Corporate Tax Residency – The High Court Rules

Emphatically, the answer is “no” based on the High Court’s recent decision in Bywater Investments Limited v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation ([2016] HCA 45).

A company that is not incorporated in Australia, but which carries on business in Australia and has its central management and control in Australia, will be a resident of Australia for income tax purposes (Income Tax Assessment Act 1936, s 6(1)).

Facts

In this case, the companies were all incorporated overseas. They all had directors who lived overseas. The board of directors met overseas. However, critical to the outcome was the factual finding that a Sydney resident controlled and made all company decisions and ran all aspects of the companies’ business – Sydney was the real place of central management and control. The board meetings merely rubber stamped the decisions made independently by the Sydney resident and did not constitute an independent exercise of decision-making power. This was so, notwithstanding the outsider’s lack of legal power to control the board.

In this case, despite the board of directors being overseas and directors meetings being held overseas, central management and control (and therefore residency) was, as a matter of fact and degree and having regard to the course of business and trading, located where the company’s operations were controlled and directed. That location was Sydney, being the place of residence of the individual who made and directed the decisions of the relevant companies, and hence, the location of central management and control.

High Court decision

The High Court affirmed and explained the proposition from Esquire Nominees Ltd v Federal Commissioner of Taxation ((1973) 129 CLR 177; [1973] HCA 67), that a company is resident where its real business is carried on and its real business is carried on where the central management and control is located, which is a question of fact and degree. In particular, the High Court observed:

A company will not be taken to be resident where its board meetings are held, even if those meetings rubber stamp decisions made somewhere else;

• A company will not be taken to be resident where its board of directors meet unless some other person has a legally enforceable power to control the board and its decision-making
• The absence of legal power to control the board is not determinative of whether the board is actually itself exercising central management and control
• A company should not be regarded as resident outside Australia merely because it has established an overseas board to act at the direction of an Australian resident
• The question of where central management and control resides is one of fact and degree

In short, the High Court found that a Sydney man dictated the business activities of the overseas companies from Sydney and the various boards of the companies did exactly as he directed them. Accordingly, central management and control was in Sydney and therefore the companies were residents of Australia for tax purposes.

Conclusion

It is not sufficient for a board to go through the motions of exercising independent judgment and decision-making in order to establish the location of the board as the place of central management and control. There has to be real and substantive decision-making, not mere “rubber stamping” which was not the case in Esquire Nominees.

The location of directors, the board and board meetings will not be determinative of the place of central management and control and hence the residency of a corporation. What is critical, as a matter of fact and degree, is the location where real and effective decision-making power is exercised. It is this location which will be the place of central management and control and the determinant of the place of corporate residency for Australian income tax purposes.

By Mark Mathews, Legal Practitioner Director, December 2016