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Central management and control of special purpose subsidiary companies

Key propositions for Central Management and Control

Peter Madden and Nikol Davies review a recent UK decision in the Upper Tier Tribunal that considers the locus of central management and control of special purpose subsidiary companies.

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In the case of Development Securities plc and Ors v HMRC (2019) UKUT 0169, the Upper Tier Tribunal (“UTT”) considered whether certain Jersey companies that had been incorporated by a UK parent company for the purposes of a property scheme were centrally managed and controlled in the UK. While this is a decision of UK courts, the discussion on central management and control is useful and instructive and can be used as a means of factually distinguishing the Australian case law authority of Bywater Investments Ltd & Ors v Commission of Taxation [2016] HCA 45.

Facts

The taxpayers were Jersey incorporated special purpose companies (“Jersey SPVs”) established by a UK parent company for the purposes of effecting a property scheme which was only entered into in order to obtain a UK tax benefit. The Jersey SPVs were established to acquire assets from a related company at an overvalue. The consideration for the acquisition of the assets by the Jersey SPVs was fully funded by the UK parent company. Shortly after acquisition of the assets, the Jersey SPVs migrated to the UK for tax purposes and the assets were sold (and thereby generated) a larger capital loss for UK tax purposes than would otherwise have been available absent the scheme. It was noted that HM Revenue and Customs (“HMRC”) had previously abandoned arguments that the scheme fell within certain anti-avoidance case law in the UK.

Issue

It was essential to the operation of the scheme, and the tax benefit derived from it, that the Jersey SPVs were viewed as tax resident in Jersey before their migration to the UK. Therefore, the question was whether the central management and control of the Jersey SPVs was in Jersey prior to the migration of the Jersey SPVs to the UK.

Decision

The UTT overturned the decision of the First Tier Tribunal (“FTT”) and found that the companies were tax resident in Jersey on the basis that the central management and control (“CM&C”) of these companies was in Jersey.

To read more of this article, particularly on the key propositions and application of CM&C, please log on to KPMG Tax Now.

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