UK: Taxpayer Victory In UK Corporate Residence Case Involving Offshore SPVs

Development Securities PLC v HMRC ( 2019 ) UKUT 0169 (TC)
Last Updated: 11 September 2019
Article by Martin Palmer

The "management and control'' test of corporate residence is a significant connecting factor for tax purposes in many common law jurisdictions. The UK's central management and control test is certainly an important consideration for non-UK registered companies operating in the UK who wish to avoid worldwide liability to UK corporation tax as UK resident companies. The UK test arguably has an additional relevance today, linked to the economic substance legislation now in force in the zero tax offshore financial centres . For example, a BVI registered company that is "non-resident'' e.g. because it is tax resident in Hong Kong, is not required to demonstrate economic substance in the BVI, provided certain administrative requirements are met around evidencing tax residence in Hong Kong. In certain circumstances this may be very helpful. Under Hong Kong law the concept of corporate residence is a common law test of management and control, and UK case law is almost always cited in Hong Kong court cases where company residence in Hong Kong is being considered. UK case law is persuasive, though not necessarily binding on the Hong Kong courts. Given that many BVI and other offshore companies must now start to determine where they are actually resident as part of their compliance with the new economic substance legislation, and given the importance of the management and control test in most common law countries, an understanding of recent case law developments in the UK is likely to be relevant and helpful to a significant proportion of offshore companies, even if their beneficial ownership is unconnected with the UK and there is little or no UK activity .

Since the UK Court of Appeal judgement in Wood v Holden [2006], the UK's central management and control test has been made much clearer in assessing the residence of offshore companies, including offshore special purpose vehicles (or SPVs). In brief, Wood v Holden is authority for the following propositions:

- that a company's directors exercise central management and control where they meet and decide business

- if the directors are "usurped" i.e. if central management and control of the business is exercised by parties other than the directors, then the usurpation displaces the meeting place of the board of directors as the company residence forum

- if the directors are subject to dictation by third parties such that the directors do not exercise independent consideration of the matters put before them for decision, then the dictating third parties displace the meeting place of the board of directors as the company residence forum

- where third parties advise or influence the directors in their decision-making, central management and control continues to rest with the directors in their board meetings and is located where these meetings are held. This remains the case even if the third-party advisors or influencers obliquely initiate corporate activity by making requests or proposals to the directors, provided that in the course of this process the directors are not usurped or dictated

In Development Securities PLC & Others v HMRC (Her Majesty's Revenue and Customs), the Upper Tribunal has reversed the controversial decision of the Fist-tier Tribunal , on the basis that the First-tier Tribunal ( FTT ) misapplied the law condensed in the propositions outlined above. At first instance, the FTT were clearly at pains to strike down or negate egregious offshore tax planning, but in doing so, they departed from all the UK authorities on this area of the law.

The facts of the case

Three wholly owned Jersey subsidiary companies were incorporated by Development Securities PLC (the parent company) in order to purchase UK property, or assets representing UK property, from various UK companies also in the Development Securities group. At the time of purchase these assets were standing at a loss for capital gains tax purposes.

No indexation relief is allowed on such capital losses, and so the purpose of the Jersey companies was to enter into a scheme whereby the capital losses could be increased by an indexation element.

The scheme required the Jersey companies to buy the property assets at a significant over-value whilst the companies were non-UK resident i.e. centrally managed and controlled in Jersey by Jersey professional directors. Once the assets had been purchased, the residence of the three Jersey companies was simultaneously migrated from Jersey to the UK. The period of Jersey residence of the Jersey companies was transitory. According to the taxpayer, Jersey tax residence commenced on incorporation (10/6/2004) and ended on or shortly after 20/7/2004, when for UK tax mitigation reasons alone, the companies migrated their tax residence to the UK.

To acquire the properties for well above market value, it was necessary that the Jersey companies were financed by the UK parent company, Development Securities PLC. Such funding was by way of share capital and separate capital contribution (i.e. gift).

The boards of the three Jersey companies were comprised of three Jersey resident professional directors, and the secretary of Development Securities Ltd, who was UK resident.

