Shades of control: dictation, domination and persuasion
The decision of the First-tier Tribunal in the case of Laerstate BV v The Commissioners for HMRC1 (Laerstate) is another reminder of the importance, in terms of residence, of respecting the separate identity of a company and the authority of its board. A company can be persuaded to make decisions, but it must not be dictated to or dominated by any other person – be it by a shareholder as in Laerstate or, as HM Revenue & Customs (HMRC) argued was the case in Wood v Holde,2 by advisors.
In this article we consider what Laerstate and Wood v Holden tell us about the shades of control that may be exercised by shareholders, directors and advisors and consider how they may affect the residence of a company.
Wood v Holden
First, a reminder of the decision of the Court of Appeal in Wood v Holden in 2006. The taxpayers had disposed of a trading company and were seeking to minimise their capital gains charge by the use of a scheme which required the intra-group disposal of the shares involving an offshore special purpose vehicle (SPV), Eulalia. The scheme had been devised by accountants, who had also advised on the relevant companies required for the scheme and the appointment of ABN AMRO as sole director of Eulalia, whose residence was in issue. Effectively, Eulalia was a company run by a professional director, ABN AMRO, and set up for one specific purpose – that of being a non-resident company acquiring the shares in the trading company.
HMRC argued that Eulalia was UK resident on the basis that the director was not making decisions – it was resolving to do whatever the accountants proposed to it. Given the limited nature of Eulalia’s activities, attention focused solely on the actions of the director on the date of the acquisition of the shares. The Special Commissioners agreed with HMRC: there was no ‘real’ consideration given, they said, to the transaction put before them. However, the High Court and Court of Appeal disagreed with imposing such a high standard on the directors: they highlighted the difference between the ‘exceptional’ case of usurpation – Unit Construction v Bullock,3 where the parent bypassed the board of the subsidiary – and the situation in which control of the company is still exercised through its constitutional organs but the company is being made aware of the wishes of the controlling shareholder.
The burden required of the directors was quite minimal. Two facts were considered sufficient to show that ABN AMRO, rather than the accountants, had control: (i) the fact that the ABN AMRO representatives were not bypassed and did execute the relevant documents; and (ii) the fact that ABN AMRO must have decided to sign the documents and there was nothing surprising in the fact that they did so. There was an expectation that the directors would decide to enter the agreement but no inference that they were dictated to by the accountants.
Laerstate concerned an appeal against an assessment to UK corporation tax by the Dutch incorporated company, Laerstate BV, on the basis that it was not UK resident. The assessment was to tax on the gain arising from its disposal of its shareholding in Lonrho plc and was claimed on the basis that the BV was resident in the UK for tax purposes at the time the gain was realised in 1996. Laerstate BV argued that it was not resident in the UK, either at the time it purchased its shareholding in Lonrho or at the time it disposed of it at a gain.
Laerstate BV was incorporated in the Netherlands and was therefore resident there for the purposes of Dutch domestic law. Initially it had two directors, being a German resident, Bock, and Trapman, a Dutch resident. Bock was also the sole shareholder. Later, but during the relevant period, Bock resigned as director and Trapman continued as sole director, as was permitted by the company’s constitution. In 1993, Bock became joint managing director of Lonrho and maintained an office in the UK, though he was only present in the UK for a third of the year from 1993-1995 and half the year in 1996.
The First-tier Tribunal applied the test of central management and control (CMC) to determine that Laerstate BV was UK resident for UK tax purposes at the time of the sale of the Lonrho shares and that the UK was also the ‘place of effective management’ (POEM) for the purposes of the tie-breaker clause in the UK-Netherlands tax treaty. The Tribunal decided on the facts that Bock was making decisions and not the board and that Bock was carrying out CMC both during and after his period of directorship. This case shows that a taxpayer has to establish that the board is, in fact, the decision-making organ.
Although the formulation of the residence test of CMC is well established, it is interesting to note that the First-tier Tribunal regarded the issue as one to be determined on a scrutiny of the whole picture: where decisions may have been made in more than one territory it was necessary to see where the overall place of management was. The residence of a company would not, it said, fluctuate with individual acts of management taking place in different countries. The point does not appear to have been argued between the parties but the statement is interesting as it seems to cast doubt on a view which had been gaining ground that a company’s residence could move in and out of the UK, depending on where its management is at any particular time. Instead, the First-tier Tribunal took the view that Lord Loreburn’s reference to the place where a company ‘abides’ in his formulation of the concept of residence in De Beers4 made it analogous to the residence of an individual, whose residence should not fluctuate with temporary absences.
