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OECD Approach To Company Residence In Response To COVID-19 Pandemic
Thursday 7th May 2020
OECD has recently issued its statement on the determination of company residence in the context of double tax treaties in response to the COVID-19 Pandemic.
The OECD statement refers to concerns arising from the COVID-19 crisis in relation to a potential change in the place of effective management of a company as a result of a relocation or inability to travel of chief executive officers or other senior executives. The concern is that such a change may have as a consequence a change in company’s residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes.
The OECD considers that it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty. A temporary change in location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency, especially once the tie breaker rule contained in tax treaties is applied.
A change of circumstances may trigger an issue of double residency in cases where the change in the place of effective management results in a company being considered resident in two countries simultaneously under their domestic laws. Whilst situations of dual residence of companies are relatively rare, in such cases tax treaties provide tie breaker rules ensuring that the entity is resident in only one of the countries.
If the treaty contains a provision like the 2017 OECD Model tie-breaker rule, competent authorities deal with the dual residency issue on a case-by-case basis by mutual agreement. This determination will take into consideration all of the facts and circumstances over the determination period and these may include, per para 24.1 of the OECD Commentary on Article 4, where meetings of the company’s board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the company is carried on, where the person’s headquarters are located.
In situations where the treaty contains the pre-2017 OECD Model tie-breaker rule, the place of effective management will be the only criterion used to determine the residence of a dual-resident entity for tax treaty purposes.
According to para 24 of the Commentary on Article 4 of the 2014 OECD Model, the place of effective management is 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 should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.
The OECD statement is relevant where the normal residence tie-breaker provision is applicable, based on either the place of effective management or competent authority. If the tie-breaker applies a different test or where there is no tie breaker clause, companies will need to assess their residence under UK domestic rules based on existing case law and HMRC guidance.
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