Page 199 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
are suitably quali ed and experienced generally and in relation to the particular company, and whether the directors had reasonable time to assess the information and make the decision. The details regarding quorums and casting votes and the circumstances in which those aspects are applied may be relevant. Again, it is necessary to look at all the relevant facts and circumstances of a particular case.
Similarly, when considering the role of different directors, it must be established whether the particular director is involved in the decision-making or is perhaps merely ratifying a decision made by other directors or people. For example, it is possible for a director to be appointed with a governance-focussed role or as a shareholder representative and custodian as opposed to being actively involved in making decisions on behalf of the company. In some companies executive directors have traditionally been involved in decision-making while non-executive directors have not had a decision-making role. A title may give an indication of a particular director’s involvement in decision-making, although this is not always the case. Accordingly, while a title may be useful in identifying the role a particular director performs, it is the actual role a particular director performs and whether it involves participating in key management and commercial decisions that is determinative, not the director’s title.
In Laerstate v The Commissioner for Her Majesty’s Revenue & Customs [Corporation Tax]* the court was in the rst instance required to consider where the company was managed and controlled for United Kingdom tax purposes and secondly, it had to consider where the company’s place of effective management was for tax treaty purposes. In so doing, the court was required to consider whether a director acted on another person’s wishes or instructions without truly considering the merit of those wishes or instructions or whether the director considered the wishes or instructions but still made the decision while in possession of the minimum information required to make a decision. In the interests of brevity the detailed facts of the particular case, which were critical to the court’s judgement, are not summarised in this Note. Accordingly, readers who would like to obtain a deeper understanding of the particular case should refer to the judgment. See also Wood & another v Holden (HMIT)† and Commissioner for Her Majesty’s Revenue and Customs v Smallwood & another.‡
In some situations taxpayers have a pre-meeting which, as the name suggests, precedes a board meeting. In these circumstances consideration must be given to what happens in the pre-meeting, who participates, where the meeting takes place and what, if any, decisions are made since this could impact on the place of effective management.
4.2.4 Modernisation and global travel
Changes in telecommunications, information technology, global travel and modern business practices can impact on the place of effective management. These factors have meant that physical meetings of the board are often no longer required or implemented or, alternatively, that even when physical board meetings are held in a particular location some, possibly a majority, of the directors or the key directors with overriding decision-making powers, are not in the same location as the physical meeting. Consequently, what initially appears to be the location where the decisions are made, that is, the physical location of the board meeting, may not be where the key management and commercial decisions are in substance being made. The use of round robin voting§ is also something that must be considered from the perspective of the frequency with which it is used, the type of decisions made in that manner and where the parties involved in those decisions are located.
Accordingly, it is important not to place an undue focus on the location where board meetings take place without considering the surrounding facts and circumstances of a particular case.
4.2.5 Shareholders
Company Law or a company’s rules or by-laws often reserve the making of certain fundamental decisions for the shareholders of the company. For example, such decisions may include the sale of all or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the company, the modi cation of the rights attaching to various classes of shares or the issue of a new class of shares. Fundamental decisions such as these typically affect the existence of the company itself or the rights of the shareholders as shareholders, rather than the conduct of the company’s business from a management or commercial perspective. Accordingly, such decisions are generally not relevant to the determination of a company’s place of effective management.
However, shareholder involvement can cross the line into that of effective management. For example, a shareholder may effectively usurp the powers of the directors of the company. This situation typically (but not necessarily) arises when the company is wholly owned by a single person (whether a company, other juristic person or individual) or when there are multiple shareholders but those shareholders are either connected persons in relation to each other or are acting in concert. This issue is of particular concern in connection with passive holding companies located in low-tax jurisdictions.
There is a distinction between shareholder guidance or in uence and usurpation. In uence does not constitute effective management but undue in uence may do so. For example, if the board considers what the shareholder has recommended and independently makes its own decision, this would not constitute usurpation even if the decision made by the board is in line with the shareholder’s recommendation. Importantly, it must be established whether the board independently makes its own decisions or is merely implementing what the shareholder has already decided for the company and in that way does not actually make decisions. Depending on the facts, the line between in uence and merely approving or rubber-stamping may be unclear. Situations in which a shareholder or another party usurps effective management will probably be the exception rather than the norm.
* [2009] UKFTT 209 (TC).
† [2006] EWCA Civ 26.
‡ [2010] EWCA Civ 778.
§ A resolution passed around for signature without the signatories gathering together in a meeting.
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