Tax Factor

07 May 2010

A Cautionary Tale of Corporate Residence

Over the last few years, a number of companies have moved their corporate headquarters away from the UK. A recent Tax Tribunal case has highlighted the need to ensure that, if non-UK residence is to be maintained, great care has to be taken to make sure that the effective management and control does not take place in the UK.

Background

UK tax residence for a company is generally determined by its being either (a) incorporated in the UK or (b) centrally managed and controlled in the UK. The latter phrase is ususally taken as meaning where major, strategic decisions are taken rather than simply the day-to-day running of the company's operations.

Main facts

The company involved in the Tax Tribunal case, Laerstate BV, was incorporated in the Netherlands in 1988. A few years later, the company was acquired by Dieter Bock, who subsequently became the CEO of Lonrho in London. He used Laerstate to acquire shares in Lonrho. Towards the end of 1996, those shares were sold.

The company had two directors, Mr Bock, who was UK resident, and Mr Trapman, who lived in the Netherlands. The company's constitution allowed either director to make decisions, without having to refer to the other.

Central management and control

The Revenue contended that Mr Bock had effective control and that the company's central management and control was therefore based in the UK. If correct, the profit on the sale of the Lonrho shares would be liable to UK tax.

The company contended that its central management and control was outside the UK, on the basis that board meetings, board agreements and various other matters were dealt with outside the UK, generally in the Netherlands, with Mr Bock being present. Unfortunately, Mr Bock's travel details contradicted this, showing that he was in the UK when he was supposed to have been abroad.

Similarly, the contention that Mr Trapman had taken the decisions relating to the sale of the shares did not stand up to scrutiny either - there was substantial evidence that the decisions were taken by Mr Bock in the UK, acting on the advice of his solicitors in London.

Unsurprisingly, the Tribunal came to the conclusion that the company's central management and control was in the UK, with the result that the profits were taxable in the UK.

Practical upshot

For a non-UK incorporated company that has a footprint in the UK to remain outside the Revenue's clutches, great care has to be taken to ensure that its central management and control takes place outside the UK. As a minimum:

• Strategic decisions should only be taken at board meetings;

• Board meetings should be held regularly;

• They should not be held in the UK;

• Unless utterly unavoidable, a UK-based director (or shadow director) should not attend a board meeting by telephone while in the UK; it would be better if he gave apologies or sent an alternate;

• Board members should be properly briefed on the matters to be discussed, and provided with enough background information and briefings to be able to reach decisions on the basis that they are properly informed;

• Board minutes should not be created in advance and simply signed off - they should be a proper record of the debate and decisions, and there should be contemporaneous evidence to support this;

• The minutes, contemporaneous notes and briefing papers should be kept securely until the Revenue is time-barred from challenging residence status - it is worth remembering that the activities reviewed in this decision took place in the mid-1990s, and the case was only heard last year;

• Directors and senior management must act in accordance with the above guidelines; and

• Ideally, the company's constitution will preclude a valid meeting of the Board taking place in the UK and provide for a majority of the directors being non-UK resident.

Clearly, UK-based shareholders who wish to use offshore company structures may find it difficult to accept that they have to cede control to a board based abroad; however, the price for effective tax planning means that there are real consequences in the real world, and this case serves as a timely reminder.