UK: Non-UK Companies and Trusts - UK Management and Control

Last Updated: 30 March 2011
Article by Patricia Milner

Many family structures have to deal with the risk of a non-UK company or trust being treated as resident in the UK for tax purposes. Concern arises where there are directors or shareholders resident in the UK or, in relation to non-UK fiduciary structures, UK beneficiaries or other persons involved in the administration who could be regarded as having too much influence.

These risks apply equally to businesses as well as family holding structures, investment vehicles and trust companies.

Management and control

If the central management and control of a non-UK company is carried out in the UK, then the company itself – and any trusts of which it is sole trustee – will be UK tax resident. 'Management and control' refers to the highest decision-making level, and need not even involve the directors themselves if the directors usually follow the effective instructions of another person, or if their decisions are overseen in some other way that inhibits their freedom. The key question is therefore whether the UK resident directors, shareholders or beneficiaries are seen to control the decision-making process from the UK, or whether the remaining or actual directors are able to make genuinely independent decisions and have the requisite skill and experience to act on their own authority.

It is important to remember that there is a distinction between a company's management and its administration (e.g. keeping of the company's books and records and filing the requisite forms with the authorities). A company can be managed and controlled from the UK even if it is administered from outside the UK. The essential question rather is where the fundamental decisions about the company are taken: it can be enough that the directors signed the relevant resolutions outside the UK (even on advice from UK advisors) so long as this act itself amounts to the free exercise of their discretion, and their role as directors has not effectively been usurped by some other person. Conversely, it is not enough to provide a paper trail if all that is happening outside the UK is effectively a rubber-stamping exercise.

Laerstate BV v HMRC

These questions were considered in England in the First Tier Tribunal in the case of Laerstate BV v HMRC. The case concerned a dispute about the UK tax-residence status of a Netherlands company. The tribunal concluded that the company was UK tax-resident because, although it apparently carried out certain high-level managerial functions outside the UK, the company's management was, in reality, undertaken from the UK by its sole shareholder.

Activities carried out by the directors and shareholders

The company pointed to the significant number of formal managerial meetings that had been held in the Netherlands and various other locations outside the UK, many of which the owner did not actually attend, so that the company's other officer appeared to be acting alone. The Tribunal, however, refused to look simply at where resolutions had been signed. They looked at all the activities of the shareholder/director in the UK, including meetings with lawyers and other advisers.

The Tribunal considered whether the activities carried on both inside and outside the UK were concerned only with ministerial matters and matters of good housekeeping, or with policy, strategic or management matters relating to the conduct of the business of the company. The Tribunal thought that the activities of the shareholder/director in the UK were related to the latter rather than the former, and that these activities included making decisions about the company's business.

Consideration of wishes of the shareholder

The Tribunal found that there is nothing to prevent a majority shareholder (whether a parent company or individual) from indicating how the directors of the company should act. If the directors consider the shareholder's wishes and act on them, it is still their decision. The borderline is between the directors making the decision and not making any decision at all.

What are the conclusions which can be drawn from this case?

  • The Tribunal acknowledged that merely having a UK resident director (even if one of two) will not mean that the company is UK resident.
  • The fact that the directors take account of the wishes of a UK resident shareholder will not mean that the company is UK resident, provided that they have the minimum amount of information necessary to take a decision and actually take a decision whether or not to follow the shareholder's wishes.
  • The directors should have enough information to enable them (on an objective test) to take a proper decision. If the decision taken is inadvisable or in breach of trust (but based on a request from the shareholder) then they are more likely to be seen as simply acting on the wishes of the shareholder.
  • If any action is taken in the UK by a director (or a shareholder if the directors are not taking decisions appropriately) concerned with the policy, strategic and management matters of the company, and which constitutes the realistic positive management of the company, then the effective management of the company is likely to be in the UK. It is important therefore to consider the nature of what is done both in the UK and outside the UK.

Although this is only a first instance decision it nevertheless gives an interesting indication of the extent to which activities can be carried on in the UK without resulting in a non-UK company becoming UK tax resident.

