The Tide Continues To Turn For Offshore Companies.

The case of Development Securities (No. 9) Ltd and other v HMRC [2017] UKFTT 0565 is the latest in a line of cases concerning the UK corporate tax residence of offshore companies. The case once again highlights the difficulties in preserving an offshore company's non-UK tax resident status, whilst giving a useful insight into the factors and evidence that HRMC will examine when considering whether the decisions of an offshore company are, in fact, being taken from the UK.

Background

Companies that are UK tax resident are subject to UK corporation tax on their worldwide profits, regardless of where they arise. A company will be UK tax resident if it is incorporated in the UK or if it is centrally managed and controlled from the UK. This latter test evolved from a line of cases on corporate residence spanning the past 100 years, starting with De Beers Consolidated Mines v Howe [1906] AC 445. In De Beers, it was held that a company is resident 'where its real business is carried on...and its real business is carried on where its central management and control actually abides'. De Beers and subsequent cases made it clear that where central management and control resides is a question of fact in each case. For example, in Unit Construction Co Ltd v Bullock [1960] 38 TC 712, a South African company's articles of association made it unconstitutional for any company decisions to be taken from the UK. The reality, however, was that all decisions were being taken by the parent company in the UK, and the provisions in the subsidiary's articles were not sufficient to prevent the company from becoming UK tax resident under the central management and control test.

HMRC's Statement of Practice 1/90 sets out HMRC's view on assessing central management and control. Broadly speaking, they will look to the highest level of control, which will typically be the board of directors (though it is possible for control to rest in the hands of a single person) and determine where decisions are taken. If the directors are not responsible for decision-making, HMRC will seek to establish who does exercise central management and control, and where. Furthermore, HMRC has stated that it will examine closely cases where a 'major objective' of the underlying arrangement is to obtain tax benefits, and there is an attempt to create the appearance of central management and control without the reality. Therefore, in such cases, HMRC will look to substance of the arrangements...