Ex-Director control shifts corporate residency

In Laerstate BV v HMRC [2009] UKFTT 209 (TC), a Netherlands company's ex-director and 100% shareholder was found to be exerting control from the UK and the company was found to be UK resident.

The case considered whether a company (Laerstate) was UK resident between 1992 and 1996.

• Laerstate was incorporated in the Netherlands in 1998 as a wholly-owned subsidiary of Gouden Akker NV (GA Properties).
• Its sole director on incorporation was a Mr Trapman.
• In December 1992 Mr Bock (a German national) acquired the entire shareholding of Laerstate from GA Properties and was appointed a director alongside Mr Trapman.
• At the same time, Laerstate purchased the Lonrho shares using a loan previously negotiated by Mr Bock.
• In August 1996 Mr Bock resigned as a director of Laerstate.
• In November 1996, following some complicated agreements involving put and call options, Laerstate disposed of its Lonrho shares.
• HMRC assessed Laerstate to Corporation Tax in respect of the gain on the Lonrho shares on the grounds it was UK resident when the gain arose.

The taxpayer argued that the company was not UK resident at any point, as specific acts of Central Management and Control (CMC) could be identified which were carried out outside the UK:

• Board resolutions where these preceded the signing of a document.
• Signing documents where there was no resolution.

HMRC argued that you have to look more widely at the whole picture, not just the location of individual resolutions/signatures.

• Decisions about the company were not made at board meetings, but by Mr Bock on his own and mainly in the UK.
• This was not a case where a director exhorted or persuaded the board to make a decision.
• Instead, the board of the company did not function as such. One dominant director who was also the 100% shareholder made all the decisions. This did not cease after he resigned.

Looking at the case law the First Tier Tribunal (FTT) identified the following key points:

• There is no assumption that CMC must be where the directors are met: it is a question of fact.
• If a company is managed by its directors in board meetings then CMC will normally be where the meetings are held.
• If management is carried out outside board meetings you have to ask who is managing the company by making high-level decisions and where even if this is contrary to the company’s constitution.
• The whole picture has to be considered, not just the mere physical acts of signing resolutions or documents.
• A meeting concerned only with housekeeping matters and not policy, strategic or management matters relating to the conduct of the company, will not be an exercise of CMC.
• There is nothing to prevent a majority shareholder (company or individual) indicating how the directors of a company should act. If they consider those wishes and act on them it is still their decision.
• The borderline is between directors making the decision and not making any decision at all.

The Upper Tribunal (UT) illustrated this final point by way of a scale.

1. An agreement is put in front of the directors open at the signature page and they sign it regardless. Here no decision can possibly have been made by the directors.
2. The directors know what they are signing (e.g. it is a share sale agreement) and sign it without considering whether it would be better to or not. In this case, there is still no decision by the directors. The test is whether the directors have the absolute minimum amount of information that a person would need in order to be able to make the decision whether to follow the shareholder’s wishes or not. This would include, for example, whether they have any knowledge of, or have received advice on, whether the price was sensible.
3. The directors follow the wishes of the shareholder after considering whether to or not and have at least the absolute minimum information required to do so, but less than a reasonable director would require in order to make a sensible decision. Here there is still a decision by the directors, although an ill-informed one.
4. The directors have sufficient information to make an informed decision.

The UT looked at a wide range of board minutes, telephone notes, agreements and letters from advisers, banks etc.  Some of these were found to be signed in the UK, others elsewhere. 

Applying these to the facts of the case the UT decided that:

• It was not possible to classify certain actions as acts of CMC (such as the signing of board minutes or documents where there was no resolution) and only look at those and not the bigger picture.
• Mr Bock himself conducted the business of the company, both when board meetings were held and when they weren’t.
• On occasion, he did this with the assistance of Mr Trapman and acts of management took place in various locations, including outside the UK.
• Throughout the period he was a director, Mr Bock carried out activities of the company that were strategic and policy in nature and managed the business of the company and he did so, to a substantial extent, in the UK.
• During this period, although Mr Trapman was a director, the evidence showed his involvement was very much secondary to Mr Bock, who was responsible for all negotiation and strategic decisions.
• Up to March 1996, there were no board meetings but substantial management activities were undertaken by Mr Bock, substantially in the UK.
• When Mr Bock ceased to be a director only Mr Trapman could sign for the company in a way that would bind it.  When it came to the main decisions made during this time the evidence showed that Mr Trapman had not made them.
• Instead, decisions continued to be made by Mr Bock in the UK. The evidence did not show any evidence Mr Trapman had the necessary information to make any of the decisions.

The UT, therefore, concluded that CMC of the company was exercised by Mr Bock in the UK both whilst a director and after his resignation. The company was therefore UK resident throughout.

Turning to the UK-Netherlands tax treaty, the UT also concluded that the Place Of Effective Management (POEM) was also in the UK: Mr Bock’s activities constituted the real top-level management of the company and Mr Trapman’s activities were limited to signing documents when told to do so and dealing with routine matters such as the accounts.

Useful guides on this topic

Companies: Permanent establishment & residence
What are the rules for determining a company's country of residence? What is central management and control? When does a company create a permanent establishment in another country?

External links

Laerstate BV v HMRC [2009] UKFTT 209 (TC)