HMRC’s defeat on appeal at the Upper Tribunal in Development Securities in June 2019 provides the latest step in the development of the UK corporate residence test. A company incorporated outside of the UK will be regarded as UK resident if its central management and control (“CMC”) is based in the UK. Dating back to the De Beers case in 1906, the location of Board meetings has always proved important in determining where “real control” lies, but over time the courts have shown a willingness to look at the bigger picture.
This is particularly evident when determining CMC for special purposes vehicles (“SPVs”) established in offshore locations, but owned by a UK parent. In Wood v. Holden (2006), it was stated that “such companies do not need frequent and lengthy board meetings”. Crucially, it determined that SPVs are not simply resident where their parent is located because they carry out a purpose determined by their shareholder.
Similarly, in Laerstate (2009) a Netherlands incorporated company was found to be UK resident because CMC was exercised by a UK resident shareholder. Laerstate highlighted that CMC is a factual matter, not just determined by Board meetings which may apply a rubber stamp. In addition to holding Board meetings outside the UK, it is important that (i) the Board meet regularly to consider strategic decisions, (ii) documentation is kept to evidence decisions reached (and on what basis), and (iii) UK Directors should not hold themselves out as being able to bind a company by themselves.
In Development Securities (2017), the First Tier Tribunal found that Jersey SPVs under a UK parent were UK resident even though 3/4 of the Directors were Jersey resident and Board meetings held offshore. It inferred that the company was controlled from the UK because the Directors were regarded as having had no choice but to follow the shareholder’s interests in approving a “very specific plan” which the court deemed uncommercial for the entities on a standalone basis.
However, that judgment was reversed in June 2019 on appeal. Two important factors influenced the Upper Tribunal’s decision; firstly, they questioned the lack of commerciality because the UK parent funded the overpayments paid by the SPV; and secondly, they placed significant weight on the fact that the Directors had a duty under Jersey Company Law to have regard to the best interests of their ultimate [UK] shareholder.
Moving into 2020, although Development Securities is scheduled to be appealed by HMRC, it helps in demonstrating that shareholder influence is not sufficient to demonstrate CMC and that there may be valid reasons for Directors to have regard to their shareholder’s interests. With increased global mobility and use of smart phones, it will always be important to look at more than just the location of Board meetings when assessing UK residency.
Should you wish to discuss any tax related exposure, please contact Paul on 020 3794 4520 or email at email@example.com