Laerstate and Wood v Holden
Although the outcome of applying the test of residence is naturally very fact-specific, it is interesting to compare the two cases as they draw out some of the practical difficulties in applying the test. It is also useful to compare the facts, which led to the different outcomes and the effect that the facts may have had on the way the Courts approached the residence test – particularly in the light of the power of the Upper Tribunal now to make findings of fact.5
The role of the board
It is clear that the location in which the board meets is only relevant provided that this is the organ by which decisions of the company are made. In Laerstate, this was stated expressly: “There is no assumption that CMC must be found where the directors meet. Where a company is managed by is directors in board meetings it will normally be where the board meetings are held. But if management is carried out outside board meetings one needs to ask who was managing the company by making decisions and where, even where this is contrary to the company’s constitution.”6
The more difficult question is how one determines whether decisions are made by the board. This is really a question of evidence.
Board minutes and transaction documents as evidence of decision making
In Wood v Holden, the Court of Appeal considered that the fact that minutes and agreements had been signed by ABN AMRO meant that it must have decided to do so. In contrast, in Laerstate the First-tier Tribunal reviewed a substantial amount of papers, including minutes and dismissed them – some because they did not believe that they had been signed in the purported location, but others which the First-tier Tribunal determined must have been signed with Bock also being present (and, one infers, dictating) or without any consideration by Trapman. For the First-tier Tribunal in Laerstate therefore, the fact a director had signed a document was not sufficient evidence that he had gone through a decision-making process, whereas it was accepted almost without question by the Court in Wood v Holden. Why was this?
It may be that it was the difference between the surrounding circumstances which affected the Court’s view of the signatures on minutes and agreements in the cases. In Wood v Holden, there was limited business to be conducted in relation to Eulalia save for the execution of certain transaction documents. Therefore there was no confusion: there was no one else who might be identified as carrying out negotiations or other business on behalf of Eulalia, merely advisers instructed to draw up proposals. In contrast, the judgment in Laerstate places a great deal of emphasis on Bock’s negotiations with third parties on behalf of his company.
Perhaps the fact that the director in Wood v Holden was a large bank also made a difference: – ‘it is inherently improbable that a major bank (or its trust company) would allow its actions to be dictated by a client’s professional advisers (however eminent).’7 Could it be that the First-tier Tribunal considered that the same assumption could not be made of Trapman in Laerstate, even though he had an impressive CV (including being a former managing director of Zanussi Germany and CEO of a Dutch department store operator)? Or was it the fact that Trapman signed documents with mistakes8 in them, which meant that the First-tier Tribunal did not give the weight to the fact of his having executed documents which the Court of Appeal in Wood v Holden gave to the fact that documents were executed by the board?
Realism – did Bock protest too much?
The idea of putting together a deal and presenting it to a board of an SPV without even an expectation that the board would resolve to proceed with it would be anathema to businesses. However, the judgments in both Laerstate and Wood v Holden recognised that parents do influence subsidiaries and that SPVs exist for a purpose. There is no need for an SPV to operate as a trading company with lengthy board meetings.9 Nor need a shareholder refrain from voicing an opinion: ‘There is nothing to prevent a majority shareholder, whether a parent company or an individual 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 borderline is between the directors making the decision and not making any decision at all.' 10
In Laerstate, it was claimed that Trapman had been left to exercise his discretion as to the exercise of the put option over the Lonrho shares and that Bock would have supported a decision either way. This conflicted with other evidence of Bock’s views at the time and the First-tier Tribunal did not accept the statements. In the light of the willingness of the Courts to accept that in the real world, shareholders do have a viewpoint and will seek to influence the board, a more successful approach might have been for Bock and Trapman to acknowledge that Bock had firm views on the transaction and that he had lobbied Trapman, but to emphasise that Trapman had considered and made a decision: ‘If he said that he discussed the matter fully with Mr Trapman before the telephone call, indicated to Mr Trapman that he wanted him to give the notice and why it needed to be given immediately, and if Mr Trapman had said that he considered the alternatives of giving the notice or doing nothing, and decided to give the notice, we would have concluded that Mr Trapman made the decision. But they deny that this is what happened.''11
Dictation, domination or persuasion?
When offshore structures are set up, it is common to provide that management may only be carried out through the board, to restrict the proportion and power of any UK directors and to ensure that offshore directors have sufficient experience to carry out their role. However, although such provisions are useful to remind directors and shareholders how to run the company, they do not provide complete protection against a finding that management is in fact being carried out by UK persons. In neither Laerstate nor Wood v Holden, did it seem that the Courts would consider that such provisions are evidence that the board could not be either usurped or dictated to. For instance it was not enough in Laerstate that the constitution provided for directorship by the sole director, Trapman, and that it prevented non-directors from binding the company.
In Laerstate, Bock seems to have run the investment and associated transactions for Laerstate BV as though he personally were party to them, with Trapman on occasion displaying a lack of understanding of what he was signing. In Wood v Holden, circumstances means that proposals were put to the board by the accountants rather than the controlling shareholder. The accountants did not have the ability to proceed as if they ran the company and ‘due process’ had, therefore to be observed and this was clearly helpful.
