Wood & Anor v HM Inspector of Taxes

These are as follows.

This is a CGT appeal from a decision of the Special Commissioners issued (according to the appellant’s notice) on 18 May 2004. The appellants are Mr and Mrs Wood. The underlying subject matter of the appeal is a complex scheme designed to avoid CGT on part of the gain referable to a sale of a group of trading companies which Mr Wood had built up over the years. Before the scheme commenced the top level company in the group was Ron Wood Greetings Cards Ltd, which I refer to in this judgment as Greetings Ltd. The transactions were carried out in 1995 and 1996, and the CGT assessment is for the tax year 1996/97. It took quite a long time before the matter came before the Special Commissioners, and it has now reached the High Court.

The scheme was carried out against the background of several detailed statutory provisions. It involved a number of quite intricate transactions, and the participation of three companies which were incorporated outside the United Kingdom. Later in this judgment I will give a thumbnail sketch of the stages in the scheme. As matters have turned out, however, the success or failure of the scheme does not turn on sophisticated points of statutory construction or on contested issues of how various statutory provisions interact with each other. Rather it turns on one of the basic concepts of United Kingdom tax law, the concept of the ‘residence’ of a company. One of the steps in the scheme involved a British Virgin Islands company, CIL, selling a United Kingdom company, Holdings, to a Netherlands company, Eulalia. (For the full names of CIL, Holdings and Eulalia see the abbreviations and dramatis personae at the beginning of this judgment.) The scheme assumed that CIL and Eulalia were not merely incorporated outside the United Kingdom but also resident outside the United Kingdom. The Revenue, however, after examining in detail the events which had taken place in the course of the scheme, took the view that, although CIL was resident outside the United Kingdom, Eulalia was resident in the United Kingdom. If that was right Mr and Mrs Wood, for reasons which I will outline later but which are not in themselves in issue, were liable for substantial sums of CGT. The Revenue made assessments on that basis, and Mr and Mrs Wood appealed to the Special Commissioners.

Accordingly, the question which the Commissioners had to decide was whether Eulalia was resident in the Netherlands or in the United Kingdom. Their decision was that Eulalia was resident in the United Kingdom, or perhaps that Mr and Mrs Wood had not established that it was not resident in the United Kingdom. (The latter formulation approaches the question in terms of the burden of proof which normally rests on the taxpayer in a tax appeal.) On appeal to this court Mr Goldberg QC and Miss Nathan submit that in that decision the Commissioners erred in law. I agree with them. It is not clear whether the Commissioners applied the correct test, or rather a different test of their own devising, but either way it is my respectful opinion that the decision which they reached was not one which was open to them on a correct application of the law to the facts of the case.

I shall therefore allow the appeal in principle. I understand that the Special Commissioners were asked only to decide the question of principle, and not to go into the detailed figures which would be consequential on their decision. Similarly I am not required to go into the figures, but it seems likely that several million pounds are at stake on this appeal.

Mr and Mrs Wood owned 96% of the shares in Greetings Ltd. The other 4% were owned by non-family members (some employees and a family friend). By early 1995 Mr and Mrs Wood were thinking about selling the company, because in March of that year they instructed Price Waterhouse Corporate Finance to try to find a buyer for the company. Price Waterhouse also advised them on the tax aspects of a sale. I do not know whether Price Waterhouse Corporate Finance was simply a department within the Price Waterhouse firm, or whether it had some form of distinct personality of its own. It does not matter which was the case. The office of Price Waterhouse with which Mr and Mrs Wood had dealings was the Manchester office.

So far as tax was concerned Price Waterhouse devised and in time the Woods embarked on a complicated scheme which was originally visualised as going through two phases, with several different steps involved in the first phase. I will go into a little more detail in the next few paragraphs, but in outline the first phase was the creation of a structure, involving a number of non-United Kingdom entities, which, so it was thought, would enable almost half of the entire gain on a realisation of the value of the Wood family’s interest in Greetings Ltd and its underlying business to be sheltered from CGT. The second stage was thereafter to identify a purchaser, and to negotiate a sale to it. The first phase was carried out in 1995, but the second phase was not carried out before the appearance of the 1996 Finance Bill. That Bill contained provisions which (as a letter at the time expressed it) ‘snookered’ what had been expected to be the favourable CGT consequences of a simple sale from the phase 1 structure to an outside purchaser. So another phase had to be built in. That phase involved the introduction of Eulalia, the sale by CIL of Holdings to Eulalia, and subsequently the sale by Eulalia of Holdings to an outside purchaser. As I indicated in the Overview earlier, it is the sale by CIL of Holdings to Eulalia which the Revenue contend, and which the Special Commissioners have decided, to have brought about the liability to CGT which is the subject matter of this appeal.

I need not record all the steps in phase 1, but I do need to describe the final structure as it existed when phase 1 had been carried out.

There are two points to make about the creation of that structure.

The original plan was that, once the phase 1 structure had been created and a purchaser had been found, the sale to the purchaser would take the form, not of a sale of Greetings Ltd itself, but rather of a sale of Holdings, which owned 96% of the shares in Greetings Ltd. I assume that the purchaser would buy the other 4% of Greetings Ltd directly from the non-family shareholders who owned them. On the anticipated sale of Holdings to the purchaser Mr and Mrs Wood and the Trustees of their children’s Trust would be liable to CGT on the gains which they made on the 51% shareholding which they sold personally. However, they would, I assume, have been liable to CGT on gains of nearly as much if they had simply kept their shares in Greetings Ltd and had sold those shares to the purchaser. So the CGT on the sale by them of the 51% of Holdings would not have been a real disadvantage.

The key feature of the scheme was directed to avoiding CGT on the gain referable to the 49% of the shares in Holdings which would be sold by CIL to the outside purchaser. CIL was considered to be a company resident outside the United Kingdom, and as such it was not itself liable to CGT. There were provisions, principally in TCGA 1992 s.13, under which in certain circumstances gains made by a non-resident company fell to be attributed to resident shareholders or, if the shareholders were non-resident Trusts, to resident settlors of the Trusts. It was clear that CIL would make a very large gain when it sold its 49% holding in Holdings (because of the feature referred to in paragraph 9(ii) above), but it was believed that, for reasons based on the small print of s.13 which I need not describe, the section did not permit CIL’s gain to be attributed to Mr and Mrs Wood or to any other person who could be liable to CGT. However, that was the feature of the scheme which was ‘snookered’ by provisions of the Finance Act 1996. That Act made changes to TCGA 1992 s.13 which had the effect that, if phase 2 of the scheme had proceeded as originally planned, the large chargeable gain which accrued to CIL on its 49% shareholding in Holdings would after all have been attributed to Mr and Mrs Wood and taxed upon them.

Price Waterhouse devised a plan to overcome that problem. The steps in it were:

The thinking behind Price Waterhouse’s revised plan was as follows.

Price Waterhouse’s revised plan was put into effect. Given the nature of the specific arguments in this case I will have to examine later some of the details of how it was all done, but at this stage I record the principal events.

