Scan Magazine

By Helena Whitmore, McGuireWoods London LLP  | Photo: Yiannis Katsaris

-

There are many reasons why someone who lives in the UK may have an ownership stake or influence over a non-UK company. For example, offshore companies as well as companies incorporated in countries such as Cyprus, Malta or Luxembourg are often in tax planning structures. It may also be the case that the owner lived in another country before coming to the UK, and set up the company in that country before moving. Also, it is not unusual for people to accept appointments as directors of companies which are based in other countries.

Having an involvement with an overseas company can provide many potential benefits, but is also accompanied by a number of tax and other risks. In particular, HM Revenue & Customs (“HMRC”) in the UK are currently focussing a fair amount of attention on the question of corporate residence. This is a very important question, because a company which is resident in the UK will be taxable in the UK on its worldwide profits, whereas a non-UK resident company will only be taxable in relation to its activities in the UK.

A company which is incorporated in the UK is resident in the UK for tax purposes. A company which is incorporated outside the UK will also be treated as resident in the UK for tax purposes, if the company’s central management and control is located in the UK. The central management and control test therefore needs to be considered for any overseas company which has a connection to the UK. The UK has a wide network of tax treaties, which often include a residence “tie-breaker” test. This test needs to be reviewed in cases where the company may be regarded as resident in more than one country (for example in country A because it is incorporated there, and in the UK because it is centrally managed and controlled in the UK). The treaties usually refer to the place of “effective management”, but there are some treaties where the residence status needs to be settled by agreement between the two tax authorities involved.

HMRC have recently issued new draft guidance to indicate cases where they would not normally look into the residence status of a particular overseas company. Unfortunately, this offers little or no comfort to private individual shareholders who own investment companies outside the UK.  The 2009 case of Laerstate BV v HMRC is also an example of where HMRC managed to persuade the court that a Netherlands company should be treated as resident in the UK, because of the amount of influence over the company which was exerted by the shareholder (who at the time was no longer a director of the company).

There is not enough space in this article to go into further detail on the concept of central management and control, other than to say that those who ignore these risks do so at their peril.  It is essential to take professional advice. Those who are interested can also find further information on HMRC’s views on this topic in their International Manual at: www.hmrc.gov.uk/manuals/intmanual/INTM120000.htm.

It should also be noted that even if the overseas company cannot be said to be resident in the UK, other tax liabilities can still arise in the UK in relation to UK based profits, as well as payroll, social security and personal income taxes on individuals who may be working for the company in the UK.

-

Further information is available on HMRC’s website www.hmrc.gov.uk, or by contacting the writer. This column is intended to provide information of general interest to the public and is not intended to offer legal advice about specific situations or problems.

Contact: Helena Whitmore, McGuireWoods London LLP
Email: hwhitmore@mcguirewoods.com – Web: www.mcguirewoods.com