“To be or not to be” – resident in the UK – useful guidance for directors of Jersey companies
In this briefing, I have attempted to consider two useful cases which deal with residence of non-UK companies for tax purposes.
In general, it is well established that companies are UK resident for taxation purposes if they are either incorporated in the UK or their central management and control is exercised in the UK. The concept of control & management is well known in the offshore industry however it is useful to reiterate what that means:
“The residence of a company is determined by the place where its real business is carried on.”
This statement on its own does not really assist directors of Jersey companies in understanding what practical steps they should take to demonstrate that real business is carried on in Jersey.
In that context, it is therefore useful to look at two recent cases where non-UK incorporated companies have been found to be UK resident for tax purposes, despite all board meetings being held outside of the UK.
Laerstate BV v HMRC  UKFTT 209
This case concerns a Dutch company; Laerstate, which was wholly owned by Dieter Bock who was also one of the two directors during the relevant period between 1992 and 1996.
Mr Bock used Laerstate to acquire shares in Lonrho Plc of which Mr Bock was the CEO in the early 1990s. Subsequently, in 1996, Laerstate disposed of the shares in Lonrho Plc at a profit.
HMRC sought to recover capital gains tax on the disposal of the Lonrho shares on the basis that Laerstate was, at all relevant times, UK resident.
Laerstate case considers the application of the corporate residence test in two scenarios (i) when Mr Bock was one of the two directors of Laerstate and (ii) after Mr Bock had resigned as director of Laerstate prior to the sale of the shares in Lonrho.
The evidence produced during the hearings showed the following:
• The articles of Laerstate allowed each director to individually bind the company in dealings with third parties;
• Some board meetings were held during the relevant periods however, these did not concern matters of overall policy and strategy of the company;
• All activities that led to the purchase by Laersate of the shares in Lonrho were conducted by Mr Bock individually;
• The other director, Mr. Trapman, was not provided with drafts of any relevant documentation he was signing; and
• Finally, travel records of Mr. Bock indicated that he undertook most of his management activities whilst in the UK.
The First-tier Tribunal concluded that it is purely a question of fact where the control and management of a company sits and it must be a location where high-level strategic and policy decisions are made. It continued to add that in order to establish the location of the central management and control, it is necessary to look at a general overview of how a company is run. In particular, it is important to consider whether the course of trading and business of a company demonstrates that the central management and control is exercised in the UK.
The Tribunal found that the relevant decisions in relation to Laerstate were predominantly taken by Mr Bock in the UK. It noted that although Laerstate held board meetings outside the UK Mr. Bock, whilst resident in the UK, remained the driving force behind the company.
In addition, the Tribunal held that not much had changed after Mr. Bock resigned as director of Laerstate as all the relevant decisions were taken by the remaining director upon instructions from Mr. Bock.
Development Securities (No.9) Ltd and others v HMRC  UKFTT 0565 (TC)
In this case, the First Tier Tribunal held that a company was treated as resident in the UK because its central management and control was exercised by its UK parent company, and not by its board of directors which met in Jersey.
The UK parent company implemented a tax avoidance plan (with the assistance and advice from one of the big four accounting firms) that would ultimately assist the parent company in crystallising latent capital losses in the UK.
This involved the incorporation of three Jersey companies which became subsidiaries of the UK parent company. It was agreed that certain companies within the group would grant the three Jersey companies call options which, if certain conditions were satisfied, would enable the Jersey companies to acquire shares in property owning companies and certain properties.
The Jersey companies then exercised the options and were subsequently brought onshore to become UK resident for tax purposes. The Jersey companies disposed of the assets which triggered a capital loss.
It is also important to note that the price the Jersey companies paid on the exercise of the options was significantly in excess of the then market value of the assets.
In this case, it was clear that the parent company followed certain steps to ensure that the Jersey companies would be tax resident in Jersey, namely:
• All board meetings took place in Jersey;
• The boards were comprised of a majority of Jersey based directors; and
• The directors applied their minds to the decisions that required the board resolution.
The Tribunal made a reference to Wood v Holden however it made a distinction in relation to the following:
• There was no commercial rationale nor corporate benefit to the Jersey companies in entering into the approved transactions;
• The directors of the Jersey companies did not take their own tax advice as to whether the transaction should be entered into at all; they merely took advice on legality of the Jersey companies’ entering into the transaction; and
• As there was no commercial or corporate benefit to the Jersey companies the transaction could only have been carried at the instigation and direction of the parent company.
Based on these factual findings the Tribunal concluded that the central management and control of the Jersey companies had been usurped by the UK resident parent company.
Lessons learned and recommendations to Jersey directors
The Development Securities decision (although subject to appeal) serves as a useful reminder to directors of Jersey companies in ensuring that proper safeguards and processes are put in place to maintain the tax residence of Jersey companies outside of the UK.
In addition to the well-established safeguards, such as proper composition of the board, ability of autonomous decision-making and physical location of the board meetings, it is now also important to consider other factors:
• Whether the directors can find commercial (as opposed to just legal or tax) justification for making their decisions;
• The aforementioned is especially important in situations where decisions are proposed to the directors by a dominant shareholder;
• It may not be enough for directors of Jersey companies to be experts in corporate governance but they should also have sufficient expertise to be involved in the commercial decisions of the business of the company;
• Directors should keep detailed notes of each board meeting they attend and the formal board minutes should accurately reflect the actual discussions held at board meetings that led to the decisions made; and
• Directors should not be afraid of asking relevant questions and seek external advice where necessary.
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By Mirek Gruna, Managing Director.
If you have any questions in relation to this briefing or would like to discuss our directorship or wider corporate services please get in touch with Mirek Gruna.