Corporate residence: how to keep management and control where you want it
Insight

A company that is not incorporated in the UK may be treated as UK tax resident if it is centrally managed and controlled here. Much careful tax planning can be undone if this point is not well understood and continually monitored.
Over the years, the concept of "management and control" has been examined in case law and certain key features have emerged. HM Revenue & Customs (HMRC) has also published guidance on the topic which can be found here.
In this briefing, we examine several significant UK corporate residence cases and conclude with a checklist to help companies avoid the various pitfalls.
How it began
The seminal case of De Beers Consolidation Mines Ltd v Howe in 1906 established the central management and control test. Lord Loreburn said: “A company resides … where its real business is carried on …. And the real business is carried on where the central management and control actually abides”.
The mining company, De Beers, was incorporated in South Africa and its main trading operations were in South Africa. However, the majority of its directors lived in the UK, and in practice the board exercised its powers in the UK, so the company was held to be UK resident for tax purposes. This case confirmed that determining the place of management and control is primarily a question of fact.
The overbearing parent
Fifty years later in Bullock v The Unit Construction Co Ltd the tax residency of the African subsidiaries of a UK parent company was considered. Although constitutionally the control of each subsidiary was vested in their board of directors, who were required to hold meetings outside the UK, the real control and management was exercised by the parent company's board in the UK. This case proved that it is the highest level of control of a business which counts.
More recently, in the 2021 case of Development Securities v HMRC, the Court of Appeal considered whether three Jersey-incorporated companies’ relationships with their UK group companies made them UK tax resident. The three Jersey-incorporated SPV companies had entered into call options with UK companies in their group to acquire certain properties and shares. The acquisitions were carried out in order to crystallise latent capital losses whilst retaining the benefit of indexation allowance. To be successful, the scheme required the Jersey-incorporated companies to be tax resident in Jersey for a specific short period when the options were exercised. Following this, the Jersey directors resigned and the SPVs’ residency moved to the UK.
HMRC contended that the Jersey companies were resident in the UK during the critical period and denied the claims to indexation allowance. They argued that central management and control of the Jersey companies was exercised in the UK, due to the UK group effectively issuing directions to the Jersey companies, which their boards followed. HMRC alleged that the only task of the Jersey directors was to approve the tax scheme which had been pre-determined by the group in the UK.
The Court of Appeal found in favour of HMRC, notwithstanding that it acknowledged that the subsidiary’s directors had not acted “mindlessly” but had taken independent advice on the scheme and had sufficient knowledge of the matters in hand to take the relevant decisions. The judgment referred to the First-tier Tribunal’s factual findings that the directors had only considered whether the company could exercise the options (because the legal requirements for exercising the options were met) but not whether the company should do so. The Court of Appeal confirmed that the First-tier Tribunal had been correct not to focus on the “uncommerciality” of the transactions and that the Upper Tribunal had misunderstood the First-tier Tribunal’s decision in overturning it.
Development Securities v HMRC reiterates that directors must exercise their own discretion in making decisions as opposed to simply checking the legality of the transaction and confirming that this benefits the company’s shareholders. The case shows that tax residence risks can arise if directors habitually implement directions from a parent company, even where there is a record of them having independently scrutinised the matters reserved to them.
Shareholders with influence
In 2006, the case of Wood v Holden examined whether a company’s management and control could be exercised by a shareholder. Mr and Mrs Wood owned shares in Greetings Cards Holdings Limited (Greetings), which they sold to a Dutch company, Eulalia Holdings BV (Eulalia). Mr Wood owned all the shares in Eulalia but had appointed a Dutch trust company to act as its sole managing director. Eulalia was a special purpose vehicle (SPV), whose only significant business decision was to sell the shareholding in Greetings. HMRC argued that the decision to sell had not been given proper consideration by the managing Dutch trust company but rather had been agreed to at the instigation of Mr and Mrs Wood, who were UK residents and that Eulalia was therefore resident in the UK at the time of the disposal. This was rejected by the Court of Appeal which held that although the managing company’s directors had been advised and influenced, they not been bypassed nor stood aside.
The dysfunctional Board
The next noteworthy case was Laerstate BV v HMRC, heard in 2009. Here, the court made a distinction between a board which scrutinises and deliberates and a board which simply rubber stamps requests from the UK. Laerstate was incorporated in the Netherlands and was resident there under Dutch law. The company had two directors during the period in dispute: Mr Bock and Mr Trapman. Mr Bock was also Laerstate’s sole shareholder. Mr Bock, a UK resident, arranged finance from a German bank for the company to acquire £150m of shares in Lonrho, a UK conglomerate. Some of the Lonrho shares were purchased by Laerstate and the company then sold an option over further Lonrho shares to Anglo American Plc. HMRC assessed Laerstate to tax on the sale of the option, arguing that the company was UK resident at the time.
