Parents and Subsidiaries: Lack of Clarity on Tax Residency Test
Businesses, particularly corporates with subsidiary companies, would be wise to review their arrangements to ensure they understand, as far as possible, how HMRC could apply the residency test for tax purposes.
A Court of Appeal ruling has somewhat muddied the waters regarding the test for corporate residence where a subsidiary company is instructed by a parent company resident in the UK.
Under UK tax laws, companies are resident for corporation tax purposes if they are incorporated in the UK or “centrally managed and controlled” in the UK. A company is ‘resident’ in the UK for corporation tax purposes if it is either incorporated in the UK or ‘centrally managed and controlled’ in the UK.
What was the case about?
In this case, HMRC won its appeal on the tax residence of companies after a company, Development Securities (DS) sought to take advantage of a tax scheme recommended by accountants. To do this, DS set up several Jersey subsidiaries, an arrangement involving those subsidiaries acquiring assets at an inflated price and funded by capital contributions from the UK parent.
The arrangements involved Jersey-incorporated companies acquiring assets for a price exceeding their market value (funded by capital contributions from the group’s UK parent).
The Jersey companies were resident in Jersey for UK tax purposes. However, HMCR’s case was they had always been UK resident for tax purposes given that their control and management was UK-based.
On this basis, the First-Tier Tax Tribunal found that the Jersey subsidiaries were controlled by the UK resident parent and that key decisions relating to the transactions in Jersey then pass control back to the UK were taken by the UK company. The board of directors, resident in Jersey, simply rubber stamped the decision to move control back to the UK. As such, the subsidiaries were, for tax residence purposes, resident in the UK. However, the Upper Tribunal allowed the appeal.
Residence
In an important reminder of the legal test for tax residency as established in the case law, the Court of Appeal reiterated that it is where the real business, the company’s central management, takes place practically. This is determined by “solid facts”, not what the company’s constitutional documents say. Residency for tax purposes is a question of fact.
The appeal court has now reinstated the FTT’s ruling, but it expressed “considerable reservations” about the FTT’s reasons for its decision. This leaves open the uncertainties around residency issues.
We will be watching future rulings on tax residence with interest. In the meantime, parent companies and their subsidiaries should take specialist advice on the tax implications of their corporate dealings and the management and control of any subsidiaries, to minimise any unwelcome or unforeseen tax consequences.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you