The global impact of the novel coronavirus (COVID-19) is leading to unprecedented changes in working practices. In particular, travel restrictions and, in many cases, border closures are already causing, and will continue to cause, significant restrictions on the conduct of international business. In such challenging circumstances the primary focus for business leaders is, of course, to formulate a strategy to ensure their businesses are robust and in as solid a position as possible to deal with the widespread effects of the coronavirus. Packages of economic support measures being rolled out in many countries may provide some reassurance and, in the coming days, be crucial for bolstering businesses.
Other issues related to the spread of COVID-19 will become apparent as days pass, including the possible impact of travel and meeting restrictions on tax residence status (for companies and individuals). International businesses may incorporate entities in different jurisdictions for a variety of commercially driven reasons, including tax. Corporate tax residence in many jurisdictions is principally determined on the basis of a test of the location of effective management and control. Jurisdictions may, for example, regard a company that is incorporated in one country as nonetheless resident for tax purposes in their jurisdiction as a result of strategic (typically board level) control being exercised in that jurisdiction. The problem of potential dual-residence can be addressed in many cases by reference to a taxation treaty between the relevant jurisdictions (mechanisms may include a “tie breaker” by reference to the place of effective management and control or a mutual agreement protocol requiring the respective tax authorities to work together to determine which jurisdiction has primary taxing rights by reason of residence).
In this context, the present restrictions on travel and working arrangements clearly have the potential to cause uncertainty and potentially, with current law and practice, to impact tax residence and/or taxation status across borders. As a broad rule, where a board of directors holds executive and strategic control over a company’s business, the place where the board physically meet will be key. If a board comprises directors resident themselves in different countries, perhaps accustomed to travelling for periodic meetings in the country of incorporation, a shift to alternative practices may be considered, in order to mitigate risk of impact to tax residence status. By way of example, a company incorporated in Jersey where the board includes some UK resident directors may be concerned that holding board meetings with UK residents participating remotely could cause the situs of the meeting to be viewed as in the UK and, consequently, lead to a risk of effective management and control being viewed as having shifted to the UK.
In addition, the prospect of a move to entirely remote access meetings must be considered. Under emergency legislation applicable for three months with a view to contain the rapid spread of COVID-19 in Luxembourg, Luxembourg enacted on Friday 20 March temporary measures applicable to all companies (and therefore, investment funds set up as corporates) to provide for virtual shareholder meetings, board meetings and meetings of supervisory boards (i.e., without any individual attending in person). These measures, outside the scope of any existing legislation, facilitate the continuation of business of all Luxembourg corporate entities during the three-month emergency state period. Other jurisdictions may be expected to adopt similar measures in the near future. In these unprecedented circumstances it remains to be seen if accompanying guidance may be forthcoming from jurisdictions to offer comfort that adopting such approaches would not (at least for a temporary period) be regarded as impacting the existing tax residence status of a company.
In the interim, companies that are concerned by the implications of meetings that are required to be held in this manner, or where non-resident directors are unable to travel to meetings, may wish to consider possible mitigating measures. Potential approaches could include (i) to review (and potentially amend) company constitutions and quorum requirements (and holding meetings, whether in person or via remote access, with a quorum of local resident directors), (ii) temporary appointment of delegates or attorneys located in the appropriate jurisdiction and/or (iii) changes to board composition and postponement of meetings (where practicable).
It is hoped that Governments and tax authorities will in due course be able to offer some comfort regarding enforced divergence from ordinary and consistently applied practices as a result of the present circumstances. In the meantime, and in any event, businesses may wish to consider, when they have the opportunity, whether any change to their practices to mitigate any potential risks to their tax status may be merited.
