Risks of UK Tax Residence Overseas Subsidiaries

The Court of Appeal has upheld a First-tier Tribunal decision finding that Jersey-incorporated subsidiaries of a UK parent company were resident in the UK for tax purposes. The central management and control test was deemed to be satisfactory as the Jersey directors merely rubber-stamped decisions that were being made by the UK parent. This overturns an Upper Tribunal decision that had found the Jersey companies were resident in Jersey, as their boards properly exercised their duties in approving the transactions. The case highlights how overseas subsidiaries can inadvertently become UK tax residents if their boards do not demonstrate substantive decision-making oversight.
The background to the case involved tax planning by Development Securities plc to use losses in subsidiaries against other group gains. Three New Jersey companies were incorporated as subsidiaries and granted call options to acquire relevant group assets. The options were exercised above market value to create losses when the assets were later transferred within the group.
The First-tier Tribunal found that while Jersey resident directors held board meetings in Jersey to approve the transactions, the uncommercial transactions had already effectively been decided by the UK parent company. The Jersey directors were rubber-stamping the UK parent’s decisions without properly considering the merits themselves.
Therefore, the central management and control was in the UK, making the Jersey companies UK tax resident. The Upper Tribunal disagreed, finding the Jersey directors had properly exercised their duties in considering the parent’s interests. But the Court of Appeal has endorsed the First-tier Tribunal’s approach.
The central management and control test depends on who makes the key strategic and management decisions and where. The Court noted the Jersey directors had not considered the merits of the transactions, just satisfied themselves they were lawful. This meant the UK parent made the real decisions.
This case highlights difficulties for overseas subsidiaries under common UK control. Too much influence from the UK parent risks subsidiary boards not demonstrating substantive oversight and effectively just implementing dictated decisions from the UK. This could make subsidiaries inadvertently UK tax resident.
However, it does not mean parent companies cannot influence subsidiary boards. As long as the board engages in real decision-making, the parent can influence and advise them without necessarily losing central management and control. The facts of each case are key.
Here, the short life of the Jersey companies, unusual transactions, and change to UK directors all likely contributed to the decision. But it shows how fine the line between parent influence and effective parent control is when looking at where decisions are made.
Overseas subsidiaries should ensure their boards exercise substantive oversight of transactions in line with directors’ duties. Seeking parent input is fine, but boards should assess the merits rather than just rubber-stamp parent requests. Failing to demonstrate this risks a determination of UK central management.
Holding boards and meetings overseas is insufficient if the directors are found not to make the decisions in substance. Companies should review transaction approval processes to ensure overseas boards add value and assessment, even if influenced by parent wishes.
For complex cases, it may help to seek formal legal, tax and financial advice on proposed transactions to demonstrate substantive consideration. Keeping detailed board minute records of discussions and deliberations is also advisable.
However, each case ultimately depends on its facts and the reality of where strategic and management decisions are taken in practising some circumstances. There are often grey areas where parent influence can risk crossing the line into effective parent circumstances.
This case will heighten HMRC’s focus on overseas subsidiaries with UK parents and the need to demonstrate substantive overseas decision-making in practice. However, its unusual facts may limit its reach as a precedent. Appellate decisions often turn on fine factual distinctions.
Parent groups should therefore review subsidiary governance arrangements carefully. Seeking professional advice where necessary makes sense to avoid falling foul of the UK central management and control test. With proper oversight and influence rather than control, overseas boards can often make the necessary decisions while aligning with group imperatives.

If you need help to plan your business and taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.