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COVID-19: UK Tax Residence for Companies and Individuals

Introduction

In these testing times the ramifications of COVID-19 continue to be felt in every area of personal and corporate life. With lockdowns announced around the world, including in the UK on 23 March 2020, travel has been severely curtailed and business practices are having to change accordingly. Below we discuss what this means for determining the tax residency of companies and individuals.

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COVID-19 Impact on Executive Compensation – Salary/Wage Reductions

We continue our blog series on COVID-19 implications on executive compensation matters with a post that addresses salary or wage reductions on a company-wide or targeted basis.

Companies impacted by the COVID-19 pandemic, including the concomitant widespread shelter in place orders, may be considering pay cuts for some or all of their workforce, either in addition to or instead of furloughs and layoffs.  In implementing salary or wage reductions, companies should be mindful of federal, state and local wage and hour and labor laws, consent and notice requirements under contractual agreements with individual employees or groups of employees, tax implications on subsequent “make-whole” or “make-up” payments, impact on employee benefit plan participation, governance considerations, and disclosure requirements for public companies.

Prior to implementing salary or wage reductions, companies should:

  • IDENTIFY affected employees and applicable state or local law:
    • Who are the employees affected by potential salary or wage reductions? Are they exempt or non-exempt? Are they part-time or full-time? How many employees are affected at any single location? Will company executives be impacted?
    • Is the salary or wage reduction being undertaken in connection with a reduction in hours? If so, is the reduction proportionate?
    • What state or local law is applicable to the employee’s employment?
    • What are the state and local requirements for the notice, if any, that must be provided to employees prior to or following a wage reduction?
    • Would a reduction result in the employee’s wage falling below the threshold level for exempt classification (currently $684 per week under federal law)?
  • REVIEW the potential effects of a salary or wage reduction under applicable law, contract, agreements, offer letters, and employee benefit plans:
    • Is the employee a party to an employment agreement, offer letter, or other agreement or arrangement that sets base salary? If so, does it expressly provide that base salary cannot be reduced, such that it would need to be amended?
    • Is the employee covered by an agreement, offer letter, or plan with a “good reason” or similar definition that would trigger severance, equity award accelerated vesting, or other rights as a result of a salary reduction? Is there an exception for across-the-board salary reductions and, if so, whether a limit or such reduction applies?
    • Does the employee participate in employee benefit plans and programs (e.g., group health plans, retirement plans, 401(k) plans, severance benefits, and vacation programs) that may be impacted by a reduction in hours and/or salary or wage reduction? For example, salary reductions may reduce an employee’s severance entitlement, pension accrual or matching contribution.
    • Does the company’s employee handbook address salary or wages during a leave of absence or furlough?
  • ACT to execute waivers, deliver notices, take action with respect to employee benefit plans and, for publicly traded companies, provide disclosure of the salary reduction where necessary:
    • Obtain consents to salary or wage reductions and waivers of “good reason” from employees as needed.
    • Provide advance notice in accordance with applicable state and local requirements.
    • Take any necessary actions under employee benefit plans and programs to continue or end coverage/participation, as applicable.
    • Prepare and file disclosure if/as required for public companies (e.g., Form 8-K, press release).
    • Consider creating a working group including representatives from HR, legal, and investor relations to coordinate actions and communications to internal and external interested parties.

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Coronavirus: The Senate Passes the CARES Act; Summary of the Tax Provisions of the Bill

Last night, March 25, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748).  The House is expected to consider the bill later this week.

This blog post summarizes the tax provisions of the CARES Act, as passed by the Senate.

