Place of effective control for Tax Treaty purposes

Update: The Supreme Court has now refused permission to appeal.

The Court of Appeal has provided guidance on the correct approach to the "place of effective control" test used in many tax treaties in Haworth v HMRC [2025] EWCA Civ 822. In particular, the decision confirms that "place of effective control" is not the same as "central management and control" and that it need not be approached on a "snapshot" basis. In this case, Mauritian trustees had been appointed for a limited period to play their part in a tax planning arrangements and, whilst they made genuine decisions to carry out the settlors' plan, this simply indicated that the place of effective, or realistic, control was elsewhere.

Background

This long-running case concerns the effectiveness or otherwise of a "Round the World" scheme to dispose of shares without the imposition of capital gains tax. It involved a trust, of which the taxpayer was settlor, selling shares on which it made a substantial gain. The taxpayer contended that at the time the shares were disposed of the trust was resident in Mauritius for the purposes of the UK/Mauritius double tax treaty by reference to the fact that the trustees at that time were Mauritian. The original Jersey trustees had been replaced by Mauritian trustees shortly before the disposal and UK resident trustees were reinstated shortly after the disposal. The trusts were resident in the UK for part of the relevant tax year, but it was common ground that, as a matter of Mauritian domestic law, the trusts were also resident in Mauritius during part of the year. The Round the World scheme depended on the trust being resident in Mauritius when the shares were disposed of but resident in the UK later in the same tax year.

The UK/Mauritius double tax treaty provided that (Article 13(4)), "Capital gains from the alienation of any property other than that mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident." On this basis, the taxpayer argued that UK capital gains tax was not payable on the disposal. HMRC considered that the trust remained UK resident at the time of the disposal and that UK capital gains tax was payable on the disposal. The treaty contained a residence tie-breaker which included the following provision: "Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated." Accordingly, the main dispute in the case related to the application of the "place of effective management" test in the treaty.

Both the FTT and Upper Tribunal held in favour of HMRC and those decisions have now been upheld by the Court of Appeal.

Decision of the Court of Appeal

The Court noted that the term "place of effective management" (POEM) as used in the treaty (and the OECD Model Treaty) had an international meaning and not a purely UK meaning. The taxpayer argued that POEM should be interpreted the same as "central management and control" (CMC), but the Court of Appeal rejected that argument. In particular, it was clear that POEM was intended as a treaty tie-breaker and had to produce one definitive result. However, it was clear from authorities on the meaning of CMC (such as Swedish Central Railway Co, Ltd v Thompson [1925] AC 495) that a company may have more than one CMC which "suggests that CMC is not well-suited to fulfil the role of POEM".

On that basis, POEM can potentially be in a place other than that in which, applying the Wood v Holden approach, CMC would be located. The Court noted that Wood v Holden shows that, where a company is incorporated in a country and its constitutional organs make their decisions there, its CMC will also be there unless "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)". The Court did not consider that the position will necessarily be the same as regards POEM. "Identifying the place of "effective" (or "realistic, positive") management allows matters to be looked at somewhat more broadly."

More specifically, the Court considered that it would be legitimate to have regard to the circumstances in which trustees from a particular jurisdiction were appointed. "The mere fact that, in making decisions during the period they were in office, the trustees made proper decisions in accordance with their duties without the decisions being dictated by outsiders or their functions being "usurped" will not automatically mean that the POEM was in the relevant jurisdiction. If the trustees were appointed because it was appreciated that fulfilment of their responsibilities would cause them to take the decisions, the POEM of the trust might not be in the jurisdiction from which the trustees come."

In addition, it was not necessary to take a "snapshot approach" to the POEM. In this case, the role of the trustees in Mauritius was effectively pre-determined. The settlors decided to adopt "an overall single plan" and, to that end, exercised their powers to appoint the Mauritius Trustees for a limited period "in the confident expectation that they would implement the plan". "While the Mauritius Trustees genuinely made decisions and, in doing so, complied with their responsibilities, there was every reason to believe that they would decide as they in fact did and so further the "overall plan". Even, therefore, during the period in which the Mauritius Trustees were in office, "effective" or "realistic, positive" management was elsewhere. The decisions which the Mauritius Trustees made had been pre-ordained and the Mauritius Trustees were doing no more than the settlors had (with good reason) foreseen. The Mauritius Trustees were (without impropriety) playing their parts in a script which had been written by others."

In those circumstances, the FTT and UT had been entitled to consider that the POEM had remained in the UK throughout the period.

Comment

The purpose of a double tax treaty is to allocate taxing rights between the parties to the treaty in a way which avoids double taxation. Taxing rights will  often depend on the place of residence of the taxpayer, and therefore it is important that a treaty has a mechanism to determine residence in cases of dual-residency. Many treaties use a tie-breaker based on "the place of effective management" and this decision is important in that context.  And whilst the UK has more recently moved away from that tie-breaker towards the Competent Authorities mutually agreeing the place of treaty, HMRC confirms in its guidance that POEM will remain relevant as one of the factors to be taken into account by the Competent Authorities.