Discover Acquarius' insights on navigating corporate residency, management, and control for UK businesses. Essential reading for international tax planning.
April 12, 2024
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5
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Done properly, setting up an international business or headquarter company overseas as part of a wider planning structure remains an attractive and feasible proposition. However, itis not something to be undertaken lightly and there are a number of important areas to take into consideration beforehand.
International cross-border tax is an extremely complicated professional field and it is fundamental that those looking to structure their personal or corporate affairs should seek appropriate professional counsel. Indeed, Acquarius’ view is that any such planning should be done properly - or not at all.
However, there are some core principles that we will explore in this and future articles on a jurisdiction’s or state’s “right to tax” income, profit or gains.
Competing international laws generally accept two very high principles. These are a) the right of a state to tax at source “source taxation” and b) the right to tax based on “residence”. Residence extends to “artificial persons” such as companies and is commonly referred to as corporate residence.
Some states (such as Gibraltar and Hong Kong) tax solely based on source. However, where a business trades internationally one must look at competing rights of other states to tax activities based on residence. This can give rise to what we refer to as Double Taxation. This is of particular concern for Gibraltar business who cannot solely look at source rules in Gibraltar but must also look at whether a second state may have the right to tax based on their activity or residence.
We will cover various areas of jurisdictional tax in a series of articles. In this first piece, Acquarius’ Managing Director Oliver Andlaw focuses on corporate residence, management & control and the importance of the fiduciary’s role. There are close links between the three that we should consider together.
Choosing professional directors wisely is essential. Acquarius is a long-established Gibraltar firm that has built an enviable reputation among some of the largest law firms in the UK.
Gibraltar is politically stable and English common law forms the basis of its legal system.
It is an excellent jurisdiction in which to headquarter a business. A modern and robust jurisdiction, it is well connected to the UK and beyond. A sophisticated, well-regulated financial services sector has allowed Gibraltar to become a leading jurisdiction for insurance, fintech, and on-line blue chip gaming companies to name just three.
Gibraltar’s favourable 12.5% corporate tax rate on profits is attractive although it is vital to understand how to protect that business from being considered tax resident elsewhere.
Much of the below focuses on what is commonly referred to as “substance”. But what does substance really mean? The concept of substance is essential for any modern and robust cross-border structuring. Substance is also the main target of the OECD's efforts to prevent global base erosion and profit shifting (BEPS). Gibraltar is a full member of the inclusive framework on BEPS.
Whilst this article focuses on UK clients and their advisers, much of it relates to Central Management & Control and Place of Effective Management (POEM) rules. These apply internationally and are therefore hugely relevant to most other jurisdictions.
Simply stated, a UK tax resident company is liable to tax on its worldwide income and gains. What is a UK tax resident company?
UK incorporated companies are generally treated as UK tax resident. The exception to that general rule is that companies resident in the United Kingdom under domestic law but treated as solely resident in a different country under that country's DTT with the United Kingdom are not treated as UK tax resident for the purposes of UK domestic tax law.
Additionally,subject to the above exception, companies incorporated overseas are also treated as UK resident if their central management and control is situated in the United Kingdom.
It is therefore perfectly possible for a company incorporated overseas to be UK tax resident.
Tax authorities generally consider Central Management and Control as being where the highest level of control takes place. This generally is a matter of fact.
CMC is critically important to a Company’s corporate residence. One may consider a non-UK incorporated entity to be UK tax resident if wielding control from the UK. There is much case law dealing with CMC most notably DeBeers Consolidated Mines v Howe, News Datacom v Atkinson, Laerstate BV v HMRC, and Development Securities plc v HMRC.
It is essential to take steps to ensure that corporate tax residence remains in the jurisdiction of incorporation (in our case, Gibraltar). Much of this focus relates to board meetings and decisions taken at them. Note though that the place where directors exercise CMC in practice is more significant than the place where board meetings take place.
Corporate residency of a company could be jeopardised, unintentionally, in various ways. Therefore, it is absolutely imperative that directors of Gibraltar companies and those in other offshore jurisdictions understand each of these risks and ensure good practice throughout. Often this will require strength on the part of the fiduciary and difficult conversations with their clients. Ultimately, the best interest of the client is the only matter that counts.
