Cyprus, in recent years has proven to be an ideal location as far as offshore business is concerned. Strategically, it is located at the cross roads of Europe, Asia, the Middle East and Africa. In addition to the above, it is a member of the E.U. since 1st May 2004 and it is considered to be a reputable international and financial centre.
One of the major advantages attracting business in Cyprus is the fact that Cyprus offers the lowest corporation tax within the E.U., the tax rate being only 10%. Although many off shore businesses choose Cyprus for tax mitigation reasons, foreign jurisdictions such as the UK keep such companies under close examination to prevent taxes flowing out from their economy.
The main objective of this article is to illustrate how offshore businesses can survive such scrutiny and this will be illustrated through the leading case of Wood and Another v Holden (HMIT)  EWCA Civ 26.
Wood and Another v Holden – The Facts
Mr. and Mrs. Wood were settlers of a number of non-resident settlements. The Trustee of the settlements was the sole shareholder of a BVI company. The BVI Company eventually sold shares to a company incorporated in the Netherlands which was a wholly owned subsidiary of the BVI Company.
The Special Commissioners found for HMRC on the basis that the central management and control of the company incorporated in the Netherlands was carried out from the UK. Following the above, capital gains tax had to be paid in the UK resulting from the sale of shares irrespective of where the company was established.
The decision was overturned by the High Court. The High Court emphasized the distinction between “exercising management and control” and “influencing those who exercise management and control”. Park J, found that on a proper application of the law to the facts, the only tenable conclusion for the Commissioners to have reached was that under the Common Law of corporate residence, applying the test of central management and control, the company incorporated in the Netherlands was resident in the Netherlands. He concluded that the Commissioners either had to have applied the conclusion that they reached could not properly be reached in an application of it so as to exhibit an error of law.
HMRC appealed against the decision, contending that the Commissioners had directed themselves correctly in point of law and that the Judge was not entitled to interfere with their decision.
The Court of Appeal held that the High Court was correct to hold that the only conclusion open to the Special Commissioners, on the facts which they found was that the company was resident in the Netherlands. Subsequently, the company was considered to be a resident in the Netherlands for tax purposes.
Lord Justice Chadwick made an important statement. He said that “in seeking to determine where the ‘central management and control’ of a company incorporated outside the United Kingdom lies, it is essential to recognize the distinction between cases where management and control of the company is exercised through its own constitutional organs (the Board of Directors or the General Meeting) and cases where the functions of those constitutional organs are ‘usurped’ in the sense that management and control is exercised independently of or without regard to those constitutional organs. And, in cases which fall within the former class, it is essential to recognise the distinction between the role of an ‘outsider’ in proposing, advising and influencing the decisions which are to be taken. In that context, an ‘outsider’ is a person who is not himself, a participant in the formal process (a board meeting or a general meeting) through which the relevant constitutional organ fulfils its function ‘’
The above case is of vital importance for offshore industries looking to set up Cyprus companies. It offers assurance to tax payers that another jurisdiction such as the UK for example can not infer that the central management and control of an overseas company takes place in the UK but in Cyprus instead. What is important is that all the legal documents such as contracts for example are properly executed within Cyprus. Even when recommendations are put to the Board by advisors such as accountants located in another jurisdiction like the UK for example or where draft documents have been prepared in another jurisdiction the control and management of the company will be deemed to be exercised in Cyprus provided certain conditions are fulfilled. The same also extends to situations where the sole Director of a company incorporated in Cyprus is a professional entity i.e a Corporate Nominee Director which is advised by overseas accountants or other professionals. What must be avoided is the direct dictation to the Nominee Director.
To conclude, it can be said that the off shore industry can feel comfort when setting up a Cyprus company and appointing nominee directors to manage and control the Company. In summary what every offshore industry should be aware of is:
· That at least 51% of the Directors are permanent residents in Cyprus
· All the board meetings are held in Cyprus
· The Nominee Directors are not dictated by outsiders as to what they will do
· The Secretary holds minutes of all the Board meetings
· All documents/transactions are executed in Cyprus
· The Nominee Director(s) following any external advice makes up its/their mind(s) as to the decisions of the company independently.