  1. Recovery Checks.  The CARES Act would provide a refundable tax credit for 2020 of $1,200 to individual filers with adjusted gross incomes of $75,000 or less (or $112,500 or less for a head of household), and $2,400 to married couples filing jointly with adjusted gross incomes of $150,000 or less, which would be paid in cash.  For individuals, heads of households, and married couples with adjusted gross income of $75,000/$112,500/$150,000 or less, there is an additional $500 refundable credit for each of their “qualifying children”.  Although the credit is for 2020, the bill treats the taxpayer as if he or she had overpaid an amount equal to the credit in 2019 (or if the taxpayer has not yet filed a 2019 tax return, 2018) so that the taxpayer is eligible to receive his or her refund immediately.  No minimum income is necessary to receive the credit.  For taxpayers with incomes over the $75,000/$112,500/$150,000 threshold, the credit is reduced by 5% of the taxpayer’s adjusted gross income over $75,000/$112,500/$150,000.  This results in a complete phase out for taxpayers who in 2019 made more than $99,000 (individuals), $146,500 (heads of households), and $198,000 (joint filers).
  2. 50% Employee Retention Credit for Employers Closed Due to Covid-19.  The CARES Act provides eligible employers with a refundable payroll tax credit equal to 50% of certain “qualified wages” (including certain health plan expenses) paid to its employees beginning March 13, 2020 through December 31, 2020 if the employer is engaged in an active trade or business in 2020 and the wages are paid (i) while operation of that trade or business is fully or partially suspended due to a governmental order related to COVID-19 or (ii) during the period beginning in the first quarter in which gross receipts for that trade or business are less than 50% of gross receipts for the same calendar quarter of 2019 and ending at the end of the first subsequent quarter in which gross receipts are more than 80% for the same calendar quarter of 2019.   The employee retention credit is available for employers with more than 500 employees, but for employers with more than 100 employees, the credit is available only with respect to wages paid to an employee that is not providing services due to the circumstances described in (i) or (ii) above.  The credit is capped at $5,000 (50% of $10,000 qualified wages) per employee for all calendar quarters.  Section 501(c) tax-exempt organizations are eligible for the credit, but governmental entities and companies receiving small business interruption loans under the CARES Act are not.
  3. Small Business Loan Forgiveness Does Not Give Rise To Cancellation of Indebtedness Income.  The CARES Act includes a loan forgiveness program for small businesses.  Any cancellation of debt income under the program would be tax-free (i.e., excluded from income), and would not result in a loss of tax attributes.
  4. Tax Treatment of Economic Stabilization Investments.  The CARES Act authorizes the Treasury to make or guarantee up to $500 billion in debt and equity investments in businesses, states, and municipalities affected by COVID-19.  The CARES Act directs the IRS to issue guidance providing that the acquisition of warrants, stock options, common or preferred stock or other equity under the program does not result in an ownership change for purposes of section 382.  While the CARES Act does not by its terms prevent investments from contributing to a section 382 ownership change, it appears consistent with the intent of the legislation for the IRS to entirely disregard investments for purposes of determining whether a taxpayer has experienced a section 382 ownership change. Any loans made or guaranteed by the Treasury under the program would be treated for tax purposes as debt issued at par, and stated interest on these loans would be treated as qualified stated interest.  As a result, loans issued or guaranteed under the program would not be treated as issued with original issue discount for tax purposes, and cash basis taxpayers would not be permitted to deduct interest on the loans until that interest is paid.
  5. The CARES Act Does Not Repeal Downward Attribution.  The CARES Act does not contain the provision in the March 16 version that would have restored section 958(b)(4).  (Before its removal as part of the 2017 Tax Cuts and Jobs Act (the “TCJA”), section 958(b)(4) prevented a United States person from being treated as owning the stock owned by its foreign owner.)
  6. NOLs; Excess Business Losses.  The CARES Act would allow a corporation’s losses from 2018, 2019, and 2020 to be carried back for five years, and would allow corporate NOLs to fully reduce taxable income (rather than only 80% of taxable income under current law).  A REIT would not be permitted to carry back losses. These provisions would temporarily reverse certain changes made by the TCJA.  However, the CARES Act effectively prevents the use of NOL carrybacks to offset income includible under section 965 (the deemed repatriation provision enacted in the TCJA). The CARES Act allows corporate taxpayers that may be able to carryback losses a 120-day period to make certain important elections, including the election to forego the carryback. The CARES Act would also retroactively suspend the excess business loss provision of section 461(l)(1) (which disallows business losses in excess of $200,000 for a single taxpayer and $500,000 for a married couple filing jointly) for 2018 through 2020.
