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Corporate tax residence: The risk of UK involvement in non-UK company decisions

Posted on 1 February 2021

The recent Court of Appeal decision in HMRC v Development Securities Plc [2020] EWCA Civ 1705 serves as a reminder of the risk of non-UK incorporated companies becoming UK tax resident because their 'central management and control' takes place in the UK. The case highlights the importance of ensuring that all decision-making of such companies genuinely takes place outside the UK. 

In this case, a UK company had a Jersey incorporated subsidiary. The Court held that the subsidiary's central management and control took place in the UK, because the subsidiary's directors acted in accordance with the parent company's directions, such that the subsidiary was UK tax resident. 

The subsidiary's board met in Jersey, reviewed the proposed documents regarding the transaction, and received a full briefing from the parent company on the purpose of the transaction. There was therefore no suggestion that they had signed documents without understanding their effect.  

The question was whether the subsidiary's directors had exercised independent judgement. The transaction in question was part of a tax arrangement which involved the subsidiary acquiring assets on uncommercial terms. Despite having fully understood the nature of what they were doing and (at least on the face of it) having discussed and considered the proposal, it was concluded that the subsidiary was in fact purely acting under direction from the parent company. The subsidiary's central management and control therefore took place in the UK, as this was where the parent's decisions were made.

The Court described a line between a parent company influencing and giving strategic or policy decisions, and giving instructions. Exactly where that line is drawn is, in each case, a question of fact.  Given that becoming UK tax resident results in a company's worldwide income and gains being subject to UK corporation tax, currently at 19%, the consequences of falling the wrong side of the line can be drastic. 

The case is potentially relevant not only to parent/subsidiary relationships, but also to non-UK companies with one or more UK resident directors, or where some or all of the management decisions of the company are made in the UK. It is a reminder and warning that the Court will be willing to look past 'window dressing' in the form of board meetings being held to consider and approve decisions where the decision has, in fact, already been taken elsewhere. 

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