Wood & Anor v Inspector of Taxes Rev 1

A foreign-incorporated company is resident where its central management and control actually abides. Management remains with the company’s constitutional organs where they take the relevant decisions, even if outsiders propose, advise on, expect or influence those decisions. The position differs where outsiders usurp or dictate the functions of those organs.

For a company with limited functions, decisions made by its director remain management decisions even if they are ill-informed, ill-advised, expected by others, or could expose the director to an allegation of breach of duty.

The taxpayers were assessed to capital gains tax after a British Virgin Islands company, CIL, transferred shares to its wholly owned Dutch subsidiary, Eulalia. The statutory consequence depended on whether Eulalia was resident outside the United Kingdom and therefore formed part of a non-resident group with CIL.

The Special Commissioners dismissed the taxpayers’ appeals, finding that Eulalia’s central management and control was in the United Kingdom. Park J allowed their statutory appeal, holding that the only lawful conclusion on the findings was that Eulalia was resident in the Netherlands: [2005] EWHC 547 (Ch). The Revenue appealed. The central issue was whether the Commissioners’ conclusion was open in law on their findings concerning Eulalia’s Dutch managing director.

1. The appeal was unanimously dismissed. Chadwick LJ held that the judge was entitled, under section 56A of the Taxes Management Act 1970, to reverse the Special Commissioners. Moore-Bick LJ agreed. Sir Christopher Staughton also agreed that the proven facts established residence in the Netherlands.

2. The applicable inquiry was the De Beers test: where the company’s central management and control actually abides. A critical distinction exists between management exercised through the company’s own constitutional organs and a case in which an outsider usurps those organs’ functions. Within the former class, advice, proposals and influence from an outsider differ from dictation of the decision to be made.

3. The Commissioners had found that Eulalia’s managing director, ABN AMRO, was not bypassed and did not stand aside. Its representatives executed the relevant documents and thereby made the two critical decisions: to acquire the shares and later to sell them. There was no evidence that Price Waterhouse or anyone else dictated those decisions. This was therefore outside the exceptional class illustrated by Unit Construction [1960] AC 351.

4. The Commissioners erred by treating ABN AMRO’s decisions as ineffective because they were inadequately informed or considered. A decision made in managing a company remains a management decision despite fuller information, better advice, or greater circumspection being desirable. That is so even where the director might risk an allegation of breach of duty. As Eulalia had no other business to manage, there was no basis for treating its actual decisions as insufficient.

5. The court also agreed that this was not a case in which the taxpayers could simply be held to have failed to discharge the statutory burden. They had produced sufficient material to establish a case for Dutch residence, and there was no basis to treat the evidence as so unsatisfactory that the burden alone determined the appeal. The treaty issue was unnecessary. The order was to be varied by directing that the assessment amendments be set aside.

• Court of Appeal (Civil Division): Dismissed the Revenue’s appeal and upheld the conclusion that Eulalia was resident in the Netherlands. The order was to be varied to direct that the amendments to the taxpayers’ self-assessments be set aside: [2006] EWCA Civ 26.
• High Court of Justice, Chancery Division: Park J allowed the taxpayers’ appeal under section 56A of the Taxes Management Act 1970, holding that the only tenable conclusion was Dutch residence: [2005] EWHC 547 (Ch).
• Special Commissioners: Dismissed the taxpayers’ appeals from amended capital gains tax assessments, finding that Eulalia’s central management and control was in the United Kingdom: [2004] STC (SCD) 416.