International Tax: Corporate Residency – A New Approach to the Application of Central Management and Control

March 1, 2010 | Bryant D. Frydberg, William J. Fowlis

The recent decision of the Tax Chamber of the United Kingdom in Laerstate BV v. HMRC [2009] UKFTT 209 (TC) has caused a stir on both sides of the Atlantic ocean for those interested in corporate residency matters. While not binding on Canadian law, UK jurisprudence is a source that Canadian courts may draw upon, which highlights the importance of such caselaw to those with international corporate structures.

The pertinent facts of the Laerstate case are succinctly summarized as follows.  Dieter Bock, an individual resident in the United Kingdom, became the sole shareholder of Laerstate BV (“BV”) after acquiring the shares from another company in December 1992.  BV was incorporated in the Netherlands. The sole director upon incorporation of BV was Johannes Trapman, a resident of the Netherlands. Bock became a director in December 1992 and resigned on August 30, 1996, leaving Trapman as the sole director.  In 1993, BV acquired all of the shares of Lonrho plc (“Lonrho”).  BV disposed of its shares of Lonrho in 1996. The resulting capital gain was assessed by United Kingdom tax authorities on the basis that BV was a resident of the United Kingdom at the time of the disposition.

The issue at hand was whether BV was resident of the United Kingdom at the time of the disposition of the shares of Lonrho. Traditionally, courts faced with this issue would apply the “central management and control” test. While the court used the central management and control test in this case, they applied the test in a unique way.

The court diligently reviewed copious amounts of corporate resolutions, memos, correspondence, notes, and other documents and found that, while Bock was a director of BV, he carried out those activities of a strategic and policy nature for BV, as well as managed BV’s business. Furthermore, the court found that the activities Bock conducted were substantially carried out from the United Kingdom. The court also concluded that, even after Bock resigned as a director of BV, he continued to carry out and perform the central management duties of BV.

Based on its findings, the court concluded that central management and control of BV rested with Bock, a resident of the United Kingdom, which meant BV was a resident of the United Kingdom as well. This was the conclusion reached despite the facts that at the time of the disposition of the shares of Lonrho, Trapman was the sole director of BV, the constating documents of BV empowered the directors to manage the company and to authorize any one or more directors to sign on behalf of the company, and Trapman signed off on written resolutions approving the sale and other ancillary matters while in the Netherlands.

The central management and control test was agreed upon by the parties as the relevant test for determining corporate residency. However, the court applied the central management and control test differently from previous cases examining the same issue. Prior to this case, it was common to consider the key acts of central management and control to be where a board of directors meeting was held, or where a written resolution in lieu of a meeting was signed in the absence of a meeting. However, a more substantive view of the application of the central management and control test was adopted in the Laerstate case, and the court looked at the larger picture to determine who the high level decision-maker was with respect to the management of the corporation.

The court focused on where and with whom central management and control abides. If central management and control abides with individuals other than the directors, then it is the residency of the actual managers or decision-makers of a company that is relevant in determining the residency of a corporation. In this case, the court found that Bock continued to be the central decision-maker of BV while he was one of two directors and even after his resignation as a director.

This case is significant because the court has said that if key strategy and policy decisions of a business take place in country A, but it shifts the final ratification of decisions and/or resolutions to country B, then, for the purpose of determining the residency of the corporation, the central management and control test will be applied with a more substantive approach to find that the residence of a corporation is in country A. Therefore, so called rubber-stamping predetermined decisions in an overseas country may no longer be sufficient when it comes to corporate residency matters. Instead, corporations must instil a corporate governance practice to ensure that actual decisions of a strategic and policy nature are made at board meetings held in the appropriate country. 


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