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Corporate residence: a new line in the sand?

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The UK rules determining the tax residence of a company are relatively straightforward and yet their application is generally not. Development Securities (No. 9) Ltd and others [2017] UKFTT 565 (TC) continues the theme: it is both comforting and cautionary.

The plan

The Development Securities Group (DSG) developed and implemented a ‘plan’, making use of companies incorporated in Jersey (the JerseyCos), designed to inflate the value of latent capital losses on certain UK property-related assets. For the ‘plan’ to work, it was critical that the JerseyCos were tax resident in Jersey. 

Corporate residence

As Jersey incorporated companies, the JerseyCos could only be UK tax-resident if they were ‘centrally managed and controlled’ (CMC) in the UK. 
The concept of CMC is not one that is defined in legislation; it has evolved over more than 100 years of case law. It is likely that this case will signal a further milestone in that evolution.
To identify the CMC of a company one looks for where the ‘real business [of the company] is carried on’. The ‘real business’ of a company can normally be found where the highest level of decision-making takes place. In the majority of cases, therefore, control will be found with a company’s board of directors. While others can influence the board, such influence will not generally affect CMC provided the board still makes the actual decisions. In exceptional circumstances, however, CMC by a board can be usurped.

Outsider influence and usurpation

Development Securities subtly redraws the dividing line between influence and usurpation.
Traditionally, the distinction has broadly been between: 
  • directors making an actual decision, however heavily influenced by an outsider – influence; and 
  • directors not making any decision at all – usurpation. 
The DSG ‘plan’ was carefully designed, and meticulously carried out, to ensure the CMC of the JerseyCos remained with the board, despite obvious influence from the parent group. 
The FTT, however, decided that the real decisions, affecting the real business, had been taken by the UK resident parent company; the board had been usurped.
In reaching that conclusion, the FTT identified three unusual features:
  • First, the only transaction to be undertaken by the JerseyCos was uncommercial, namely to acquire assets for a substantial amount in excess of their market value;
  • Second, even if the corporate law impediment to implementing the ‘plan’ could be resolved, it did not necessarily follow that the companies should implement it; and 
  • Finally, the JerseyCos were only ever intended to be Jersey resident for a very short period of time.
Based on these three, fact-specific findings, the FTT concluded that ‘from the outset, in the very act of agreeing to take on the engagement, the Jersey directors were in reality agreeing to implement what the parent had already at that point in effect decided to do’; that is, the parent exercised the CMC of the JerseyCos.

A new line in the sand? 

On one level Development Securities is reassuring. Although it is a timely reminder to ensure advice and processes are robust, there is no implication that the use of non-UK resident companies in a group’s commercial operations is about to be challenged.
That said, by redrawing the borderline, taxpayers (and their advisers) will need to review and tighten their processes and controls to ensure non-UK resident companies remain non-UK resident for tax purposes. In particular, alongside the normal safeguards, careful consideration should now also be given to: 
  • whether or not there is a commercial (as opposed to tax) justification for making particular decisions;
  • ensuring that formal board minutes accurately reflect the actual discussions conducted at board meetings; and
  • the use and status of single-purpose non-UK resident companies.Development Securities represents authority to distinguish between offshore companies established to perform a limited, single, function for a group of companies and those established to perform single act.
Taxpayers with offshore operations and structures might like to double-check they are still standing on the right side of the line in the corporate residency sand.
Jeremy Cape & Robert O’Hare, Squire Patton Boggs
Issue: 1365
Categories: In brief