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Written by: Kyle Barford, Product Manager (Tax)

Though the responses of international governments to the COVID-19 outbreak have been varied, many countries have imposed strict border controls, implemented mandatory quarantine periods for entrants, and broadly encouraged higher uptake of home working. Each of these measures have impacted the day-to-day work and lives of millions, and for those individuals who are internationally mobile for work, family or other reasons, a host of potential tax issues can arise.

Tax residence of the individual

HMRC were quick to publish guidance on the matter of UK days of presence, and under what circumstances days of presence in the UK related to the COVID outbreak are considered “exceptional” and thereby may be excluded from certain day-counting tests present in the UK Statutory Residence Test (SRT) rules.

HMRC’s guidance confirmed the continuation of the general 60 day cap on the number of days of relief that can qualify as “exceptional”. The guidance also confirms that “exceptional circumstances” apply where an individual is present in the UK on a given day for one of the following reasons:

• The individual is quarantined or self-isolating as advised by a healthcare professional or public health guidance on COVID-19
• The individual is following advice form the UK government not to travel from the UK as a result of COVID-19
• The individual is unable to leave the UK as a result of the closure of international borders
• The individual was asked to return to the UK temporarily by their employer, as a result of COVID-19

It is clear that HMRC can expect far more exceptional circumstances claims than usual this year, given the low number of days of presence many individuals are permitted in the UK. Affected individuals should take care to document not only their entry and exit dates to the UK, but also their reasons for remaining in the UK including records of border closures and healthcare advice received, as “exceptional circumstances” claims can be subject to HMRC enquiry.

Additional changes have already been enacted to the SRT rule, in order to preserve the non-resident tax status of individuals whose presence in the UK was in a professional capacity connected with COVID-19. The rules are very specific, but qualifying individuals may be able to ignore affected days of UK presence for the purposes of applying the SRT.

Tax residence for corporations

Many corporate directors and employees will have changed their working locations in response to COVID-19. The increased acceptance and wider implementation of remote working is encouraging employers to attribute less importance to where they are hiring their talent, even if that is in another country. In addition, there has been an increase in the number of individuals asking to emigrate or return to their home country, on the basis that their remote work can just as easily be performed from abroad as from within the UK.

As a result of this, there are risks both that corporations might inadvertently change their tax resident status in one or more countries, and that corporations might be considered to have set up a permanent establishment in a country, thereby giving it a taxable presence there.

In the UK, a company is tax resident if it is either incorporated in the UK, or centrally managed and controlled in the UK.

Due to the facts and circumstances nature of the definition of “central management and control”, there is a risk that business activity carried out in the UK due to COVID-19 that would otherwise have been carried out abroad could cause a company to become UK resident. HMRC have issued guidance to confirm that a few board meetings in a short space of time isn’t necessarily enough to make a company UK resident for tax, but this remains a key area for companies to take advice.

The definitions of corporate tax residence vary from country to country, so care should be taken to consider the implications of business activities carried out in any non-UK jurisdiction under the relevant domestic law and tax treaties.

Permanent establishments

Tax treaties between countries will vary, but under the OECD model, an entity which creates a “fixed place of business” in a tax jurisdiction can create a “permanent establishment” in that jurisdiction, the activities of which become subject to tax in that jurisdiction.

Employers agreeing arrangements for staff to work from home or remotely from overseas should carefully consider the question of whether the arrangements create such a permanent establishment.

In clarifying the model treaty, the OECD explain that a workplace requires a “degree of permanence” in order to be considered “fixed”, and that the business must be carried out wholly or partly from that fixed place. The likelihood of a temporary remote working arrangement creating a permanent establishment therefore increases depending on how normalised the working arrangement becomes over time. An arrangement made for the duration of the COVID-19 outbreak is more likely to be considered temporary, but one which appears to be indefinite may be more likely to be considered fixed.

Employers concerned over the potential implications of remote working arrangements should take careful advice in this area, and retain clear records of formal and informal agreements around the specific remote working locations, durations and other arrangements.