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Company residence: Statement of Practice 1/90

SP1/90 is reproduced below:

Company residence

Residence has always been a material factor, for companies as well as individuals, in determining tax liability. But statute law has never laid down comprehensive rules for determining where a company is resident and until 1988 the question was left solely to the Courts to decide. FA88/S66 introduced the rule that a company incorporated in the UK is resident there for the purposes of the Taxes Acts. Case law still applies in determining the residence of companies excepted from the incorporation rule or which are not incorporated in the UK.

A THE INCORPORATION RULE

The incorporation rule applies to companies incorporated in the UK subject to the exceptions in FA88/SCH7 for some companies incorporated before 15 March 1988. (This legislation is reproduced for convenience as an Appendix to this Statement). Paragraphs 3 to 8 below explain how HM Revenue & Customs interpret various terms used in the legislation.

CARRYING ON BUSINESS

The exceptions from the incorporation test in Schedule 7 depend in part on the company carrying on business at a specified time or during a relevant period. The question whether a company carries on business is one of fact to be decided according to the particular circumstances of the company. Detailed guidance is not practicable but HM Revenue & Customs take the view that ‘business’ has a wider meaning than ‘trade’; it can include transactions, such as the purchase of stock, carried out for the purposes of a trade about to be commenced and the holding of investments including shares in a subsidiary company. Such a holding could consist of a single investment from which no income was derived.

A company such as a shelf company whose transactions have been limited to those formalities necessary to keep the company on the register of companies will not be regarded as carrying on business.

For the purpose of the case law test (see B below) the residence of a company is determined by the place where its real business is carried on. A company which can demonstrate that in these terms it is or was resident outside the UK will have carried on business for the purposes of Schedule 7.

`TAXABLE IN A TERRITORY OUTSIDE THE UK`

A further condition for some companies for exception from the incorporation test is provided by Schedule 7 Para 1(1)(c) and Para 5(1). The company has to be taxable in a territory outside the UK. `Taxable` means that the company is liable to tax on income by reason of domicile, residence or place of management. This is similar to the approach adopted in the residence provisions of many double taxation agreements. Territories which impose tax on companies by reference to incorporation or registration or similar criteria are covered by the term ‘domicile’. Territories which impose tax by reference to criteria such as `effective management`, `central administration`, `head office` or `principal place of business` are covered by the term ‘place of management’.

A company has to be liable to tax on income so that a company which is, for example, liable only to a flat rate fee or lump sum duty does not fulfil the test. On the other hand a company is regarded as liable to tax in a particular territory if it is within the charge there even though it may pay no tax because, for example, it makes losses or claims double taxation relief.

`TREASURY CONSENT`

Before 15 March 1988 it was unlawful for a company to cease to be resident in the UK without the consent of the Treasury. Companies which have ceased to be resident in pursuance of a Treasury consent, as defined in Schedule 7 Paragraph 5(1), are excepted from the incorporation rule subject to certain conditions. A few companies ceased to be resident without Treasury Consent but were informed subsequently by letter that the Treasury would take no action against them under the relevant legislation. Such letter is not a retrospective grant of consent and the companies concerned cannot benefit from the exceptions which depend on Treasury consent.

B THE CASE LAW TEST

This test of company residence is that enunciated by Lord Loreburn in De Beers Consolidated Mines v Howe (5TC198) at the beginning of this century:

`A company resides, for the purposes of Income Tax, where its real business is carried on … I regard that as the true rule; and the real business is carried on where the central management and control actually abides`.

The `central management and control` test, as set out in De Beers, has been endorsed by a series of subsequent decisions. In particular, it was described by Lord Radcliffe in the 1959 case of Bullock v Unit Construction Company (38TC712) at page 738 as being:

`as precise and unequivocal as a positive statutory injunction … I do not know of any other test which has either been substituted for that of central management and control, or has been defined with sufficient precision to be regarded as an acceptable alternative to it. To me … it seems impossible to read Lord Loreburn’s words without seeing that he regarded the formula he was propounding as constituting the test of residence`.

Nothing which has happened since has in any way altered this basic principle for a company the residence of which is not governed by the incorporation rule; under current UK case law such a company is regarded as resident for tax purposes where central management and control is to be found.

PLACE OF `CENTRAL MANAGEMENT AND CONTROL`

In determining whether or not an individual company outside the scope of the incorporation test is resident in the UK, it thus becomes necessary to locate its place of `central management and control`. The case law concept of central management and control is, in broad terms, directed at the highest level of control of the business of a company. It is to be distinguished from the place where the main operations of a business are to be found, though those two places may often coincide. Moreover, the exercise of control does not necessarily demand any minimum standard of active involvement: it may, in appropriate circumstances, be exercised tacitly through passive oversight.