  7. Increase the Section 163(j) Limitation on Business Interest Expense Deduction From 30% to 50%.  The CARES Act would retroactively increase the section 163(j) limitation on business interest expense deductions from 30% to 50% for 2019 and 2020.  Taxpayers may elect out of the increase (for example, to defer the deduction and avoid generating or increasing a net operating loss which, under the CARES Act, would again be usable only to the extent of 80% of taxable income beginning in 2021).  The CARES Act also provides that the increase in the limitation applies to partners in partnerships only in 2020 (and not in 2019) but, for partners that do not elect out of the provision, 50% of the business interest of a partner that is accrued in 2019 is deemed to accrue in 2020 and is not subject to any limitation in 2020.
  8. Filing and Payment Extensions.  The CARES Act would permit employers and self-employed individuals (other than taxpayers who have had indebtedness forgiven under the CARES Act) to delay payment of the 6.2% employer share of the Social Security tax (but not the 1.45% employer share of the Medicare tax) from the date of enactment through the end of 2020.  The tax would be payable over the following two years with half paid by December 31, 2021 and the other half by December 31, 2022.  These provisions would be available to everyone, regardless of income.  The CARES Act does not extend the April 15 filing date to July 15, 2020 nor extend the due date for estimated tax payments by individuals and corporations to October 15, 2020, although the Treasury and the IRS extended both the due date for the first quarter (but not, for now, second quarter) estimated tax payments and the April 15 filing date to July 15, 2020 in guidance issued earlier this week.
  9. Waiver of 10% Early Withdrawal Penalty for Distributions of Up to $100,000 From Retirement Funds for Affected Individuals.  The CARES Act allows an individual to withdraw up to $100,000 from a qualified retirement account without incurring the 10% penalty for early withdrawals if (1) they are diagnosed with COVID-19, (2) their spouse or dependent is diagnosed with COVID-19, or (3) they experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS.  This provision applies to distributions from January 1, 2020 (rather than the date of enactment of the CARES Act) through December 31, 2020.  Income attributable to the withdrawal will be taxable over three years (unless the taxpayer elects otherwise) and the taxpayer may recontribute the amount within three years without regard to the cap on contributions.  The bill also increases the maximum amount that an individual may borrow from a qualified plan from $50,000 to $100,000, allows an individual to borrow up to the present value of the employee’s nonforfeitable accrued benefit (rather than merely one-half of that amount, as under current law), and if the loan would mature between the date of enactment and December 31, 2020, allows up to an additional year to repay the loan.
  10. $300 Above the Line Charitable Contribution Deduction; Relaxation of the Charitable Contribution Limitation.  The CARES Act would allow a permanent “above the line” charitable contribution deduction for up to $300 of cash contributions to certain section 501(c)(3) public charities beginning in 2020, even if the individual takes the standard deduction.  The bill would also suspend the 50% adjusted gross income limitation for charitable contributions by individuals in 2020 (so that individuals could receive a charitable contribution deduction for up to 100% of their 2020 adjusted gross income), and would increase the 10% taxable income limitation on charitable contribution deductions for corporations to 25%.  Finally, the bill would temporarily increase the cap on deductions for charitable contributions of food inventory in 2020 from 15% to 25% of taxable income (in the case of a C corporation) or aggregate net income for all relevant trades or businesses (in the case of an individual).
  11. Immediate Expensing of Costs Associated With Improving Qualified Improvement Property.  The CARES Act would correct an error in the TCJA that prevented businesses from expensing certain costs for improvements to “qualified improvement property”, and required the costs to be depreciated over the 39-year life of the building.  Qualified improvement property is any improvement to the interior of a nonresidential building that is placed in service after the building is first placed in service. Qualified improvement property does not include improvements that are attributable to the enlargement of the building, elevators or escalators, or the internal structural framework of the building.  The change is retroactive to the date of enactment of the TCJA.
  12. Acceleration of Alternative Minimum Tax (AMT) Credits.  The TCJA repealed the corporate AMT and allowed corporations to claim corporate AMT credits over several years until 2021.  The CARES Act allows corporations with outstanding AMT credits to claim their credits immediately.
  13. Tax-Free Employer Repayment of Employee Student Loans.  Under the CARES Act, an employer’s repayment of up to $5,250 of an employee’s student loan debt would be tax-free to the employee if made after the enactment of the CARES Act and before January 1, 2021 (i.e., the repayment is excluded from the employee’s income).  The $5,250 cap would apply to the total employer educational assistance provided to an employee under current law (e.g., tuition, fees, and books) and the new provision in the CARES Act.

