management is typically the deciding factor where a company would otherwise be dual resident by virtue of being incorporated in one country and managed in another, either because a double tax treaty makes place of effective management the deciding factor; or it is the most important factor taken into account by tax authorities when they have to agree who gets taxing rights under a double tax treaty mutual agreement procedure.

In the UK, management tests look at where a company is “centrally managed and controlled” which is also referred to as the “CMC test”. The test determines the highest level of control of a business and is invariably equated with the control exercised by the board of directors through decision-making at board meetings.

 The Impact on Residency Issues Due to Travel Restrictions 

Due to the current situation, travel restrictions will impact non-resident directors’ ability to travel to attend such board meetings. As a result, the ongoing travel restrictions may hinder the ability of professional directors in the UK to attend such meetings if they live in one jurisdiction and provide professional services in another. This potentially may raise a huge tension to corporate tax residency risk.

The international tax structuring often relies on key decision-makers (mainly directors) making their decisions at board meetings in the jurisdiction in which that company is tax resident to limit the risks associated with central management and control moving abroad. Under  the current limitation on travelling businesses will need to carefully consider their business activity to ensure that, individuals currently located in the UK do not unintentionally move the residence of a non-UK company to the UK or cause that non-UK company to have a taxable presence in the UK or strategic business decisions of a UK company are made, or new contracts are entered into, outside the UK, that other jurisdiction could potentially seek to assert taxing rights over the profits generated as a result of that activity.

Offshore undertakings for collective investment in transferable securities (UCITSs) and alternative investment funds (AIFs) can be managed and controlled from the UK without becoming UK tax resident but permanent establishment issues including other tax issues, such as creating a fixed place of business for value-added tax (VAT) purposes are at risk.


upport of Tax Authorities

The government along with tax authorities have introduced beneficial measures regarding that. HMRC has provided guidance regarding any individual present in the State and that presence is shown to result from travel restrictions related to COVID–19, in this case revenue will be prepared to disregard such presence in the State for corporation tax purposes for a company in relation to which the individual is an employee, director, service provider or agent. 

We understand that companies are actively engaging with their tax advisors to make sure they fully appreciate the nuances of the rules and guidance in their respective jurisdictions. This early engagement with the advisor community is to be encouraged. Contact your local accountants in London to know more.

Risk Reduction 

Risk reduction in case of avoiding changing residency might include properly documenting the COVID-19 situation.The following steps can be taken in order to mitigate certain risk:

  • Appoint alternate directors for individuals off-side the tax residence  jurisdiction (for U.K. fund managers with directorships of fund or portfolio companies; this may include appointing alternate directors in the jurisdiction in which the relevant fund or portfolio company is currently tax resident).


  • Restricting non-resident directors to being observers/not voting, restricting overseas dial-ins and even considering whether hosting a board meeting in a different/unrelated country may be appropriate.


  • Consider directors who can join meetings as an observer rather than as a decision-maker or not join at all located outside the relevant tax residence jurisdiction.

These measures may need to be constructed under the corporate governance framework and constitutional documents of each company. However, questions of tax residency are necessarily fact dependent and the current situation will lead companies to a residency-based challenge from tax authorities. Whilst taking the steps above may reduce the risk of a successful challenge by a tax authority, they cannot protect against the associated costs of a dispute nor provide absolute certainty of the tax position.

Areas of Uncertainty 

Uncertainty may occur in jurisdictions if tax authorities decide not to provide clarity and reassurance to taxpayers. On the contrary to the UK position, they intend to closely review the residency of companies during this period. A flexible approach is yet to be introduced to companies facing difficulties relating to corporate tax residency by the tax authorities. 

Companies are currently focussed on cash preservation and cost savings as an unexpected tax liability would be highly undesirable. In cases of underpin residence, such as the location of board meetings are typically well documented, tax authorities will be able to undertake thorough reviews in the fullness of time.

Ensuring Certainty

Certainty can be assured by taking preventive measures against a risk of challenge by a tax authority. To be specific, the insurance would protect against any tax resulting from the challenge including funding any tax which is payable in order to make an appeal, interest, penalties, and advisor fees associated with defending a challenge by the tax authority.

For providing terms in case of a residency risk, insurers will typically need to review the board minutes, any correspondence with the relevant tax authority relating to residency, residency certificates (where relevant), the residency status and professional experience of the individual directors, any operational handbook that the company has on residency and any tax advice the company has received in relation to residency.

The restriction on travelling may cause risk to the permanent establishment by giving a raise. The pricing of the policy limit purchased is expected to be between 0.75% and 2.75% depending on the specific facts and the jurisdiction in question. 

DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you to contact Taj Accountants for further assistance.


Who does your UK Residence and Tax work for me?

Your UK residence status affects whether you need to pay tax in the UK on your foreign income. Non-residents only pay tax on their UK income, they do not pay UK tax on their foreign income. Residents usually pay UK tax on all their income, whether it’s from the UK or abroad. But there are special rules for UK residents whose permanent home (‘domicile’) is abroad

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