CMS Expert Guide on substance issues across Europe in United Kingdom

A company is tax resident in the UK by reason of either incorporation or central management and control. The question of ‘substance’ is therefore not relevant for UK incorporated companies. As the UK is no longer an EU member state, the implementation of ATAD 3 will not directly change this position. However, companies are advised to give greater attention to ‘substance’ where they are incorporated overseas but seeking UK tax residence status – or where they are not seeking UK tax residence but have a management presence in the UK.

A company will be considered as tax resident in UK if it is incorporated in the UK. A non-UK incorporated company will be tax resident in the UK if it is centrally managed and controlled in the UK.

There are no specific ‘substance’ criteria which apply to UK companies. If a company is incorporated in the UK, it will be automatically UK tax resident under UK law. To qualify for certain tax-advantaged regimes (such as the UK’s Qualifying Asset Holding Company or the UK REIT regime), a company must be UK tax resident.

As long as a company is incorporated in the UK, it will be considered UK tax resident. In this respect, the substance rules in the UK are very limited.

If a company is incorporated overseas, it will be considered UK resident if it is centrally managed and controlled in the UK. Whilst there is no defined set of criteria which will cause a company to be ‘centrally managed and controlled’ in the UK, set out in below are the important factors to consider.

HMRC takes the view that the correct starting point is to look to the location of the highest level of control of the business – which will normally mean the location of statutory board-level decisions.

In particular, a company should consider:

• To whom do the company’s legal and constitutional documents (such as the Articles of Association) grant powers of central management and control?
• Do these people, in reality, exercise central management and control?
• In either case – where is the central management and control physically exercised?

Note that the UK’s domestic test of ‘central management and control’ is different from the ‘effective management and control’ test found in the OECD model treaty – and which is commonly used by EU jurisdictions.

The highest level of control of the business should be undertaken in the UK. This means that physical board meetings should take place in the UK.

It is advisable to have a majority of board level directors tax resident in the UK.

It may be advisable to have a dedicated office space in the UK for physical board meetings.

There is no requirement to have a local bank account.

At present, none – given that the UK is no longer an EU member state, ATAD 3 will not directly apply to UK companies.

An overseas incorporated company must have its centre of management and control in the UK in order to be UK tax resident. Separately, in order for the UK to provide certain tax treaty benefits (such as an exemption on the obligation to withhold tax on UK source interest payments), the UK requires that the overseas recipient is the ‘beneficial owner’ of the payment. Therefore, questions of substance often arise in this context, given that, for example, nominees or conduit companies cannot be ‘beneficial owners’.

While ATAD 3 will not apply directly to UK companies, UK companies which are part of a group including EU entities should be aware of the rules. Further, the European Commission has already announced that it intends to follow up with a similar initiative for non-EU entities – progress of this initiative will be closely monitored.