Company residence: 'Treaty non-resident' companies
Residence under a Double Taxation Agreement - FA94/S249 (now CTA09/S18)
Where a company is dual resident (see INTM120100 for an explanation of dual residence) and
- there is a Double Taxation Agreement (DTA) between the UK and the other country containing a residence tie-breaker for companies and
- under that tie-breaker, residence is awarded to the other country
the company is called ‘treaty non-resident’ (TNR).
Until FA94, a TNR company remained resident under UK law but was non-resident for the purposes of the treaty. FA94/S249 provides that such a company is treated as not resident in the UK. This rule is effective from 30 November 1993 and from 1 April 2009 is to be found at CTA09/S18.
FA94/S250 contained special rules affecting those companies which were already TNR on 30 November 1993 and so underwent a forced migration on that date. This provision is now spent and is not included in CTA09.
FA94/S251 repealed legislation which contained special provisions for TNR companies since FA94/S249 made all those special provisions unnecessary.
The purpose of the TNR rules is to ensure as far as is possible that no mismatch arises between a company’s residence status under domestic law and the relevant treaty. The rule has no application where treaty residence would be awarded to the UK (because then there would be no mismatch between domestic law and the treaty) or where the treaty does not contain a tie-breaker. A company does not have to make a claim under a treaty before the new rule applies. This is an anti-avoidance measure intended to stop a company moving in and out of UK residence depending on whether or not it makes a claim.
An article on the FA94 legislation was published in the December 1994 issue of Tax Bulletin (Issue 14, superseded by this guidance). The article included a list of the UK’s comprehensive DTAs in force at 1 March 1994, showing separately those which contain a tie-breaker for companies and those which do not (see the current list below). It should be noted that the UK’s treaties with the Isle of Man, the Channel Islands and the 1975 DTA with the USA do not contain a tie-breaker (although the 2003 DTA with the USA does). Any claim that the wording in the Isle of Man or Channel Islands treaties amounts to a tie-breaker should be referred to the Tax Treaty Team in CTIAA.
List of the UK’s comprehensive DTAs in force at 1 December 2009 showing separately those which contain a tie-breaker for companies and those which do not
The following is a list of the UK’s comprehensive DTAs in force at 01 December 2009, showing separately those which contain a tie-breaker for companies and those which do not:
Dual resident companies
Tie-Breaker Provisions In UK Double Taxation Agreements
|Country||Tie-Breaker present||Tie -Breaker not present|
|Antigua & Barbuda||X|
|Ireland (Republic of)||X|
|Isle of Man||X|
|Ivory Coast (Côte d’Ivoire)||X|
|Korea (Republic of)||X|
|Papua New Guinea||X|
|St Kitts & Nevis||X|
|Serbia & Montenegro*||X|
|Slovak Republic (Slovakia)||X|
|Trinidad & Tobago||X|
|United States of America||X|
|Yugoslavia (Federal Republic of)||X|
The UK’s Convention with the Federal Republic of Yugoslavia is to be regarded as in force between the UK and the former Yugoslav states marked with *.
**The UK’s 1986 Convention with the Soviet Union is regarded as being in force between the UK and Belarus pending the entry into force of the UK/Belarus Convention.
DTAs with standard tie-breakers
The tie-breaker will usually be found in the residence or domicile Article of the relevant agreement. Its precise terms need to be considered. Most tie-breakers operate using an objective test - typically by reference to the state in which the company’s ‘place of effective management’ lies. This is generally referred to as a ‘standard tie-breaker’. As standard tie-breakers operate by reference to an objective test they can be applied unilaterally by HMRC. Where residence is found to be in the UK under a standard tie-breaker, the treaty non-resident rules will not be relevant. However if HMRC considers residence to be outside the UK under a standard tie-breaker the rule in CTA09/S18 will apply even where the company has not made any claim.
HMRC’s application of the tie-breaker may give rise to a risk of double taxation if the other territory does not agree with HMRC’s view of the facts. In such cases a company would need to seek a resolution under the mutual agreement article of the relevant treaty.
DTAs with non standard tie-breakers
Not all tie-breakers rely on the place of effective management test. For example, the tie-breakers in the agreement with Canada and the 2003 treaty with the USA depend on agreement between the Competent Authorities of the two states. In such a case, the CTA09/S18 rule cannot be applied unilaterally by HMRC. It can only apply where the respective Competent Authorities have made a determination of residence and residence has been formally awarded to the other country. As is clear from the wording of the legislation, the absence of a claim by a company will not prevent S18 from being applied following a determination by the Competent Authorities. However it is likely that bilateral negotiations will generally be initiated following discussions between the company and at least one of the tax authorities concerned.
How to deal with treaty non-residence cases
Cases will fall into two main categories.