COVID-19: UK Chancellor announces measures to support the self-employed

Earlier this evening (26 March 2020) the UK Chancellor announced the new Self-Employed Income Support Scheme to help the self-employed face the economic hardship wrought by the COVID-19 pandemic. Below are the key points:

  • The scheme will provide direct cash grants of 80 per cent of individuals’ taxable profits (based on average monthly trading profit over the three tax years 2016-17, 2017-18 and 2018-19), up to £2,500 per month.
  • The scheme will be open to those with a trading profit of less than £50,000 in 2018-19 or an average trading profit of less than £50,000 from 2016-17, 2017-18 and 2018-19. To qualify, more than half of their income in those periods must come from self-employment. 95 per cent of self-employed individuals are expected to benefit with this limitation.
  • The scheme will initially run for three months from 1 March and is expected to be accessible from June.
  • To prevent fraud, it will only apply to those that are already self-employed and have a tax return from 2018-19. Those that missed the deadline for that tax return (31 January this year) are allowed an additional four weeks to complete it.
  • Individuals should not contact HMRC now. HMRC will use their existing information to determine potential eligibility and contact individuals asking them to make applications once the scheme is operational.
  • Importantly, the scheme does not apply to individuals who operate through a company and pay themselves a salary and dividends through that company. Instead, those individuals and their companies will be able to use the previously announced Coronavirus Job Retention Scheme to the extent that the companies operate PAYE schemes and qualify for benefits under the Job Retention Scheme. However, the scheme announced today will apply to self-employed members of partnerships.

The Self-Employed Income Support Scheme is meant to be equivalent to the Coronavirus Job Retention Scheme announced on 20 March 2020 to support employees (reported by us Coronavirus: UK Chancellor announces unprecedented measures to support the British economy). Given the parity in treatment under the two schemes, and as a separate matter, the Chancellor has also suggested that he might look in due course to eliminate the differences in National Insurance Contribution (NIC) obligations for the employed and self-employed in order to recoup at a later stage some of the huge costs being incurred now.

COVID-19 Impact on Executive Compensation (Leave of Absence)

COVID-19 has had significant impacts on all aspects of business.  While employers are assessing how to handle immediate employee needs related to sick leave, family leave and benefits claims, employers should also consider the impact that changes in their workforce or economic conditions will have on their compensation plans and programs.

This blog post addresses one of those compensation issues that many companies are currently grappling with – whether a temporary leave of absence or furlough triggers forfeiture, payment, vesting, or other treatment under compensation arrangements.

In following blog posts, we will address other compensation issues, including:

  • Effect of salary reductions on compensation arrangements (including “good reason” triggers);
  • Limitations on amendment of equity awards and performance goals; and
  • Funding and termination of nonqualified deferred compensation plans (“NQDC plans”) and limitations on such actions.

Is a leave of absence or furlough a “termination of employment” or “separation from service”?

Many employment agreements, severance plans, equity awards and other compensation arrangements provide for partial or full vesting or payment of amounts upon an employee’s termination of employment or separation from service.

Although many employees have experienced a significant decline or cessation of work in connection with the COVID-19 outbreak, such employees may not have necessarily had a separation from service or termination of employment under the terms of the applicable compensation arrangement.

