The UK-resident director of an Estonian company

What is the residence test?

A company incorporated in the UK is UK tax resident. A company incorporated elsewhere is also UK tax resident if its central management and control is exercised in the UK. HMRC, the UK tax authority, sets out its approach in Statement of Practice 1/90 and in its International Manual at INTM120200.

This matters directly for a UK-resident director. The question is where the company is actually run, not where it is registered. A director who lives and works in the UK may be part of the answer.

What does the test look at?

Central management and control is a question of fact rather than paperwork. In plain terms, it asks where the people who really run the company make the big decisions. We do not say how HMRC weighs individual factors. These are the questions your UK adviser will usually want to work through:

• Where do the directors who make the key decisions live and work?
• Where are board meetings held, and are the decisions made at the meeting or beforehand somewhere else?
• Does someone based in the UK direct strategy, pricing, hiring or borrowing in practice, whatever the minutes say?
• What do the Estonian staff, premises and local management actually decide?
• Who negotiates with the main customers and suppliers, and from where?

What if both countries treat the company as resident?

A company can be resident in two states at once. In that case, a tie-breaker in the double tax treaty decides which state prevails. HMRC covers dual resident companies in its Company Taxation Manual at CTM34505.

We do not go further than that. How the tie-breaker would apply to your company, and what follows from the result, is for your UK adviser, with an Estonian adviser on the Estonian side. The company may end up taxed in the UK, and it is better to consider that before incorporating.

Why does an Estonian registration not settle the question?

An entry in the Estonian commercial register shows that a company exists under Estonian law. It does not show where the company is run. An Estonian address, an Estonian bank account and an e-Residency card fit a company managed from the UK just as well as one run from Tallinn.

Controlled foreign company rules

The UK has controlled foreign company rules in Part 9A of TIOPA 2010 (the Taxation (International and Other Provisions) Act 2010). They can attribute a foreign subsidiary's profits to a UK company. We do not say whether they could apply to you, which gateway tests or exemptions are relevant, or how they interact with the residence question. Please ask your UK adviser about these points.

Questions for your UK adviser

1. Is central management and control of this company exercised in the UK, given where I live and work?
2. If it is, what are the UK filing and payment consequences, and from when?
3. If the company is resident in both states, how does the treaty tie-breaker apply to these facts?
4. Could the controlled foreign company rules apply to the Estonian company's profits?
5. How is a payment from the Estonian company to me, as salary, board fee or distribution, treated in the UK?
6. What records should I keep to show where decisions are made?

What can accurate Estonian records do?

Good books show what the company earned, spent, paid and distributed, and when. They cannot change where decisions are made. If you make the decisions from the UK, tidy Estonian accounts will not change the answer to the residence question. We also do not write records that describe decisions differently from how they were made. Minutes and invoices have to match what happened.

The books are still necessary. Whatever your adviser concludes, the Estonian company has Estonian obligations. These are monthly bookkeeping, the VAT return (KMD) by the 20th of the following month if the company is registered, and the annual report by 30 June. Our article on where an Estonian company is actually taxed covers the general question.

How we work with you

We start with the facts: who the directors are, where they live, where the staff work and how decisions are recorded. We then keep the Estonian side in order and give your UK accountant what they ask for. If the facts suggest the company would be better closed or restructured, we say so.