The client is looking to relocate to Ibiza, where the company will become Spanish resident for tax purposes. They will continue to operate the trade and property business and wondered what the tax effects are of the company’s migration?”
A UK resident company is chargeable to corporation tax on income on all of its profits irrespective of their source, whereas a non-UK resident company is generally only within the charge to corporation tax on income arising from trades operated through a UK permanent establishment or UK property income (s.5 CTA 2009).
Assessing Residence
As the clients company is incorporated in the UK, it is treated as a UK resident company for corporation tax purposes (s.14 CTA 2009). When the company obtains Spanish residency, it will become a dual resident company, as it will continue to be UK resident under the above test. The UK-Spain double tax treaty contains a tie-breaker clause, based on the 2017 OECD model convention, which contains a test used to determine the countries treaty residence for tax purposes:
“Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated. Competent authorities decide”
The test is assessed under mutual agreement of the competent authority of the territories concerned, and if it is determined that the effective management of the company is now in Spain, it will become treaty resident in Spain. As the company is treaty resident in Spain, it will be treated as non-UK resident for corporation tax purposes (s.18 CTA 2009).
In-depth guidance on the tie-breaker rule can be found on Croner-i at 764-160.
Effect of Migration
In this scenario, we have a UK resident company that becomes non-UK resident, and therefore the tax effects of a company migration need to be considered.
The company is required, under s.109B TMA 1970, to provide a statement outlining their intention to cease UK residence in advance of becoming non-UK resident. The notification should detail the companies outstanding tax liabilities and particulars of the arrangements which it suggests making for securing the payments. HMRC guidance notes on the detail to include within the notification can be found within CTM34195.
The clients accounting period will cease at the date of the migration (s.10(g) CTA 2009), and any stock will need to be revalued for the purpose of a deemed disposal (s.41 CTA 2009), as the company is treated as ceasing to trade. Due to the deemed cessation of trade, disposal values will need to be brought into the capital allowance pools, which may lead to balancing allowances and/or charges (s.61 CAA 2001).
Any chargeable assets for capital gains purposes will also be treated as disposed of and immediately reacquired at the assets market value at the time of the migration (s.185 TCGA 1992), potentially triggering capital gains and losses. This provision is disapplied where the asset in question is an interest in UK land (s.187B TCGA 1992).
Instead, the gain or loss that would have arisen is postponed until the property is subsequently disposed of. If the company wishes to pay the tax on the postponed gain instead, this disapplication of s.185
TCGA 1992 can itself be disapplied on the making of an election within 2 years of the migration.
In-depth guidance on the effects of a company migration can be found on Croner-i at 764-220.
Payment of Tax
The corporation tax liability for the accounting period that ceases when the company migrates will be due nine months and one day after the end of the accounting period (s.59D(1) TMA 1970).
It is possible for the client to enter into a corporation tax exit charge payment plan (ECPP) with HMRC, as they are a UK company migrating to a relevant EEA state. A relevant EEA state includes members of the EU or states that are ‘party to an agreement with the United Kingdom that provides for mutual assistance equivalent to that provided for by Council Directive 2010/24/EU of 16 March 2010 concerning mutual assistance for the recovery of claims relating to taxes’.
The conditions to be met for ECPP where a UK company migrates to a relevant EEA state are that an application is made to HMRC before the ordinary payment date for the accounting period, the company carries on a business in the relevant EEA state, and, on becoming resident in the relevant EEA state, the company is not treated as resident outside of the EEA for the purpose of any tax treaties (para 1 Sch 3ZB TMA 1970).
The ECPP allows for the liability to be split into six equal (interest bearing) instalments, payable each year starting nine months and one day after the end of the accounting period of migration (para 11 Sch 3ZB TA 1970).
In-depth guidance on the payment of tax in this instance can be found on Croner-i at 183-418.