On 17 July 1996 CIL acquired the shares in Eulalia. Eulalia was a Netherlands-incorporated company which had done some business in the past (I do not know of what nature), but which was dormant at the time. It was owned by a company in the well-known Netherlands banking and financial group ABN AMRO. AA Trust was appointed the corporate managing director of Eulalia, and there was a management agreement for AA Trust to manage the company.

On 23 July 1996 a contract was made for CIL to sell and Eulalia to buy CIL’s 49% shareholding in Holdings for £23.7m (left outstanding for the time being) plus, in the event of an onward sale within 3 years for more than £23.7m, 95% of the excess.

On 21 October 1996 Eulalia and the other shareholders in Holdings (Mr and Mrs Wood and the Trustees of their children’s Trust) sold the shares in Holdings to an outside purchaser. The price receivable by Eulalia was just below £30.8m. Holdings, it will be recalled, owned 96% of Greetings Ltd. Also on 21 October 1996 the non-family shareholders sold to the purchaser the 4% of the shares in Greetings Ltd which were not owned by Holdings.

I will return later to examine the detailed facts concerning how the critical things which Eulalia did were decided upon and implemented. For the present, however, it is convenient to consider the law about the residence of a company. I do so against the background that it is agreed that if, on 23 July 1996 when CIL disposed of its 49% shareholding in Holdings to Eulalia, CIL was not resident in the United Kingdom but Eulalia was resident in the United Kingdom, then Mr and Mrs Wood are in principle liable to CGT on the gain which accrued to CIL on the disposal. Conversely, it is also agreed that, if both companies were not resident in the United Kingdom (Eulalia being specifically resident in the Netherlands), then Mr and Mrs Wood are not liable to CGT and their appeals should succeed.

There are two sets of principles which, so far as relevant to this case, may regulate the question of where a company is resident for purposes of United Kingdom tax law. One is the set of principles which have been established by a body of case law over the years. Mr Goldberg referred to this as the common law of corporate residence. The expression may not be strictly correct, because what it describes is the meaning which case law has attributed to a concept used in statutory provisions, but the expression is nevertheless convenient, and I will adopt it. The other set of principles is found in a relatively recent statutory provision, s.249 of the Finance Act 1994. The Special Commissioners found that under both sets of principles Eulalia was resident in the United Kingdom at the critical date. Mr Goldberg submits that they were wrong in both respects.

I should add for completeness that since 1988 it has been enacted by statute that a company incorporated in the United Kingdom is automatically treated as resident in the United Kingdom: Finance Act 1988 s.66. However, since both CIL and Eulalia were not incorporated in the United Kingdom, that section is irrelevant in this case.

The basic test which the cases have evolved is the ‘central management and control’ test. The test seems to have originated in the Court of Exchequer in 1876: Calcutta Jute Mills Co Ltd v Nicholson 1 TC 83, and Cesena Sulphur Co Ltd v Nicholson 1 TC 88. It was adopted some thirty years later by the House of Lords in what is generally regarded as the seminal authority on the matter: De Beers Consolidated Mines Ltd v Howe [1906] AC 455. Lord Loreburn said at page 458:

“… the principle that a company resides for purposes of income tax where its real business is carried on. … I regard that as the true rule, and the real business is carried on where the central control and management actually abides.”

In all the three cases which I have mentioned the underlying trading operations were to a considerable extent carried on overseas (for example, in De Beers, diamond mining in South Africa), but because the central control and management of the business operations was carried on in the United Kingdom, the companies were held to be resident in the United Kingdom. In all normal cases the central control and management is identified with the control which a company’s board of directors has over its business and affairs, so that the principle almost always followed is that a company is resident in the jurisdiction where its board of directors meets.

In the previous sentence I have said ‘almost always’ because it is possible for a company to be resident in one territory even if it does not hold directors’ meetings there. The authority always cited for that proposition is the House of Lords decision in Unit Construction Co Ltd v Bullock [1960] AC 455. A United Kingdom parent company owned several subsidiaries which were incorporated in jurisdictions in East Africa and carried on trading activities there. The managing director of the parent company formed the view that ‘the situation of the African subsidiaries was becoming so serious that it was unwise to allow them to be managed in Africa any longer, and that their management must be taken over by the directors of [the parent company] in London.’ The board of directors of the parent company ‘decided that … they were forced to take over management and control’. (See paragraph 5 of the Case Stated at 38 TC 716.) Thereafter the representative of the parent company in East Africa effectively usurped the functions of the local boards, which still existed but stood aside, and controlled the subsidiaries in accordance with the requirements of the parent. Much of that may have been irregular, or even unconstitutional, but it was what happened. It was held that the African subsidiaries had become resident in the United Kingdom.

Unit Construction v Bullock is a very important case, but it is also in my view a highly exceptional case in terms of the result. It was not a case where the local boards still exercised central management and control, but did so under guidance and influence from the parent company in the United Kingdom. It was a case in which the local boards stood aside altogether, and the parent company effectively usurped what in theory were the functions of the local boards.

That is not the normal situation as between a parent company and its subsidiaries, and in any consideration of the principles governing the common law of corporate residence the normal realities of the parent and subsidiary relationship have to be taken into account. They were not relevant in the Calcutta Jute or Cesena Sulphur cases, or in De Beers. In all those cases the companies were not subsidiaries. Unit Construction did involve subsidiaries, but, as I have explained, the circumstances were exceptional. In the context of a group of companies where matters proceed in a normal way and not in an exceptional way it is to be expected that the parent company will have plans for what it wants its subsidiaries to do, and that the directors of the subsidiaries will ordinarily be willing to go along with the parent company’s wishes. If in those circumstances the subsidiaries were resident for tax purposes wherever the parent company is resident the consequences would, in my view, be unsatisfactory, productive of double taxation clashes between different jurisdictions, and disruptive of national tax systems.

There is a difference between, on the one hand, exercising management and control and, on the other hand, being able to influence those who exercise management and control. There is another difference, highlighted by Unit Construction v Bullock, between, on the one hand, usurping the power of a local board to take decisions concerning the company and, on the other hand, ensuring that the local board knows what the parent company desires the decisions to be. It is also necessary to keep in mind that, while the cases which I have referred to so far all involved the residence of companies with active continuing businesses, it is possible (and is common in modern international finance and commerce) for a company to be established which may have limited functions to perform, sometimes being functions which do not require the company to remain in existence for long. Such companies are sometimes referred to as vehicle companies or SPVs (special purpose vehicles). ‘Vehicle’ has a belittling sound to it, but such companies exist. They can and do fulfil important functions within international groups, and they are principals, not mere nominees or agents, in whatever roles they are established to undertake. They usually have board meetings in the jurisdictions in which they are believed to be resident, but the meetings may not be frequent or lengthy. The reason why not is that in many cases the things which such companies do, though important, tend not to involve much positive outward activity. So the companies do not need frequent and lengthy board meetings.

I will now mention four quite recent cases which were cited to me, and which demonstrate how the courts recognise some of the considerations to which I have alluded in the last few paragraphs.

