UK Court decision on corporate tax residency

Written by: Justin Liebenberg, Director Cliffe Dekker Hofmeyr Tax

A company incorporated outside South Africa can be tax resident here if its place of effective management (POEM) is located in South Africa. POEM is also often used as the tie-breaker to finally determine corporate tax residency under double tax agreements. A recent court decision in the UK sheds further light on POEM especially in the context of a double tax agreement.

The facts

In the English case of Laerstate v HMRC [2009] UKFTT 209 (TC) the First Tier Tax Tribunal dealt with the question of whether a company incorporated in the Netherlands was tax resident in the UK and consequently whether a sale of shares by the company was subject to tax in the UK. In doing so it was required to decide on whether the Central Management and Control (CMC) was exercised in the UK (the residency test in the UK) and whether the POEM for the purposes of the UK/Netherlands treaty was in the UK.

The determination of where the CMC and POEM is located is largely a question of fact. The facts in the case were that the appellant, Laerstate BV, was a company incorporated in the Netherlands and at all relevant times was resident under the Netherlands domestic law. Laerstate owned shares in Lonrho and its sole shareholder, Mr Bock was the CEO of Lonrho.

Laerstate’s articles specified that it was to be managed by a board of directors. The board would be responsible for the management of the company and each director was independently authorised to represent the company. Mr Bock was a director as was a Mr Trapman.

Laerstate had decided to sell its Lonrho shares in two tranches and the Tribunal considered the issue of corporate tax residency at the time of each sale. In the period of time before the first sale, Mr Block was a director of the company however during the period before the second sale only Mr Trapman was a director.

First sale of shares

During this time Mr Bock was a director and was therefore authorised to represent Laerstate. The Tribune stated that there is no assumption that the CMC is located where the directors meet, however where a company is managed by directors in board meetings the CMC is normally found where the board meetings are held. However if the management is carried out outside board meetings the test is who was managing the company by making high level decisions? At the time Laerstate was not managed through board meetings.

Mr Bock argued that the meetings in the UK dealt with ministerial matters and matters of good house-keeping. The Tribunal found that although Mr Bock managed with the assistance of Mr Trapman, his involvement was secondary. Mr Bock carried out the activities of Laerstate of a strategic and policy nature and managed the business and he did so to a substantial extent while he was in the UK. This was demonstrated by the fact that although substantial business was conducted during this period there were no board meetings for a considerable time. The Tribunal found that the CMC and POEM was in the UK at this time.

Second sale of shares

During this period only Mr Trapman was a director. The issue was whether Mr Trapman managed Laerstate by signing relevant resolutions and documents.

The Tribunal found that the mere physical acts of signing resolutions or documents do not suffice for actual management. There is nothing wrong with a majority shareholder such as a parent company indicating how the directors of the company should act. If they consider the wishes and act on them it is still their decision. The borderline is where no decision is made at all. The objective way to test this is to ask if the directors who signed the resolution had the absolute minimum amount of information that a person would need to make a decision.

At this time only Mr Trapman could sign any document that would bind Laerstate. The issue was whether Mr Trapman acted on Mr Bock’s instructions without considering the merits of them and made the decisions himself while in possession of the minimum information necessary for anyone to be able to decide whether or not to follow them.

The Tribunal decided that on the facts Mr Bock took the necessary decisions, Mr Trapman did not make decisions, he furthermore did not have the necessary information to make decisions and therefore the CMC and POEM was located in the UK.

Importance of the case

The decision is of particular relevance to the determination of the POEM in the context of a double tax agreement. In pursuing this matter the UK revenue authority looked at travel and other relevant documentation. Local companies with subsidiaries in other jurisdictions should ensure adequate paper work is in place to support the fact that the POEM of the foreign subsidiaries is not in South Africa. The decision emphasises the need to not only have minutes but that the minutes should indicate the date of meetings, those present and the fact that sufficient information was placed before the directors to make competent decisions. Evidence of the directors having requested advice or having had discussions in relation to important decisions would also be useful.