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8. Corporate Residence Notes

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

8. CORPORATE RESIDENCE

1. Key Principles A. Definitions and Background Information B. Liability to Corporation Tax C. The Meaning of "Resident" D. Tax Consequences of Ceasing to be UK Resident E. Taxing Resident Companies

2. The Traditional UK Tests for Corporate Residence A. The Common Law Test of Central Management and Control of Companies B. The Supplementary Statutory Test of Incorporation

3. Double Taxation Treaties/Agreements (DTTs/DTAs) A. The Place of Effective Management (POEM) B. The Meaning of "Effective Management" __________________________________________________________________________________

1. Key Principles A. Definitions and Background Information

1. Source principle: Income is taxed only in the country in which it is produced; foreign source income is tax exempt.

2. Resident principle: Income is taxed by the country of residence of the investor. Credits are granted by residence state for foreign tax paid.

3. A company is subject to UK corporation tax on all its profits wherever they arise if the company is UK resident (subject to double taxation relief): the common law test of residence of a company is where the central management and control is located, but a statutory test (supplementing the common law) of incorporation was added by Section 66 FA 1988 (now Sections 13-18 CTA 2009, see later)

4. Non-resident companies are not subject to UK corporation tax (but may be to UK income tax in respect of some types of income e.g. rent on investment property in the UK, or CGT where trading in the UK through a permanent establishment), see Section 5 CTA 2009 B. Liability to Corporation Tax

A company that is resident in the UK is liable to pay corporation tax on all its profits wherever arising

Section 5(1) Corporation Tax Act (CTA) 2009 - Territorial Scope of Charge "(1) A UK resident company is chargeable to corporation tax on all its profits wherever arising..."

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

But a non-resident company is liable to corporation tax only if it trades in the UK through a permanent establishment and liability will then be restricted to the chargeable profits from that permanent establishment A non-resident company who trades in the UK but not through a permanent establishment will not be liable to corporation tax but may be to UK income tax: an example is where the non-resident company owns investment property and its rent is taxable income

Section 5(2),(3) CTA 2009 - Territorial Scope of Charge "(2) A non-UK resident company is within the charge to corporation tax only if it carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom. (3) A non-UK resident company which carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom is chargeable to corporation tax on all its profits wherever arising that are chargeable profits as defined in section 19 (profits attributable to its permanent establishment in the United Kingdom)."

But a non-resident company not trading through a permanent establishment but whose trade gives rise to chargeable gains under CGT rules will not be taxed: such gains can only be taxed where the company is trading through a permanent establishment (s10B TCGA 1992)

Section 19 CTA 2009 - Chargeable Profits (Non-Resident Company, UK Permanent Establishment) (1) This section applies if a non-UK resident company carries on a trade in the United Kingdom through a permanent establishment in the United Kingdom. (2) The company's chargeable profits are its profits that are—
(a) of a type mentioned in subsection (3), and (b) attributable to the permanent establishment in accordance with sections 20 to 32. (3) The types of profits referred to in subsection (2)(a) are—
(a) trading income arising directly or indirectly through or from the establishment, (b) income from property or rights used by, or held by or for, the establishment, and (c) chargeable gains falling within section 10B of TCGA 1992 (nonresident company with United Kingdom permanent establishment)—

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

(i) as a result of assets being used in or for the purposes of the trade carried on by the company through the establishment, or (ii) as a result of assets being used or held for the purposes of the establishment or being acquired for use by or for the purposes of the establishment.

C. The Meaning of "Resident"

Formerly, companies were treated as UK resident and taxed accordingly if their central management and control was situated in the UK; but where precisely management and control is exercised is a factual question of some difficulty.

Two points must be noted:

i.

The overseas country where the company was incorporated is usually of little significance to the question of establishing UK residence;

ii.