The four cases which I have described in the foregoing sub-paragraphs involve different sets of facts, and are obviously not identical. However, they do have some common features which, in my opinion, are relevant to the present case. They all involved persons based in one jurisdiction (commonly a high tax jurisdiction) causing companies to be established in other jurisdictions (commonly low or no tax jurisdictions). In all the cases the companies so established were intended to fulfil particular purposes which were ancillary to the activities of the persons who caused them to be established. In all the cases the local managements did not take initiatives, but responded to proposals (described in some passages in the judgments as instructions) which were presented to them. In all the cases they did implement the proposals, and it is obvious that, when the foreign companies had been established, the confident expectation was that they would implement the proposals. In general, although large amounts of money may have been involved, the functions which the companies were established to fulfil did not involve much regular activity, so there was no great need for frequent exercises of central management and control. It is worth stating that, except for Unit Construction v Bullock, Mr Brennan did not refer me to any case which might give a different impression of the law from the four cases which I have described. Further, in all four of them Unit Construction v Bullock was expressly distinguished. The essential ground of distinction was that, whereas in Unit Construction v Bullock the parent company itself exercised central control and management of the African subsidiaries, effectively by-passing the local boards altogether, in the four cases the parent companies or their equivalents, while telling the local boards what they wished them to do, left it to the local boards to do it.

S.249(1) provides as follows:

“A company which-

(a)

would (apart from this section) be regarded as resident in the United Kingdom for the purposes of the Taxes Act, and

(b)

is regarded for the purposes of any double taxation arrangements as resident in a territory outside the United Kingdom and not resident in the United Kingdom,

shall be treated for the purposes of the Taxes Acts as resident outside the United Kingdom and not resident in the United Kingdom.”

There is a double taxation convention between the United Kingdom and Netherlands. The relevant article is article 4, which, so far as relevant, is as follows:

“Article 4 – Residence

(1)

For the purposes of this Convention, the term ‘resident of one of the States’ means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. …

(2)

…

(3)

Where by reason of the provisions of paragraph (1) a person other than an individual is resident of both States, then it shall be deemed to be a resident of the State in which its place of effective management is situated.”

I will consider the possible application of the foregoing provisions later. It may, however, be helpful for me to mention here that Eulalia was certainly regarded as resident in the Netherlands for purposes of Netherlands tax (I say more about this later), so if the Special Commissioners are right that it was resident in the United Kingdom under the common law principles of corporate residence, it is nevertheless to be treated for purposes of United Kingdom taxation as a Netherlands resident if it would be so treated under the double taxation convention. Whether that is so or not depends on the application of the ‘tie-breaker’ provision in article 4(3). In which State was its ‘place of effective management’ situated? That is the question which I will consider at a later point.

Against the background of the foregoing analysis of both the common law of corporate residence and of s.249 of the Finance Act 1994, it is convenient for me now to describe in detail the specific facts concerning Eulalia at and around the relevant time. The precise relevant time was 23 July 1996, when CIL sold its 49% shareholding in Holdings to Eulalia, but it is plainly appropriate to look at the position leading up to that date and to the position after it down to the date (21 October 1996) when Eulalia sold the shareholding on to the outside purchaser.

To a considerable extent the facts have to be elicited from documents which have been retained on relevant files, principally the files of AA Trust. There was not much witness evidence. Mr Brennan makes submissions about this for the Revenue, but the Special Commissioners, while agreeing with him as to the final result of the case, attach little if any significance to the absence of witnesses. In paragraph 143 of their decision they note that most of the absent witnesses had moved jobs. They comment, realistically and fairly in my view, that evidence in December 2003 of events over seven years earlier would have been of limited value except in so far as supported by or based on notes or records at the time. The head of the legal department at AA Trust, Mr Wirix, was to have been a witness, but was indisposed at the time of the hearing. Mr Brennan, who appeared for the Revenue before the Commissioners as he did before me, opposed an application for an adjournment, so Mr Wirix’s evidence went in in the form of a witness statement. Mostly he gives evidence from a recent reading of the files, and says that due to passage of time he has no specific recollection of the events. The Special Commissioners realistically say that his statement in that respect is wholly credible. They would have been sceptical of evidence that he did recall events in detail.

In the following sub-paragraphs I will describe as concisely as I can the relevant events which took place.

That completes my summary of the documents. It is an agreed fact that on 21 October Eulalia joined with CIL in selling the shares in Holdings (the owner of 96% of the shares in Greetings Ltd) to the purchaser, which was a new company owned by two companies, one in the Schroders group and the other in the Prudential group. By the same agreement the non-family shareholders in Greetings Ltd sold their 4% holdings to the purchaser. The consideration receivable by Eulalia on the sale was slightly less than £30.8m. Eulalia was, of course, liable to pay an amount by way of supplement to the price payable by it to CIL for its earlier purchase of its 49% holding. The supplement was 95% of the excess over £23.7m of the price received by it from the purchaser.

There are two other evidential items which I should mention. I have already referred to the witness statement of Mr Wirix, the head of the internal legal department at AA Trust. As I said, he did not specifically remember the events, so most of his statement is a reconstruction derived from his reading of the file. However, he does make two points of a more general nature in paragraph 10 of his witness statement. One is that normal practice within AA Trust is for its legal counsel to the transaction to review the relevant legal documentation. In this particular case he believed that he no doubt did that, although he had no specific recollection of so doing. The other point is expressed as follows:

“AA Trust judges as independently as possible whether transactions on behalf of companies we manage are in the interest of that company and do not damage our position. This means that the relevant documentation is considered in general terms, taking into account (i) compliance with Dutch law, (ii) AA Trust’s position, and (iii) ABN AMRO’s reputation.”

The second other evidential item arises from enquiries which the United Kingdom Revenue made of the Netherlands Revenue in the course of their investigations of the scheme. A tax inspector in the Netherlands, after enquiries had been made, including (it seems) a visit to AA Trust and a meeting with an officer of the company, made a formal statement in writing dated 19 February 2003 that Eulalia ‘is a corporation according to Dutch legislation and is a resident of the Netherlands within the meaning of article 4 of [the United Kingdom/Netherlands double taxation Convention]’. On 4 March 2003 a further letter was sent by the Netherlands Revenue authorities to the United Kingdom Revenue. It includes this sentence:

“Further investigation convinced the Dutch tax authorities that the actual management of Eulalia Holding BV was carried out by the Trust [i.e. by AA Trust], meaning that the taxable domicile of Eulalia Holding BV is located in the Netherlands.”

In this and the next two sections of my judgment I make frequent references to numbered paragraphs of the Special Commissioners’ decision. In order not to confuse them with the numbered paragraphs of this judgment I interpolate in each case the letters SC. Thus for example ‘paragraph SC145’ means paragraph 145 of the Special Commissioners’ decision.

