Wood & Anor v HM Inspector of Taxes

Corporate residence is determined by the location of a company’s central management and control. A foreign subsidiary does not become resident where its parent or professional advisers are based merely because it follows an overall scheme or complies with recommendations. The question is who actually makes the company’s decisions. Influence and guidance differ from management and control, unless the local board is effectively displaced or its powers are usurped. The test remains applicable to vehicle companies with limited activity. Where a taxpayer produces evidence showing that management occurred abroad, the evidential burden may pass to the Revenue to identify material supporting a contrary conclusion. For the statutory tie-breaker, the relevant question is the particular place of effective management, not merely an unspecified place somewhere in the United Kingdom.

Mr and Mrs Wood appealed against assessments to capital gains tax arising from a tax scheme involving CIL, a British Virgin Islands company, and Eulalia, a Netherlands-incorporated company. CIL transferred shares in a United Kingdom holding company to Eulalia, which later sold them to an external purchaser. The tax consequences depended on whether Eulalia was resident in the Netherlands or the United Kingdom when the transfer occurred.

The Special Commissioners concluded that Eulalia was resident in the United Kingdom, or that the appellants had failed to establish otherwise. The appeal concerned the proper application of the common-law central-management-and-control test and, alternatively, the statutory test in Finance Act 1994, s.249, read with article 4(3) of the United Kingdom/Netherlands double taxation convention.

Appeal allowed. The Special Commissioners’ decision could not stand. On the facts found or undisputed, the only tenable conclusion was that Eulalia was resident in the Netherlands.

1. The common-law test is the location where the company’s central management and control actually abides. The ordinary case is where the board of directors meets and exercises its powers. Unit Construction Co Ltd v Bullock was exceptional because the parent company had usurped the subsidiaries’ boards, which had stood aside altogether.
2. A parent’s plans, influence and professional advice do not themselves constitute management and control. A subsidiary may follow recommendations and implement an overall group plan while its local board remains responsible for decisions. This principle applied equally to a vehicle company with limited activity.
3. AA Trust, acting as Eulalia’s managing director, made the relevant decisions in Amsterdam. It resolved to acquire the shares and later accepted the recommended sale and executed the documents there. The fact that Price Waterhouse devised and superintended the scheme in Manchester did not make Manchester the place of Eulalia’s management. Nor did the limited nature of Eulalia’s business alter the applicable test.
4. The Commissioners had wrongly treated the burden of proof as decisive. Although Taxes Management Act 1970, s.50(6), placed the statutory burden on the taxpayers, their evidence raised a case that Eulalia was resident in the Netherlands. The evidential burden then passed to the Revenue, which produced no positive evidence showing a change of residence or identifying management in the United Kingdom.
5. Alternatively, if Eulalia was resident in the United Kingdom under domestic law, article 4(3) required identification of the specific place of effective management. The evidence pointed to AA Trust’s offices in Amsterdam. The Commissioners’ conclusion that there was no indication of effective management decisions in the Netherlands was unsustainable.

1. High Court (Chancery Division): appeal from the Special Commissioners allowed. Eulalia was resident in the Netherlands under the common-law test and, alternatively, under Finance Act 1994, s.249 read with article 4(3) of the United Kingdom/Netherlands double taxation convention.
2. Special Commissioners: decision issued on 18 May 2004; concluded that Eulalia was resident in the United Kingdom, or that the appellants had not established otherwise.