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Further consideration of a company's tax residence by Jonathan Schwarz, author of 'Booth & Schwarz: Residence, Domicile and UK Taxation'.

The Untelrab Synthesis

From a practical perspective, a brief statement of principles is most desirable. In Untelrab Ltd & Ors v McGregor (HMIT) (1995) SpC 55 the first published decision of the Special Commissioners dealing with company residence, an attempt was made to synthesise the principles developed in a large number of cases over more than a century as follows:

‘From these authorities we have identified the following principles:

• that the residence of a company is where the directors meet and transact their business and exercise the powers conferred upon them;

• that if the directors meet in two places then the company’s residence is where its real business is carried on and the real business is carried on where the central management and control actually abides;

• that a determination as to whether a case falls within that rule is a pure question of fact to be determined by a scrutiny of the course of business and trading;

• that the actual place of management, and not the place where a company ought to be managed, fixes the place of residence of a company;

• that it is an exceptional case for a parent company to usurp control from its subsidiaries; a parent company usually operates through the boards of its subsidiaries;

• that although a board might do what it was told to do it did not follow that the control and management of the company lay with another, so long as the board exercised their discretion when coming to their decisions and would have refused to carry out an improper or unwise transaction; and

• that when deciding the issue of residence one should stand back from the detail and make up one’s mind from the picture which the whole of the evidence presents.’

(Untelrab Ltd & Ors v McGregor (HMIT) (1995) SpC 55 at para 74)

The case is one that represents two modern circumstances where arguments between companies and the Revenue have been most acute. The first, as in Untelrab, is where a company forms part of an international group of companies and the operations of group members are affected to a greater or lesser extent by group policies led from the parent company. The second is in relation to privately-owned companies where it is claimed that the power of a dominant shareholder prevails. Very often these are special purpose vehicles set up to perform a specific function within a corporate group or in organising an individual’s affairs.

Untelrab concerned subsidiaries of a UK resident public company incorporated in the Channel Islands and Bermuda. Their directors were lawyers and accountants resident in those territories. Board meetings were held there and the day-to-day management of the companies undertaken there. Although managed overseas, in certain respects, they adopted group policy as formulated by the parent company. The Special Commissioners found that the board of Untelrab met in Bermuda and transacted the company’s business there. At board meetings proposals were discussed and decisions were made by the directors in the best interests of the company. They would have refused to carry out any proposal which was improper or unreasonable. The UK resident parent company did not control the board in the exercise of their powers. It could have taken steps to remove the directors but could not control them in their conduct of Untelrab’s business.(Untelrab Ltd & Ors v McGregor (HMIT) (1995) SpC 55 at para 73). The decision was not appealed. It was however endorsed by Park J in the High Court in Wood v Holden [2005] EWHC 547 (Ch) (at para 26).

A Question of Fact

In relation to the application of the central management and control test, Lord Loreburn, having formulated the rule, continued in De Beers:

‘It remains to be considered whether the present case falls within that rule. This is a pure question of fact, to be determined, not according to the construction of this or that regulation or byelaw, but upon a scrutiny of the course of business and trading.’

(De Beers Consolidated Mines v Howe (1906) 5 TC 198 at 213)

Although the enquiry into exercise of central management and control is a factual enquiry, special considerations apply in the context of a legal person. Early case law proceeded by analogy with individuals. Thus in the seminal decision in De Beers, Lord Loreburn said:

‘In applying the conception of residence to a Company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A Company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see whether it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a Company.’

(De Beers Consolidated Mines v Howe (1906) 5 TC 198 at 212).

While the habits and lifestyle of an individual form the obvious fact base, in the case of companies, the question as to which facts ought to be examined is less obvious and has been controversial. Case law and administrative practice has focused on identifying what is meant by ‘central management and control’, who exercises it and where that exercise takes place. These elements are interrelated but may be considered individually for ease of analysis.

Because the residence of a company is to be determined by the location of its central management and control, and because that location is a question of fact, a finding by the Commissioners that a company is resident in this place or that will be unassailable provided the Commissioners have before them evidence from which their finding can be made and providing they do not misdirect themselves in law. The court’s approach is well-illustrated by Lord Loreburn’s conclusion in the De Beers case:

‘The Commissioners, after sifting the evidence, arrived at the two following conclusions, viz: ... (2) That the head and seat and directing power of the affairs of the Appellant Company were at the office in London, from whence the chief operations of the Company, both in the United Kingdom and elsewhere, were, in fact, controlled, managed and directed. That conclusion of fact cannot be impugned, and it follows that this Company was resident within the United Kingdom for the purposes of Income Tax.’

(De Beers Consolidated Mines v Howe (1906) 5 TC 198 at 213–214). 

The above is an extract from 'Booth & Schwarz: Residence, Domicile and UK Taxation' by Jonathan Schwarz, and is published with the kind permission of Bloomsbury Professional.