The decision is lengthy, and it would be difficult for me to attempt to summarise it in this judgment. The earlier paragraphs describe the facts and the arguments. The Special Commissioners’ conclusions are contained in paragraphs SC113 to SC161, of which paragraphs 113 to 147 are relevant to the issues with which I am concerned. Paragraphs 148 to 161 are directed to an argument which is no longer pursued. If this judgment is reported, as I expect it will be, most series of reports will also include in the report the full text of the Commissioners’ decision, so paragraphs of the decision to which I refer in my own analysis of the issues should be readily accessible. For the assistance of readers of this judgment in the form in which I will hand it down I annex at the end a copy of paragraphs SC113 to SC147. Most of the discussion in those paragraphs relates to the common law of corporate residence. It culminates in paragraph SC145 in which the Commissioners explain the main elements of the reasoning which led them to dismiss the appeal. I reproduce the paragraph in full in paragraph 54 below, after which I analyse its contents and respectfully disagree with them in several respects. In paragraph SC146 the Commissioners, as I understand them, set out their view on the statutory test of residence under s.249 of the Finance Act 1994 coupled (in this case) with the United Kingdom/Netherlands double taxation convention. I will set out that paragraph in full in paragraph 74 below, and I will consider it in paragraphs 75 to 81.

In my judgment, on a proper application of the law to the facts the only tenable conclusion for the Commissioners to reach was that, under the common law of corporate residence, Eulalia was resident in the Netherlands. I accept Mr Goldberg’s submission that the Commissioners must either have applied the wrong test, or that, if they applied the right test, they came to a conclusion which could not properly be reached on an application of it, so as to exhibit an error of law on familiar Edwards v Bairstow principles ([1956] AC 14).

There is a point of a general nature which Mr Goldberg makes with which I have considerable sympathy, but which by itself would not, I think, persuade me that the Commissioners’ decision cannot stand. It is that there is an evident inconsistency between the Revenue’s attitude to the residence of CIL and their attitude to the residence of Eulalia. The claim for tax which is made against Mr and Mrs Wood is made under TCGA 1992 s.13. They are said to be taxable upon a chargeable gain which accrued not to them but to CIL, and which under s.13 falls to be assessed on them. It is fundamental to the Revenue’s claim for tax that CIL was not resident in the United Kingdom at the time when it disposed of the 49% holding in Holdings to Eulalia. If CIL had been resident in the United Kingdom at that time s.13 could not have applied.

However, there is no realistic difference between CIL and Eulalia as respects whether they were resident in the United Kingdom at the time. Both companies were established or acquired abroad in order to implement particular parts in the wider tax scheme of which the architects were Price Waterhouse. Both were managed in the offices of overseas financial organisations: CIL in the Geneva offices of Barclaytrust, and Eulalia in the Amsterdam offices of AA Trust. Mr Goldberg’s point is that, if CIL was resident outside the United Kingdom (which the Revenue not merely accept but assert as an essential ingredient in the claim for tax which they advance against Mr and Mrs Wood), then there is no credible basis on which it can be said that Eulalia was resident in the United Kingdom. A somewhat similar point was made by counsel who appeared for Mr and Mrs Wood before the Special Commissioners. He argued that, if (contrary to his contentions but in accordance with the Revenue’s) Eulalia was resident in the United Kingdom, then CIL was resident in the United Kingdom also. On that basis the assessments made upon Mr and Mrs Wood could not stand. Mr Goldberg does not now advance any submission that Eulalia was or might have been resident in the United Kingdom. Essentially he puts the point the other way round: the Revenue rightly proceed on the basis that CIL was resident outside the United Kingdom, and consistency would mean that Eulalia was resident outside the United Kingdom also.

I think that this is mostly, though not entirely, a complaint rather than a reason for allowing the appeal. As a complaint, however, it seems to me to have considerable force. Mr Brennan says that the taxpayers and their advisers presented the scheme on the basis that CIL was resident outside the United Kingdom, and that the Revenue are content to accept the taxpayers’ assertions in that respect; that does not prevent them (the Revenue) from probing and thereafter contesting the taxpayers’ assertion that Eulalia was resident outside the United Kingdom. As a formal matter that may be right, but I cannot refrain from observing that I find it an unattractive position. I realise that this is a case about a tax avoidance scheme, and that the Revenue have every right to test such schemes rigorously. Indeed they ought to do so. But there is an air of running with the hare and hunting with the hounds in saying that they will not investigate the residence of that one of the two companies where it suits them to accept at face value what the taxpayers say, but they will investigate and contest the residence of the other one where it does not suit them to accept at face value what the taxpayers say. Further, one specific consequence which could affect the decision of the case does, I think, follow. The Revenue, having accepted that CIL was resident outside the United Kingdom, cannot successfully argue that Eulalia was resident in the United Kingdom simply on the ground that it was a vehicle company used for a particular stage in a tax avoidance scheme devised and superintended by professional advisers in the United Kingdom acting ultimately in the interests of United Kingdom clients. Mr Brennan has not sought to put his case as simply as that, but the point is worth spelling out nevertheless.

However all that may be, I move on on the basis that CIL was resident outside the United Kingdom, so that the only issue which has to be decided is whether or not Eulalia was resident in the Netherlands, as the taxpayers contend. In the following paragraphs I will identify and examine certain passages in the decision which appear to me to be significant, and then I will add some observations of my own. As I have said, the critical paragraph in the Special Commissioners’ decision is paragraph SC145, but there are several matters which I wish to identify or discuss in some of the earlier paragraphs in the ‘Conclusions’ section of the Commissioners’ decision.

In paragraphs SC 118 and SC119 the Commissioners refer to Unit Construction Ltd v Bullock, and they correctly distinguish it, saying in paragraph SC119:

“Whereas in Unit Construction Co the local board was by-passed or purported meetings did not take place, the directors of Eulalia and CIL were not by-passed nor did they stand aside since their representatives signed or executed the documents.”

The Commissioners proceed to say in paragraph SC120 that the case for the Revenue is that ‘ABN AMRO [AA Trust] did not in fact take the decisions but did what it was told to do by Mr Wood or by Price Waterhouse acting on his behalf’. I have two comments to make.

In paragraph SC125 the Special Commissioners say:

“It is also clear that the legal formalities were carried out abroad including both the meetings approving the transaction and the signing of the documents.”

They nevertheless conclude that Eulalia was not resident abroad. It is of course possible for a company to be centrally controlled and managed in one jurisdiction and to carry out the legal formalities of a transaction in a different jurisdiction, but one would normally expect there to be some specific evidence that central control and management was in the first jurisdiction and not in the second one. Here there is none beyond the feature, to which I keep returning and which the authorities show not to be enough, that Eulalia was participating in accordance with the overall plan for a tax scheme devised and superintended by personnel in the Price Waterhouse Manchester office. Also, I do not accept the implication in the Commissioners’ sentence that the meetings which approved the transactions can be dismissed as immaterial legal formalities. Without decisions by AA Trust in its capacity as managing director of Eulalia to enter into the agreement to purchase the holding in Holdings and into the later agreement to sell that holding those agreements would not have been made. There can be no doubt that AA Trust took those decisions in Amsterdam, and none the less so by reason of having been recommended to take the decisions by Price Waterhouse in Manchester.

