Tax scheme SPVs were not UK resident, says Upper Tribunal

Out-Law News | 11 Jun 2019 | 10:01 am | 3 min. read

Three special purpose vehicles (SPVs) incorporated in Jersey as part of a tax planning arrangement were not tax resident in the UK for tax purposes, the UK's Upper Tribunal (UT) has decided, overturning a previous First-tier Tribunal (FTT) decision.

"The FTT decision cast some doubt on how the residence test should be applied in the very common case of a subsidiary company acting in accordance with its parent company's wishes," said Jake Landman, a tax disputes expert at Pinsent Masons.

However the UT judges confirmed "the mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even  instructions of its parent does not mean that central management and control vests in the parent." 

The case concerned the Development Securities property development and investment group of companies. The group had assets standing at a loss and decided to enter into a scheme designed by PwC to increase the capital losses. The scheme involved the companies which held the assets granting call options to the Jersey companies at a price considerably in excess of the then market value of the asset.

It was critical to the success of the scheme that the Jersey companies were non-UK resident at the time the assets were acquired. HMRC argued that the companies were in fact UK resident.

Where a company is not incorporated in the UK, it is tax resident where its central management and control (CMC) is carried out.

The FTT had concluded that CMC resided in the UK on the basis that the directors in Jersey had a specific task entrusted to them by their parent following which they were to resign and because the scheme they were implementing would involve the Jersey companies acting in a manner that was contrary to their commercial interests.

The UT overturned this, however, and in doing so held that the FTT had misquoted the CMC test so as to introduce an error of law in the FTT's decision, Jake Landman said.

The UT said that the directors of the Jersey SPVs had not "abdicated responsibility for management and control" as the FTT had suggested, simply because they had approved the purchasing of assets at an overvalue. The UT said that the FTT had erred in focusing on the perceived uncommerciality of the transactions to the individual Jersey companies without having regard to the actual duties the directors owed to those companies.

Although the scheme involved the SPVs purchasing assets at an overvalue, the UT pointed out that the SPVs were not economically disadvantaged as a result, because the overpayment was funded by the UK parent company. The UT said that the primary regard of the Jersey directors ought to have been directed to what was in the best interests of its parent company as shareholder.

The tribunal said the facts showed the directors had given detailed consideration to the appropriateness of the scheme and had concluded that the transactions were in the best interests of the shareholders and therefore in the best interests of the SPVs, there being no prejudice to either employees or creditors of the SPVs.

"We do not consider that the mere fact that the directors had a specific task entrusted to them by their parent, after which they were to resign, says anything about where CMC vested," the UT judges said in their judgment, overturning the FTT decision.

They said that in the case of SPVs the CMC test must be approached "with particular care", so as to distinguish between influence over the subsidiary and control of the subsidiary.

"Where a parent company merely 'influences' the subsidiary, CMC remains with the board of the subsidiary. It is only where the parent company 'controls' the subsidiary, i.e. by taking the decisions which should properly be taken by the subsidiary’s board of directors, that CMC vests in the parent," they said.

"The place of central management and control is the place where CMC is actually to be found, not the place where CMC ought to be exercised. It is the substance, and not the form, that is determinative," the judges said.

The judges said that directors can "abdicate responsibility for management and control" and not consider the questions that they ought to consider if properly exercising management and control, behaving "as a rubber stamp". An indicator of acting as a ‘rubber stamp’ is where the person who ought to have CMC disregards or breaches the duties imposed on them or where the board knowingly takes decisions without having sufficient information properly to make that decision, the judges said.