Jersey companies were UK tax resident, according to Court of Appeal
By Ewan Pettman
01 June, 2021
The UK Court of Appeal has ruled that subsidiaries incorporated in Jersey by the UK parent company, Development Securities plc, were resident in the UK for tax purposes, which has significant ramifications for how subsidiaries should be considered from a tax planning perspective in relation to how international corporate structures are managed.
Development Securities implemented a structure intended to use latent losses on the acquisition of subsidiaries and properties to offset other gains in the group. Options to buy subsidiaries and properties were exercised at a price exceeding their market value, and were then transferred to other Development Securities Group companies at a loss.
The big question was the tax residency of the subsidiaries in Jersey. HMRC argued that the major decisions at director level were made in the UK and not by the boards of directors of the companies in Jersey, which, according to HMRC, merely reviewed the decisions in light of Jersey law.
Legally, the two questions surrounding such cases are who makes management decisions and where that happens.
In June 2019 the UK Upper Tribunal ruled that the Jersey subsidiaries were resident in Jersey because the companies were managed in Jersey. The board meetings had a Jersey resident majority, and the board meetings at which decisions were finalized took place in Jersey.
This overturned the previous ruling, by the First Tier Tribunal (FTT) in August 2017, which concluded that central control of the Jersey subsidiaries was ultimately down to the UK parent company. The purchase of assets at prices above their market value was not in the interests of the Jersey companies, so under Jersey law these decisions had to be approved by the UK company and were therefore the UK company's responsibility.
In December 2020, the Court of Appeal agreed with the FTT's initial ruling. The crux of the matter was the role played by the Jersey directors in the decision-making process, which was to consider the transactions in terms of their lawfulness and not their merit, leading the Court of Appeal to conclude that the decisions were made by Development Securities in the UK.
Why is this important?
The decision may yet be appealed to the Supreme Court, but as things stand this is, in the words of Lord Justice Nugee of the Court of Appeal, "a significant departure from previous case law". The FTT's ruling of 2017 was the first time a local board of directors had been judged not to have exercised central control despite having met and reviewed all aspects of the decisions in question.
The last time the Court of Appeal considered the question of company residency was in the 2006 case of Wood v. Holden, which established the principle that the influencing of directors' decisions by a parent company in the UK is insufficient to conclude that the UK parent company is in control of a non-UK subsidiary. Hence, there is a distinction between influence and control.
The Development Securities case shows that this distinction is not always clear. Superficially, the Jersey companies appeared to be acting under their own control, but the matter of whose interests were best served by the transactions brought this into question, and the question was answered by a thorough examination of the actual decision-making processes involved.
This makes the overall pattern of management and control of foreign subsidiaries a much more important consideration, for UK businesses, when establishing international structures that may bring advantages from a tax planning perspective, alongside other benefits such as facilitating trade. Essentially, these structures must function within the spirit as well as the letter of the law.
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