I have already noted that in paragraph SC129 the Commissioners say that until 18 July 1996 Eulalia can only have been resident in the Netherlands. For all that on a tax appeal s.50(6) places the burden on the taxpayer of showing that the assessment overcharges him, undisputed features of the facts must surely be capable in appropriate circumstances of placing an evidential burden on the Revenue to demonstrate why something like the residence of a company has changed. I agree with Mr Goldberg that, it being admitted on all sides that until 18 July 1996 Eulalia was resident in the Netherlands, it was incumbent on the Revenue to produce at least some material to show a change of residence. In my judgment the Revenue produced none.

It is true that on 18 July 1996 Eulalia’s shares were purchased by CIL. But a change of share ownership does not of itself entail a change in the national jurisdiction where a company is resident. Further, in this case the new owner of the shares, CIL, is accepted by the Revenue to have been resident outside the United Kingdom. It is also true that, in consequence of Eulalia having been purchased by CIL, it (Eulalia) became a participant in a tax scheme being carried out for the benefit of individuals resident in the United Kingdom and on the advice of United Kingdom professional advisers. But in that respect Eulalia’s position became identical to that of CIL. The Revenue accept that CIL was resident outside the United Kingdom, and (as I have pointed out earlier) have assessed Mr and Mrs Wood to CGT specifically on that basis. It must follow that for CIL to have become a participant in the same scheme was in itself no indication that it had changed its residence to the United Kingdom.

The Commissioners go on to say in paragraph SC130 that on 18 July, following the purchase of Eulalia’s shares by CIL, AA Trust became its managing director and undertook responsibility for day to day management. Indeed AA Trust did do those things, but it was a Netherlands company and it operated at its head offices in Amsterdam (where, incidentally, Eulalia had been administered in previous years, in so far as it required administration). The assumption by AA Trust of the responsibilities which it took on cannot be any indication that the residence of Eulalia moved from the Netherlands to the United Kingdom. The Commissioners then say that the appointment of AA Trust was at the behest of Price Waterhouse. If by at the ‘behest’ of Price Waterhouse the Commissioners mean at the request and on the introduction of Price Waterhouse, I agree, but comment that it is irrelevant. If they mean on the orders or command of Price Waterhouse (which is the dictionary definition) I do not agree.

In paragraphs SC132 and SC133 the Special Commissioners make critical remarks to the effect that AA Trust appear to have resolved that Eulalia should purchase the 49% holding in Holdings for £23.7m without having any information about whether that was or was not an appropriate price. They return to this theme in the culminating paragraph SC145, and I will postpone my comments on it until I discuss that paragraph.

In paragraph SC135 the Commissioners state that, after Eulalia had purchased the Holdings shares, it had no business other than holding them. I would ask: ‘So what?’ But in any event I do not agree with what the Commissioners say. Eulalia purchased the shares with a view to reselling them. It entered into an agreement with Price Waterhouse for Price Waterhouse to provide their services in advising upon and negotiating for the shares to be sold. In October it received advice from Price Waterhouse to accept the offer from Schroder Ventures. It accepted the offer and sold the shares for almost £30.8m.

To a similar effect, the Commissioners say in paragraph SC136 that the only activity of Eulalia between its acquisition by CIL and the sale of its shares in Holdings was the acquisition and sale of those shares and the matters connected therewith:, They add: ‘There was nothing else to manage.’ That is true, but how does it show that Eulalia was resident in the United Kingdom or that it was not resident in the Netherlands? What Eulalia did was a big transaction in terms of the amounts involved, but if it did not require frequent or intensive control and management, and if all the evidence that there is shows that such decisions as were needed were made in the Netherlands, the conclusion must surely be that the company was resident in the Netherlands.

There are then several paragraphs in which the Commissioners, in a balanced way, make several points. One is that there were strong commercial reasons for Eulalia to agree to the proposed sale of its shares in Holdings: the price was obviously a good one, and was acceptable to Mr Wood and to the owners of the business (see paragraph SC140). I would add, although the Commissioners do not, that the price was acceptable to Price Waterhouse, who had been engaged to advise and negotiate by Eulalia (having similarly been engaged by Mr Wood since 1995), and who positively recommended the transaction to Eulalia. The Commissioners add the pertinent comment that to a considerable extent the decision made itself. As against this, the Commissioners say that AA Trust did not give any, or at least sufficient, consideration to the issues involved in whether or not to join in the sale to Schroder Ventures Ltd of Holdings and of the outstanding 4% of the underlying company Greetings Ltd. This returns to the theme that AA Trust did not have adequate information to support its decisions. I will comment on it in connection with paragraph SC145 of the decision.

In paragraph SC142 the Commissioners say that AA Trust ‘simply fell in with the wishes of Mr Wood expressed by his advisers, the sale having been approved by [Eulalia’s] parent, CIL ..’. That is largely true, but it seems to me to ignore the realistic recognition in the authorities that, when companies are established in overseas jurisdictions in order to carry through some element in a wider scheme or business structure the idea for which originated with the parent company, their directors customarily do fall in with the overall plan: but the companies do not thereby fail to be resident in their own jurisdictions.

For example, in the Esquire Nominees case (see paragraph 26(ii) above) Gibbs J held that the company was resident in Norfolk Island notwithstanding that the local directors followed the guidance of the firm of Australian accountants, WBBC. An important part of his reasoning was that he did not believe that the directors would have acted on an instruction to do anything improper or inadvisable. I believe that the same would be true of AA Trust as a director of Eulalia, and indeed paragraph 10 of Mr Wirix’s witness statement (see paragraph 33 above) says so. If the Commissioners were not going to accept Mr Wirix’s statement, having admitted it in evidence under a rule of the procedural directions which govern appeals to the Special Commissioners, they needed expressly to say so. If Commissioners record evidence given by a witness without specific comment, the general practice of the courts on appeals from the Commissioners is to assume that the evidence was accepted.

A further example to a similar effect is the decision of the Special Commissioners in the Untelrab case (see paragraph 26(iv) above). Although the subsidiary was ‘complaisant’ to do the will of the United Kingdom parent company, the Commissioners rejected the Revenue’s argument that the subsidiary was resident in the United Kingdom. Thus I do not consider that the Commissioners’ comment in paragraph SC142 of their decision in this case that AA Trust ‘simply fell in with the wishes of Mr Wood expressed through his advisers’ leads to the conclusion that Eulalia was resident in the United Kingdom.

I come now to paragraph SC145 of the decision. It represents the culmination of the Commissioners’ reasoning on the application to Eulalia of the common law of corporate residence, and I think that it is sufficiently important for me to reproduce it in full at this point.

“SC145. We conclude that the Appellants have failed to satisfy us that the central control and management of Eulalia was not in London from 18 July 1996 when CIL became its shareholder. The only acts of management and control of Eulalia were the making of the board resolutions and the signing or execution of documents in accordance with those resolutions. We do not consider that the mere physical acts of signing resolutions or documents suffice for actual management. Nor does the mental process which precedes the physical act. What is needed is an effective decision as to whether or not the resolution should be passed and the documents signed or executed and such decisions require some minimum level of information. The decisions must at least to some extent be informed decisions. Merely going through the motions of passing or making resolutions and signing documents does not suffice. Where the geographical location of the physical acts of signing and executing documents is different from the place where the actual effective decision that the documents be signed and executed is taken, we consider that the latter place is where “the central management and control actually abides.” ”

I have several comments to make about this paragraph, and I will make them at some length here, even though some of them may in essence repeat points which I have made already.