As a general matter, employers with compensation arrangements with separation from service or termination of employment triggers who have employees who are being placed on leave, reduced hours or furlough should take the following steps, preferably before or as soon as possible after implementing any workforce changes:
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Coronavirus: CARES Act Vote Fails in Senate; Summary of the Tax Provisions of the Bill

Today, March 23, 2020, for the second time the Senate defeated a procedural motion on a third stimulus bill, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) (H.R. 748).  The vote was 49 in favor and 46 opposed (yesterday, the vote was 47 to 47).  Sixty votes were required to advance the legislation.  This blog summarizes certain of the tax provisions of the bill and compares them to the earlier draft that was released on March 16.

  1. Recovery Checks.  The CARES Act would provide a refundable tax credit for 2020 of $1,200 to individual filers with adjusted gross incomes of $75,000 or less(or $112,500 or less for a head of household), and $2,400 to married couples filing jointly with adjusted gross incomes of $150,000 or less, which would be paid in cash checks.  In addition, for individuals and married couples with adjusted gross income of $75,000/$112,500/$150,000 or less, there is an additional $500 refundable credit for each of their “qualifying children”.  Although the credit is for 2020, the bill treats the taxpayer as if he or she had overpaid an amount equal to the credit in 2019 (or if the taxpayer has not yet filed 2019 tax return, 2018) so that the taxpayer is eligible to receive a refund check immediately.  No minimum income is necessary to receive the credit. For taxpayers over the $75,000/$112,500/$150,000 threshold, the credit is reduced by 5% of the taxpayer’s adjusted gross income over $75,000/$150,000.  This results in a complete phase out for single taxpayers who made more than $99,000 in 2019 ($198,000 for joint filers).  The earlier version of the bill had limited the $1,200/$2,400 credit to taxpayers who had sufficient tax liability, but provided for a minimum of $600/$1,200 credit for taxpayers with earned income, social security benefits, and certain pension income of at least $2,500 in the aggregate or with insufficient tax liability.  Under the CARES Act, there is no minimum tax liability or income to receive the full $1,200/$2,400.  Also, in the prior version, the taxpayer was treated as if he or she had overpaid an amount equal to the credit in 2018 (as opposed to 2019 in the CARES Act) or, if the taxpayer had not yet filed his or her 2018 tax return, 2019.
  2. The CARES Act Does Not Repeal Downward Attribution.  The CARES Act does not contain the provision in the earlier version that would restore section 958(b)(4).  (Before its removal as part of the 2017 Tax Cuts and Jobs Act (“TCJA”), section 958(b)(4) prevented a United States person from being treated as owning the stock owned by its foreign owner.)
  3. NOLs; Excess Business Losses.  The CARES Act would allow a corporation’s losses from 2018, 2019, and 2020 to be carried back for five years, and would allow a corporate NOL to fully reduce taxable income (rather than only 80% of taxable income under current law).  These provisions would temporarily reverse certain changes made by the TCJA.  However, in a change from the prior version, the CARES Act effectively excludes income includible under section 965 (the deemed repatriation provision enacted in the TCJA) from income that may be offset by NOLs that are carried back. The bill would also retroactively suspend the excess business loss provision of section 461(l)(1) (which disallows business losses in excess of $200,000 for a single taxpayer and $500,000 for a married couple filing jointly) for 2018 to 2020, as if it had never been enacted.
  4. Increase the Section 163(j) Limitation on Business Interest Expense Deduction From 30% to 50%.  The CARES Act would retroactively increase the section 163(j) limitation on business interest expense deductions from 30% to 50% for 2019 and 2020.  In a change from the prior version, taxpayers may elect out of the increase (for example, to defer the deduction and avoid generating or increasing a net operating loss which, under the CARES Act, starting in 2021 will again be usable only to the extent of 80% of taxable income).  In addition, in a change from the prior version, the CARES Act provides that the increase in the limitation applies to partners in partnerships only in 2020 (and not 2019) but, for partners that do not elect out of the provision, 50% of the business interest of a partner that is accrued in 2019 is deemed to accrue in 2020, and then is not subject to any limitation in 2020.
