The tax problem did not appear when Luca moved to Italy. It appeared months later, when two advisers began preparing two different versions of the same company.
For almost a year, nothing happened.
That was precisely why Luca thought everything was fine.
He had moved from the United Kingdom to Italy, taken his laptop with him and continued running his consultancy.
Clients still paid Albion Consulting Ltd.
The company still had the same Companies House registration.
The same UK bank account.
The same accountant.
The same contracts.
There had been no letter from HMRC.
No enquiry from the Italian tax authorities.
No blocked bank account.
No dramatic event suggesting that the structure had stopped working.
Commercially, the business felt exactly as it had before.
Then the financial year ended.
And two perfectly reasonable accountants asked two perfectly reasonable questions.
The UK accountant asked:
“Can you send me the information so that I can finalise the company accounts and Corporation Tax return?”
The Italian adviser asked:
“Can you send me the accounts of the UK company and explain where the business has actually been managed during the year?”
They were looking at the same company.
But they were not necessarily looking at the same tax map.
The first problem was not tax. It was the story the accounts were telling.
Historically, Albion Consulting Ltd had operated entirely from the United Kingdom.
Its accounts reflected that reality.
Revenue belonged to the UK company.
Expenses belonged to the UK company.
The residual profit was subject to UK Corporation Tax.
Straightforward.
But Luca had now spent most of the year living and working from Italy.
He had negotiated new engagements from his house in Puglia.
He had agreed fees there.
He had held client meetings there.
He had decided which projects to accept.
He had authorised significant expenditure there.
And when a long-standing client asked for a substantial reduction in fees, Luca had made the final decision from Italy.
None of this appeared as a separate line in the company’s accounting records.
There was no account headed:
“Strategic decisions taken in Italy.”
There was no ledger code for:
“Client relationships managed from Puglia.”
The trial balance therefore looked British.
The business activity did not look nearly as British.
That distinction was about to become important.
Two countries can look at one company and ask different questions
The UK starting point remained clear.
Albion Consulting Ltd was incorporated in the United Kingdom and was therefore ordinarily UK resident under domestic law.
But that was not necessarily the end of the analysis.
Italy could apply its own corporate residence rules to the same facts.
If both jurisdictions regarded the company as resident under their respective domestic laws, the UK–Italy tax treaty then became relevant.
For a company resident in both countries, Article 4 of the treaty looks to the place of effective management.
That meant Luca could not solve the problem simply by producing the certificate of incorporation.
Nor could he solve it by pointing to the company’s registered office.
The question had become factual:
Where was the company really being directed?
HMRC’s own approach to company residence similarly emphasises where the highest level of management and control is actually exercised rather than merely where formal documentation says that it should occur.
And that was where the story became uncomfortable.
The advisers stopped looking at the accounts and started looking at the calendar
The first exercise was surprisingly mundane.
They reconstructed the year.
Month by month.
Luca’s flights.
Board meetings.
Client meetings.
Contract negotiations.
Bank approvals.
Emails.
Electronic signatures.
The dates on which important commercial decisions had been made.
The exercise quickly revealed something the annual accounts could never show.
Before the relocation, important decisions had unquestionably been taken in London.
Afterwards, many of them had not.
There had been four formal board meetings in the United Kingdom.
But between those meetings Luca had negotiated contracts, approved commercial terms and managed the business continuously from Italy.
The UK director had participated in the formal meetings.
But the crucial question was no longer:
“Was there a UK director?”
It was:
“What did that director actually decide?”
There is an important difference between considering a commercial decision and documenting a decision that somebody else has already made.
The board minutes said one thing.
The email trail supplied the chronology.
One email was more revealing than four board minutes
A new client had approached Albion Consulting Ltd in June.
The engagement was significant.
Luca negotiated the scope over several calls.
He agreed the commercial terms.
He offered a discount.
He approved the final engagement letter.
Two days later, the UK director received an email saying:
“All agreed. Please approve at the next board meeting for the records.”
From a corporate administration perspective, the email looked harmless.
From a residence perspective, it raised a much more difficult question.
If the commercial decision had already been made, what exactly was the UK board approving?
This is why corporate residence cannot safely be manufactured through minutes.
Governance evidence matters enormously.
But good evidence records where authority is genuinely exercised.
It does not relocate that authority.
Then came the second question: what if the company was still UK resident?
Luca initially thought this would solve everything.
Suppose Albion Consulting Ltd could properly remain treaty-resident in the United Kingdom.
Surely that meant Italy could not tax the company’s business profits?
Not necessarily.
Residence and permanent establishment are different questions.
A company can remain resident in one country while carrying on sufficient business activity in another country to create a permanent establishment there.
Under the UK–Italy treaty, a fixed place of business may constitute a permanent establishment, and a place of management or office is expressly included among the examples. The treaty also contains an agency PE rule.
The modern international tax discussion around home working has made this issue still more relevant. The OECD’s 2025 update to the Model Tax Convention expanded the commentary dealing with cross-border work performed from an individual’s home or other location. It does not mean that every home office automatically becomes a PE. It reinforces the need to examine the factual circumstances, permanence and role of that location in the enterprise’s business.
Luca was not an employee occasionally answering emails from a holiday apartment.
He was the founder.
He generated the work.
He negotiated with clients.
He delivered much of the service.
He controlled the commercial relationship.
And he did those things repeatedly from the same location in Italy.
The residence conclusion therefore did not eliminate the PE analysis.
It merely changed the next question.
Then somebody asked the question that mattered most
“How much profit belongs to Italy?”
Luca had expected a simple answer.