We consider below some of the practical considerations running a Gibraltar company resident in Gibraltar only.
A company’s articles of association will usually give the directors the authority to manage the business at their discretion. Any obstruction, say by a UK tax resident shareholder or corporate parent, may suggest that the company is in fact managed and controlled in the UK.
Decisions considered at properly convened meetings must be independent, autonomous, and not be any form of "rubber stamp”. For example, the company should avoid a UK resident chair or business owner forcing the board of directors to accept their instructions. When applying the “highest level of control” CMC test, any individual overriding the board’s discretion could be exercising effective control of the company.
Generally, directors will not have relinquished CMC if they delegate day-to-day tasks to third parties and professional advisers. However, the Board must retain oversight and supervision of professional contracts; engagement letters should be signed in the country where the company is tax resident.
For Gibraltar incorporated entities, general principles apply that ensure CMC stays within the jurisdiction. Convened at least quarterly, board meetings should be held at a clearly identifiable place locally. The majority of the directors, especially those participating in the board meetings, should be resident in Gibraltar. A chair or director holding a casting vote should not be UK resident.
Company matters for which the directors might make decisions in Gibraltar are wide ranging. These include (but are not limited to) business financing, investment policy and strategy, production, marketing, and expansion (geographically or by new product). They could also involve employing senior position holders, appointing auditors and professional advisers and executing material contracts for the company.
Accurate minutes should be prepared clearly demonstrating adherence to the company’s constitution and the board’s independent, autonomous decision-making process. Detailed agenda and board packs should be circulated in advance allowing sufficient time for proper consideration and informed decision making.
There should be no company management conducted within the UK (or any other country where such actions could cause tax issues). UK resident individuals can be directors of a Gibraltar company but should not vote or take part in a board meeting whilst in the UK. Decisions made at meetings should be by a majority of directors present in Gibraltar and company records should reflect this.
The company’s articles should prohibit it from holding meetings in the UK and ideally, a quorum should insist on the majority of directors being Gibraltar resident.
No decisions should be premeditated, nor will the board approve any without coming to its own conclusions.
The board may appoint “alternates” where a UK resident director cannot attend meetings in Gibraltar. Such an appointment will evidence that the board meeting took place in the jurisdiction. The company’s constitutional process should be followed ensuring that its board decisions cannot be jeopardised and in particular avoiding any accusation that a non-board member has exerted control.
UK resident third parties and professional advisers can inform and influence but must never dictate a director’s decision and should not give instructions within the UK. Directors should have enough information to make decisions seeking advice where appropriate. Communication documents should be worded appropriately where they are asked to "consider” and to “sign at discretion” rather than simply being instructed.
A non-UK tax resident business may also be taxable in the UK if it is trading there through a Permanent Establishment (PE).
Defining whether there exists a PE can be complicated. A definition is set out in the model OECD double tax treaties, and the UK definition is largely (but not completely) based on this. Subject to the terms of the relevant DTT, a non-resident company will have a PE in the United Kingdom if:
● it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on, or
● an agent acting on behalf of the company has and habitually exercises authority to do business on behalf of the company in the United Kingdom.
Even if not trading in the UK through a PE, a company may still encounter a tax liability relating to:
● Trading profits attributable to a trade dealing in, or developing, UK land.
● Gains that arise on direct, and certain indirect, disposals of UK immovable property.
● Profits of a UK property rental business.
We will look at PE in more detail in another blog.
A UK company may also be tax resident in another country under the domestic laws of that jurisdiction. If a treaty exists between the two countries, tiebreaker provisions in the relevant treaty should apply. If these provisions treat the company as tax resident in the second country (and is not dual resident) then it will be considered non-UK tax resident.
Most double tax treaties that follow the OECD Model Tax Convention will deem the company to be tax resident where its Place of Effective Management (POEM) is situated. Similar to CMC, this is where key management and commercial decisions are made necessary for the conduct of the business. Gibraltar signed a tax treaty with the UK in October 2019.
These notes are not a substitute for proper professional advice and cannot be relied upon for any decision-making or taken as tax advice.
To arrange a no obligation consultation, please get in touch either directly or through your professional adviser.
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