The paragraph, with respect to the Commissioners, gets off to a bad start by the curious reference to London. London had nothing to do with the transaction or with Eulalia’s part in it. ‘London’ must have been a mistake by the Commissioners, but I would have wished to know what the Commissioners meant to say. Did they mean to refer to the United Kingdom, without being specific as to any particular place in the United Kingdom? Or did they mean to refer to Manchester, which was where the relevant offices of Price Waterhouse were situated? Or did they mean to refer to Bury, which is where Mr and Mrs Wood lived and where the offices of Greetings Ltd were situated? Given the form in which the sentence is cast (‘the Appellants have failed to satisfy us that the central control and management of Eulalia was not in London’), the Commissioners appear to have started with a presumption that Eulalia was resident somewhere in the United Kingdom, and required the appellants to show that it was not. But it is not clear where the presumed place of residence was.

A consequence of the point which I made in the previous sentence is that the Commissioners have based their decision, not upon a reasoned and positive finding that Eulalia was resident in the United Kingdom, but rather upon the propositions that the burden of proof on the appeal rested upon Mr and Mrs Wood, and that they had not discharged it. It is noteworthy that nowhere in paragraph SC145 or, as far as I can see, anywhere else in the decision, do the Commissioners say where they consider Eulalia to have been resident. The Revenue’s case was that Eulalia was resident in the United Kingdom, but the Commissioners have more cautiously said that Mr and Mrs Wood had not satisfied them that Eulalia was not resident in the United Kingdom.

In the last sentence of paragraph sc145 the Commissioners refer to ‘the place where the actual effective decision that the documents be signed and executed is taken’, but they do not say what they consider that place to have been. In my opinion it was Amsterdam, where AA Trust resolved to enter into the agreement to acquire the shareholding in Holdings and where it later decided to accept Price Waterhouse’s advice to sell the shares and to execute the required documents. Where else could it have been? The only candidates in the United Kingdom are Manchester or Bury. I do not think that either can be right.

In and from Manchester Price Waterhouse devised the scheme, superintended the carrying out of it, and advised the participants about the steps which it was appropriate for them to take next if the scheme was to proceed. Of course Price Waterhouse expected the parties to accept the advice and to carry out the steps, but I do not think that any reputable professional adviser would accept that he takes the decisions and that the clients do not. He advises them of what, in his professional opinion, it is desirable for the clients to decide. Usually they accept the advice. But the clients, not the professional adviser, make the decision. As regards Bury, I of course accept that Mr and Mrs Wood decided to instruct Price Waterhouse to advise on a scheme to avoid CGT, and that they also decided to instruct Price Waterhouse to go ahead and seek to put the scheme into effect. That is not at all the same thing as Mr and Mrs Wood in Bury taking the individual decisions which were necessary before each specific stage in the scheme would take place.

I wish to say more about the way in which the Commissioners have based their decision on what they see as the failure of Mr and Mrs Wood to discharge the burden of proving a negative. I accept, despite a submission of Mr Goldberg to the contrary, that, when an Inspector of Taxes makes an adjustment to a taxpayer’s self-assessment and the taxpayer appeals against the adjustment, the statutory burden on appeal rests on the taxpayer to show that the adjustment is wrong. That is the effect of s.50(6) of the Taxes Management Act 1970:

“If, on an appeal, it appears to … the Commissioners … by evidence –

(c)

that the appellant is overcharged by an assessment …

the assessment … shall be reduced accordingly, but otherwise the assessment … shall stand good.”

However, there plainly comes a point where the taxpayer has produced evidence which, as matters stand then, appears to show that the assessment is wrong. At that point the evidential basis must pass to the Revenue.

In this case, at the beginning of the appeal before the Special Commissioners the position was that the Revenue had made an adjustment on the basis that Mr and Mrs Wood were liable to CGT, and that Mr and Mrs Wood had to show to the civil standard of proof that the adjustment was wrong. I accept that the onus was on them to show that Eulalia was not resident in the United Kingdom, but rather was resident in the Netherlands. They showed that Eulalia was incorporated in the Netherlands. They showed incontrovertibly that it had been resident only in the Netherlands until it was acquired by CIL. They showed that CIL was not itself a United Kingdom company, and indeed was a company which the Revenue asserted to have been resident outside the United Kingdom. They showed that, from the time when Eulalia was acquired by CIL, its managing director was AA Trust, a large Dutch company with offices in Amsterdam. They showed resolutions and consequential actions being taken in the offices in Amsterdam. They accepted that what Eulalia was doing was part of a tax scheme which was being superintended by Price Waterhouse in their Manchester offices. They called evidence from the Price Waterhouse partners who at the time were heads of the firm’s departments for corporate finance and for tax in Manchester. They produced a witness statement from the head of the legal department at AA Trust. They were willing for the appeal to be adjourned in order that the witness could attend in person to be available for cross-examination. They produced all the documents which existed (so I assume, and no one has suggested that any documents were suppressed). The documents showed guidance and influence coming from Price Waterhouse, but no more than that. Mr and Mrs Wood were able to point out that the Netherlands Revenue had stated to the United Kingdom Revenue that the actual management of Eulalia was carried out by AA Trust, ‘meaning that the taxable domicile of Eulalia Holding BV is located in the Netherlands’. Surely at that point they can say: ‘We have done enough to raise a case that Eulalia was not resident in the United Kingdom. What more can the Special Commissioners expect from us? The burden must now pass to the Revenue to produce some material to show that, despite what appears from everything which we have produced, Eulalia was actually resident in the United Kingdom.’

The Revenue produced no positive material. They had submissions to make. One was ‘the missing witnesses argument’. In particular they said that there was no evidence from Mr Senior of Price Waterhouse or from some of the officers of AA Trust who had been involved in the transactions in 1996. However, that was plainly not the basis of the Commissioners’ decision. As I have already described, in paragraph SC143 they said that they did not attach any real weight to the absence of the witnesses. Most of the witnesses had moved jobs, and in any event seven years had passed, so that their memories could not be expected to be accurate. I refer here to what I have already said in paragraph 30 above. I add a point which the Commissioners did not make. Unless I have misunderstood, the Revenue took a long time over their enquiries into the realisation of the Greetings Ltd business. I can well understand why, but in the circumstances it would be harsh to treat the absence of witnesses with a clear recollection as a factor counting against Mr and Mrs Wood on this appeal.

Another line of argument which the Revenue advanced was represented by a critical analysis which Mr Brennan had prepared of many of the documents which I have described. Mr Brennan repeated the argument before me, and reproduced the critical analysis in his skeleton argument. In my judgment, however, what it really amounted to was a convincing demonstration of things which are not denied: that the steps taken were part of a single tax scheme, that there were overall architects of the scheme in Price Waterhouse, and that those involved all shared the common expectation that the various stages of the scheme would in fact take place. I have already said that that does not to my mind mean that Eulalia was resident in the United Kingdom. And if it did CIL would have been resident in the United Kingdom as well, whereas it is an essential part of the Revenue’s claim for tax against Mr and Mrs Wood that CIL was not resident in the United Kingdom.

