Business Brief – Double Tax Agreement – Residence – change of HMRC practice
Following an agreement between the UK and Jersey, HMRC has published an important change of interpretation on residence for treaty purposes.
HMRC’s view now is that the better interpretation of residency article in the UK-Jersey Double Tax Agreement 1952 (“UK Jersey DTA”) is that it includes a tie breaker provision to decide where a company is to be treated as resident.
HMRC has said that it will apply this interpretation to 16 Double Tax Agreements (“DTA”), which contain identical or very similarly worded provisions (see list below).
Previously, it was HMRC’s view that there was no effective tie breaker clause in the relevant treaties and that dual-resident companies (for example, one resident in UK by incorporation and also resident in Jersey by management and control) were treated as not resident in either jurisdictions for treaty purposes and so were outside the scope of DTA.
The newly agreed view is that the relevant provisions (para 2(1)(f) in the UK Jersey DTA) should be read as treating a dual-resident company as a resident of the jurisdiction in which it is managed and controlled. Companies which are managed and controlled in both UK and the other jurisdiction will still remain outside the scope of the DTA.
The relevant DTAs affected are those in the following countires:
Antigua
Belize
Brunei
Burma
Greece
Grenada
Guernsey
Isle of Man
Jersey
Kiribati
Malawi
Monserrat
St Kitts & Nevis
Sierra Leone
Solomon Islands
Tuvalu
Generally, the change is helpful and clarifies the position. For example, it will increase the range of companies which can become a UK REIT.
However, given that HMRC are of the view that companies may still be dual resident in certain circumstances, it will have important practical ramifications such as the loss of the ability to claim group relief and make use of cross border no gain no loss transfers in those circumstances.
HMRC policy paper on the change of view the interpretation of the residence articles.