Jersey board meetings

The three Jersey companies each held five board meetings in Jersey between 11 June and 20 July 2004. It was not contended that the meetings did not take place.

At the first board meeting held in Jersey on 11 June 2004, the tax planning scheme was outlined to the Jersey directors by the UK resident director, who attended the board meeting in person. It was envisaged that if the Jersey directors decided to enter into the scheme, the UK parent company would be likely to make a capital contribution and to subscribe for newly issued shares to assist in the purchase of the assets.

On 25 June 2004 the Jersey directors agreed to execute various call options over the UK property assets , having received a resolution from the UK parent company (via its nominee shareholder) approving the transaction and advising the Jersey boards that entering into the transaction was for the benefit of the 3 Jersey companies. This UK parent company approval was coupled with a letter of intent from the parent company, to the effect that it would consider making a capital contribution towards the purchase of the relevant UK property assets, although there was no obligation for it to do so.

A pre-condition for the implementation of the scheme was that the FTSE Real Estate Total Return Index would have to close at 2082 or above for at least five consecutive days in a specified period. Another pre-condition required final approval by the parent company (presumably these measures were designed to prevent the scheme being collapsed under the Ramsay principle: however, the likelihood that the chosen index would close above 2082 on five consecutive days was almost certain).

Further board meetings were than held on 28 June 2004 (to transfer the legal ownership of the Jersey companies' shares to Development Securities PLC, the parent company); on 12 July 2004 in order to exercise the options (the FTSE conditions having been met) and to request the funding from the parent company.

Finally, on 20 July 2004 the Jersey directors resigned, and UK resident directors were appointed. Shortly after the appointment of the UK directors, and when it was considered that the Jersey companies were all UK tax resident, the Jersey companies took steps to sell the property assets, thereby triggering a capital loss including the indexation element built in to the over-value paid by the Jersey companies.

The decision at first instance

The First-tier Tribunal decision that the Jersey companies were always UK resident i.e. centrally managed and controlled in the UK by the UK parent, seems to have been based on the assumption that the Jersey companies were acting contrary to their best interests by entering into a transaction to buy assets at more than their market value i.e. on uncommercial terms. This assumption then led to the conclusion that the Jersey directors had surrendered their discretion.

An obvious flaw in this reasoning was that although the Jersey companies paid over the odds for the assets, they suffered no loss in doing so, because the purchase price was fully funded by the parent company. Moreover, the transaction augmented a capital loss for the clear benefit of the parent company and its group, and therefore indirectly benefitted the Jersey companies as members of the group.

The other flaw in the First-tier Tribunal's finding that the Jersey companies were UK resident from the outset , was that the evidence showed that the Jersey directors were at pains to ensure that what they were agreeing to implement was lawful from a Jersey perspective, and that no stakeholders in the Jersey companies could be prejudiced by the Jersey companies paying over the odds for the property assets ( such stakeholders that the Jersey directors took into account included creditors , and employees). Only once the Jersey directors had satisfied themselves on these points and had also taken specific advice on both Jersey company law and UK taxation on behalf of the Jersey companies, did they feel able to agree to proceed with the transaction. In other words, the facts showed no evidence that the directors had surrendered their discretion or been dictated to. On the contrary they implemented the scheme because they, and they alone, decided to do so, after careful consideration.

Conclusion

This is a good win for the taxpayer, although the actions of Development Securities PLC do not inspire admiration when read today. The decision at first instance seems to have been an example of the maxim "hard cases make bad law". The tax planning undertaken by Development Securities PLC was conceived in 2004 and looks unconscionable today. If such contrived tax planning was implemented in 2019, it is reasonable to suppose it would be struck down by the General Anti-Avoidance Rule (or GAAR). However, HMRC were unable to invoke the GAAR, due to its transitional provisions. The First-tier Tribunal were understandably unhappy with the tax planning, but their efforts to stretch the laws of corporate residence to unravel the taxpayer's scheme has not found favour with the Upper Tribunal.

If you would like to discuss any of the issues mentioned in this publication, please get in touch.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Proskauer Rose LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions