U.K. tax residence.

In the U.K., as in many other countries, the location of a company's mind and management can determine its tax residence. This is often overlooked by U.S. tax practitioners accustomed to tax based on incorporation and source under U.S. rules. The U.K. had particularly difficult rules based on case law. However, a recent U.K. case, Unigate Overseas Ltd. v. McGregor (Inspector of Taxes), Special Commissioner's Decision, 1996 STC (SCD) 58, significantly restricts the U.K.'s Inland Revenue's ability to argue that a foreign company is resident in the U.K. based on having its central management and control there.

Unigate Overseas Ltd. v. McGregor involved a foreign subsidiary of a U.K. company. The Inland Revenue contended that the policy decisions of the offshore company were made in London by the parent and merely rubber-stamped by the offshore company's board of directors who were based offshore. The court disagreed and held that the foreign-based directors genuinely operated as the company's board outside the U.K. The fact that the board always followed U.K. wishes did not mean they were a mere rubber stamp, as long as their decisions to acquiesce to the London parent's decisions were honest and had integrity.

This is a severe blow to the Inland Revenue, since it has the burden of proof to show that control of an offshore company is in the U.K. Inland Revenue may appeal to a higher court, since this issue involves substantial amounts of tax.