Withers Worldwide

The background

An offshore corporate trustee will be regarded as UK tax resident if it acts as trustee in the course of a business carried on through a permanent establishment in the UK. This can have significant consequences since, if that trustee is sole trustee, the trust will be treated as UK resident for tax purposes.

Draft guidance issued by HMRC

HMRC have issued draft guidance on their interpretation of when a corporate trustee can be treated as having a permanent establishment in the UK.

Further guidance on the meaning of ‘permanent establishment' can be found in the Commentary to the OECD Tax Model Convention. The Convention defines ‘permanent establishment' as a fixed place of business, which can include shared premises (but not always the provision of services by one subsidiary company to another) and places of business used for short periods of time, but regularly over long periods.

The Convention also provides that a company can have a permanent establishment if it acts through a dependent agent, who has and habitually exercises authority to do business on behalf of the company (considered further below).

Three step process

In their draft guidance HMRC have specified three questions for determining whether corporate trustees are UK resident under this test.

(a) Is the corporate trustee carrying on a business in the UK?

The question here is whether the trustee is in the business of providing professional trustee services for a fee in the UK, in general terms, without reference to any specific trusts.

(b) If the corporate trustee is carrying on a business in the UK is it carrying on that business through a permanent establishment in the UK?

HMRC clarify that this refers to the trustee's activities from which it ‘substantially derives its profits' and not its activities in relation to a single trust.

(c) If so, is the corporate trustee carrying on the business of that particular trust in the course of its business through the permanent establishment?

The question here is whether the trustee is acting as trustee in relation to each particular trust through a permanent establishment in the UK. In looking at this question HMRC look at whether it is the core activities of the trust which are carried out in the UK, not those activities which are auxiliary or preparatory, these include:

• the general administration of the trust;
• the investment strategy;
• monitoring the performance of the trust's investments;
• deciding how to deal with trust income and whether distributions should be made;
• accounting, preparing tax returns and record-keeping.

If the core activities are being carried out in the UK through the trustee's permanent establishment, the trustee of that trust would be treated as UK resident.

Non-core activities will vary from trust to trust, but HMRC consider that they could include information gathering meetings, including meetings with independent agents or beneficiaries.

In considering the significance of meetings held in the UK, HMRC will consider the frequency of those meetings, their subject matter and quality in light of all the facts of the situation. For example, if all the work for a trust is carried out by the trustee in its UK offices with trustee meetings being held offshore merely to ‘rubber stamp' the work carried out in the UK, the trustee would likely be regarded as acting as trustee through a UK permanent establishment.

Activities carried on for the trust other than by the non-UK resident corporate trustee. Even if the trustee itself is not carrying out its core activities in the UK, it is also necessary to consider whether activities are carried out in the UK on the non-resident trustee's behalf by a dependent agent. An unconnected person or a UK subsidiary of the trustee can be a dependent agent. If the services are provided at arm's length terms then it is unlikely that there will be a dependent agency permanent establishment. If the agent provides services over and above the contractual terms, it is then necessary to consider whether the agent has ‘authority to do business on behalf of the non-resident trustee'. Examples of work which would, if carried on at arm's length terms, not fall foul of this rule include investment advice, preparation of trust accounts and tax returns, day to day management of let property and signing small cheques.

UK resident directors or other employees of a non-UK resident corporate trustee. HMRC will look to see if the director or employee is carrying out core trustee duties in relation to a particular trust in the UK and if he does HMRC are likely to treat the non-resident trustee as having a permanent establishment in the UK. This appears to be the case if either the employee or director operates from a fixed base in the UK or habitually acts on behalf of the trustee with authority to make decisions on behalf of the trustee. Examples of what will not constitute core business include marketing the business of the trustee and meetings with beneficiaries. In the latter case, it will be necessary to consider the subject matter of the meetings, the decisions taken and the frequency of the meetings to determine whether they fall the right side of the line.

Appeal procedure

The draft guidance confirms that trustees can appeal to an independent tribunal if HMRC regard a trustee as UK resident on the basis of the application of the above rules.

This draft guidance has been issued as part of a consultation process which ends on 13 March 2009.