UK Company with overseas directors

If you're a director of a UK-registered limited company but live abroad, it’s essential to understand how your company’s tax obligations might be affected. This article breaks down the key points about corporate residency, permanent establishments, and dual taxation.

Corporate Residency and Taxation

UK companies are usually subject to UK corporation tax on their worldwide income because they are considered UK tax resident. However, residency can also be influenced by where the company is managed:

Incorporation: A company incorporated in the UK is automatically tax resident in the UK
Central Management and Control (CMC): This refers to where high-level decisions about the company’s strategy are made, typically by the board of directors.

If directors living abroad manage the company’s operations and make key decisions outside the UK, the company may risk becoming "dual resident." This means it could be considered tax resident in both the UK and the directors’ country of residence, potentially leading to double taxation.

What is Central Management and Control (CMC)?

CMC is a crucial concept in determining where a company is tax resident. It focuses on where and how strategic decisions about the company are made. For example:

Board Meetings: Holding regular board meetings in the UK can help establish CMC in the UK.
Decision-Makers: If major decisions are consistently made by directors based overseas, the company’s CMC could shift abroad.
Documentation: Clear evidence, like meeting minutes, is vital to demonstrate where decisions are made.

The location of CMC affects the company’s tax obligations and where it’s considered resident under UK and international tax rules.

What Happens If the CMC is Overseas?

If the company’s CMC is based outside the UK, additional complexities arise:

Dual Residency: The company might be taxed in both the UK and the country where CMC occurs.
Double Tax Treaties: Treaties often include "tie-breaker" rules to resolve dual residency. These rules usually assign tax residency based on the company’s "place of effective management" (PoEM), where the most significant decisions are made.

UK Taxation of a Dual Resident Company

If the company is UK tax resident due to its incorporation but also tax resident abroad because of CMC, the UK generally taxes it on its worldwide income, unless a double tax treaty applies.

Double Tax Treaty Relief:

If the treaty assigns residency to the foreign country under the tie-breaker rule, the company may become non-resident for UK tax purposes, except for any UK-sourced income (e.g., profits from UK operations).
The UK might apply double tax relief to prevent taxation on the same income in both countries:
- A credit method, where the UK provides a tax credit for foreign taxes paid.
- An exemption method, depending on the circumstances and treaty provisions.

Practical Examples

Example 1: A UK Company Managed from France

A UK-incorporated company is managed entirely by directors based in France, where strategic decisions are made.
Under French law, the company may be treated as tax resident in France.
The UK-France double tax treaty includes a tie-breaker rule based on PoEM, which might assign sole residency to France.
The company would no longer be taxed on its worldwide income in the UK but may still owe UK corporation tax on UK-sourced income (e.g., from property or UK business activities).

Example 2: No Treaty Available

If there’s no double tax treaty between the UK and the foreign country, the company could be fully taxable in both jurisdictions, leading to double taxation unless relief mechanisms are in place domestically.

What is a Permanent Establishment (PE)?

A Permanent Establishment (PE) is created when a business has a physical presence or someone acting on its behalf in another country. Examples include:

An office or branch operating abroad.
An individual (e.g. a director) habitually concluding contracts on behalf of the company in another country.

If a PE is established in the director's country of residence, that country may impose taxes on profits attributable to the PE. This could create additional tax obligations for the company.

How are Overseas PEs Taxed?

An overseas PE of a UK company is taxed both in the UK and the foreign country:

The UK taxes profits from PEs as part of the company’s global income. However, companies can often avoid double taxation through relief mechanisms, such as:

Exemption: Electing to exempt PE profits from UK tax under certain conditions.
Credit: Claiming a credit for taxes paid in the foreign country.

Double tax treaties between the UK and the host country usually help minimise double taxation by clearly defining taxing rights.

Key Considerations for Directors Abroad

To avoid unexpected tax liabilities, directors living abroad should take these steps:

Document Decision-Making: Maintain detailed records of board meetings and strategic decisions to support the company’s tax residency in the UK.
Understand Local Tax Laws: Check the tax rules in your country of residence to identify any risks of dual residency or a PE.
Review Tax Treaties: Familiarise yourself with the double tax treaty between the UK and your host country for clarity on taxing rights.
Consult Experts: Seek advice from tax professionals experienced in UK and international tax laws to ensure compliance and optimise tax outcomes.