Offshore corporate entities have and continue to be a useful tool in the tax structuring framework for many organisations. However, HMRC under renewed government pressure to increase tax revenues in the current economic downturn and buoyed by its recent tribunal success in Laerstate BV v HMRC (2009) TC00162, seems to want to take an antagonistic approach to offshore tax structures by investigating and attacking the residency of some offshore corporates.
The Laerstate case heralds a new era of an interventionist tax inspectorate. Shortly after the Tribunal’s decision in October 2009, a senior figure at HMRC confirmed that it would no longer only concentrate its residency investigations on offshore special purpose vehicles but would instead look at the place of residence of major listed companies.
Central management and control
The location of a corporate’s central management and control (CMC) has long been the test for determining where the entity is resident for tax purposes and this has generally been held to be where the board of directors meets. As such, it was in the past relatively easy to ensure that a company was not resident in the UK for tax purposes by complying with certain prescriptive guidelines, which included:
- the company being incorporated and all the corporate books being maintained outside of the UK;
- the majority of the directors being resident outside of the UK; and
- the Board meeting regularly outside of the UK and sitting for a reasonable amount of time to properly consider their decisions.
In Laerstate both parties agreed that the residence of the company in question (Laerstate BV) should be determined by reference to where CMC was based. However, the Tribunal determined that CMC could not simply be evidenced by Board minutes showing that Board meetings were held offshore to approve particular transactions. Instead the Tribunal investigated where, as a matter of fact, strategic decisions were actually made, not where they were approved. The Tribunal accepted, on the basis of extensive factual evidence presented by HMRC, that CMC of Laerstate BV during the relevant time was based in the UK. The evidence presented to the Tribunal included extract diary entries, airline ticket stubs and transcripts from interviews with the relevant directors and other third parties.
Laerstate BV was a company incorporated and registered in Holland and was the vehicle used by Dieter Bock to acquire and then dispose of shares in Lonrho plc. Dieter Bock was the sole shareholder of Laerstate BV during the relevant period and was one of the directors from incorporation until his resignation in August 1996, following which time Johannes Trapman was the sole director.
The Tribunal had to determine whether: (a) whilst Dieter Bock was a director; and (b) after he had resigned, CMC was located in Holland or in the UK, where (following the acquisition of Lonrho plc) Dieter Bock was permanently based. The Tribunal found that during the period in which Mr Bock was a director, the fact that the constitutional documents of Laerstate authorised Mr Bock to represent and bind the company in his own right was persuasive evidence that CMC was where Mr Bock resided and not where the company held its Board meetings.
In relation to the period after Mr Bock’s resignation the Tribunal held that the available factual evidence suggested that Mr Bock, rather than Mr Trapman, was still making the strategic decisions in relation to the disposal of the shares in Lonrho. Mr Trapman (as the sole director) was effectively rubber stamping decisions already made by Mr Bock.
The reasoning behind the Laerstate decision is quite simple. Corporates should be resident in the UK for tax purposes if their business is genuinely run in the UK and no sham structuring should enable a corporate to avoid liability to UK tax. However, in practice what this case does is to create an environment (at least for the time being) where it is difficult for truly international organisations to determine where corporates within the organisation are resident for tax.
In July 2010, HMRC published new draft guidance on situations where it would not usually review a company’s residence status. The advice restates a lot of the old case law but does little to clarify the confusion created by Laerstate.
Following the Laerstate case corporates should be wary of how their business is run. No longer can advisers set out a set list of criteria, which if met will ensure that a corporate is resident offshore for tax purposes. Corporates will have to review their business in the round and the governance of where key decision makers are based and where they make strategic decisions will have to be tightly controlled and clearly documented.