This case involved an appeal by Laerstate BV (‘Laerstate’), a company incorporated in the Netherlands, to an assessment to corporation tax in the UK arising from the sale of shares it held in a UK company Lonrho plc (‘Lonrho’).

At the time of incorporation in 1988 the company was a wholly owned subsidiary of another Dutch company and its sole director was Mr Trapman. In 1992 the entire shareholding of the company was acquired by a Dutch resident called Mr Bock. Mr Bock was appointed director at the time of acquisition and later resigned in 1996. Under Dutch law, Laerstate was at all times resident in the Netherlands by reason of its incorporation there.

In 1992 Mr Bock entered into a loan agreement with the Frankfurt head office of a German bank, BFG Bank AG in order to purchase Lonrho shares. The board of Laerstate had approved the purchase on 7 December 1992. Two days later Laerstate entered into an agreement to subscribe for new shares in Lonrho. It also entered into a sale and option agreement with Mr Bock and a company called Yeoman Investments Limited (“Yeoman”) to purchase Lonhro shares from Yeoman. This agreement further provided for associated put and call options between Yeoman and Laerstate over more shares in Lonrho.

In February 1993 Mr Bock took up employment in London and became joint managing director and CEO of Lonrho. In June of that year a Dutch company owned by Mr Bock family acquired a flat in London in which Mr Bock stayed from April 1994. During 1993, 1994, 1995 and 1996 Mr Bock travelled extensively and spent between 163 and 232 days outside the UK in each of those years. It was only from January 2007 that he had a personal London office.

In 1996 Yeoman gave notice to exercise its put option. At the same time a third party, Anglo American Corporation of South Africa Limited (“Anglo”), made an offer to Laerstate and Mr Bock to purchase the shares that were the subject of the option. The board of Laerstate resolved to acquire the shares from Yeoman and to immediately sell them. It then signed an agreement giving Anglo the right of first refusal over all of its shares in Lonhro provided Anglo purchased the option shares. In April 1996 Laerstate, Mr Bock and Anglo entered an agreement giving Laerstate a put option on Anglo over Laerstates entire shareholding in Lonhro. In October 1996 Laerstate gave notice of its exercise of the put option. The transaction was completed on 7 November 1996.

One year after the completion of the transaction the Inland Revenue assessed Laerstate to corporation tax in respect of the gain arising on the disposal of the Lonhro shares on the basis that Laerstate was resident in the UK for tax purposes at the time.

Laerstate appealed the assessment on the basis that it was not resident in the UK at the time of purchase or sale of the shares or any time in between.

The First Tier Tax Tribunal held that Laerstate was resident in the UK both in domestic law and under the double taxation agreement throughout the relevant period.

In arriving at its decision the court considered not only the place of incorporation of the company but also where its place of central management and control lay. While the court acknowledged the fact that the meetings of the board occurred outside the UK it stated that there is no assumption that central management and control must be found where the directors meet. It went on to state that where a company is managed by its directors in board meetings the place of central management and control will normally be where the board meetings are held. However if the management is carried out outside board meetings then one needs to ask who was managing the company by making high level decisions and where. This is the case even where such action is contrary to the company's constitution.

In this instance the court found that the actions taken by Laerstate and its board were mere physical acts of signing resolutions or documents and these acts did not suffice for actual management. On the other hand Mr Bocks actions both during his time as a director and after went much further than ministerial matters or matters of good housekeeping. His activities in the UK as a director of Laerstate were concerned with policy, strategic and management matters, and included decision making in relation to the company's business.

With regard to the time after Mr Bock ceased to be a director only Mr Trapman could sign for the company in a way that would bind a third party. However according to the court this alone was not sufficient to conclude that central management and control did not take place in the UK. It stated that the issue was whether Mr Trapman acted on Mr Bock's instructions without considering the merits of them, or whether he considered Mr Bock's wishes and made the decision himself while in possession of the minimum information necessary for anyone to be able to decide whether to follow them or not. The court found the former to be true. Therefore it could not be said that there was any change in the way the Laerstate was managed before or after Mr Bock ceased to be a director of the company. The fact was that Mr Bock predominantly made the decisions affecting the company while in the UK. Accordingly, and regardless of the fact that Mr Bock may or may not have been tax resident there at the time of making the decisions the court found that the company was centrally managed and controlled in the U, and therefore resident there.

With regard to the UK-Netherlands double taxation treaty the court found that since Mr Bock's activities were concerned with policy, strategic and management matters throughout the time when he was a director of the Laerstate and also after he ceased to be a director his activities constituted “real top level management”. As such the place of effective management was in the UK.

The full case can be accessed at http://www.financeandtaxtribunals.gov.uk/Aspx/view.aspx?id=4518