Perhaps his salary.
Perhaps the cost of his home office.
Perhaps some percentage based on the number of days he worked there.
None of those answers necessarily addressed the correct question.
If an Italian permanent establishment existed, the treaty does not simply allocate a proportion of overhead to Italy.
Article 7 requires consideration of the profits attributable to the PE by reference to the profits it might be expected to earn if it were a distinct and separate enterprise carrying on the relevant activities.
HMRC’s own PE guidance follows the same basic functional approach: the activities performed, assets used and risks assumed must first be understood before the attributable profit can sensibly be quantified.
For Albion Consulting Ltd, this produced a difficult commercial question.
What actually generated the profit?
Was it the UK company’s historic reputation?
Its existing client base?
Work performed by UK personnel?
Or Luca’s continuing ability to win engagements, determine pricing, deliver advice and maintain relationships?
There was no universal answer.
But one thing became clear.
Allocating £5,000 of home-office costs to Italy and leaving every pound of entrepreneurial profit in the United Kingdom would not necessarily reflect the business that was actually being conducted.
The company now had three possible histories
By this point the exercise had stopped being about filing one tax return.
There were potentially three different ways of characterising what had happened.
The first was that Albion Consulting Ltd had remained treaty-resident in the United Kingdom throughout, but had developed an Italian permanent establishment.
The second was more significant: that the company had become dual resident under domestic law and its place of effective management had shifted to Italy for treaty purposes.
A UK-incorporated company that becomes treaty non-resident can fall within the UK treaty non-resident rules in CTA 2009 s18. HMRC expressly recognises that a company which is UK resident under domestic rules may nevertheless cease to be UK resident for tax purposes where the applicable treaty awards residence to the other jurisdiction.
That route may then bring further questions, including the consequences of migration and the treatment of assets and latent gains.
The third possibility was that the factual position had changed during the year.
The business Luca ran in January was not necessarily the business he was running in December.
That meant the chronology mattered.
The answer could not simply be selected according to whichever produced the lowest tax charge.
It had to follow what actually happened.
Fixing next year was easier than fixing last year
Once the historic facts had been reconstructed, Luca asked the obvious question.
“Can we just set up an Italian company now?”
Yes.
Possibly.
But that would solve a different problem.
A new subsidiary could provide a clearer framework for the future.
It could employ Luca locally.
Enter into appropriately delineated intercompany arrangements.
Carry on defined functions.
Receive an arm’s-length return for those functions.
Potentially contract with customers directly where commercially appropriate.
But incorporating a company in January does not rewrite what happened the previous June.
A new legal structure operates prospectively.
The historic tax analysis still follows the historic facts.
This is one of the most common mistakes in cross-border restructurings.
A business identifies a problem and immediately asks:
“What company should we create?”
The first question should usually be:
“What structure have we already created through our conduct?”
Only then should the future model be designed.
Luca eventually made a commercial decision, not a tax decision
The business had changed permanently.
Luca was not returning to the United Kingdom.
His principal working location would remain Italy.
Future recruitment was likely to be European.
Some UK clients would remain, but there was no longer a commercial reason for every important business function to be treated as though it happened in London.
That made the strategic choice clearer.
Instead of trying to preserve a historical structure indefinitely, the company needed an operating model reflecting where people would actually work and where authority would actually sit.
That required more than tax planning.
It required decisions about:
corporate governance;
contracting;
customer ownership;
employees and payroll;
banking authority;
intellectual property;
transfer pricing;
profit allocation;
VAT;
social security;
and the role, if any, that the UK company would continue to perform.
The tax structure came afterwards.
Because a sustainable international structure starts with an operating model.
Not with a tax residence label.
The most expensive sentence was also the most innocent
Months earlier, before the move, Luca had said:
“Nothing is changing with the company. I am only moving myself.”
At the time, the sentence sounded entirely reasonable.
The company was not moving house.
Its Companies House registration was not changing.
Its UK bank account would remain open.
Its clients would continue paying the same legal entity.
But a founder-led business does not operate through incorporation documents.
It operates through people.
And where the founder is simultaneously the chief executive, principal salesperson, technical specialist and commercial decision-maker, moving the individual may move much more of the enterprise than anyone initially intended.
The lesson arrived one year late
By the following year Luca’s position was considerably cleaner.
Authority had been deliberately allocated.
The functions of each entity were documented.
The remuneration model followed the actual operating model.
Payroll and social-security obligations had been addressed.
The treatment of cross-border profit was no longer something the accountants attempted to reconstruct twelve months after the event.
Most importantly, the emails, contracts, board papers and bank authorities all told substantially the same story.
That was the real improvement.
Not a clever tax structure.
A coherent one.
The difficulty in Luca’s first year abroad had not arisen because the United Kingdom and Italy had somehow discovered the same company at the same time.
Both countries had simply applied their rules to the business that Luca had actually operated.
The uncertainty arose because the business itself had never decided which country was supposed to do what.
And in international tax, if the business does not make that decision prospectively, the facts will eventually make it retrospectively.
Vectigalis AC Tax Limited advises internationally mobile founders, owner-managed businesses and corporate groups on corporate residence, permanent establishments, transfer pricing, business migration and cross-border operating structures.
A founder relocating abroad does not necessarily need to close or migrate a UK company. But the corporate tax position should ideally be analysed before management, revenue-producing functions and decision-making begin to move.
For a confidential preliminary discussion: angelo@vectigalistax.co.uk
This article is for general information only and does not constitute tax, legal or accounting advice. The analysis depends on the particular facts, jurisdictions, treaty provisions and tax periods involved.