Under the MLI (meaning the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS developed by the OECD) residence tie-breakers have been removed from some of the UK's tax treaties in favour of competent authority determinations. This change would allow the residence status of companies that previously relied on the tie-breaker to be revisited. Whilst HMRC "will generally not seek to revisit any previous determination", the application of such grandfathering is subject to the agreement of the other countries' tax authorities. 

Tax residence, tax treaties and the MLI

Bilateral tax treaties generally determine tax residence, first, by reference to the relevant countries' national rules. So, if both countries regard a company as resident, there is a conflict that needs to be resolved to prevent double taxation.  

Before the MLI, a number of the UK's tax treaties resolved this conflict by reference to an objective criterion or tie-breaker. For example, the UK-Australia treaty provided that an ostensibly dual-resident company shall be treated as resident only in the country where its place of effective management is located. 

Pursuant to the MLI, the position has changed such that it is for HMRC and the Australian tax authorities to "endeavour to determine by mutual agreement" where the company should be treated as resident. This change allows HMRC and the Australian tax authorities to reconsider a company's tax residence where their hands were previously bound by a tie-breaker. 

As a result, taxpayers will be in a substantially more uncertain position - not least because the relevant authorities may fail to reach agreement. In that case, the company would not be entitled to any relief or exemption under the tax treaty. 

HMRC guidance

HMRC have confirmed that, where a tax treaty has been modified by the MLI so as to remove the residence tie-breaker, they "will generally not seek to revisit any previous determination". But there will be exceptions. 

It can be expected that HMRC would seek to revisit a previous determination if material facts change, or if treaty benefits have been denied under the principal purpose test. 

Moreover, as a matter of principle, the grandfathering of previous determinations can apply only if the other country's tax authority agrees. Based on HMRC's guidance, it looks as if, so far, only New Zealand has agreed to this approach. (The Netherlands, Jersey, Guernsey and Isle of Man have also agreed to residence grand-fathering, but not in the context of the removal of a residence tie-breaker pursuant to the MLI.)

It remains to hope that other tax authorities will take a similarly sensible view.