Non-resident trusts: residence rules: professional trustees not resident in the UK - branch, agency or permanent establishment
The rules include the provision (section 69(2D) TCGA 1992 and section 475(6) ITA) that a trustee will be treated as UK resident (and therefore, if he is the sole trustee, the trust will be taxed as a UK trust) when the trustee acts as trustee in the course of a business which he carries on through a ‘branch, agency or permanent establishment’ in the UK.
HMRC accept that for trustees the ‘branch’ and ‘agency’ tests apply to non-corporate trustees and the ‘permanent establishment’ test to corporate trustees. Non-UK resident companies that are trustees therefore need only be concerned about being treated as UK resident if they carry on a business through a permanent establishment in the UK. This is in line with section 10B Taxation of Chargeable Gains Act 1992 which has the effect that an overseas company is not taxed on the gains made by a UK branch or agency, but only on those made by a permanent establishment here.
The Commentary to the OECD Tax Model Convention provides further guidance on the meaning of “permanent establishment”. The Convention is used by OECD and other countries as a basis for the negotiation, application and interpretation of bilateral tax treaties. Further information on the OECD Tax Model Convention is given in TSEM10070.
As the legislation refers to a business carried on in the UK through a ‘branch, agency or permanent establishment’ the same principles outlined in A-C and the examples below apply in the case of non-corporate trustees (a branch or agent) as they apply in the case of corporate trustees (permanent establishment). Because most cases will in practice involve non-UK resident trust companies the examples refer only to them. However, where particular concepts that are peculiar to permanent establishment are concerned, eg the independent agent exemption, then they affect only corporate trustees, and the language used reflects that.
When considering the applicability of the tests in section 475(6) Income Tax Act 2007 and section 69(2D) Taxation of Chargeable Gains Act 1992 the following three questions are relevant:
A. Is the trustee carrying on a business in the UK?
By business we mean the business of providing professional trustee services for a fee. This question does not relate to the business of a particular trust that might be conducted by the trustee. It enquires whether the person who is a trustee carries out business activities (as a professional or businessman, not as trustee of a particular trust) in the UK.
B. If the trustee is carrying on a business in the UK is it carrying on that business through a branch, agent, or permanent establishment in the UK?
Again this means that the trustee is carrying on through the branch, agency or permanent establishment the sort of activities from which it substantially derives its worldwide profits - providing professional services for a fee - and not what it is doing in relation to an individual trust. In the case of a corporate trustee it might be the case that activities are carried out in the UK on its behalf by a dependent agent with the result that the trustee is treated as having a PE in the UK (‘Trustee carrying out duties for the administration of any trust’ section of TSEM10065 refers).
C. If so is the trustee carrying on the activity of being a trustee of that particular trust in the course of its business through the branch, agent or permanent establishment?
For example, a corporate trustee could have a permanent establishment in the UK but it is only when it is acting as a trustee through that place that the deemed residence rules apply in relation to the particular trust for which the company acts as trustee. The test is on a trust by trust basis. So while a corporate trustee might be acting as a trustee in relation to one trust through a fixed place of business in the UK, other trusts must be considered separately according to their facts and circumstances.
The same principle applies in the case of a non-corporate trustee: the test is on a trust by trust basis.
In connection with Question C and in line with the Commentary to the OECD Tax Model Convention, “carrying on the function of being a trustee” means in this context activities which are the core activities of a trustee and not those activities which are auxiliary or preparatory. This applies equally to non-corporate trustees.
A trustee is the person who has a legal duty to manage the assets of that trust in the best interests of the beneficiary or beneficiaries. The trustee manages, employs and disposes of the trust assets in accordance with both the terms of the trust and the duties and responsibilities which the law places upon trustees. The core activities of a trustee would therefore be regarded as including:
- the general administration of the trusts
- the over-arching investment strategy.
- monitoring the performance of those investments.
- decisions on how trust income will be dealt with and whether distributions should be made.
There are other activities which trustees carry out which are not core activities central to their conduct and management of the trust, but are instead preparatory or auxiliary activities. These generally can include information gathering meetings, including meetings with independent agents or with beneficiaries but, as mentioned below, each case will have to be considered individually.
In deciding whether the conduct and management of a particular trust is being carried on in the course of the corporate trustee’s business through a permanent establishment, HMRC’s approach will be to look at where the core activities are physically being carried out. If these core activities are being carried on in the UK through the corporate trustee’s permanent establishment, the trustee would be treated as UK resident for the purposes of the particular trust. However as well as the nature or significance of the individual activities and meetings and whether they are core activities, we would also consider the issue of frequency. So where there is, in relation to a particular trust, evidence of considerable administrative work – such as meetings with investment managers or beneficiaries - being carried on in the UK through a permanent establishment, so that such meetings have become a major element of the trustee’s activities in relation to that trust, and no longer preparatory or auxiliary, we would need to consider carefully whether as a matter of fact the non-UK resident corporate trustee was acting as a trustee through that permanent establishment.