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HMRC internal manual

International Manual

From
HM Revenue & Customs
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Company residence: how to review residence

The law

Although central management and control depends ultimately on the facts, a review of residence normally starts with the question of law. A company is governed first by the law of the country in which it is incorporated and second by its constitution (the latter will be found in Articles of Association or their foreign equivalent which should always be examined). So, the question of law is where and by whom the company ought to be managed and controlled according to this legal and constitutional framework.

In the UK, management is normally entrusted to the directors, although it can be given to a single individual such as a managing director who has exclusive authority under the terms of the Articles. Where the company is incorporated abroad, it will be necessary to take into account the system of company management under the law of the country of incorporation. Some countries, such as Germany and Holland, have a two-tier system - a Supervisory Board and a Managing Board.

For smaller companies, a Supervisory Board may be optional or there may be only one supervisor and one manager. Neither board will be the exact equivalent of the UK Board of Directors. In very general terms, the Supervisory Board watches over and advises the Managing Board on behalf of the shareholders and the Managing Board runs the business. We would usually take the view that central management and control of the business is to be found at Managing Board level. But the exact set-up differs from country to country and between different types of company in each country and may depend on the instrument governing the management of the company. In some companies the shareholders themselves may have management functions.

The facts

When it has been established where and by whom the company ought to be managed and controlled, the questions to be resolved are matters of fact.

  • Do those to whom management is legally entrusted in fact exercise central management and control?
  • If so, where do they carry out this duty?
  • If those entitled to act do not exercise central management and control, where and by whom is it exercised?

Paragraphs 11 to 17 of SP1/90 (see INTM120200) - which are written in terms of UK companies - set out the methods of approach and matters to be considered. When determining whether the directors do have control, the first step may be to consider whether any person is, in fact, likely to be able to instruct the directors, irrespective of the legal position. If so, are the directors of sufficient standing and likely to have the requisite expertise to be able to act on their own authority and do they, in fact, do so?

Directors’ meetings

The investigation necessary to ascertain whether directors exercise management and control will normally resolve the questions of where this is exercised and by whom if not by the directors. The place of directors’ meetings is significant as an indication of the place of central management and control if, but only if, the board of directors does have the controlling power and exercises that power wholly or mainly at board meetings. The place of meetings will not be decisive if the directors are acting on the instructions of some other person or if they artificially divorce the place of their meetings from the place where they together manage and control the business outside the meetings - see paragraph 14 of SP1/90 at INTM120200.

It is necessary to look at what happens between meetings. But if, for example, a main board made up of executive and non-executive directors meets regularly overseas and the directors in the UK are only executive directors, subject to the control of the board, it is unlikely that the company is resident in the UK even though the role of the main board may be relatively passive. The board must, however, have real control. This is unlikely if it is made up partly of ‘stooge’ directors recruited simply to give the appearance of control.

In a detailed examination of residence, try to build up a complete picture of just how the business is run, over a period of time. Meetings with those involved in the management, and examination of records and correspondence are essential to a thorough examination.

Parent and subsidiary

There is often little to be gained by challenging the overseas residence of a subsidiary of a UK parent. If the company were resident here, credit for overseas tax might wipe out the UK tax liability and losses would be available for group relief. But where the subsidiary appears to be used for avoidance, the relationship between the directors of the parent and those of the subsidiary should be closely examined. Income profits diverted to a low tax territory subsidiary may be vulnerable to the controlled foreign companies’ legislation - see INTM200000 onwards.

Paragraphs 16 and 17 of SP1/90 (see INTM120200) outline the difficulties of distinguishing between acts by a parent company which are merely those of a shareholder and those which amount to management and control of the subsidiary’s business. In Bullock v Unit Construction Co Ltd (34TC207) the parent had removed all higher management responsibility from the subsidiary’s directors. It remains possible for central management and control to lie with a subsidiary’s directors even where it seems improbable that they would act other than in accordance with the directors of the parent.

Some element of supervision by the parent will be expected. For example, there is often a system of regular reporting from subsidiaries to parents. Reporting by itself, or the issue of general group directives on such matters as finance control, do not necessarily indicate that the residence of the subsidiary lies with the parent. Intervention beyond this may lead to that result.