Development Securities plc - Court of Appeal of England and Wales locates the residence of Jersey subsidiary in the UK given that its directors took instructions from the UK parent on a transaction not in its commercial interests

A U.K. tax avoidance scheme entailed special-purpose Jersey subsidiaries acquiring assets from their UK parent (DS Plc) or its U.K. subsidiaries at prices corresponding to the assets’ historical cost plus an inflation-indexation adjustment and then, after the Jersey-resident directors had resigned, selling those assets back to the DS group at their much lower fair market value, thereby triggering a tax loss that could be used in the DS group. The scheme depended on considering that these subsidiaries had their central management and control (“CMC”) and, thus, residence, in Jersey at the moment of the acquisitions. Their directors consisted of the UK-resident secretary of DS Plc and three Jersey residents who also served as directors of numerous other client companies. The board held a three-hour meeting in Jersey to review and approve the transactions, and three briefer meetings to approve the granting and then exercise of the call options, and the replacement of the Jersey directors by UK-management directors (when the time came in the PwC plan for the subsidiaries’ CMC to shift to the UK).

In reversing the Upper Tribunal and reinstating the decision of the First-Tier Tribunal that, at the acquisition times, the CMC of the subsidiaries was exercised in the UK by the parent’s management and not in Jersey, David Richards LJ stated:

The clear conclusion to which the FTT came … was put by the FTT at [422], "the Jersey directors were acting under what they considered was an 'instruction' or 'order' from the parent".

The inevitable conclusion from that finding was … that the decision to enter into the relevant transactions was taken by the parent in the UK, not by the directors in Jersey. They were, of course, concerned to ensure that what they were being instructed to do was lawful. … Likewise, the directors were concerned to ensure that there were no unexpected liabilities for the Jersey companies, such as stamp duty, and to ensure that the documents were in proper order. None of that detracts from the FTT's finding as to who made the decision to enter into the transactions and where that decision was made.

The applicable principle was stated in the concurring reasons of Newey LJ:

A company may be resident in a jurisdiction other than that of its incorporation not only where a constitutional organ exercises management and control elsewhere, but if the functions of the company's constitutional organs are usurped, in the sense that management and control is exercised independently of, or without regard to, its constitutional organs, or if an outsider dictates decisions (as opposed to merely proposing, advising and influencing decisions). [emphasis added]

Neal Armstrong. Summary of R & C Commrs v Development Securities plc & Ors, [2020] EWCA Civ 1705 under s. 2(1).