The special commissioners decided that a corporate trustee was not resident solely in Mauritius for the purpose of the UK–Mauritius double tax treaty when a gain was made on the sale of shares held in a trust, but if it had been, art. 13(4) of the treaty would have prevented the UK from taxing the gain. In the circumstances the place of effective management of the trust under art. 4(3) was in the UK and the treaty did not prevent the UK from taxing the gain.

Facts

The settlor had settled property on trust for the benefit of himself and his family. A corporate trustee resident in Mauritius had been appointed. In January 2001 the trustee sold shares giving rise to chargeable gains.

New UK trustees were then appointed in the same tax year. The provisions of the Taxation of Chargeable Gains Act 1992, s. 77 potentially applied because the trustees were resident in the UK for part of the year within the meaning of s. 77(7). Conversely s. 86, which attributed gains of non-resident settlements to beneficiaries, did not apply if the trustees were UK resident for any part of the year. The trustees argued that the treaty prevented the UK from taxing the gains. They claimed double taxation relief because, at the dates of the disposals, the trust was resident in Mauritius.

The trustees appealed against a closure notice issued by Revenue and Customs which amended the trust's tax return for the year ending on 5 April 2001 to include the full amount of the gains arising on the disposal of the shares, and disallowing the claim for double taxation relief. The closure notice stated that, under the provisions of TCGA 1992, s. 77(1), the trustees were not chargeable on those gains and so the amendment would not result in any amendment to the tax payable by the trustees for the year ending on 5 April 2001. The settlor appealed against a closure notice issued by the Revenue on 31 January 2005, amending his return so as to show the chargeable gains and tax due. There was a parallel appeal by the settlor because any gains would be chargeable on him under s. 77(1)(c) if the trustees’ argument did not succeed.

Issue

Whether the corporate trustee was resident for the purpose of the treaty solely in Mauritius when the gains were made and, if so, whether art. 13(4) of the treaty prevented the UK from taxing the gains; and, if the trustee was resident in both the UK and Mauritius when the gains were made, whether the place of effective management of the trust under art. 4(3) of the treaty was Mauritius or the UK.

Decision

The special commissioners (Dr AN Brice and Dr John Avery Jones) (dismissing the appeals) said that, so far as the interpretation of art. 13(4) was concerned, art. 13 in general dealt with a conflict between taxation on the basis of source and on the basis of residence. Articles 13(1)–(3) depended on source; but art. 13(4) was more general and did not contain any reference to source. It stated that if the alienator was treaty-resident in one state the gains were taxable only in that state. If the state other than that of treaty residence taxed by its domestic law on any basis other than treaty residence, the treaty would prevent it. There would be no scope for any basis of taxation in the non-treaty residence state to continue. The plain words ‘taxable only’ in the treaty residence state meant what they said.

English law drew a distinction between residence and chargeability, so that if a person was resident for part of the year he was chargeable for the whole year. In contrast, the treaty equated the two by defining residence in terms of liability to tax. So long as the liability to tax was by reason of one of the listed items, the relevant one being residence (in this context the act of residing), then there was no distinction between treaty residence and liability to tax. The words ‘by reason of residence’ did not mean solely past or current residence. If residing in a subsequent period caused residence for the whole year, then liability was by reason of residence, meaning residing. If hindsight could not be used to determine residence or liability to tax, it would matter in what order a person spent the requisite time in a state in order to become resident.

Chargeability to tax under domestic law for the whole tax year resulted in treaty residence throughout the tax year regardless of whether that chargeability was caused by residing in a later part of the tax year. Accordingly the trust had not been solely resident in Mauritius. That meant that, during the Mauritius residence period, there was dual residence that had to be solved by the tiebreaker in art. 4(3). The issue was as to the meaning of ‘place of effective management’ (‘POEM’). The result of the decision on the interpretation of art. 13(4) meant that if Mauritius won, the UK could not tax the gains; and if the UK won it could.

Having regard to the ordinary meaning of the words in their context and in the light of their object and purpose, the issue of POEM depended on where the real top-level management (or the realistic, positive management) of the trustee, as trustee, was to be found. The POEM was where the key management and commercial decisions that were necessary for the conduct of the entity's business were in substance made, which would normally be where the most senior persons, such as the board of directors, made their decisions. The directors could not be regarded as a rubberstamp or puppet if they applied their minds to the decision-making process (Wood v Holden (HMIT) [2006] BTC 208 considered).

On the evidence, the trust's ‘place of effective management’ was in the UK and the gain arising on the disposal of the shares was taxable in the UK.

(2008) Sp C 669.
Decision released 19 February 2008.