Social distancing, travel restrictions and other measures introduced worldwide following the onset of the pandemic have not only impacted commercial activities, but are also raising unique corporate residency tax issues as business leaders scramble to conduct their affairs and hold board meetings remotely from different locations around the globe.
In this article, we discuss recent Canadian and U.S. tax authority guidance that organizations should consider as they adjust their business management strategies to accommodate for the “new normal” work environment.
The Canada Revenue Agency (CRA) recently published the “Guidance on international income tax issues raised by the COVID-19 crisis” (Guidance) in an effort to clarify some of the Canadian income tax issues that arise as a result of travel restrictions imposed by governments, including the Government of Canada, and businesses across the world in response to the COVID-19 pandemic (travel restrictions).
Given the uncertain duration of these travel restrictions, the CRA has indicated that the Guidance will apply from March 16 until August 31, 2020; with possible extension or rescinding of the Guidance as needed.
Among the concerns raised as a result of the travel restrictions is whether a corporation established in a foreign jurisdiction may be considered resident in Canada for Canadian income tax purposes, potentially giving rise to dual residency issues.
Under Canadian income tax law, the common law concept of a corporation’s “central management and control” is used to determine whether a corporation established under foreign law is resident in Canada. In assessing the location of central management and control, the jurisdiction where the board of directors meets is a key consideration.
As indicated in the Guidance, the travel restrictions may have prevented directors from attending board meetings in foreign jurisdictions, instead requiring them to “attend” such meetings remotely while being physically present in Canada. This raises the questions as to whether the central management and control may be considered to be in Canada.
The CRA’s position
The Guidance indicated that for a corporation established in a foreign jurisdiction and covered by a particular tax treaty between Canada and that jurisdiction (a treaty), the particular treaty may have a residency “tie-breaker” rule that looks to the corporation’s place of effective management. In such situations, the CRA administratively will not consider that corporation to be resident in Canada solely because a director had to participate in a board meeting from Canada due to the travel restrictions.
However, with respect to a corporation not covered by a treaty, the CRA stated that residency will be determined on a case-by-case basis. The CRA also stated that it will adopt a similar approach for other foreign entities that are considered corporations for Canadian income tax purposes, and where appropriate for commercial trusts.
The CRA further provided a reminder that notwithstanding such administrative relief, the location of board meetings remains only one element in its determination of corporate residency.
The U.S. Internal Revenue Service (IRS) has addressed similar issues for nonresident alien individuals and foreign corporations caught in the U.S. due to COVID-19 travel disruptions.
Nonresident alien individuals who perform services in the United States and foreign corporations who employ individuals or engage individuals as agents to perform services in the U.S. may be considered engaged in a U.S. trade or business (USTB). If the individuals performing those services are temporarily in the U.S. solely due to COVID-19 travel disruptions, this may cause the nonresident alien or foreign corporation to become engaged in a USTB when the nonresident alien or foreign corporation would not be so engaged were these individuals not present in the United States. Generally, a nonresident alien or foreign corporation that is engaged in a USTB is taxable on its income effectively connected to that USTB.
The IRS has determined that a nonresident alien or foreign corporation may choose a period of up to 60 consecutive calendar days, beginning on or after February 1, 2020, and on or before April 1, 2020 (the COVID-19 Emergency Period), during which services or other activities conducted in the U.S. will not be taken into account in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by individuals temporarily present in the U.S. and would not have been performed in the U.S. but for COVID-19 travel disruptions.
Similarly, if a nonresident alien individual or foreign corporation has a USTB, services or other activities performed by individuals temporarily present in the U.S. will not be considered in determining whether the nonresident alien or foreign corporation has a “permanent establishment” in the U.S. under an applicable tax treaty, provided that the U.S. services or other activities would not have occurred but for COVID-19 travel disruptions.
In addition, the IRS will permit nonresident alien individuals that intended but were unable to leave the U.S. due to COVID-19 travel disruptions to exclude up to 60 consecutive calendar days of presence in the U.S., starting at any point during the COVID-19 Emergency Period, for purposes of determining whether an individual is treated as having a “substantial presence” in the U.S. and thus treated as a U.S. resident for U.S. tax purposes.
While the tax authorities have introduced measures to address travel restrictions presently in effect, organizations planning for the conduct of their affairs in the future will need to bear in mind the location of their management and permanent establishments for corporate tax residency purposes going forward.