Successive decided cases have emphasised that the place of central management and control is wholly a question of fact. For example, Lord Radcliffe in Unit Construction said that `the question where control and management abide must be treated as one of fact or `actuality`` (p.741). It follows that factors which together are decisive in one instance may individually carry little weight in another. Nevertheless the decided cases do give some pointers. In particular a series of decisions has attached importance to the place where the company’s board of directors meet. There are very many cases in which the board meets in the same country as that in which the business operations take place, and central management and control is clearly located in that one place. In other cases central management and control may be exercised by directors in one country though the actual business operations may, perhaps under the immediate management of local directors, take place elsewhere.

But the location of board meetings, although important in the normal case, is not necessarily conclusive. Lord Radcliffe in Unit Construction pointed out (p.738) that the site of the meetings of the directors’ board had not been chosen as `the test` of company residence. In some cases, for example, central management and control is exercised by a single individual. This may happen when a chairman or managing director exercises powers formally conferred by the company’s Articles and the other board members are little more than ciphers, or by reason of a dominant shareholding or for some other reason. In those cases the residence of the company is where the controlling individual exercises his powers.

In general the place of directors’ meetings is significant only insofar as those meetings constitute the medium through which central management and control is exercised. If, for example, the directors of a company were engaged together actively in the UK in the complete running of a business which was wholly in the UK, the company would not be regarded as resident outside the UK merely because the directors held formal meetings outside the UK. While it is possible to identify extreme situations in which central management and control plainly is, or is not, exercised by directors in formal meetings, the conclusion in any case is wholly one of fact depending of the relative weight to be given to various factors. Any attempt to lay down rigid guidelines would only be misleading.

Generally, however, where doubts arise about a particular company’s residence status, HM Revenue & Customs adopt the following approach:

They first try to ascertain whether the directors of the company in fact exercise central management and control.

If so, they seek to determine where the directors exercise this central management and control (which is not necessarily where they meet).

In cases where the directors apparently do not exercise central management and control of the company, HM Revenue & Customs then look to establish where and by whom it is exercised.

PARENT/SUBSIDIARY RELATIONSHIP

It is particularly difficult to apply the `central management and control` test in the situation where a subsidiary company and its parent operate in different territories. In this situation, the parent will normally influence, to a greater or lesser extent, the actions of the subsidiary. Where that influence is exerted by the parent exercising the powers which a sole or majority shareholder has in general meetings of the subsidiary, for example to appoint and dismiss members of the board of the subsidiary and to initiate or approve alterations to its financial structure, HM Revenue & Customs would not seek to argue that central management and control of the subsidiary is located where the parent company is resident. However, in cases where the parent usurps the functions of the board of the subsidiary (such as Unit Construction itself) or where that board merely rubber stamps the parent company’s decisions without giving them any independent consideration of its own, HM Revenue & Customs draw the conclusion that the subsidiary has the same residence for tax purposes as its parent.

HM Revenue & Customs recognise that there may be many cases where a company is a member of a group having its ultimate holding company in another country which will not fall readily into either of the categories referred to above. In considering whether the board of such a subsidiary company exercises central management and control of the subsidiary’s business, they have regard to the degree of autonomy which those directors have in conducting the company’s business. Matters (among others) that may be taken into account are the extent to which the directors of the subsidiary take decisions on their own authority as to investment, production, marketing and procurement without reference to the parent.

CONCLUSION

In outlining factors relevant to the application of the case law test, this statement assumes that they exist for genuine commercial reasons. Where, however, as may happen, it appears that a major objective underlying the existence of certain factors is the obtaining of tax benefits from residence or non-residence, HM Revenue & Customs examine the facts particularly closely in order to see whether there has been an attempt to create the appearance of central management and control in a particular place without the reality.

The case law test examined in this Statement is not always easy to apply. The Courts have recognised that there may be difficulties where it is not possible to identify any one country as the seat of central management and control. The principles to apply in those circumstances have not been fully developed in case law. In addition, the last relevant case was decided almost 30 years ago, and there have been many developments in communications since then, which in particular may enable a company to be controlled from a place far distant from where the day-to-day management is carried on. As the Statement makes clear, while the general principle has been laid down by the Courts, its application must depend on the precise facts.

C. DOUBLE TAXATION AGREEMENTS

In general our double taxation agreements do not affect the UK residence of a company as established for UK tax purposes. But where the partner country adopts a different definition of residence, it may happen that a UK resident company is treated, under the partner country’s domestic law, as also resident there. In these cases, the agreement normally specifies what the tax consequences of this `double` residence shall be.

Under the double taxation agreement with the United States, for example, the UK residence of a company for UK tax purposes is unaffected. But where that company is also a US corporation, it is excluded from some of the reliefs conferred by the agreement. On the other hand, under a double taxation agreement which follows the 1977 OECD Model Taxation Convention, a company classed as resident by both the UK and the partner country is, for the purposes of the agreement, treated as resident where its `place of effective management` is situated.

