I have been told that the tax authorities in Spain have deemed the company, for the same accounting period, to be Spanish resident. I am aware that this might affect what the company will need to pay UK corporation tax on but just need some clarification.
The territorial scope of UK Corporation tax is defined in s5 CTA 2009 . It will cover all profits, wherever arising, of a UK resident company and for a non-UK resident company (in very broad terms) any profits, income or non-resident capital gains that derive from the UK.
As such defining whether the company is UK or non-resident and where the income is derived are key points. However, it is entirely possible that the company is also resident in another jurisdiction under their domestic rules in which case the terms of the relevant Double Taxation Agreement need to be reviewed.
Defining UK residence
s13 CTA 2009 states the four methods by which a company can be determined resident in the UK. For simplicity I will discuss the two points that seem relevant for your client.
The incorporation rule at s14 CTA 2009 states companies that are incorporated in the United Kingdom are UK resident for Corporation tax purposes. The legislation goes on further to say, even if a different place of residence is given by rule of law, the company is not resident in that place for the purposes of the Corporation Tax Act.
Interaction with double taxation agreements
It seems that the Spanish tax authorities have determined that the company is tax there on the basis that it is being managed and controlled where the sole director shareholder is now living. As such, in lieu of any other form of relief, the company will have reporting and tax obligation in both the UK and Spain.
However s18 CTA 2009 overrides the UK incorporation rule at s14 but is reliant on meeting both points (a) and (b) in 18(1) – these being that, for the purposes of any double taxation arrangements (DTA), the company is treated as;
(a) resident in a territory outside the United Kingdom
(b) non-UK resident
To meet point (a) the client will need Spain to confirm that the company is resident in Spain as per its domestic laws – we recommend consulting a Spanish tax advisor to confirm this. To meet point (b) we then need to follow the residency section at article 4 often referred to as the ‘tie break test’. Para 3 is relevant here and the extract below notes a company
‘shall be deemed to be a resident only of the State in which its place of effective management is situated.’
Effective management is discussed in the OECD Model Tax Convention commentary 2017 and explained that this should be considered on a ‘case by case basis’. It flags considering where board meetings are held, where senior day to day activities are carried out and accounting records are kept etc.
It seems, as this a sole shareholder director company, that the meetings and activities have likely to have occurred in the shareholder / director’s home office, currently located in Spain, effective management is there.
As we meet (a) and (b) the company will be deemed Treaty Non-Resident. HMRC guidance, in their international manual INTM120070, discusses this point of treaty non residence and also effective management.
Summary
Even though the company is incorporated in the UK if it is Spanish resident under its domestic law and the effective management is now with Spain it will be considered treaty non-resident for Corporation tax purposes under CTA 2009 s18.
As treaty non-resident, HMRC would only, under s5 CTA 2009, be able to tax any UK sourced profits. Since the business is that of providing remote IT support from the Spanish premises it seems unlikely that the company will be carrying on a business in the UK to be caught by article 7. However, you will need to review this article and discuss how the director has been running the business in the accounting period to see if this may be in point. Even if you conclude the business profits are out of UK charge you may need to consider if the company has any other UK sourced income such as interest etc which may still be in charge.
Further points
Although not specifically asked in the query you should consider if, due to the treaty non residence of this company, this will trigger some further tax charges. These could be under s185 TCGA 1992 deemed disposal of assets for capital gains, deemed cessation of trade under s41 CTA 2009 which may trigger balancing charges for capital allowances. HMRC guidance for migrating companies and the administration notifications to HMRC can be seen in CTM34195 which touches on these points and notification to be made under s109B TMA 1970.
This does seem like a large research and admin burden that might mean the taxpayer would rather voluntarily pay corporation tax in the UK on the basis that it might be possible to claim a tax credit in Spain for the UK tax suffered. In the first instance the tax paid in the UK would be incorrect but it is also worth considering that in the UK we have a tax minimisation rules under s33 TIOPA 2010. This legislation caps a tax credit claim for foreign tax where the taxpayer has not done all they can to reduce their tax burden. It seems likely Spain may also have a similar rule – but as with other points raised earlier a Spanish tax advisor should be able to confirm this.
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