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Haworth: Residency Tie-Breaker Tests in a ‘Round the World’ Tax Scheme

The UK’s First-tier Tribunal recently considered the application of the “place of effective management” residency tie-breaker test found in double tax treaties in the recent case of Haworth and others v HMRC [2022] UKFTT 34 (TC). Such issues had previously been considered by the UK’s Court of Appeal in HMRC v Smallwood and Another [2010] EWCA Civ 778, [2010] STC 2045.

Here, Haworth concerned a “round the world” tax scheme in which three family trusts held shares in a UK incorporated company. The Jersey resident trustees of the family trusts were replaced with Mauritius resident trustees prior to the sale of the shares in the UK incorporated company. In the same UK tax year, and following the sale of the shares in the UK incorporated company, the Mauritius resident trustees resigned in favour of UK resident trustees. The intended effect of the scheme was that the sale of the shares in the UK incorporated company would not be subject to capital gains tax in the UK (and, in practice, no capital gains tax would be payable in Mauritius). This outcome was expected on the basis that Article 13(4) of the UK-Mauritius double tax treaty provided that capital gains should only be taxable in the contracting state of which the trusts were resident. At the time of the disposal of the shares in the UK incorporated company, the residency of the trustees had been expected to be regarded as Mauritius albeit that Mauritius would not have charged capital gains tax.

However, the family trusts were found to have been resident in both the UK and Mauritius. It was therefore necessary for the First-tier Tribunal to consider the application of the residency tie-breaker test in Article 4(3) to determine which jurisdiction had the relevant taxing rights in respect of the gain arising on the disposal of the shares in the UK incorporated company.

Having regard to the decision in Smallwood, the First-tier Tribunal looked to consider where the real top-level management of the family trusts took place and whether there was some “scheme of management of [the] trust which went above and beyond the day-to-day management exercised by the trustees.”

The First-tier Tribunal in Haworth held that the place of effective management was in the UK at the relevant times. In reaching this conclusion, particular consideration was given to the active role of the UK settlors and UK advisors, the nature and significance of the decisions taken by the UK settlors and the UK advisors, and it being integral to the plan that the Mauritian trustees were appointed for only a brief period of time and for the purposes of implementing the plan. Critically, it was held to be where the top-level management of the trust rather than the trustees that was relevant to determining where the “place of effective management” carried on. Accordingly, the place of effective management of the family trusts was in the UK and thus UK capital gains tax was chargeable on the disposal of the shares in the UK incorporated company.

Whilst it is unlikely that such tax schemes are still being implemented, the decision in Haworth provides a useful reminder of the application of the residency tie-breaker tests in double tax treaties, including where third parties appointed are involved in top-level management rather than simply day-to-day management.

 

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