What are the risks to the global economy and state aid?

COVID-19 presents an enormous challenge for the global economy. Governments are responding with interest rate cuts and quantitative easing programs on a scale not seen since the 2008 financial crisis. The response has also seen the introduction of measures designed to ease the burden for business, with deferrals for tax payments and emergency loan funding schemes introduced in a number of jurisdictions.

In the UK, a number of measures designed to support small business were already on the cards. These have been extended at Spring Budget in response to COVID-19 with business rates reliefs, a Coronavirus Business Interruption Loan Scheme and a £2.2bn grant scheme for small businesses. A dedicated HMRC COVID-19 helpline has been established for individuals and businesses seeking support.

The EU’s state aid framework enables Member States to take action to support individuals and businesses facing economic difficulties. Tax holidays, suspension of payments of corporate and value-added taxes or Social Security contributions or payments of wage subsidies are being introduced in a number of jurisdictions. The framework also allows support to be granted to consumers, for example, in respect of cancelled services which are not otherwise reimbursed or to help companies with urgent liquidity shortages. As the scale and severity of the situation worsens, the Commission is able to approve additional national economic support measures which would, ordinarily, have contravened state aid rules.

The travel restrictions introduced in response to COVID-19 are also raising issues for individual and corporate tax residency. Individuals will hope that local rules allow them to disregard days of presence beyond their control. Company directors may not physically be able to attend board meetings. As boards move to hold virtual meetings, companies, in particular those which are resident for tax purposes outside their jurisdiction of incorporation, will face challenges to maintain central management and control in the intended jurisdiction. There have been indications in some jurisdictions that temporary adjustments to normal operating practices introduced in response to COVID-19 may be disregarded but, with risks of exit charges and of becoming subject to a less favorable tax regime if tax residency moves, many corporates may consider delegating responsibilities or try to gain greater assurance from authorities.