Evidence emerged showing that Laerstate’s board meetings were not really meetings at all since no discussions had taken place. Mr Bock told Mr Trapman to exercise the option and Mr Trapman did so without giving the matter any particular consideration. As a consequence, the court agreed with HMRC that the board did not function as such, and Mr Trapman had abdicated his responsibility to a dominant director who was resident in the UK.
An international angle
Different jurisdictions will have their own domestic law tests for determining tax residence. Companies may therefore find themselves in the difficult position of being tax resident in more than one jurisdiction. In that case, the existence of a double tax treaty between the jurisdictions concerned will be essential to ensure that such a company’s profits are not taxed twice. Tax treaties relieve double taxation by allocating taxing rights between tax authorities which would both otherwise have a claim against a taxpayer. Double tax treaties based on the OECD 2017 model also include a “tiebreaker” provision, which settles companies’ dual tax residence in favour of one jurisdiction.
Outside of the UK, if a company were dual tax resident by virtue of its incorporation in a jurisdiction and could not avail itself of a double tax treaty, that company might, alternatively, consider corporate re-domiciliation (this being the process by which a company incorporated in one jurisdiction to become a company incorporated in another jurisdiction whilst retaining its legal personality). In the UK, an independent expert panel report published in October 2024 advocated firmly in favour of the introduction of a two-way UK re-domiciliation regime (this followed the positive reception of the UK government’s 2021 consultation on the same). At the time of writing, however, the UK does not allow either inward or outward corporate re-domiciliation.
For dual tax resident companies which are part resident in the UK, careful consideration should therefore be given to the terms of applicable tax treaties to ensure that the conditions for any relevant relief are satisfied.
This was highlighted in the recent case of HMRC v GE Financial Investments which considered tax residence in an international context. The taxpayer was UK tax resident but the stapling of its share capital to the shares of a Delaware-incorporated affiliate meant that it was also liable to tax in the US on its worldwide income. To benefit from relief from UK tax on the same income, the company needed to also be tax resident in the US for the purposes of UK-US Double Tax Convention (the Convention). The Court of Appeal held that the fact that the company was subject to US tax as a result of the specific local law provision concerning share stapling did not mean that it was in fact tax resident in the US for the purposes of the Convention and therefore the company was not entitled relief from UK tax under the Convention.
Checklist
In light of this case history and the hazards associated with dual tax residence, how can one best ensure that a company maintains its residency outside the UK? The answer is that it is all about proper corporate governance and following due process, even though this means a more onerous compliance regime than would be observed in relation to a UK resident company. A number of dos and don’ts are worthy of consideration:
Don't:
- Simply pay lip service to the place where the board meets.
- Have a majority of UK resident directors, or even an equal number of UK resident and non-resident directors.
- Allow UK based board members to phone in to meetings from the UK.
- Rely on the services of non-UK directors who do.not have the necessary skills and experience to make informed decisions, unless they can clearly demonstrate that they put their minds to the decision-making process.
- Allow a controlling shareholder or anyone else to run a company’s affairs without reference to the board. Such a person can advise, exhort and persuade – but ultimately the board must make the decisions and go against that advice where it is in their company’s best interests.
- Rely on board minutes prepared in advance. Pre-prepared board minutes are essential to the completion of any transaction; however, the minute of a meeting in which the decision to undertake the transaction, is a critical document and must demonstrate that the board has applied its mind and genuinely scrutinised and deliberated decisions.
- Allow board members to involve themselves in strategic decisions in the UK without reference to the board.
Do make sure that:
- The members of the board are the ones “who make the decisions” and exercise their discretion in doing so.
- The composition of the board, and the location where board meetings are to take place, are appropriate for the business of the company. Business happens in real time and the board may have to convene at short notice.
- It is clear which decisions in relation to the company’s affairs amount to exercising "central management and control". Typically, these will be strategic decisions; for example, about buying or selling an asset, or raising finance.
- It is clear to everyone involved that only the board can take strategic decisions and that its meetings will be outside the UK.
- If UK residents are to be on the board, they are prepared to travel to board meetings outside the UK.
- The board meets regularly, in keeping with the nature of the company’s business.
- The board has the information that enables it to make informed decisions on matters of strategy and policy.
- Copies of the information provided to, and considered by, the board are kept.
- Full minutes of board discussions and decisions are retained. Sound or video recordings of board meetings taking place can put the decision-making process beyond doubt.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2024