Client Alert

Impact of COVID-19 on UK Corporate Tax Residency: OECD and HMRC Guidance Issued

09 Apr 2020

The COVID-19 pandemic has resulted in significant disruption to international travel and business arrangements. Enforced travel restrictions have left many people, including company directors and employees, stranded outside of their company’s country of residence. In the UK, concerns have been raised over how the tax residency of companies will be maintained. Additional concerns regarding the creation of permanent establishments, either in the UK or elsewhere, are also apparent.

This Client Alert considers the rules on corporate tax residency in the context of the COVID-19 pandemic and the latest guidance issued by the OECD and the UK tax authority, HMRC.


In the UK, a company is UK tax resident if it is incorporated in the UK or has its place of central management and control in the UK. A UK tax resident company can lose its UK tax residency if it is deemed to be tax resident in another country under a double tax treaty (“DTT”). Generally, this can happen if either (i) the UK company’s “place of effective management” is deemed to be outside of the UK, or (ii) the relevant competent authorities in the countries that are party to the applicable DTT determine by “mutual agreement” which of the two countries the entity is tax resident in.

If a UK company loses its tax residency, it will cease to be able to access the benefits of the UK’s DTT network. An “exit charge” may also arise, which imposes a corporation tax (19%) charge on the company’s unrealised gains, which can be a significant amount.

Place of Effective Management

The place of a company’s effective management is, broadly, where the key management and commercial decisions necessary for the conduct of the company’s business as a whole are substantively made. The emphasis on “place” being a primary determinant of tax residency is problematic at a time when directors may find themselves stranded outside the country of their company’s tax residence. The OECD commentary on the “residence” article of DTTs, however, makes it clear that “all relevant facts and circumstances must be examined to determine the place of effective management.” OECD commentary also explains that the concept of “place of effective management” has been interpreted by some treaty states as the place that is “ordinarily” or “usually” used by directors to make key business decisions. The OECD Secretariat Analysis of Tax Treaties and Impact of COVID-19 (the “Report”), published on 3 April 2020, states that “all relevant facts and circumstances should be examined to determine the ‘usual’ and ‘ordinary’ place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.” This is echoed by HMRC, who have stated: “We do not consider that a company will necessarily become resident in the UK because a few board meetings are held here, or because some decisions are taken in the UK over a short period of time. The existing HMRC guidance makes it clear that we will take a holistic view of the facts and circumstances of each case.”     

Mutual Agreement

Under some DTTs, corporate tax residence is instead determined through a process of “mutual agreement” between the tax authorities of the two countries that are party to the applicable DTT. The process involves looking at all of the facts and circumstances on a case-by-case basis. Given the exceptional circumstances caused by the unprecedented COVID-19 pandemic, and the impact the pandemic has had on international travel, the Report suggests it is unlikely that tax authorities will determine that a company’s tax residency has changed owing to changes in activities caused by the pandemic.  


In addition to concerns about losing UK tax residency, directors may be concerned that company personnel are creating a new taxable presence (i.e., a permanent establishment) (or, “PE”) in other countries. Broadly, the treaty definition of a PE is either (i) a fixed place of business through which the business of an enterprise is wholly or partly carried on, or (ii) where an employee habitually concludes contracts on behalf of the enterprise. In the first instance, the Report confirms that the PE must have a certain degree of permanency and be at the disposal of the enterprise. Carrying on intermittent business activities at home does not make it a place at the disposal of the enterprise and such activities also lack a sufficient degree of permanency. In the second instance, the Report suggests that an employee’s or agent’s activity is unlikely to be regarded as habitual if they are working in such way because of force majeure and/or government directives impacting on their normal routine.


The conditions for maintaining corporate tax residency often require directors to be physically present at board meetings in the country of the company’s tax residence, which has naturally raised concerns over companies losing UK tax residency due to the disruption caused by the COVID-19 pandemic. The Report provides some guidance on how the tax residency requirements operate within the context of the COVID-19 pandemic, and suggests that disruption to normal business practices caused by the pandemic will not in itself cause the tax residency of companies to change. HMRC has also published updated guidance on the tax determination of UK PEs in the context of the COVID-19 pandemic, stating that “HMRC is very sympathetic to the disruption that is being endured” and that the existing legislation and guidance “already provides flexibility to deal with changes in business activities necessitated by the response to the COVID-19 pandemic.”

While companies should continue to consider the tax residency consequences of their activities during this time, some reassurance can be taken from the Report and HMRC guidance that modifications to normal business activities that are attributable to the COVID-19 pandemic are unlikely to cause changes to UK corporate tax residency.   



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