Non-UK resident companies and liability to UK tax

It has been long-established law that the test for tax residence of a non-UK incorporated company is the place from which central management and control (CMC) is exercised. To answer this question requires a determination of by whom CMC is exercised. The issues are ones of fact.

The decision in Laerstate BV -v- HMRC on 11 August 2009 serves as a reminder of those important considerations a court will look at in determining corporate tax residence. It tells us little that is new, but it is a warning - to shareholders, directors and professional advisers - for the need for discipline (and clear thinking) in corporate management.

• It is essential to identify by whom (in reality) high-level decisions are made, and then to determine where those decisions are made.
• The board of directors may or may not be the body making those high-level decisions. In exceptional cases, the board might stand aside altogether and allow another (for example, a major shareholder or a dominant board member) to usurp those functions.
• The CMC test involves a general overview of the company's course of business and trading over a period, and not just isolated individual acts of management. It is naïve to believe that the mere physical acts of signing resolutions or documents will suffice for actual management. Those acts might merely be legal formalities (which, at one level, might amount only to "mindless signing") and cannot (by themselves) constitute actual management.
• The board must be sufficiently informed to make a decision - directors must have an absolute minimum level of information necessary to reach an informed decision; directors must apply their minds to whether or not to sign, and to exercise their discretion when coming to a decision.

Laerstate was incorporated in the Netherlands. Its sole shareholder was Mr Bock. Mr Trotman was the sole director.

The company bought and sold shares and made a gain. HM Revenue & Customs contended that Laerstate was tax resident in the United Kingdom at the time the gain was realised, and sought corporation tax from it on that gain. Laerstate resisted the assessments, arguing that relevant board resolutions and documents had been executed outside the United Kingdom, and board meetings had been held outside the United Kingdom.

On the facts, the First Tier Tax tribunal found against Laerstate and upheld the assessments. Bock was the person making the high-level decisions, and he made those decisions in the United Kingdom.

The lesson from the case is that the company, its shareholders, board and advisers should go back to basics when looking at establishing corporate tax residence outside the United Kingdom and the way in which that process is managed. So good practice would include the following:

• Board meetings should be held regularly, and always outside the United Kingdom (preferably, and consistently, in one jurisdiction).
• The physical presence of directors should be required at board meetings, and participation by directors by telephone from the United Kingdom must be avoided.
• A majority of board members who attend a meeting and make decisions must not be UK resident.
• Strategic decisions should be reserved for meetings of the board and should occur only at that level.
• The board must be provided with (and must be seen to be provided with) more than the absolute minimum of information to enable them to come to a considered decision.
• Accurate minutes should be produced of the proceedings at board meetings, with full details of all information provided to the meeting and evidencing the relevant discussions, considerations and decisions.

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