Tax Residency, Corporate Governance And Directors' Decision-making: Update

• Published date: 14 January 2021
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Corporate Governance, Securities, Shareholders
• Law Firm: Carey Olsen
• Author: Mr James Willmott

Corporate governance and directors' decision-making can affect the tax residency of an entity. A series of UK judgments relating to a Jersey structure established by Development Securities plc (DS plc), including a UK Court of Appeal (CoA) judgment in December 2020, are likely to be of interest to anyone who is involved in international tax structuring or planning.

SUMMARY OF KEY POINTS

• It is an established principle that
  • For tax purposes, a company resides where its central management and control (CMC) is exercised
  • CMC is exercised where a company is actually managed, which is a matter of fact (but is usually where its board of directors makes decisions)
• A company's tax residency can be affected by management and control being exercised independently of (or without regard to) a company's board, or by a person who dictates decisions to the board
  • That is not to say that CMC of a subsidiary will be taken to be exercised by its parent merely because directors of the subsidiary cause it to follow a tax planning scheme put forward by the parent - the key factor being where the decision to participate in that scheme was actually taken
  • On the other hand, CMC is not necessarily exercised where the formal approval to authorise a company to take particular actions is given (ie where the relevant board meeting is held) - directors merely ensuring that what they are to approve is lawful (and authorising related actions such as execution of documents) may not, in and of itself, constitute making the decision to cause the company to take the relevant action(s)
  • Care should be taken in directors relying on shareholder authorisations which, as a matter of fact, could be taken to be instructions and therefore the exercise of CMC by the shareholder
• Whilst the proper exercise of directors' duties and CMC are not directly connected, there remains some uncertainty as to the level of engagement required for directors to be taken to have actually made decisions
  • It is clear that directors being fully appraised of relevant matters can go to evidencing that they actually made the relevant decisions
  • Meetings of directors should be properly minuted, and those minutes should deal with the decision-making process and not just the decisions themselves

BACKGROUND

Structure

The Development Securities judgments relate to a structure that was established in 2004 by DS plc, a UK tax resident company, to crystallise latent capital losses in UK real estate.

The structure involved three newly-incorporated Jersey companies acquiring assets from other members of the DS plc group at a time when the Jersey companies were intended to be Jersey tax resident. The Jersey companies then became UK tax resident and disposed of the assets at a loss, creating a tax benefit for the group.

Each Jersey company had a board consisting of two Jersey-resident professional directors and one UK-resident client director. All board meetings during the period that the companies were intended to be Jersey tax resident were held in Jersey.

HMRC determination and resultant litigation

HMRC formally challenged the structure, determining that the Jersey companies were UK tax resident at the time they entered into option agreements to acquire, and then acquired, the relevant assets, which was fatal to the success of the scheme in generating the...