Non-UK resident companies are still outside the territorial scope of UK corporation tax on chargeable gains. This is provided that the company does not have a UK permanent establishment. Exemption applies even when the underlying assets are situated in the United Kingdom - including UK real estate.

However, we anticipate that HM Treasury and HM Revenue & Customs (HMRC) will be looking more closely at, and challenging, the residence status of overseas incorporated companies with a UK connection.

Lately HMRC has been less inclined to negotiate with errant taxpayers and may be keen to redress the balance following recent defeats in high-profile tax residence cases involving overseas incorporated companies. This is particularly likely in the current economic climate, where diminished revenues are squeezing the Government's general tax-take and demands for action against perceived tax avoidance grow louder.

It is, therefore, vital that an overseas incorporated company is carefully and properly established, managed and controlled if it is successfully to escape the United Kingdom's tax net.

Key points

If an overseas incorporated company is to be non-resident for UK tax purposes:

  • all board meetings should be held outside the United Kingdom (preferably, regularly and at the same place), and be fully minuted;
  • the board should execute all company documents outside the United Kingdom; and
  • all documents and proposals put to the board should be carefully discussed and considered by the board (not merely "rubber stamped" with decisions actually made in the United Kingdom).

It is important that the company's board does not allow itself to be dictated to by shareholders (or others) and that the company's constitution enshrines, supports and protects the above principles.

Provided that a company can demonstrate that management and control decisions have taken place outside the United Kingdom, the burden shifts to HMRC to prove any allegation that a company has been centrally managed and controlled from the United Kingdom (and so is liable to UK tax on chargeable gains).


A company is within the territorial scope of UK corporation tax on chargeable gains if it:

  • is incorporated in the United Kingdom;
  • has a UK permanent establishment (but only to the extent that such gains are realised in respect of that permanent establishment); or
  • is incorporated overseas but is UK resident.

A company has a UK permanent establishment, broadly, if it has a fixed place of business, or an authorised agent carrying on business on its behalf, in the United Kingdom.

To determine whether an overseas incorporated company is resident in the United Kingdom, both a common law and statutory test need to be considered.

At common law, a company is UK resident for tax purposes if its central management and control is exercised in the United Kingdom. The House of Lords, in the 1906 De Beers case, adopted the test that a company was resident "where its real business [was] carried on ... where the central management and control actually abides". Effectively this test looks at the "highest" level of control exercised over the company.

Under statute, if a company would, as a result of the common law test, be tax resident in the United Kingdom and also, as a result of any double tax treaty "tie-breaker" provision, be resident in another territory outside the United Kingdom, then the company is not UK resident for tax purposes.

In 2006 the Court of Appeal confirmed, in Wood v Holden, long-standing principles on the tax residence of overseas incorporated companies.

Wood v Holden

The Court of Appeal's decision in Wood v Holden is a leading authority on company residence for UK chargeable gains purposes. The Court of Appeal upheld the High Court's ruling for the taxpayer following the Special Commissioners' decision for HMRC.

Mr Wood and his wife owned 96% of the shares in a company which operated a chain of card shops. The case concerned a sophisticated capital gains tax mitigation structure, at the heart of which were certain overseas incorporated companies - including the Dutch incorporated company Eulalia Holdings BV. Following its acquisition into the structure, and as part of the tax planning, Eulalia acquired, and then disposed of, shares in a new holding company.

Eulalia had been acquired as a dormant company from Airone BV, a subsidiary of ABN AMRO Bank NV. Following its acquisition, ABN AMRO Trust Company was appointed as sole managing director of Eulalia.

HMRC contended that, notwithstanding that the board meetings had been held and the documents executed outside the United Kingdom, the reality was that Eulalia had effectively been controlled by Mr Wood (or his accountants) from the United Kingdom and that, accordingly, Eulalia was UK resident for tax purposes.

In the 1960 Unit Construction Co case the parent company usurped the powers of the board of the subsidiaries, which stood aside and did not meet at all. Unlike in that case, representatives of ABN AMRO did execute the relevant legal documents. However, the case for HMRC was that ABN AMRO did not take the decisions but, instead, did what it was told to do by Mr Wood (or his accountants).

The Special Commissioners did not consider that the physical acts of signing resolutions or documents, nor the preceding mental process, were sufficient to determine actual management. The Special Commissioners considered that the place where an effective decision is taken is where the central management and control abides. The failure of ABN AMRO to give any sufficient "real" or "informed" consideration to the terms upon which the shares were acquired, or sold, by Eulalia had the effect that the actual effective decision that the documents be signed and executed was not taken by ABN AMRO in Amsterdam. However, the Special Commissioners did not find it necessary to say where, or by whom, the actual effective decision was taken; but the inference was that they thought the decision was taken by Mr Wood and/or his accountants. The Special Commissioners had concluded that Mr Wood had not established that Eulalia was not UK resident for tax purposes.