The Commentary in paragraph 3 of Article 4 of the OECD Model records the UK view that, in agreements (such as those with some Commonwealth countries) which treat a company as resident in a state in which `its business is managed and controlled`, this expression means `the effective management of the enterprise`. More detailed consideration of the question in the light of the approach of Continental legal systems and of Community law to the question of company residence has led HM Revenue & Customs to revise this view. It is now considered that effective management may, in some cases, be found at a place different from the place of central management and control. This could happen, for example, where a company is run by executives based abroad, but the final directing power rests with non-executive directors who meet in the UK. In such circumstances the company’s place of effective management might well be abroad but, depending on the precise powers of the non-executive directors, it might be centrally managed and controlled (and therefore resident) in the UK.

The incorporation rule in FA88/S66 (1) determines a residence which supersedes a different place `given by any rule of law`. This incorporation rule determines residence under UK domestic law and is subject to the provisions of any applicable double taxation agreement. It does not override the provisions of a double taxation agreement which may make a UK incorporated company a resident of an overseas territory for the purposes of the agreement (see 20 and 21 above).

APPENDIX TO SP1/90

FINANCE ACT 1988

  1. Subject to the provisions of Schedule 7 to this Act, a company which is incorporated in the United Kingdom shall be regarded for the purposes of the Taxes Acts as resident there; and accordingly, if a different place of residence is given by any rule of law, that place shall no longer be taken into account for those purposes.
  2. For the purposes of the Taxes Acts, a company which -

 

 

  1. is no longer carrying on any business; or
  2. is being wound up outside the United Kingdom,

shall be regarded as continuing to be resident in the United Kingdom if it was so regarded for those purposes immediately before it ceased to carry on business or, as the case may be, before any of its activities came under the control of a person exercising functions which, in the United Kingdom, would be exercisable by a liquidator.

  1. In this section `the Taxes Acts` has the same meaning as in the Taxes Management Act 1970.
  2. This section and Schedule 7 to this Act shall be deemed to have come into force on 15 March 1988.

SCHEDULE 7 - EXCEPTIONS TO RULE IN SECTION 66(1) CASES WHERE RULE DOES NOT APPLY

  1. Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not apply in relation to a company which, immediately before the commencement date -

 

  1. was carrying on business;
  2. was not resident in the United Kingdom, having ceased to be so resident in pursuance of a Treasury consent; and
  3. where that consent was a general consent, was taxable in a territory outside the United Kingdom.

 

  1. If at any time on or after the commencement date a company falling within sub-paragraph (1) above -

 

 

  1. ceases to carry on business, or
  2. where the Treasury consent there referred to was a general consent, ceases to be taxable in a territory outside the United Kingdom,

Section 66(1) of this Act shall apply in relation to the company after that time or after the end of the transitional period, whichever is the later.

  1. If at any time on or after the commencement date a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time.
  2. Subject to sub-paragraphs (2) and (3) below, Section 66(1) of this Act shall not apply in relation to a company which -

 

  1. carried on business at any time before the commencement date;
  2. ceases to be resident in the United Kingdom at any time on or after that date in pursuance of a Treasury consent; and
  3. is carrying on business immediately after that time.

 

  1. if at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above ceases to carry on business, Section 66(1) of this Act shall apply in relation to the company after that time or after the end of the transitional period, whichever is the later.
  2. If at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time.

CASES WHERE RULE DOES NOT APPLY UNTIL END OF TRANSITIONAL PERIOD.

  1. Subject to sub-paragraph (2) below, in relation to a company which -

 

 

  1. carried on business at any time before the commencement date;
  2. was not resident in the United Kingdom immediately before that date; and
  3. is not a company falling within paragraph 1(1) above,

Section 66(1) of this Act shall not apply until after the end of the transitional period.

  1. If at any time on or after the commencement date a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time.
  2. Subject to sub-paragraph (2) below, in relation to a company which -

 

 

  1. carried on business at any time before the commencement date;
  2. ceases to be resident in the United Kingdom at any time on or after that date in pursuance of a Treasury consent; and
  3. is not a company falling within paragraph 2(1) above,

Section 66(1) of this Act shall not apply until after the end of the transitional period.

  1. If at any time after it ceases to be resident in the United Kingdom a company falling within sub-paragraph (1) above becomes resident in the United Kingdom, Section 66(1) of this Act shall apply in relation to the company after that time.

SUPPLEMENTAL

  1. In this Schedule -

`the commencement date` means the date of the coming into force of this Schedule;

`general consent` means a consent under any section to which sub-paragraph (2) below applies given generally within the meaning of subsection (4) of that section;

`taxable` means liable to tax on income by reason of domicile, residence or place of management;

`the transitional period` means the period of five years beginning with the commencement date;

`Treasury consent` means a consent under any section to which sub-paragraph (2) below applies given for the purposes of subsection 1(a) of that section.

  1. This sub-paragraph applies to the following sections (restrictions on the migration etc of companies), namely -

Section 765 of the Taxes Act 1988;

Section 482 of the Taxes Act 1970;

Section 468 of the Income Tax Act 1952; and

Section 36 of the Finance Act 1951.

  1. Any question which arises under any of the provisions of this Schedule shall be determined without regard to the provision made by Section 66(1) of this Act.