Central management and control and SPVs

The fact that an overseas Special Purpose Vehicle (SPV) was set up to carry out a specific transaction did not lead to any presumption that the directors had abdicated responsibility for the central management and control of that SPV.
  • Submitted 5 July 2019
  • Applicable Law UK
  • Topic Tax > Corporate

The Upper Tribunal has reversed the decision of the First-Tier Tribunal (FTT) in Development Securities Ltd v HMRC concerning the tax residence of three Jersey incorporated subsidiaries involved in a tax planning scheme: Development Securities Ltd v HMRC [2019] UKUT 169. The Tribunal considered that the FTT had erred in law in concluding that the directors of the Jersey companies had abdicated their responsibilities such that central management and control was in reality in the UK.

The decision restores the status quo in relation to the application of the central management and control test to SPVs by stressing the mere fact that an SPV is set up to carry out a specific transaction says nothing about control and whether it is exercised by the directors of the SPV.

Background

The case involved the implementation of a tax planning scheme put together for Development Securities by PwC designed to obtain the benefit of indexation relief on capital assets that were now standing at a loss. It was essential to the success of the scheme that the transfer of those assets was made to Jersey SPV companies which were not UK tax resident. The three Jersey companies were incorporated in Jersey and had three “professional” Jersey based directors and one director from Development Securities.

HMRC contended that the Jersey SPVs were, in fact, resident in the UK. The central management and control of those SPVs was not in fact carried out by the directors in Jersey. In particular, those SPVs had been set up for a very particular purpose by the parent company and once that purpose had been carried out the Jersey directors would be replaced by UK directors (allowing the benefits of the indexation allowance to be obtained). In particular, the arrangements involved the purchase of the relevant assets at a price in excess of their market value and HMRC contended that this was evidence of the fact the directors were not exercising central management and control but had abdicated that control to the parent company. The FTT agreed with HMRC at first instance finding that: (i) the directors of the SPVs had merely a specific task entrusted to them by the parent after which they resigned and (ii) the directors knew from the outset that that specific task would cause the Jersey companies to act in a manner contrary to their commercial interests by paying for the assets at an overvalue and the only inference from this was that they had abdicated their decision making function.

Decision of the Upper Tribunal

The Upper Tribunal has overturned the decision of the FTT, finding that the FTT’s reasoning had been incorrect.

The Upper Tribunal noted that there is a fine distinction between a parent influencing the activities of a subsidiary and it usurping the decision making of that subsidiary. However, it was clear from the case law that the central management and control test was equally applicable to subsidiaries and SPVs and “the mere fact that a 100% owned subsidiary carries out the purpose for which it was set up, in accordance with the intentions, desires and even instructions of its parent does not mean that central management and control vests in the parent”. Accordingly, the Tribunal rejected the FTT’s suggestion that the mere fact that the directors had a specific task entrusted to them by their parent, after which they were to resign, “says anything” about where central management and control vested.

As regards the uncommerciality of the activities of the Jersey SPVs, the Tribunal held that the FTT was wrong on this point too. The Tribunal noted that the FTT had been making the sort of inference described in Untelrab: “…a significant factor is whether the directors would have declined to do something improper or inadvisable; if they would, then this would point towards the conclusion that there was no control by the parent.”

However, the basis for the conclusion that the Jersey directors had abdicated responsibility was that the directors had failed to decline to do something that was improper or inadvisable, in that they had entered into so-called uncommercial transactions. In particular, the Tribunal held that it had been wrong to say that the assets were acquired on uncommercial terms in the sense that those companies were commercially disadvantaged. This was because the overpayment for the acquisition of those assets was funded by the parent company. Whilst those transaction might be called “artificial”, they were not uncommercial from the perspective of the Jersey companies. (HMRC had previously decided not to pursue arguments based on Ramsey in this case.)

As such, the Tribunal held that the FTT had been wrong to suggest that the directors had not acted in the best interests of the Jersey companies and accordingly any inference from that conclusion that they had abdicated their decision making responsibilities was equally misguided. Indeed, the Tribunal stressed that the duties of directors of a subsidiary equally involve consideration of the interests of the shareholders. Given that the tax planning scheme was propounded by the Jersey SPV’s shareholder, it would have required “a factor of some significance (for example a material risk that the Scheme was unlawful) for the Jersey directors properly to be in a position to refuse to enter into the transactions required by the Scheme”.

Moreover, the Tribunal noted that the board minutes showed that the directors had applied their minds to the transactions and had not abdicated their responsibility to the parent companies. Accordingly, the Tribunal overturned the decision of the FTT and held that the companies were resident in Jersey at the time they acquired the UK assets as required by the scheme.

Comment

The original FTT decision had caused some concerns as to the location of company residence in the case of SPVs set up to carry out a specific function. The decision of the Upper Tribunal now restores the status quo by stressing the mere fact that an SPV carries out the functions for which it was specifically set up says nothing about where central management and control is located.

As regards the uncommerciality of the transactions, the Upper Tribunal’s decision shows that this must be viewed in the particular circumstances. Although the subsidiaries paid more than the market value for the assets in this case, there was a good reason for doing so and the subsidiaries themselves were not commercially disadvantaged by doing so. Moreover, the directors were required to take into account the position of the shareholders which, in this case, actively wanted the transactions to take place.

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