The Inland Revenue Department has clarified the meaning of "central management and control" in the Departmental Interpretation and Practice Notes No. 43 to address the industry's concern about the residency requirement for directors of the management committee of offshore funds in their applications for profits tax exemption.
The “central management and control” test is a well-established common law rule adopted in many jurisdictions, such as Singapore, the UK and Australia, in determining the residence of a company and other non-individual entities. The common law rule was enunciated by Lord Loreburn in De Beers Consolidated Mines, Limited v. Howe (5 TC 198 at page 213):
“… 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 management and control actually abides.”
The central management and control refers to the highest level of control of the business of a company. The exercise of central management and control does not necessarily require any active involvement. The place where the central management and control is exercised is not necessarily the place where the main operations of the business are to be found, though the two places may often coincide. Further, the place of registration or incorporation of a company is not in itself conclusive of the place where the central management and control is exercised, and is therefore not conclusive of the place where the company is resident (Todd v. Egyptian Delta Land and Investment Co. Ltd., 14 TC 119).
The location of central management and control is wholly a question of fact. Each case must be decided on its own facts. Factors that are decisive in one case may carry little weight in another. In general, if the central management and control of a company is exercised by the directors in board meetings, the relevant locality is where those meetings are held. In many cases, the board meets in the country where the business operations take place, and central management and control is clearly located in that country. In other cases, central management and control may be exercised by directors in one jurisdiction though the actual business operations may take place elsewhere. It should be noted that the residence of individual directors is generally not relevant in determining the locality of a company’s central management and control (see, however, the comments in paragraph below). Therefore, the mere fact that the majority of the directors of the management board of a company are resident in Hong Kong does not of itself mean that the company is centrally managed and controlled in Hong Kong, and hence would not adversely affect the application of the tax exemption.
The place of board meetings also is not necessarily conclusive. It is significant only in so far as those meetings constitute the medium through which central management and control is exercised. In cases where central management and control of a company is in fact exercised by an individual (for example, the board chairman or the managing director), the relevant locality is the place where the controlling individual exercises his power. As central management and control is a question of fact and reality, when reaching a conclusion in accordance with the case law principles, only factors which exist for genuine commercial reasons will be accepted.
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