Corporate residence in a CGT avoidance arrangement

Thu 27 Jun 2019

In the case of Development Securities plc (DS) the Upper Tribunal (UT) has held that DS’s Jersey incorporated subsidiaries set up on 10 June 2004 were Jersey resident until 20 July 2004.  This decision overturned the First tier Tribunal (FTT) decision, with the result that losses arising from acquisition of group companies at an overvalue crystallised for tax when the Jersey incorporated subsidiaries sold the assets after becoming UK tax resident.

This is a significant case criticising the FTT’s interpretation of the principles behind central management and control.  International groups claiming with non-UK entities held to be resident outside UK might usefully consider whether their corporate management procedures for central management and control could similarly stand up to scrutiny.

For a further discussion of the tax issues around corporate residence, please get in touch with a member of the Mazars international tax team.

Further details of the case

Although the UT, the company and HMRC agreed the arrangement was a tax avoidance arrangement, the UT considered the FTT had fundamentally misunderstood the nature of the transactions undertaken by the Jersey companies and the duties undertaken by the Jersey directors.  The transactions were not uncommercial for the Jersey companies (the acquisitions were financed by funds from the UK parent) and the Jersey directors had followed their duties as required by Jersey law and not acted as mere puppets of the parent.

HMRC had given up arguing for disregard of transactions under the Ramsay principle, and the UT dismissed their contentions that there had been a usurpation of control, or that the Jersey companies were dual resident.

The planning involved the Jersey companies acquiring properties and companies holding properties, as a result of the exercise of options, thereby acquiring the assets at above market value.  On relocation of those companies to the UK and subsequent disposals, UK tax losses crystallised.  The transactions were effected before the introduction of UK CGT loss anti avoidance in TCGA 1992 s16A and also the general anti-avoidance rule.