First, a company may claim that CTA09/S18 applies to exempt profits from tax. In these cases, the company should obtain a certificate of residence from the overseas authority and enable HMRC to satisfy itself that the company should be regarded as resident in the other country under the tie-breaker. Efforts should be made to find out where the business of the company is being carried on and if the facts support the claim that the business is carried on in the other country, the claim may be accepted.
Where the business is carried on in a third country, HMRC will need to be satisfied that the place of effective management is not also in that country, rather than that in which the company is a dual resident of with the UK. This may be the case, for example, in the one man incorporated type of business where the shareholder/director is conducting the business. If the company refuses to provide sufficient details to enable an informed decision as to the location of its place of effective management to be made, it will be impossible to establish that CTA09/S18 should apply and so the company should continue to be treated as a UK resident subject to the normal filing rules.
Second, there will be cases where the company is claiming or surrendering relief as a UK resident, typically for losses made outside the UK, but it is considered that CTA09/S18 should apply. In the past, the central management and control of loss-making subsidiaries may have been brought to the UK simply to establish UK residence for group relief purposes. This result will be more difficult to achieve, post FA94, as a company would also have to demonstrate residence in the UK under the tie-breaker in the treaty.
When considering TNR cases it is important to check the wording of the residence article in the relevant treaty. Where it contains a non-standard tie-breaker based on bilateral discussion the outcome of any enquiries will be subject to agreement by the Competent Authorities. CTIAA, Double Tax Treaty Team should be consulted before opening enquiries into such cases. Where open enquiries already exist, contact Business International before issuing a closure notice.
Similarly where it is accepted that CTA09/S18 applies, such acceptance is necessarily subject to the outcome of discussions between the Competent Authorities where the relevant DTA contains a non-standard tie-breaker.
Place of effective management
Effective management will normally be located in the same country as central management and control but may be located at the company’s true centre of operations, where central management and control is exercised elsewhere. The Commentary to Article 4, paragraph 3 of the OECD Model Tax Convention (July 2008) defines the place of effective management as
‘the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management at any one time’.
The meaning of place of effective management and its distinction, if any, from the place of central management and control has yet to be considered by the UK courts. The phrase was considered by the Special Commissioners in the context of a dual resident trust (where it is also used as a treaty tie-breaker) in the 1996 decision concerning the Trustees of M N Wensleydales’ Settlement, which is at SpC 73, but the taxpayers did not pursue their appeal. The taxpayers’ aim was to have the trust considered resident in Ireland by operation of the tie-breaker and they arranged for formalities to be carried out by the trustees there. The Special Commissioners looked through the form to the substance of the arrangements, to the whereabouts of the proactive management decision making.
Any case in which the company presses a claim, or it emerges that the central management and control and effective management are located in different territories should be submitted to Business International when all the facts have been obtained.
UK holding companies
Prior to the FA00 changes to the group relief rules, some overseas groups with a number of trading subsidiaries in the UK had inserted a UK incorporated holding company into their group structure, in order that group relief could flow between the trading subsidiaries. It might be arguable that the holding company is effectively managed in the group’s home country and so not resident under CTA09/S18. The group relationship between the trading subsidiaries would then be broken. It is not intended that the CTA09/S18 rule will generally apply to such cases, unless the company invokes the DTA. It should not be argued that a holding company is caught by the TNR rules without first submitting the file to Business International.
Other effects of the treaty non-resident rules
Where a company is not resident in the UK by virtue of CTA09/S18, the tax consequences of non-residence apply in the normal way.
Where the company’s only connection with the UK has been UK incorporation then, where CTA09/S18 applies, the file may be closed. The company should be reminded to notify HMRC if it ceases to be resident for treaty purposes in another country under the tie-breaker in the treaty between the UK and that other country. In that event, it would again become resident by virtue of UK incorporation.
For companies which become TNR after 30 November 1993 and actually cease to be UK resident, the guidance in the Company Taxation Manual at CTM34100 onwards applies. In particular, the company must comply with the provisions in FA88/S130 which require the company to give notice of migration.
Companies which were treaty non-resident on 30 November 1993
Companies which underwent a forced migration because they were already TNR on 30 November 1993 were plainly in a special position. The effect of FA94/S250 is to
- remove the obligation under FA88/S130 to obtain approval before migration. Accordingly no penalties under FA88/S131 can arise
- amend the rule for the exit charge under TCGA92/S185. The charge is computed in the normal way but deferred for six years or so until the asset is disposed of. The special rules are set out in the Capital Gains Manual at CG42455 and CG42456.
- disapply the de-grouping charge under TCGA92/S179.
In most cases, the exit charge will be limited by the treaty to gains on land in the UK but will be wider if there is no capital gains Article in the relevant treaty. Do not overlook the fact that gains may have arisen under TCGA92/S186 on the company becoming TNR after 15 March 1998 (seeCG42460 to CG42490) or under TCGA92/S188 on an existing TNR company if an asset was removed from the UK or the UK permanent establishment ceased to exist (seeCG42700 to CG42706).