It is possible under English law to be resident in two countries: "dual residency"

The common law residency test is supplemented by an additional test based on the place of company incorporation; UK incorporated companies will always be taxed as UK resident irrespective of where central management and control is exercised However, "dual resident" companies that would not be treated as UK resident under the "tie-breaker" provisions of a double tax treaty are not treated as UK resident This means there is now a dual test: a company will be UK resident if EITHER (1) it was incorporated in the UK; OR (2) not incorporated in the UK but its central management and control are located in the UK (see HMRC's views on this in SP 1/90)

HMRC Statement of Practice 1/90 - Company Residence (HMRC Guidance INTM120020) 1 - Carrying on Business

The exceptions from the incorporation test in Schedule 7 CTA depend in part on the company carrying on business at a specified time or during a relevant period: the question whether a company carries on business is a question of fact in the particular circumstances

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

HMRC take the view that "business" has a wider meaning than "trade" and can include transactions such as the purchase of stock, carried out for the purposes of a trade

For the purpose of the case-law test, the residence of a company is determined by the place where its real business is carried on and a company which can demonstrate that in these terms it is resident outside the UK will have carried on business for the Schedule 7 purposes

2 - Place of Central Management and Control


The case law concept of central management and control is directed at the highest level of control of the business of the company and is to be distinguished from the place where the main operations of the business are to be found (though the two may be the same place) The relevant exercise of control does not have to be active but can be exercised tacitly through passive oversight Under the common law test, a number of decisions have attached importance to the place where the company board meet; in some cases the management and control may be exercised by directors in one country, though the actual business operations might take place elsewhere; but the place of board meetings is not necessarily conclusive The directors' meetings are significant only insofar as those meetings constitute the medium through which central management and control is exercised e.g. if directors were engaged actively in the UK, the company would not be regarded as non-UK resident merely because the formal meetings were held outside the UK (HMRC looks at substance, not form) Where doubts arise, HMRC adopt the following approach: i.

First try to ascertain whether the directors of the company in fact exercise central management and control;

ii.

If so, HMRC seek to determine where the directors exercise this

iii.

If not, HMRC look to establish where and by whom it is exercised

3 - Parent and Subsidiaries

Where the parent and subsidiary operate in different territories, if the parent merely exercises the powers of a majority shareholder in the subsidiary e.g. the power to appoint or remove directors, HMRC will not seek to argue that central management and control is located where the parent company is resident But if the parent company usurps the functions of the subsidiary's board (such as in Unit Construction), or where the board merely rubber 4

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

stamps the parent's decisions, HMRC will draw the conclusion that the subsidiary has the same residence as the parent for tax D. Tax Consequences of Ceasing to be UK Resident

Subject to the "tie-breaker" provisions, a UK incorporated company cannot lose its UK residence; in the case of overseas companies though, if central control and management moves elsewhere, UK residence will cease and in that event a tax charge will arise on the unrealised gains immediately prior to the change of residence (an "exit tax")

Section 185 TCGA 1992 deems the company to have disposed of its assets at market value immediately before it becomes non-resident, and to have immediately re-acquired them If the tax is not collected within 6 months of it becoming payable, it may be collected from other persons defined in Section 190 TCGA 1992

Worked Example On 1 Aug 2002, Rambo Ltd (incorporated in Panama with management in the UK) ceases to become UK resident because its management moves to France. At the time it owns chargeable assets of £200,000 on which its allowable expenditure is
£50,000. Immediately before its change in residence it is deemed to sell the assets for £200,000, immediately reacquiring them, and thereby realising a chargeable gain of £150,000.

