Establishing the central management and control of your offshore company
Being able to show that the management and control of your offshore company is overseas is crucial in ensuring your company is non resident (and therefore exempt from UK tax on overseas income and capital gains).
However actually achieving this can be less than straightforward.
It’s essentially a question of fact so HMRevenueCustoms / the Commissioners will look at where in actual fact the company is controlled from (where the ‘real heart’ of the company is). However when they refer to ‘management and control’ exactly what level of control do they mean?
Company Command Structure
HMRevenueCustoms split a company’s management into three different levels:
This is the shop floor management. So in the case of a shop for instance you may have the shop manager or the supervisor.
This is the head office or the place where the executives and senior managers are. This is where the company’s operations are controlled from and where the orders are given.
This is referred to by HMRevenueCustomss as the ‘central policy core of the whole enterprise’. This is where the long term strategy and operations are governed from. This could be active or a passive body. You’ll probably have realised that there will often be no clearly definable split between the three levels.
In a small enterprise for instance you could have all 3 levels in the same person.
Similarly you may find that in many small companies level 2 is effectively the same as level 3. So if you have a small company which runs 5 restaurants the individual restaurant managers would represent level 1. The head office could be run by the directors who together represent the board. If all the directors are UK residents who actually live and work in the UK they would represent the level 2 and level 3.
When you’re looking at establishing the central management and control of offshore companies overseas it’s the level 3 “top level” management that is of key concern.
How to establish level 3 management overseas
In the past there used to be more of a clearly definable split between levels 2 and 3.
In the case of the restaurant business above you may have had the headoffice run by a general manager and a team of senior managers. They would not be board members.
The board would have been primarily non executive directors and exercised the active control over the senior managers. It was the non execs that would have represented the level 3 management.
As stated above though the usual practice now is for executive directors to actually exercise some element of control.
A common scenario is to use nominee directors based overseas to act as the board.
There is however no written law that the board of directors represents the level 3 management. In various cases the courts have affirmed that the constitutional position based on company law is not definitive. It’s always a question of fact.
So if you lived and worked in the UK but actually directed the overseas nominee directors you would represent the level 3 management in the company. The board would need to actually have independent authority and actually exercise it on occasion (even if it was passive for long periods).
However where you have a board of directors that are actively controlling the company this is where the level 3 control will be.
For anyone looking to establish control as overseas, what is in your favour is that whilst level 2 management may be relatively difficult to transfer overseas, level 3 is much less so as the board does not have to be tied to the operational base.
HMRC provide a concise example which highlights the key points well:
‘…A small grocery store is run by a man A and his son A junior. There is a grandfather, once sole proprietor, who no longer takes an active part in the business but owns the property and makes his views known on important matters. A company is formed with A as chairman and managing director, the son as sales director and grandfather as a mere shareholder.
Every year A and his son spend holidays in Jersey. It is very unlikely that any body of Commissioners would accept that by holding their only board meetings when they are in Jersey they had made the company resident outside the United Kingdom. Both level two and level three management are exercised by A and his son and they are clearly based in the United Kingdom.
But an alternative scenario has grandfather as both major shareholder and chairman with A and his son as full-time working directors. Grandfather takes no part in the day-to-day running of the business but takes a keen interest in its success and his word on important matters carries great weight.
Here level three management emerges as something quite distinct from level two which remains with A and his son. Level three may be found either with grandfather alone or with grandfather and his sons acting as a board depending on the extent of grandfather’s real power. If grandfather moves to Jersey, level three management may genuinely move with him, either because he alone exercises central management and control from Jersey or because the board meetings, at which he plays an important part, are held there…’
This example shows nicely how the level 3 management is crucial. You can appoint an overseas MD, Chairman or other senior figure who has overall control and have the level 2 in the UK. By ensuring that either:
· the senior figure exercised sole level 3 control or · the senior figure and UK directors exercised control at the board level and board meetings are based overseas.
The senior figure in this case is essentially acting in a similar role to the non execs who would have previously kept a close eye on the other directors.
Note though that the position as a shareholder is only relevant to the issue of control if the directors actually stand aside and are directed by the shareholders (as in this case they would exercise the level 3 control).
How to make the management and control overseas
We’ll list below some of the key considerations and structuring opportunities to assist in demonstrating that management and control is located overseas:
- All meetings of the boards of directors should be held in the overseas country (We’ll assume it’s Jersey for this article) and the article of association of the company should prohibit such meetings being held anywhere else other than the Jersey.
- The majority of the board of directors should ideally be tax resident in Jersey. The chairman should be resident for tax purposes in Jersey, particularly if he/she has a casting vote.
- It is possible to form a quorum for decisions to be taken outside the normal board meetings. However, such a quorum should consist of a majority of Jersey resident board members. Non Jersey directors of the Boards should not by themselves be able to form a quorum. (This should be confirmed by reference to the Articles of Association). The constitution may also reserve the powers of policy and strategy exclusively to the board acting as a quorum.
- Individual board members should have the expertise to control the business and you should therefore avoid having just professional or nominee directors. It’s for this reason that the standard method of ensuring control overseas put forward by many offshore incorporators (ie having nominee overseas directors) won’t actually work.
- You should ensure that board meetings are fully minuted.
- Board meetings should be held regularly. The exact frequency will depend on the amount of activity but should be at least quarterly.
- It’s important that the board of directors should take all decisions affecting matters of policy or management of the companies’ businesses at meetings of the board. In addition there should be documentary evidence that supports the decisions made. This should include financing issues, appointment of staff, capital expenditure, acquisitions, key policy decisions and the final accounts.
- It’s essential that the overseas board of directors should not just rubber stamp any UK shareholder. It should be able to be evidenced that the directors have ultimate authority in all matters and do not report back to any other person.
- Books of account and company records including minute books and other documents required by statute should be kept in Jersey.
- Members of the board should avoid acting in matters regarding the management and control of the company business when outside Jersey. If this is not possible, conference calls should be set up with a quorum of board members represented by a majority of Jersey directors.
- Ideally, non Jersey directors should not have sole signatory authority over the bank account of the offshore company without prior approval from the quorum of board members, where the transfer of funds relates to a major transaction or contract.
Central Management and Control – A QC’s view
Questions Asked by HMRC about a company’s residence