For the foregoing reasons, in so far as the Commissioners decided this appeal against Mr and Mrs Wood on grounds relating to the burden of proof (and the opening part of paragraph SC145 suggests that those were the critical grounds for the decision), I consider that they were in error.

The Commissioners do, however, say more in paragraph 145. The second sentence of the paragraph is:

“The only acts of management and control of Eulalia were the making of the board resolutions and the signing or execution of documents in accordance with those resolutions.”

I agree with Mr Goldberg that it is extraordinary that the Commissioners, having made that statement, came to the conclusion that Eulalia was resident in the United Kingdom, or at least came to the conclusion that it had not been shown that Eulalia was resident in the Netherlands. The making of the board resolutions and the signing and execution of documents which the Commissioners say were the only acts of management and control of Eulalia all took place in the Netherlands. A company is resident where its central management and control are situated. How, therefore, can Eulalia have been resident in the United Kingdom? How can it have been resident anywhere other than the Netherlands?

Mr Brennan urges me to read and consider the second sentence of paragraph SC145, not in isolation, but in the context of the whole of the paragraph. I have done that, but I am still mystified by the Commissioners’ reasoning. What they seem really to be saying is that, although the only acts of control and management took place outside the United Kingdom, there was not much involved in them. But the test of a company’s residence is still the central control and management test: it is not the law that that test is superseded by some different test if the business of a company is such that not a great deal is required for central control and management of its business to be carried out.

The Commissioners then say:

“We do not consider that the mere physical acts of signing resolutions or documents suffice for actual management. Nor does the mental process which precedes the physical act.”

I see the point of the first sentence, but not of the second. If directors of an overseas company sign documents mindlessly, without even thinking what the documents are, I accept that it would be difficult to say that the national jurisdiction in which the directors do that is the jurisdiction of residence of the company. But if they apply their minds to whether or not to sign the documents, the authorities, which I will not repeat, indicate that it is a very different matter. Further, in this case the Commissioners had the explicit evidence of Mr Wirix, in the light of which it is impossible to regard AA Trust as in the nature of a puppet manipulated by a puppet master in the United Kingdom. The exchanges in September and October 1996 show that Price Waterhouse did not regard AA Trust as a puppet or treat it as a puppet. Price Waterhouse (mainly in the person of Mr Senior) reported to AA Trust on what they were doing in their role as the party engaged by Eulalia to advise and negotiate about an onward sale of the Holdings shares. They made a recommendation to Eulalia, and asked AA Trust to confirm that it was content for Eulalia to proceed. Of course they expected AA Trust to say that it was content, but it was clear that the sale to the outside purchaser could not proceed without AA Trust’s confirmation, and that Price Waterhouse were not in a position, and did not consider themselves to be in a position, to issue orders to AA Trust about what it must do.

The Commissioners then go on to make points to the effect that AA Trust did not have sufficient information to make informed decisions. This picks up the theme of several earlier paragraphs, as respects which I said earlier that I would make my own observations in connection with paragraph SC145. That is what I now do. In paragraph SC145 the Commissioners say that ‘effective decisions … require some minimum level of information. The decisions must at least to some extent be informed decisions’. This seems to be implying that AA Trust, as managing director of Eulalia, did take decisions, but because they were not informed decisions they somehow did not count. I cannot agree, for several reasons.

The decisions which matter are the decision in July 1996 that Eulalia should purchase the 49% holding in Holdings and the decision in October 1996 that Eulalia should sell the holding. If AA Trust, in its capacity as managing director of Eulalia, took those decisions and took them in its offices in Amsterdam, as in my view the facts which the Commissioners had before them demonstrate that it did, then the central control and management of Eulalia was in the Netherlands, and the company was resident there. Mr Brennan cited to me a passage in the judgment of Jonathan Parker J in re Barings plc (No. 5), approved by the Court of Appeal at [2000] 1 BCLC 523, 535 to 536, in which the learned judge summarised the duties of directors. One point which he made was that directors have a duty ‘to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors’. The extent of the duty, and the question whether it had been discharged, ‘must depend on the facts of each particular case.’ The passage is important generally, but I derive little assistance from it so far as the issues in this case are concerned. Barings (No. 5) was a directors’ disqualification case. This case is not. Several of the directors of Barings were disqualified because of inadequacies in their performance, but no-one would suggest that the central control and management of Barings’ business did not rest with its board. In this case there may or may not be grounds for saying that AA Trust could and should have gone into matters more deeply before it took the two critical decisions, but, given that it was AA Trust which took those decisions, it remains the case that Eulalia was resident in the Netherlands.

In any case, the Commissioners overstate their criticisms of AA Trust in these respects. As respects the acquisition of the shareholding in July 1996 it is apparent from the earlier paragraphs SC132 and SC133 that the Commissioners’ criticism is that AA Trust did not have enough information about the basis for the price being set at £23.7m. However, at that stage in their discussion of the issues they fairly answer the criticism themselves in paragraph SC134, where they make the point that Eulalia was a wholly-owned subsidiary of CIL (the vendor), and that the price was left outstanding interest free. ‘It would’, they say, ‘be a far-reaching proposition to state that any subsidiary entering into a contract to acquire property from its parent on such a basis without independent consideration of the terms is necessarily ceding its central management and control to the parent.’ In paragraph SC134 they found ‘from the viewpoint of Eulalia … nothing surprising in the fact that its directors accepted the agreement prepared by Price Waterhouse and executed by Condor on behalf of CIL’. By the time that they reached paragraph SC145 they had formed the view that AA Trust’s decision to accept the agreement was insufficiently informed to be an effective decision at all. The reasoning at the two places is difficult to reconcile.

I move to the second critical decision: the decision to concur in the sale of Holdings to the outside purchaser. In paragraph SC140 the Commissioners accepted that there were ‘strong commercial reasons for Eulalia to accept terms for the sale of its shares in Holdings which were acceptable to Mr Wood and to the managers of the business.’ But in paragraph SC145 they nevertheless were of the opinion that Eulalia’s decision to accept the terms was so insufficiently informed that it failed to be an effective decision. This disregards several substantially undisputed facts: that AA Trust on behalf of Eulalia had engaged Price Waterhouse to advise and represent it on negotiations for a resale (so that the critical responsibility to evaluate the terms of a resale rested in the first instance with Price Waterhouse); that Price Waterhouse twice reported in writing to AA Trust about its negotiations; that there was at least one telephone conversation between Mr Senior of Price Waterhouse and a representative of AA Trust; that Price Waterhouse recommended AA Trust to accept the offer from the outside purchaser; that the normal practice within AA Trust was for Mr Wirix to review the legal documentation and for AA Trust to judge as independently as possible whether transactions on behalf of companies which it managed were in the interests of that company and did not damage AA Trust’s position; and that the transaction did not take place until two representatives of AA Trust specifically confirmed in writing to Price Waterhouse and to the solicitors acting on the sale that AA Trust agreed with the draft agreements and would execute them on behalf of Eulalia.