E. Taxing Resident Companies

All profits wherever made by a UK resident company will be charged to corporation tax in the UK, subject to any available double taxation reliefs When a trade is to be carried out by a UK company in a foreign country, there are three possible methods of operation available:

1. The trade may be with that country so that there is no trading presence within the country and the foreign tax is avoided

2. A branch may be opened overseas which, from a UK tax point of view, results in any profits being subject to corporation tax; it also means that loss relief will also be available. If a foreign branch is incorporated by the formation of a foreign subsidiary company in the foreign jurisdiction, it is possible to postpone the payment of UK tax on capital gains that would otherwise result (Section 140 TCGA 1992)

3. A subsidiary non-resident company may be formed with the result that corporation tax is generally avoided on profits until they are distributed to the UK by way of a dividend. This has obvious advantages where the foreign tax rate is lower than the UK; 5

Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

Sections 747-756 TA 1988 contain provisions to prevent tax avoidance by the use of controlled foreign companies

2. The Traditional UK Tests for Corporate Residence

The common law test of company residence is that enunciated by Lord Loreburn in De Beers Consolidated Mines v Howe that "a company resides for the purposes of Income tax, where its real business is carried on... and the real business is carried on where the central management and control actually resides"

This test of "central management and control" has been endorsed in subsequent decisions and particularly by Lord Radcliffe in Bullock v Unit Construction as being "as precise and unequivocal as a positive statutory injunction"

A. The Common Law Test of Central Management and Control of Companies De Beers Consolidated Mines v Howe

The question was whether De Beers Mines ought to be assessed to income tax on the footing that it was a company resident in the United Kingdom, despite being registered in South Africa, having its Head Office in Kimberley, South Africa, mining diamonds in South Africa and selling the diamonds under contracts in South Africa The House of Lords nevertheless held it to be resident in the United Kingdom

Lord Loreburn LC


Mr Cohen for De Beers propounded a test which had the merits of simplicity and certitude: a company resides where it is registered and nowhere else, and De Beers is registered in SA I cannot adopt Mr Cohen's contention: we must proceed on the analogy of a company to an individual and while a company cannot sleep or eat, it can keep house and do business An individual may be of foreign nationality and yet reside in the UK: so can a company Otherwise it might have its chief seat of management and trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered and abroad and distributing its profits abroad But a company resides where its real business is carried on... and the real business is carried on where the central management and control actually resides That is a pure question of fact to be determined upon a scrutiny of the course of business

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Corporate & Business Taxation (BCL)/Magister Juris (MJur)

Bachelor of Civil Law

The majority of directors live in England, the directors meetings in London are the meetings where the real control is always exercised in practically all the important business of the company except the mining operations London has always controlled the negotiation of the contracts with the diamond syndicates, has determined policy in the disposal of diamonds and other assets, the development and working of the mines, the application of profits and the appointment of directors The Commissioners concluded that the trade of the company constituted one trade or business, and was carried on and exercised by the company within the UK in London These conclusions of fact cannot be impugned, and it follows that this company was resident in the United Kingdom

Unit Construction v Bullock (Inspector of Taxes)


Three companies which were wholly-owned subsidiaries of AB & Co, a company resident in the UK, were registered in Kenya, with distinct boards from that of the parent in the UK However, none of those boards ever took decisions as a board, and the real control and management was exercised by the board of AB & Co in the United Kingdom This arrangement was not authorised by the articles or memorandum The appellant company, also a subsidiary of AB & Co., made certain payments to the Kenyan companies and it was accepted that if the Kenyan subsidiaries were "resident in the United Kingdom" then the payments in question were deductible from the appellant's profits The House of Lords held that it was the actual place of management which was relevant to the inquiry of residence, and not the place it ought to be managed, such that the appellant company's payments were made to UK-resident companies, and were allowable deductions

Lord Radcliffe

Every decision of any importance that concerned the running of the businesses in Kenya of AB & Co. subsidiaries were taken in London by directors of the parent company; and to manage the subsidiaries in this was inconsistent with the articles and memorandum under which their meetings could not be validly held in the UK (but this was not a sham) On the facts, the seat of the "control and central management" of the subsidiaries changed and passed from Africa to the UK - this is a straightforward case of de facto control being actively exercised in the United Kingdom while the local directors "stood aside" The appellant [who wants the Kenyan companies to be UK resident]
admits that the three African subsidiaries were resident in Africa, but I 7

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