Jersey SPV = UK Tax Resident: The Development Securities Case

Companies that are incorporated in one jurisdiction but resident for tax purposes in a different jurisdiction are not an uncommon feature of transaction structures. The tax residency of a company is important both for determining the primary tax regime applicable to the company and the company’s entitlement to the benefits of double tax treaties.

In the recent case of Development Securities and others v HMRC [2019] UKUT 169, the UK’s Upper Tribunal (UT) overturned the decision of the UK’s First-tier Tribunal (FTT) in a case concerned with whether certain special purpose vehicles (SPVs) incorporated in Jersey as subsidiaries and as part of a scheme to use certain capital losses were tax resident for UK tax purposes. The success of the tax planning arrangements required these companies to be non-UK tax resident and involved the acquisition of assets from other group companies at an overvalue. The SPVs were funded by the UK parent, the board meetings took place in Jersey and a majority of the directors were also Jersey tax resident.

For UK tax purposes, a company will be liable to UK corporation tax on its worldwide profits (subject to credit for certain overseas taxes) only if it is resident in the UK for UK tax purposes. For a company not incorporated in the UK, it may be treated as resident in the UK for UK tax purposes if its “central management and control” is located in the UK.

The question of whether a company is centrally managed and controlled in the UK is one of fact to be determined with regard to the manner in which the company’s affairs are conducted. Her Majesty’s Revenue and Customs (HMRC) (the UK tax authority) has provided guidance which notes that 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 the business are to be found, though those two places may often coincide.In practice, central management and control is usually considered to be located in the place where a company’s board of directors hold their board meetings, provided the directors’ meetings are the mechanism through which such central management and control is exercised.

The decision of the FTT noted that the same test for determining “central management and control” applied to companies formed for a specific or limited purpose. Accordingly, the fact that such companies required relatively little in the way of “strategic and management” decisions did not necessarily mean that “central management and control” resided outside the board; they could still have an independent board of directors. In particular, in finding that the “central management and control” of the Jersey incorporated SPVs was in the UK, the FTT relied on the directors in Jersey undertaking specific tasks entrusted to them by their UK parent entity, even in the absence of a commercial rationale or corporate benefit to the SPVs to approve entering into the transactions.

In overturning the decision of the FTT, the UT held that the Jersey companies in Development Securities were also Jersey tax resident for UK tax purposes. The UT noted that when determining the location of the central management and control of SPVs, care must be taken so as to distinguish between mere “influence” over the subsidiary and “control” over the subsidiary, as central management and control of the subsidiary would remain with the board of the subsidiary where the parent merely “influences” (rather than “controls”) the subsidiary. In particular, the UT noted that where those who have responsibility for central management and control “do not bring their mind to bear on the questions that they ought to consider if properly exercising central management and control” that such responsibility for the central management and control may be abdicated. The UT also rejected the FTT’s conclusions that the directors of the SPVs had abdicated their responsibility for management and control, noting that the directors had in fact acted in accordance with their directors’ duties.

Whilst it is yet to be seen if the decision of the UT will be subject to further appeal, the decision of the UT serves as an important reminder for directors of companies incorporated in one jurisdiction but intended to be tax resident in a different one, especially in the context of SPVs undertaking limited activities. Directors should give careful consideration to residency guidelines as well as their duties when considering entering into transactions.

 

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