  5. Filing and Payment Extensions.  The CARES Act would extend the individual April 15 filing date to July 15.  (The Treasury Department and the IRS independently did this in guidance issued March 18.)  The bill would also permit employers and self-employed individuals to delay payment of the employer share of the Social Security tax.  The tax would be payable over the following two years with half paid by December 31, 2021 and the other half by December 31, 2022.  These provisions would be available to everyone, regardless of income. The CARE Act does not contain the provision in the prior version providing that estimated tax payments by individuals and corporations would be extended to October 15, 2020.  On March 20, Treasury and the IRS extended the date for paying estimated tax payments to July 15, 2020.
  6. Waiver of 10% Early Withdrawal Penalty for Distributions of Up to $100,000 From Retirement Funds for Affected Individuals.  The CARES Act provides that any individual (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19 or other factors as determined by the IRS may withdraw up to $100,000 from a qualified retirement account without incurring the 10% penalty for early withdrawals.  Income attributable to the withdrawal will be taxable over three years and the taxpayer may recontribute the amount within three years without regard to the cap on contributions.  The bill also increases the maximum amount that an individual may borrow from a qualified plan from $50,000 to $100,000, allows an individual to borrow up to the present value of the employee’s nonforfeitable accrued benefit (rather than merely one-half of that amount, as under current law), and if the loan would mature between the date of enactment and December 31, 2020, allows up to an additional year to repay the loan. In a change from the prior version, the CARES Act provides for withdrawal from a qualified retirement account beginning on January 1, 2020 (as opposed to the date of enactment) and requires that the taxpayer certify on satisfying the conditions for coronavirus-related distribution.
  7.  $300 Above the Line Charitable Contribution Deduction; Relaxation of the Charitable Contribution Limitation. The CARES Act would allow an “above the line” charitable deduction for up to $300 of cash contributions to section 501(c)(3) organizations in 2020, even if the individual takes the standard deduction.  The bill would also suspend the 50% adjusted gross income limitation for charitable contributions by individuals in 2020 (so that individuals could receive a charitable contribution deduction for up to 100% of their 2020 adjusted gross income), and would increase the 10% taxable income limitation on charitable contribution deductions for corporations to 25%.  Finally, the bill would increase the cap on deductions for charitable contributions of food inventory from 15% to 25% of taxable income (in the case of a C corporation) or aggregate net income for all relevant trades or businesses (in the case of an individual).  The provision is identical to the provision in the prior version.
  8. Allow Immediate Expensing of Costs Associated With Improving Qualified Improvement Property.  The CARES Act would correct an error in the TCJA that prevented businesses from expensing certain costs for improvements to qualified improvement property, and required the costs to be depreciated over the 39-year life of the building.  The change is retroactive to the date of enactment of the TCJA.  The provision is identical to the provision in the prior version.  However, news reports indicate that Senate Democrats have not agreed to this provision.

Coronavirus: UK Chancellor announces unprecedented measures to support the British economy

Earlier this evening the UK Chancellor announced an economic intervention which is “unprecedented in the history of the British state” with measures to support the United Kingdom economy in the midst of COVID-19. Below are the key measures he announced for businesses:

  • The government is setting up a Coronavirus Job Retention Scheme. The scheme will allow an employer to apply for a grant of up to £2,500 a month to cover 80% of the salary of those remaining as employees but not working. It will cover the cost of wages backdated to 1 March and will be available initially for 3 months with a review at that time. There will be no limit on the amount of funding that is available under the scheme.
  • The next quarter of VAT payments for businesses are deferred until the end of June with payment due at the end of the current financial year, an injection of £30 billion of cash to businesses.
  • The Coronavirus Business Interruption Loan Scheme is extended to enable businesses to receive interest free loans for 12 months (previously announced as 6 months).
  • The 31 July instalment of income tax payment for the self-employed has been postponed until 31 January 2021.

The latest measures are in addition to those outlined by the Chancellor on 17 March 2020 (reported by us UK Chancellor’s latest measures in response to COVID-19).

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