What comes to mind when you hear the phrase “central management and control”? For many, the eyes will start to glaze over and thoughts will drift to plans for the next holiday in the Caribbean. However, if you have an interest in a corporate structure in an offshore jurisdiction such as the Isle of Man you should sit up and pay attention.
Central management and control (CMC) is one of the tests applied by many tax authorities, including HMRC, to determine the tax residence of a company. Generally, a company will be tax resident in the UK if:
- It is incorporated in the UK; or
- For companies incorporated outside the UK, the CMC of the business is in the UK
Although there is no statutory definition of CMC, case law determines that “a company resides…..where its real business is carried on…..and the real business is carried on where the central management and control actually abides”.
So far so good.
CMC is taken to be where the highest level of decision making takes place. In most cases, this will be in the hands of the Board of Directors. If the Board of Directors reside (in this instance) in the Isle of Man and the strategic decisions are made at board meetings in the Isle of Man one would be confident that CMC is located in the Isle of Man (and not the UK).
Again, so far so good. But there is always a potential catch.
- If an individual located in the UK is involved in or exercising influence over the decision making process, whether an appointed director or not, HMRC will argue that the company is tax resident in the UK. Directors attending board meetings by phone whilst in the UK must be avoided;
- Central management and control will be prejudiced if the real decisions of the company are made elsewhere (e.g. by the parent company) and the directors merely “rubber stamp” such decisions.
This latter point is fundamental. The case of Laerstate highlights that a company’s place of CMC is not necessarily determined by the location of the meetings of the directors, but will be determined by the facts – where were the decisions actually made? There are a number of actions a company can take to protect its CMC, including:
- Ensuring the Board meet in the jurisdiction of incorporation on a regular basis to review the strategic and policy decisions of the company;
- Providing the Board with sufficient time to consider proposed actions, and ensuring all directors receive sufficient information to enable them to reach an informed decision;
- Properly recording the decision making process through the minutes of the meeting, noting the documents tabled, the issues discussed and decisions reached;
- Avoiding attendance at meetings by directors located in the UK;
- Ensuring documents are executed outside of the UK; and
- Ensuring the directors have sufficient knowledge and experience of the company’s business to be able to reach informed decisions.
The importance of the final point above has often been ignored or understated in the past. Not only should the directors have sufficient experience in the relevant business sector, but they should also be fully conversant with the business of the company itself. How can the directors make the right decision for the company if they are not properly informed?
The message here is that if non-UK companies wish to avoid being deemed to be tax resident in the UK, they should ensure they have sufficient substance in their jurisdiction of incorporation to be able to demonstrate that CMC really does emanate from home.
Does your company pass the CMC test?