Garron v The Queen (Canada)

Background

In the Garron case the Canadian court considered the residence status of two trusts with the same Barbados resident corporate trustee. The trusts held shares in Canadian holding companies, which on a sale realized substantial capital gains. Amounts on account of potential tax on the gain had been remitted to the government pursuant to withholding procedures under the Canadian Income Tax Act. Subsequently the trusts sought a return of the amounts withheld, claiming an exemption pursuant to a double tax treaty between Canada and Barbados which provided that "gains from the alienation of property... may be taxed in the Contracting State of which the alienator is a resident (i.e. Barbados)."

The question for the court was whether the trusts were resident in Barbados or Canada for treaty purposes, at the time of share sale. Barbados lacks statutory or judicial authority concerning the residence of a trust, but it was put to the court that the residence of a trust is determined by reference to the place of residence of the trustees, upon the assumption that the control and administration of the trust is exercised in that place by resident trustees. On the other side, the minister submitted that the trusts were liable to tax under the Income Tax Act by being resident. Without a legislative definition of resident, general principles would be applied and the minister submitted that the trusts were resident in Canada by reason of who actually controlled the trusts, namely two Canadian individuals (D&G) who were beneficiaries of the trust and not the Barbados trustee, who simply complied with D&G's decisions.

Management and control in the corporate context

The court determined that a management and control test, similar to that applied for companies, should be applied to a trust (and the court preferred this over "mind and management"). The court identified that in the corporate context, management and control had usually been found to reside in a board of directors, even though the directors might be under significant influence from shareholders and others. The threshold level of decision making for the directors could be quite low, but it should be clear that no one had dictated those decisions – i.e., to find that management and control is with shareholders would require something more than evidence of shareholder influence.

Management and control in the trust context

The court considered the role of the Barbados trust company and evidence that the trustee's role was largely administrative in relation to the share sale. It noted that memoranda suggested that the trustee would not make distributions without D&G's consent; that the beneficiaries and trusts shared investment advisors, with the effect that the beneficiaries could direct the trusts' investment activity; the tax-reduction scheme concerning the trusts was, on the facts, under D&G's direction; and there was virtually no documentation that the trustee took an active role in managing the trusts or dealing with the trusts' affairs (except for execution of agreements, accounting and tax affairs).

The court also took into account the fact that D&G were able, in effect, to replace the trustee at any time. D&G could ask the protector to replace the trustee and if the protector was not compliant, the protector could be replaced. There seemed to be no evidence that the protector thought his role was other than to assist D&G control their trusts. It was suggested that D&G took little interest in the trustee and who was involved with their trusts, but the court held that if the trustee had a substantive role to play in managing the trusts, D&G should be interested in what the trustee was doing and in ensuring that the persons involved were competent to manage the trusts.

The court concluded that there was no evidence that the trustee had not agreed to assume a limited role in the management of the trusts and the central management and control of both trusts was in Canada, namely with D&G, with the result that trusts were also Canadian resident.

What factors may identify the key players who determine the location of management and control for a trust?

  • Consideration of anything that limits a trustee's role in trust management, and whether a trustee apparently assumes a limited role in the management of trusts, indicating that other persons or entities have the key and/or material role in management.
  • The power of particular persons to replace the trustee and the fact that a protector acts in a way that suggests that he deems his role primarily to assist persons who may hire and fire the trustees.
  • The level of interest in the trustees' activities by persons integrally linked to the creation of the structure.
  • The experience and expertise of the trustee in undertaking transactions for the trust, for example, undertaking proper due diligence, and the question of who actually has that expertise.
  • The fact that a trust instrument limits trustee liability, for example to wilful neglect or default, which could mean there is no practical concern about legal liability, which begs the question as to where such liability would lie.

This decision of the Canadian court clearly highlights the well documented need to look behind the role of the trustee. It also adds to the range of factors and circumstances to consider when setting up and practically administering complex structures that include a trust, so that the question of residence of a trust as determined by how and where it is managed and controlled does not cause undue tax liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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