Tax residence of overseas companies

There have been some recent developments in relation to the tax residence of overseas companies with a key victory by HMRC before the First-Tier Tax Tribunal case  Laerstate BV v HMRC.

The decision in favour of HMRC was based on the following facts which showed that Laerstate BV was effectively managed in the UK:

• Laerstate BV only required one director to authorise a decision and make it binding to a third party. Although the company had two directors, one - Mr B - (who was also the sole owner of the company) was controlling its key decisions, with most of his time spent in the UK.
• When Mr B ceased to be a director of the company, the remaining director (Mr T) was the only director who was able to authorise a decision and make it binding to a third party. However, HMRC concluded that although Mr T was signing the documents, he was often without even "the absolute minimum information" necessary to make an effective decision. He was therefore signing documents under the instruction of the shareholder i.e. key decisions were simply "rubber stamped" from outside the UK. 
• Although board meetings were held outside the UK, HMRC argued that they were not frequent enough (there was an interval of 18 months in which no board meetings had been held) to show that ideas and strategies had been properly evaluated at the meeting prior to a decision being authorised.  On some occasions, Mr T attended the meetings alone. This further enhanced HMRC's claim that decisions were only "rubber stamped" outside the UK.  
• The fact that Mr B was the sole shareholder of Laerstate BV, meant that only he could profit from a sale of shares (held by the company as an investment) and he was therefore enforcing the decisions.
• Professional advisers were instructed by, and corresponded with, Mr B and not with Mr T, thereby indicating that Mr B was managing the company. In addition it is clear that Mr B did not appreciate that Laerstate BV was a separate person.

 Conclusion

The case is a timely reminder that, to remain tax resident outside the UK:

• Board meetings should be held regularly outside the UK and strategic decision making eg decisions to buy or sell investments should occur only at those meetings.  Having a UK based director and conferring that director with the the authority in the articles to bind Laerstate BV was clearly unhelpful;
• Board members should be provided with sufficient information e.g. financial information for all necessary decisions to be made at the meeting;
• Evidence of the information provided, and of deliberations of the issues at the meeting, should be created and retained in the minutes;
• Directors and other influential personnel may be resident in the UK but must conduct their activities in relation to the company in a manner consistent with these principles, especially when in the UK.

 In addition, we continue to recommend that, as a minimum

•  A majority of directors are non UK resident (and preferably resident where the company is incorporated);
• Non-UK resident directors have suitable expertise;
• Participation of board meeting by telephone from the UK should be avoided;
• Physical attendance at board meetings in the offshore location should be normal;
• The chairman and casting vote if applicable should be with a non UK resident director and they should not be in the UK.

HMRC have been looking for sometime to find a case to take before the Courts on the subject of corporate residence – they now have this with Laerstate BV.  It is not clear whether the taxpayer will appeal and, if so, whether the Tribunal's decision will be upheld by the higher Courts.  Notwithstanding this taxpayers are well advised to take note and ensure that their affairs are in order!