What if you can’t get to your board meeting abroad?
One consequence, alongside many others of course, of COVID-19 is that directors may not be physically able to attend board meetings outside the UK.
And that’s potentially more than an inconvenience.
It could have implications for the tax residence of a company. Specifically, a non-UK company could become UK tax resident where key decision makers are prevented from leaving the country.
This could mean an organisation ultimately becomes subject to different tax rules and potentially faces unexpected tax or increased tax on corporate income and gains.
An organisation may attract questions over its intended place of tax residence where a director is unable to travel to a meeting. This is because the tax residence rules focus on the location of strategic management for the purposes of domestic law or double tax treaties.
And, as such, companies should consider what steps they should take now to mitigate that risk.
Modern technology could be one solution, but that’s not necessarily an easy fix.
Under the current travel restrictions one practical option – assuming the company’s constitution allows it – may be to hold an online or telephone board meeting.
That could prove risky because of the central management and control test of residence on decision-makers’ physical location when they make strategic decisions.
The level of risk depends on numerous factors including —
- The composition of the board — if the UK based directors are in a clear minority and their importance in the decision-making process is not disproportionate to others, it may be possible to reach a view that the “centre of gravity” of the governance process has not shifted to the UK
- Travel restriction duration — an isolated incident in which directors participate in a board meeting from the UK, when set against a history of regular non-UK meetings, may not disturb the residence status of the company, in particular if the matters discussed at the meeting are fairly routine
- The company’s governance history — whether or not there have been regular instances of directors participating in decision-making processes from the UK in the recent past may affect the ability to take a pragmatic view of a limited period in which directors have to participate from the UK during the period of the crisis
- The type and level of decisions being taken by the board — it is key strategic decisions that matter most for the purpose of the test. If what’s under discussion is more routine and administrative, it may be possible to be more sanguine over a period in which certain directors participate from the UK. The risks are inevitably greater where key commercial and strategic decisions need to be taken
Mitigating the risk
Unlike some other jurisdictions, such as Jersey or Luxembourg, there has been no guidance so far focusing on any kind of change in approach for corporate residence.
So organisations should consider ways to approach this and these include —
- Reconstituting the board — take UK-based board members off the board an, or add in others from outside the country
- Ensuring UK board members do not participate
- Deferring major strategic decisions to later meetings or postpone the board meeting entirely until the full board can attend
But it may well be, if the hiatus is likely to be prolonged, that some organisations need to consider reconfiguring their governance arrangements to permit greater decision making in the UK without prejudicing the residence position of group companies that are not UK resident.
This may have a cost in terms of transfer pricing for additional services being provided from UK companies, but it may protect the residence status of other group companies and reduce the strain on governance procedures.
As ever, the best and most proportionate response will often be dictated by the nature of the business of the relevant company.