In those circumstances I cannot agree with the Commissioners that AA Trust’s participation was ‘merely going through the motions of passing and signing documents’.

My conclusion on common law residence is that the decision of the Commissioners cannot stand. On a proper understanding of the law the only correct conclusion capable of being reached on the basis of the materials which the Commissioners had before them was that Eulalia was resident in the Netherlands.

In this part of my judgment I consider the appeal on the assumption that I am wrong in my view, explained under the foregoing sub-heading, that Eulalia was resident in the Netherlands under the common law test of corporate residence. If I am right in that view it is in itself sufficient to mean that this appeal succeeds. However, suppose that I am wrong and that under the common law test Eulalia was resident in the United Kingdom. Eulalia was undoubtedly also resident in the Netherlands for purposes of Netherlands tax. That is clearly established by the letters from the Netherlands Revenue department to which I referred in paragraph 34 above. In that situation it would become necessary to consider the statutory test in s.249, read with article 4 of the United Kingdom/Netherlands double taxation convention. I have set out the statutory provisions in paragraph 28 above. I will not repeat them here, but the effect is that the case would be governed by the ‘tie-breaker’ provision in article 4(3) of the convention. Eulalia would be regarded as a resident of that one of the two States in which ‘its place of effective management [was] situated’.

The Commissioners deal with the question shortly in paragraph SC146 of their decision. The paragraph does not refer specifically to s.249 or to article 4(3), but it must have them in mind. It refers to the record at paragraph SC103 of a submission by Mr Brennan, and that paragraph explicitly identifies article 4.3 as the subject matter with which it is dealing. Paragraph SC146 reads as follows:

“146.

This raises the question of where the place of effective management was situated. We accept Mr Brennan’s submission at paragraph 103 that in the present context there is no difference between central management and control and the place of effective management. In our judgment the place of effective management must be the place where effective management decisions are taken. There is no indication that any effective management decisions were taken in the Netherlands.”

Mr Brennan repeated before me his successful submission to the Special Commissioners. He said that, if the central management and control of Eulalia was in the United Kingdom, then so also its place of effective management must have been situated in the United Kingdom. Mr Goldberg submitted otherwise. He said that the ‘place of effective management’ of Eulalia was in Amsterdam, and that that was so even if the common law test of residence had the effect that, contrary to his submission, the company was resident in the United Kingdom.

On that issue too I agree with Mr Goldberg. If on common law principles Eulalia was resident in the United Kingdom I think that the reason can only have been that the degree of influence emanating from the United Kingdom amounted to central management and control. Influence of one sort may have been possessed by Mr Wood, though there is no evidence that he exercised it in any positive way. Influence of another sort may have been possessed by Price Waterhouse, the personnel of whom provided detailed guidance about what it was appropriate for Eulalia’s local management in Amsterdam to do. But I find it very hard to conceive of Mr Wood’s home or his office as a place of effective management of Eulalia. Similarly, I believe that Price Waterhouse, or indeed virtually any professional firm, would resist strongly any suggestion that, because a client is relying on them for, and is following, professional guidance which they are providing on a sophisticated scheme which extends over several months, therefore their offices are a place of effective management of the client.

The way in which the Commissioners have expressed their decision does not greatly help on this. They say that in their opinion the place of effective management must be the place where effective management decisions are taken, but they do not say where that place was. They only say that ‘there is no indication that any effective management decisions were taken in the Netherlands’. I do not agree with them on that, for reasons which I have explained in several earlier paragraphs, including paragraphs 41, 47 and 56, but there is a further point to be made here. Article 4(3) requires there to be identified a ‘place’ of effective management, and it has to be a place situated in one of the two States. So far as common law residence is concerned it might be enough for the Revenue to say that the central control and management of Eulalia was carried on in the United Kingdom, without needing to be more precise and to identify specific premises. On that basis the Revenue might be able successfully to argue that Eulalia was resident in the tax jurisdiction of the United Kingdom, and that they do not need to go into any further detail.

That, however, will not do when it comes to applying the detailed wording of article 4(3). What was the ‘place … situated’ in the United Kingdom which was Eulalia’s ‘place of effective management’? The Commissioners do not attempt to answer the question, and their misguided reference to London at the beginning of paragraph 145 increases the difficulty of inferring what their answer would have been. The only possibilities seem to be either Mr and Mrs Wood’s home in Bury, or Mr Wood’s office elsewhere in Bury, or Price Waterhouse’s offices in Manchester. For the reasons which I gave in paragraphs 56 and 57 above, which I will not repeat here, I do not think that any of those three are convincing candidates to be Eulalia’s place of effective management.

As with the common law test of residence, I do not think that it is satisfactory in this case for the Commissioners simply to rest their decision on the burden of proof and s.50(6) of the Taxes Management Act 1970. But that is what they have done. They round off, before moving to a different issue which was not argued before me:

“We conclude therefore that the appellant has not established that Eulalia was not resident in the United Kingdom for tax purposes.”

I must point out, however, that Eulalia had the use of the offices of AA Trust in Amsterdam. It had a constitutionally appointed managing director, AA Trust, whose offices and personnel were situated in Amsterdam and on no conceivable basis were situated in Bury or Manchester. Its postal address was in Amsterdam. All documents which were required to be signed by its management were signed in Amsterdam. Its books and records were kept in the offices in Amsterdam. (That may not be found in so many words by the Special Commissioners, but it was obviously the case.) When the Dutch Revenue, at the request of the United Kingdom Revenue, investigated the residence status of Eulalia they went to AA Trust’s offices in Amsterdam, and concluded that ‘AA Trust Company BV executed the actual management of Eulalia Holding BV as a result of which the fiscal residence of Eulalia BV is located in the Netherlands’. I share Mr Goldberg’s surprise that nowhere in paragraph SC 146 do the Commissioners make any reference to the Netherlands Revenue’s conclusion.

Against that background I repeat, this time in the context of s.249 and article 4(3), something which I have already said in the context of common law residence. Surely the point has been reached at which the appellants in this case can say that they have shown a great many things from which it would appear that, although not much effective management was required for what Eulalia did, the place where the effective management was carried out was at AA Trust’s offices in Amsterdam, and the evidential burden must shift to the Revenue to produce some evidence that the place of effective management was not there after all, but rather was situated at a place in the United Kingdom: a place, furthermore, which the Revenue needed to identify specifically. In my judgment it cannot be enough for the Revenue simply to say that they are not sure what the precise place of effective management of Eulalia was, but, whatever it was, it was situated somewhere in the United Kingdom.

Therefore, if I am wrong that, on the common law test of residence, Mr and Mrs Wood have discharged the burden which s.50(6) of the Taxes Management Act places on them of showing that Eulalia was resident in the Netherlands, I nevertheless consider that the effect of s.249 of the Finance Act 1994 read with the tie-breaker provision in article 4(3) of the United Kingdom/Netherlands double taxation convention is that by statute Eulalia was resident in the Netherlands.

For the foregoing reasons I allow this appeal.