This update contains:
- a recap of the general position on tax residency under Jersey legislation;
- a consideration of the previous case law relating to management and control of Jersey companies; and
- an evaluation of a recent UK tax case involving three Jersey companies which is relevant to local service providers.
The principal Jersey tax statute is the Income Tax (Jersey) Law 1961, which determines the rate of Jersey income tax payable by Jersey companies.
For the purposes of the Income Tax Law, a company is Jersey tax resident if it is incorporated in Jersey or – if incorporated elsewhere – if its business is managed and controlled in Jersey. The general rate of tax is 0%, subject to some local exceptions.
Notwithstanding the general rule that Jersey-incorporated companies are treated as Jersey tax resident, the Income Tax Law states that a Jersey-incorporated company may be regarded as exclusively tax resident elsewhere if:
- its business is managed and controlled in a jurisdiction other than Jersey;
- it is tax resident in that jurisdiction; and
- the highest rate of corporate income tax in that jurisdiction is 10% or higher.
For Jersey and English purposes, tax residency is broadly determined by reference to where an entity's central management and control abides, as this is where the high-level strategic decisions of the company are made. The principles of management and control in Jersey are the same as those in the United Kingdom, so English case law is relevant. However, as outlined below, there are other factors which influence where management and control is deemed to be located.
The English case Wood v Holden ( EWCA Civ 26) confirmed that all board meetings should be held, and all decisions and resolutions should be made, in Jersey to ensure that a Jersey entity's tax residency remains there as a matter of English tax law.
In the English case Laerstate BV v HMRC ( UKFTT 209) the First Tier Tribunal held that company residency cannot be established merely on the basis of the location of board meetings. The tribunal found that a company should be resident in the place where it had been doing all of its real business, including contract negotiations and obtaining advice. In Laerstate the tribunal found that this was within the United Kingdom, which made the company tax resident there. The following guidelines were raised:
- When determining central management and control, the tribunal will apply a general overview of how a company is run, and in particular look at the course of trading and business of a company (this is more relevant to trading companies than holding companies which have no operations overseas).
- All board meetings should be held and all documents signed outside the United Kingdom, and attendance by telephone from within the United Kingdom should be avoided (travel documentation should be kept as evidence of attendance at meetings and of where documentation is signed).
- UK resident directors – or directors conducting business from within the United Kingdom – should not conduct themselves in such a way that may lead third parties to assume that they are authorised to negotiate on behalf of and bind the company (ie, any duties carried out on behalf of the company – such as the negotiation of documents – should be delegated by the board at a meeting, and the execution of all documentation should remain subject to the board's approval).
The recent case of Development Securities (No 9) Ltd v HMRC ( UKFTT 0565 (TC)) – a first-instance decision of the First Tier Tribunal which may be appealed – sounds a further note of caution with regard to interaction between offshore subsidiaries and UK parent companies and the role of directors.
Development Securities (No 9) Ltd (DSL) set up three Jersey subsidiaries to participate in a tax planning arrangement on the recommendation of a 'big four' accounting firm.
The Jersey companies were to acquire assets at more than their market value via the use of call options which could be exercised once certain conditions were met. This structure was intended to increase the capital losses that were available to the DSL group while protecting against allegations that the transactions were preordained.
At face value the acquisitions did not make commercial sense for the Jersey subsidiaries. However, they did make commercial sense for DSL on the basis that any capital loss – when set off against any capital gain – could be deducted from the group's tax liabilities, reducing the amount that DSL would have to pay in corporation tax.
Shortly after the acquisitions were completed, each Jersey subsidiary would become a UK tax resident company by a resolution of its directors. In theory, each such tax migration would avoid the accrual of stamp duty or corporation tax and reduce the overall level of tax that each company would have to pay as a result of the capital losses.
Correspondence and manuscript notes on the Jersey subsidiaries' board minutes referred to an instruction from DSL rather than advice or a recommendation from DSL or another adviser. The tribunal found that the Jersey subsidiaries were following DSL's orders and were held to be managed and controlled from the United Kingdom and not from Jersey.
The tribunal made reference to Wood v Holden, but this case was distinguished by the following:
- The acquisitions made no commercial sense for the Jersey subsidiaries and only made sense when looking at the wider picture of DSL's tax planning; and
- As the acquisitions made no commercial sense for the Jersey subsidiaries (arguably with no corporate benefit to them), the acquisitions could only have been carried out at the direction of DSL.
The Development Securities case again highlights the importance of the safeguards that Jersey service providers and advisers are used to ensuring are in place, including:
- the proper composition of a non-UK company's board of directors;
- protecting the genuine autonomy of that board; and
- ensuring that all decisions in relation to the business strategy and activities of the company are taken at board meetings held outside the United Kingdom.
However, although it is an extreme case, it highlights several other considerations:
- Attention should be paid to the terminology used in board meeting minutes and other correspondence (eg, 'recommendations' rather than 'instructions'). Central management and control can be influenced or negated if there are dominant shareholders or shadow directors.
- The absence of any corporate benefit will make it easier for Her Majesty's Revenue and Customs (HMRC) to challenge the location of management and control. Companies should consider whether there is a commercial – as opposed to tax – rationale for entering into a transaction (and should ensure that this rationale is discussed and recorded in board meeting minutes). Such discussion and recording of rationale will provide a better audit trail for the future. Note that an Article 74 corporate benefit 'whitewash' under the Companies (Jersey) Law 1991 where there is no benefit will not assist in the context of UK tax and residency.
- If the benefits of a transaction are tax benefits, the company should seek advice on the benefits and risks.
- HMRC will consider all company records, emails and correspondence in close detail and although correspondence with lawyers may be privileged, other correspondence and advice, including tax advice, will be available for inspection by HMRC.
- HMRC may begin to look more closely at company residence in other situations.
- An unforeseen impact may arise where an exit is being considered by a shareholder via a sale of the company and the purchaser or the insurer providing warranty, and indemnity insurance may scrutinise records in more detail than it would have before. Due diligence in relation to Jersey companies which have participated in tax planning exercises may become more time-consuming and costly as a result.
As a result, companies should:
- ensure that all documents, policies and protocols emphasise the need to avoid language relating to 'instructions' or 'directions', and that there are drafting and correspondence guidelines for staff;
- ensure that all statutory and other correspondence is centrally held and easily accessible if HMRC request it;
- try to avoid having directors attend from the United Kingdom, particularly if they represent a shareholder; and
- ensure that board meeting papers properly consider and document the commercial rationale for transactions intended to deliver a particular outcome for English tax purposes.
The case also serves as a timely reminder that Jersey resident directors cannot provide a purely 'administrative' service for the benefit of the parent owner; directors carry all of the duties and responsibilities of a director generally and, as such, they must ensure that they have sufficient knowledge and understanding of the company's business.
For further information on this topic please contact Raulin Amy or Simon Felton at Ogier by telephone (+44 1534 514 000) or email (firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.