Best practice recommendations, as noted in our alert dated 24 November 2009, include the following:
- Board meetings
- A majority (as a minimum, but preferably all) of the directors of the offshore company should be resident for tax purposes outside the UK, preferably in the relevant offshore jurisdiction.
- Regular board meetings should be held outside the UK, preferably in the relevant offshore jurisdiction. Detailed minutes of board meetings should be made and kept securely. Directors should attend board meetings ideally in person and certainly not by telephone from the UK.
- Directors should be suitably qualified and have relevant experience for the business undertaken by the offshore company. They should all be fully aware of the business operations of the company and, as a result, be able to ask relevant, pertinent questions regarding the business tabled at board meetings so that informed decisions can be made.
- The Weavering case highlights the importance of the directors being familiar with the constitutional documents of the company and in particular any investment restrictions. It also demonstrates the importance of ensuring that service provider contracts with the company have reasonable terms and are properly performed and monitored.
- Strategic decisions should only be made following due consideration by the directors at a properly convened board meeting.
- The directors should be provided with full information, and in sufficient time, to allow them to make a considered decision about the matters to be discussed at board meetings. It is important for the directors to duly consider all matters tabled at a board meeting, investigate any concerns, and be seen properly to exercise their power. Board meetings should not simply "rubber stamp" proposals put forward by any UK resident managers or executives of a UK resident parent company.
- Consider carefully the governing law of the key documents to be executed by the offshore company. If it is English law, then consider whether or not that is appropriate in the circumstances. There could be good reason, in certain cases, for English law to apply. If, however, there are no UK resident parties to a document then consider whether the governing law of a different jurisdiction would be more appropriate.
- Ensure that emails and other communications made by fund managers and advisers to the offshore company are properly directed to the managers or executives of the company rather than exclusively to individuals resident in the UK.
- A copy of all documents involving the offshore company should be kept by the company at its registered office or principal place of business in the jurisdiction concerned.
- Execution of agreements
- Once written agreements have been duly considered and approved by the board of the offshore company, it is preferable for such agreements to be signed by non-UK resident directors rather than signed in the UK by any UK resident directors.
- It is more important, however, that the actual decision to execute is made in the relevant offshore jurisdiction, rather than the manner of execution of that decision. HM Revenue & Customers (HMRC) recognises in its guidance notes that "the mere physical acts of signing resolutions or documents does not suffice for actual management".
- UK resident parent company
- Care is required in any dealings between a UK resident parent company and its offshore subsidiary. HMRC recognises that it is particularly difficult to apply the central management and control (CMC) test when the offshore company has a UK-based parent. It is expected that the parent company will usually influence the activities of its subsidiary, especially if it is the sole or majority shareholder.
- It is acceptable for the parent company to exercise those powers that are typically reserved for a shareholder, such as the appointment and removal of directors, and approving the financial structure of a subsidiary. HMRC confirms in its guidance that it would not usually seek to argue, in these cases, that the CMC of the subsidiary is in the UK.
- The situation differs however, when the parent company usurps the function of the subsidiary's board, or where the board simply rubber stamps the parent company's decisions without giving independent consideration to the same. In these instances, HMRC will draw the conclusion that the subsidiary is subject to CMC from the UK and is therefore UK resident for tax purposes.
- Delegation of decisions to the UK resident management company
- Great care is also needed when an offshore company delegates certain decisions to a UK resident company or other agent. What decisions can be delegated without prejudicing the offshore company's tax residence? HMRC acknowledges that it is possible to delegate certain decisions to a UK agent without necessarily bringing the offshore company within the territorial scope of UK tax. HMRC considers that offshore companies: "can exercise power in truth and fact by doing very little indeed. They can appoint agents and servants to attend to the day-to-day running of affairs..."
HMRC's guidance, and the relevant case law, can be difficult to interpret and apply in practice. While it seems clear that the key strategic decisions of a company should be taken by the board, and that the more routine day-to-day decisions could be delegated, what about the decisions which fall between the two?
In practice we have seen the following methods used to try to facilitate the identification of decisions which can be safely delegated:
- By listing the broad type of decisions that the offshore company will face in practice and separating out the important strategic decisions from a list of the more routine day-to-day decisions.
Examples of key strategic decisions are: the acquisition or disposal of material assets (including real estate or shares in other companies); the approval of annual accounts and tax returns; financial decisions (borrowing and calling down contributions from shareholders); and adopting the annual business plan and budget. Examples of routine day-to-day decisions are: collecting rent and service charges; and undertaking routine maintenance. Such day-to-day decisions can usually be delegated to a UK resident asset manager.
- By reference to the business plan and budget adopted by the offshore company's board. Decisions relating to the implementation of matters approved in the business plan or budget may be delegated. This delegation may also (and should) be subject to additional parameters set by the offshore company's board. Any items of expenditure not specifically referred to in the approved budget or business plan must be referred to the offshore company's board before being expended.
- By reference to an appropriate financial threshold. The board of the offshore company may decide that certain decisions that fall below a certain financial threshold are of less strategic importance and hence can be delegated. The threshold needs to be carefully considered and selected by the board.
- If any delegation is to be agreed, then the terms should be set out clearly in a written agreement. The terms of the delegated authority should be fully and carefully considered by the board of the offshore company before it is executed (and in accordance with the recommendations above).