INTM120070 - Company Residence

Company residence: 'Treaty Non-Resident' companies

Residence under a Double Taxation Agreement – FA94/S249

Where a company is dual resident (see INTM120090 for 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.

FA94/S250 contains special rules affecting those companies which were already TNR on 30 November 1993 and so underwent a forced migration on that date.

FA94/S251 repeals legislation which contained special provisions for TNR companies since FA94/S249 made all those special provisions unnecessary.

There is an article on the FA94 legislation in the December 1994 issue of Tax Bulletin (Issue 14). The article answered various questions that had been asked about the legislation. 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 Revenue's treaties with the Isle of Man or Channel Islands and the 1975 DTA with the USA do not contain a tie-breaker. The 2003 DTA with the USA does contain a tie-breaker. Any claim that the wording in the Isle of Man or Channel Islands treaties does amount to a tie-breaker should be referred to Central Policy, Tax Treaty Team.

List of the UK's comprehensive DTAs in force at 1 January 2004, 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 1 January 2004, 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 CONVENTIONS.

Country	Tie-Breaker present	Tie –Breaker not present
Antigua & Barbuda
Argentina
Australia
Austria
Azerbaijan
Bangladesh
Barbados
Belarus**
Belgium
Belize
Bolivia
Bosnia-Herzegovina*
Botswana
Brunei
Bulgaria
Canada
China
Croatia*
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Falkland Islands
Fiji
Finland
France
Gambia
Germany
Ghana
Greece
Grenada
Guernsey
Guyana
Hungary
Iceland
India
Indonesia
Ireland (Republic of)
Isle of Man
Israel
Italy
Ivory Coast (Côte d’Ivoire)
Jamaica
Japan
Jersey
Jordan
Kazakhstan
Kenya
Kiribati
Korea (Republic of)
Kuwait
Latvia
Lithuania
Lesotho
Luxembourg
Macedonia*
Malawi
Malaysia
Malta
Mauritius
Mexico
Mongolia
Montserrat
Morocco
Myanmar (Burma)
Namibia
Netherlands
New Zealand
Nigeria
Norway
Oman
Pakistan
Papua New Guinea
Philippines
Poland
Portugal
Romania
Russian Federation
St Kitts & Nevis
Serbia & Montenegro*
Sierra Leone
Singapore
Slovak Republic (Slovakia)
Slovenia*
Solomon Islands
South Africa
Spain
Sri Lanka
Sudan
Swaziland
Sweden
Switzerland
Taiwan
Thailand
Trinidad & Tobago
Tunisia
Turkey
Tuvalu
Uganda
Ukraine
United States of America
Uzbekistan
Venezuela
Vietnam
Yugoslavia (Federal Republic of)
Zambia
Zimbabwe

Note:

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 an *.

**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 Treaty. Its precise terms need to be considered. Most tie-breakers operate on an objective test – typically the location of 'effective management'. In such cases, it is not necessary for the company to have made a claim under the treaty before the FA94/S249 rule applies. It can be applied unilaterally by HM Revenue & Customs. The rule will apply where the company would be treated as non-resident for treaty purposes under the tie-breaker in the treaty.

DTAs with non-standard tie-breakers

Exceptionally, a tie-breaker may not contain an objective test which can be applied unilaterally by HM Revenue & Customs. For example, the tie-breaker in the treaty with Canada and in the 2003 treaty with the USA depends on agreement between the Competent Authorities of the two states. In such a case, the FA94/S249 rule can apply only when a claim for relief under the treaty which requires the determination of residence has been made and residence has been formally awarded to the other country.

How to deal with FA94/S249 cases

Cases will fall into two main categories.

First, a company may claim that FA94/S249 applies to exempt profits from tax. In these cases, the company should obtain a certificate of residence from the overseas authority and you must satisfy yourself that the company should be regarded as resident in the other country under the tie-breaker. You should also find out where the business of the company is being carried on. If you are satisfied that the business is carried on in the other country, you may accept the claim.

Where the business is carried on in a third country you 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, you cannot be satisfied that FA94/S249 should apply and so should continue to treat the company as a UK resident subject to the normal filing etc 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 you consider that FA94/S249 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 surmount the higher hurdle of residence in the UK under the tie-breaker in the treaty. A nominal transfer of central management and control to the UK while effective management remains with the subsidiary overseas will not suffice.

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 (January 2003) 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 are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and 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 Commissioner in the context of a dual resident trust, where it is also used as a treaty tie-breaker, in the case of Trustees of M N Wensleydales' Settlement Dated 2.12.81, which is at (1996) Sp C 73, but the taxpayers did not pursue their appeal. Of relevance is the circumstance that the aim of the taxpayers 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. Encouragingly, the Special Commissioner looked through the form to the substance of the arrangements, to the whereabouts of the proactive management decision making.

The meaning of effective management is also discussed in Tax Bulletin 14 and also at ITH438, now reproduced at INTM120150.

Any case in which the company presses a claim, or you consider, that the central management and control and effective management are located in different territories should be submitted to CT & VAT, International CT when you have obtained the facts.

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 FA94/S249. The group relationship between the trading subsidiaries would then be broken. It is not intended that the FA94/S249 rule will generally apply to such cases, unless the company invokes the DTA. Do not argue that a holding company is caught by FA94/S249 without first submitting the file to CT & VAT, International CT.

Other effects of FA94/S249

Where a company is not resident in the UK by virtue of FA94/S249, 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 FA94/S249 applies, the file may be closed. You should remind the company to notify you 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 therefore under FA94/S249 actually cease to be UK resident, the guidance in the Company Taxation Manual at CT3411 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 TNR on 30 November 1993 – FA94/S250

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 (see CG42460 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 (see CG42700 to CG42706).