UK: Company Residence: Laerstate BV v HMRC

Last Updated: 25 November 2009
Article by Mark J. Summers and William Hancock

This is a recent case that acts as a sharp reminder that care and attention is needed to ensure that a non-UK company does not become UK tax resident. It illustrates that there is more to the issue than simply where the directors purport to be making decisions on the face of documents and resolutions. It was decided by the First Tier Tax Tribunal (formerly the Special Commissioners) concerning a company's tax residence from 1993 to 1996.

Under UK tax law, a company is resident in the UK if it is incorporated here. Where it is not incorporated in the UK, it will still be resident here if it is centrally managed and controlled from the UK. In the context of Laerstate, the central management and control (CMC) related to the acquisition and disposal of the shares in Lonrho. The effect of being UK resident is that the company's profits and gains are subject to UK corporation tax.

Key facts

Laerstate BV was incorporated in The Netherlands in 1988 but was more or less dormant until it was acquired by Dieter Bock, a German national, as a vehicle for the acquisition of shares in Lonrho in December 1992. At that time, Mr Bock was resident in Germany but in February 1993 he moved to London to take up the post of joint managing director and CEO of Lonrho and (it seems) became UK resident then.

It seems that Laerstate was a fairly passive holding company until the sale of its Lonrho shares, which was completed towards the end of 1996. In the context of Laerstate, the aspects of CMC related to the acquisition and disposal of the shares in Lonrho.

During most of this period, Laerstate had two directors, a Mr Trapman, who at all material times was resident in The Netherlands, and Mr Bock who was UK resident. Dutch law and the company's articles of association permitted either director to enter into contracts on behalf of the company which were binding on the company (so it was not necessary for both directors to be involved).

The key (simplified) facts relevant to this case relate to put and call options over the Lonrho shares, negotiations with Anglo American over the sale of the Lonrho shares, the eventual sale of those shares to Anglo American Corporation and the advice that was given in relation to those transactions by Laerstate's London solicitors and, crucially, where the decisions were taken.

The court's findings as to central management and control

Laerstate's position was that all the key decisions were taken outside the UK. Its counsel pointed to a series of board meetings, board resolutions, agreements, a deed of priorities, option notices and similar acts all occurring outside the UK. Some of these acts recorded that Mr Bock was present (usually in The Netherlands) but on a number of occasions this was contradicted by his schedule of travel arrangements which indicated that he was in the UK at the relevant times.

It was also argued that Mr Trapman had made the important decisions relating to the sale, which the articles of association permitted. But examination of the evidence showed that Mr Bock attended meetings at Laerstate's London solicitors and that they sent their advice to him, not to Mr Trapman, nor did they advise Mr Trapman. Also Mr Bock negotiated with Anglo American concerning the sale of the Lonrho shares (including the options, the timing and the price). The court found that Mr Trapman was not kept informed of developments throughout.

The court said that "there is no assumption that CMC must be found where the directors meet. It is entirely a question of fact where it is found. Where a company is managed by its directors in board meetings it will normally be where the board meetings are held. If the management is carried out outside board meetings one needs to ask who is managing the company by making high level decisions and where, even where this is contrary to the company's constitution."

The court went on to say that the test is not confined to looking at particular actions of the company (eg signing documents or making board resolutions) if a more general overview of the course of business and trading shows that as a matter of fact CMC abides in the UK.

The court also went on to state that "there is nothing to prevent a majority shareholder indicating how the directors of the company should act. If they consider the wishes and act on them it is still their decision." The question is whether the directors (Mr Trapman in this case) have the absolute minimum amount of information that a person would need in order to be able to make a decision at all on whether to agree to the shareholder's wishes or to decide not to sign the documentation. In this case, that would have included information or advice on whether the price was sensible. There was no such information or advice given to Mr Trapman.

As a consequence of the key decisions having been taken in the UK, Laerstate was held to be UK resident under domestic law. Under Dutch law, the company was resident in The Netherlands. For broadly the same reasons as above, under the double tax treaty between the two countries, the company's place of effective management was also found to be in the UK, so for treaty purposes the company was UK resident too, and hence liable to corporation tax on the gain arising from the sale of the Lonrho shares.

Comment

The case is a useful reminder to clients and fiduciaries that it is not enough just to have the formal acts of a company documented as occurring outside the UK in order to maintain that it is not UK tax resident. It is essential that the directors are kept informed so that they can properly make their decisions (whether they accede to the shareholder's wishes or not).

However, this case is helpful in that it seems to accept in principle that a company incorporated outside the UK can retain its foreign residence even though the sole shareholder (who is also a director) is UK resident provided it is actually centrally managed and controlled from outside the UK.

There also appears to be no objection to the UK-based shareholder/director being involved in high level negotiations (as in this case concerning the sale of the Lonrho shares) provided the other directors are adequately informed and advised before making decisions on behalf of the company. From a practical perspective, the more information the other directors receive, the better. Likewise, the more records there are to substantiate this, the better.

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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