The High Court, in rejecting the decision of the Special Commissioners, emphasised the distinction between, on the one hand, exercising management and control and, on the other hand, being able to influence those who exercise management and control. In determining where central management and control of an overseas incorporated company lies it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs are usurped and control is exercised independently. The High Court considered that it was not enough for HMRC simply to say that it was not sure where the precise place of effective management was, but, wherever it was, it was situated somewhere in the United Kingdom.

The Court of Appeal, in upholding the High Court's decision, was clear that there comes a point where the taxpayer has produced evidence which appears to show that the assessment is wrong and at that point the evidential burden must pass to HMRC. It was not sufficient for HMRC merely to criticise the lack of evidence from some of those at ABN AMRO and the taxpayers' accountants who had been involved in the transaction several years earlier. Nor was it sufficient for HMRC to demonstrate that the steps taken were part of a single tax scheme and that those involved all shared the common expectation that the various stages of the scheme would in fact take place. Neither of these points were denied by Mr Wood but nor did they lead to the conclusion that Eulalia was UK resident.

The Court of Appeal held that, on the facts, the proper conclusion (as should have been reached by the Special Commissioners) was that Eulalia was resident in the Netherlands for tax purposes. The directors of Eulalia were not by-passed nor did they stand aside since the ABN AMRO representatives signed and executed the relevant documents. Implicit in the finding that ABN AMRO representatives signed and executed the documents, was that they must have decided to do so. There was no basis to the inference that Mr Wood, his accountants or anybody else dictated to ABN AMRO what decision it should take.

News Datacom v Atkinson

Later in 2006, and signalling another victory for the taxpayer, the Special Commissioners confirmed in the case of Datacom v Atkinson that, provided that the board of directors has not been usurped, central management and control is exercised at the place where the board meets. The Special Commissioners did not, however, confirm exactly where the central management and control took place, suffice that it was outside the United Kingdom.

At the heart of the Datacom case was the question of the residence for tax purposes of News Data Security Products Limited (NDSP), a company incorporated in Hong Kong. While the majority of NDSP's directors were not UK resident, and all but one of its board meetings had taken place outside the United Kingdom, HMRC contended that NDSP was nevertheless subject to central management and control from within the United Kingdom by reason of a shareholders' agreement requiring certain strategic decisions to be approved by all shareholders (the majority shareholder being a UK resident company) and the appointment by the board of an executive committee, which met almost exclusively in the United Kingdom. However, the Special Commissioners held that central control and management operated at the level of the board and took place where the board met – namely, outside the United Kingdom.


The decision in Wood v Holden provides comfort for taxpayers that HMRC cannot merely infer that central management and control of an overseas company takes place in the United Kingdom and that the execution of legal documents outside the United Kingdom is simply a "rubber stamping" procedure.

It is important that the management and control of the board is not usurped (as in the Unit Construction Co case where the board of directors did not meet at all). However, provided that the board does properly meet to consider and sign documents outside the United Kingdom, HMRC should not be able to infer that the management and control of the company has not been properly exercised outside the United Kingdom - even where recommendations have been put to the board by persons or advisors located in the United Kingdom or where draft documents have been prepared in the United Kingdom. This would also be true where, say (and as in Wood v Holden), the sole director of an overseas incorporated company is a professional corporate entity and it is reasonably anticipated by UK advisors or investors that such a director will act in a certain way. Provided that such anticipation does not amount to dictation, the central management and control of the company would nevertheless be exercised from outside the United Kingdom.

While (and as confirmed in Datacom) it is not necessary to demonstrate where the actual exercise of management and control of a company takes place, suffice that it is outside the United Kingdom, it is nevertheless prudent to ensure that an overseas incorporated entity does have a fixed place of residence. Furthermore (and as also confirmed in Datacom), the holding of UK meetings that are "of a purely ministerial or housekeeping nature" should not, of itself, result in a company being UK resident for tax purposes – although, clearly care should be taken where any meetings (preferably, none at all) are to be held in the United Kingdom.

Evidentially it is far easier to demonstrate that a company has been effectively managed and controlled from outside the United Kingdom if a particular place can be identified where regular board meetings have taken place (preferably with voluminous minutes) and at which all decisions are made (after careful discussion and consideration, not merely "rubber stamping") and all documentation executed.