The First-tier Tribunal in Laerstate summed up the boundaries drawn in Wood v Holden between a person acting as an interested party and acting as the controller of the company. They said that the directors of a board are exercising CMC if they make a decision where they have sufficient information to make an informed decision such that they would have refused to carry out an improper or unwise decision, even where the directors follow the decision of a shareholder after consideration and with the benefit of minimum information but less information than a reasonable director would require in order to decide sensibly whether or not to follow a shareholder’s wishes. They may make ill-informed or ill-advised decisions but they are still management decisions.
On the other hand, the board is not exercising CMC where the directors sign knowing what they are signing but without considering whether it would be better to sign or not (e.g. they do not have the minimum information necessary such as any advice on price) or where they sign documents and resolutions without even thinking what documents they are.
From an evidential perspective, the position of making ill-informed decisions is a risky one in which to be, even if it sits at the acceptable end of the scale. In Wood v Holden, the Court of Appeal made the express point that there was no good reason why Eulalia should not decide to enter the transaction and that it could not be imagined that a bank such as ABN AMRO could be being dictated to by the accountants. In Laerstate, on the other hand, Trapman’s apparent misunderstanding of documents and failure to take action which the First-tier Tribunal thought he should have taken, was evidence that he was not simply making bad decisions, but that he was not considering the documents at all.
Individuals and companies compared
It is interesting, and useful, to reflect on the relationship between the tax residence of a company and the tax residence of an individual. A number of important overlaps exist, and all the more so in cases involving companies which are wholly owned by UK residents.
As the First-tier Tribunal noted, the test for corporate residence set out in the (extremely short) House of Lords judgment in De Beers is based squarely upon an analogy with the tax residence of individuals – hence, in fact, the very use of the word ‘residence.’ In the words of Lord Loreburn L.C.: ‘a company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business.’ It should be noted also that issues of management and control are also relevant to the availability of the remittance basis for non-UK domiciled partners in a partnership and (usually) a limited liability partnership, although this raises questions beyond the scope of this article.
Despite this, the tests for residence of a company and residence of an individual are of course distinct. It is possible for an individual to be UK tax resident without prejudicing the tax residence of a company which he controls. Similarly, it is possible for a non-UK resident individual to carry out acts in the UK which would result in causing that company to be UK tax resident. The Tribunal in Laerstate were clear in making this distinction. They stated expressly that the mere fact that Mr Bock was resident in the UK during the period up to 30 August 1996 did not of itself mean that Laerstate BV was resident in the UK.
The test for tax residence of an individual is hopelessly unclear. Aside from a few statutory provisions dealing with particular situations, practitioners have to advise their clients based on a mass of somewhat opaque case law, taken in conjunction with HMRC guidance (which has recently been updated but which is not unambiguously uncontroversial).
It is common in practice for foreign executives to spend some time in the UK, during which period they may well take management decisions relating to foreign companies. Their personal residence position is analytically distinct from that of such companies, and must be considered separately. For example, directors should be aware that residence is not just based on day count tests – broadly speaking, an individual who comes to the UK on a regular basis and has a settled lifestyle pattern connecting him to the UK is likely to be resident here.
When assessing the residence of a company, the focus tends to be on individual transactions entered into by the company, and where the management and control of the company was exercised at the time of such transactions. One therefore analyses a series of discrete events. Individual residence, by contrast, is more linear, in the sense that all connections to the UK during the purported period of residence may potentially be relevant, although differing weight might attach to different linking factors.
Accordingly, as a practical matter, directors who spend more than de minimis amounts of time in the UK (even if they fall below the day count threshold) should think carefully about whether such activity compromises either their personal tax position or that of the companies of which they are directors. Factors which may be material to the tax position of an individual may also be material to the residence position of a foreign company, and vice versa.
- 1.  UKFTT 209 (TC).
- 2.  1 WLR 1393.
- 3.  AC 351.
- 4. De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes)  AC 55.
- 5. See ‘The Upper Tribunal’s power to make determinations of fact on appeal from the First-tier Tribunal’, by Heather Gething and Jessica Barker, (B.T.R. 2009, 4, 351-360).
- 6. Para 27  UKFTT 209 (TC).
- 7. Wood v Holden  1 WLR 1393 at para 41.
- 8. ‘The board resolution that Mr Trapman signed on 7 December 1992 misstated that the purchase was from Mr Rowland when it was from Yeoman (which was a company owned by Mr Rowland), and more importantly that the purchase of 43,478,260 shares in Lonrho was by means of a call option when it was an outright sale and the put and call (not put) options over 45,529,447 shares were a separate transaction that was not mentioned in the resolution. We infer that Mr Trapman was aware of the transactions in general terms particularly as it was originally proposed that he should also invest, but that he was not aware of the details of the transactions’. (Laerstate, para 13).
- 9. Ibid at para 25.
- 10. Laerstate, Para 34  UKFTT 209 (TC).
- 11. Ibid at para 43.