UK: Overseas Companies: Retaining non-UK Tax Residence

Last Updated: 24 August 2016
Practice Guide by Verfides

A non-UK company will become tax resident in the UK under UK domestic law where its central management and control is exercised in the UK.  Under many double tax agreements, this test is instead determined by the “place of effective management” (POEM).  However, in the context of companies resident in low tax jurisdictions without tax treaties with the UK, it is the former test which is important and which forms the subject of this note.

If management and control is found to be in the UK then the company will be taxable on its worldwide income.  This is a problem often faced by offshore companies with UK-resident shareholders.  It is therefore important to take steps to ensure that control is maintained at all times outside the UK and to have robust documentary evidence to demonstrate this.

HMRC Approach to Central Management and Control

HMRC’s approach is set out in Statement of Practice 1/90 which, to some extent, mirrors decided cases in this area.

HMRC acknowledge that the place of management and control refers to the highest level of control of the business and the place of strategic management.  It is not necessarily where day-to-day tasks are carried out.  Their approach is:

  1. To look at the facts and decide whether the directors in fact exercise management and control.
  1. If the directors do exercise management and control, HMRC will look at where this power is exercised.  This will not necessarily be the place where directors formally meet.
  1. If directors do not exercise management and control (e.g. on account of being under direct control of others such as shareholders) they will look to see who really does control the company and where this power is exercised. 

It can be seen from this approach that the fact that there are non-UK directors does not guarantee non-UK residence.  It is where decisions are really being made and by whom which is important.

Practical Steps to Retain Non-UK Residence

The following is a non-exhaustive list of what should be done to ensure, as far as possible, that a company retains non-UK residence:

  • A majority of non-UK resident directors.  These should be “professional” – i.e. of sufficient competence and experience to undertake the role.
  • Ideally, a non-UK Chairman with a casting vote.
  • Directors should take planning and policy decisions which should be fully evidenced.
  • Directors must be provided with detailed information and documentation which would be required in order for them to make an informed decision on a major issue.
  • Minutes of board meetings should be available and must document in detail decisions actually made. It should be clear that major issues are discussed and not merely “rubber stamped” by the Board.
  • The meetings should be held outside the UK.
  • The company’s Articles of Association could be amended to require that directors’ meetings are held outside the UK with no attendance by UK residents.  If input is required from the UK via telephone or video-conferencing then there should be an offshore majority present at the meeting.
  • Board meetings should be held regularly.
  • The non-UK directors should have authority to hire and fire staff and determine remuneration levels.
  • Responsibilities of UK directors / senior employees / consultants should be defined and documented to ensure that they cannot exercise management and control in the place of the directors.
  • A UK resident director should not be able to make binding decisions without recourse to the Board.

Key decisions to be made by the overseas Board:

  • Thorough consideration of major new contracts / deals
  • Approval of financial statements and budgeting
  • Dividend policy
  • Changes in capital structure
  • Arrangement of finance
  • Management changes

Summary

Non-UK companies owned by UK-resident shareholders must take steps to ensure that they retain non-UK tax residence.  HMRC will look to who the real decision makers are and where they are exercising control.  Thorough procedures and documentation are key considerations.

Verfides is experienced in all areas of cross-border taxation of companies and individuals.  We can advise on specific strategies to mitigate tax risk in relation to residence, including provision of professional non-UK directors.

This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

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Useful Resources
Use supplementary pages SA105 to record UK property income on your SA100 Tax Return.
When you start renting out property, you must tell HM Revenue and Customs (HMRC) and you may have to pay tax.
Use online form service or postal form (SA700) to file a tax return for a non-resident company.
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