The Tax Tribunal has recently considered the question of corporate residence in the case of Laerstate BV v HMRC TC162. (The facts are long and complicated but very interesting as they chronicle the power struggle between Tiny Rowland and Dieter Bock over the control of Lonrho.) Of course, the much more interesting aspect was the discussion about how to determine the residence of a company. Unusually, there was no dispute between the taxpayer and HMRC over the tests to be applied. Having what amounts to an agreed statement of the relevant tests seemed to be so valuable that I thought it may be useful to set out the Tribunal’s comments, at least in summary form.
- They started with the classic formulation that a company resides where its real business is carried on, i.e., where the central management and control actually abides.
- There is no assumption that central management and control must be found where the directors meet. It is entirely a question of fact. Normally the location where central management and control abides will be where a company is managed by its directors in board meetings, but if the management is carried out outside board meetings you have to identify who was managing the company by making high level decisions – and where they were doing it. This is the case, even though it may be contrary to the company’s constitution.
- You have to look at the particular actions of the company such as the signing of documents and the making of board resolutions but the factual question must be considered following scrutiny of the course of business and trading. A company’s residence will not fluctuate merely because individual acts of management take place in different territories. The whole picture must be considered.
- It would be exceptional for a parent company to assume the functional management of its subsidiary because a parent company usually operates through the boards of its subsidiaries. However the position will be otherwise if the parent company effectively usurps what in theory are the functions of the local boards.
- The mere act of signing resolutions or documents does not suffice to create actual management. The local directors must apply their minds to whether or not to sign the documents. There is nothing to prevent a majority shareholder from indicating how the directors of the company should act. If the directors consider those wishes and act on them it is still their decision. The distinction is between directors making the decision and not making any decision at all – for example where an agreement is put in front of the directors opened at the signature page and they sign it regardless.
- Moving up the scale, it is still insufficient for the directors to know what they are signing but to sign it without considering whether or not it will be a good idea. What is needed is a genuine informed decision of whether the resolutions should be passed or the documents signed – merely going through the motions is not enough.
- The directors might follow the wishes of shareholders after considering the position, having at least the absolute minimum information to make a decision. It may be an ill advised decision but it can still be their decision. However if the directors are not in possession of the absolute minimum information necessary then there can be no decision at all. (The paper trail necessary to back up the decision making process will obviously be extremely important.)
These were the principles upon which the case of Laerstate BV v HMRC was decided. (This is a useful supplement to other recent decisions such as Untelrab and Wood v Holden and we are getting close to a fairly comprehensive code on the subject). As it turned out, the majority shareholder in Laerstate was the person concerned with strategic policy and management matters throughout his time as a director of the company and also after he ceased to be a director. The Tribunal decided that his activities constituted the real top level management (or the realistic positive management) of the company. Other directors were limited to signing documents when told to do so. Where he was resident was not important – what mattered was where the relevant activities were actually carried out. It was clear that he did them in the UK, and that made the company resident here.
There was some discussion about whether central control and management is the same as the place of effective management which is the phrase commonly used in double taxation agreements to determine residence. This is significant because although the Tribunal made it clear that you have to look at the whole picture and a company’s residence will not move around from one territory to another depending on individual acts of management (which is a relief because of the possibility of exit charges arising on each occasion). However, this could very well be the position with trustees whose residence will fluctuate (and exit charges will arise) by reason of a change in the residence of one of the trustees. If the place of effective management is determined on the same basis as central control and management, that could be a useful safety net to trusts which might otherwise be vulnerable to exit charges.