Swedish Central Railway Co Ltd v Thompson [1925]

Swedish Central Railway Co Ltd v Thompson [1925] AC 495 (HL)

Introduction

A registered company can have more than one residence for UK Income Tax Act purposes. Such companies are thus potentially liable to pay corporate tax in more than one jurisdiction. This legal proposition is confirmed in Swedish Central Railway Co v Thompson.¹ The 1925 House of Lords decision has influenced how English and Commonwealth courts determine the location of a company’s place of ‘central management and control’ (CM&C).² This particular test has proven pivotal in subsequent UK income tax enactments regarding where companies owe their income tax obligations.

Key issue

The House of Lords was required to determine whether the Special Commissioners³ decision (as affirmed by the Court of Appeal) was correct that the appellant company was liable to pay UK income tax.⁴ The Commissioners found that whilst company business was subject to Swedish CM&C, the company was a UK resident person by virtue of its London office location.

Facts

The appellant company was incorporated in England in 1870.⁵ It intended to construct and operate a Swedish railway; the registered company office was in London.⁶ The company subsequently leased its railway to a traffic company for fifty years, with annual rents (33,500l.) paid to the company in England. The company articles were later amended to transfer all business control and management from England to Sweden.⁷ It was common ground between the parties that the company business that the company business had been controlled and managed from the Swedish head office since 1900.⁸ In 1920, the company directors appointed a committee to transact formal administrative business only in the UK. These matters included: (i) dealing with UK share transfer; (ii) affixing the company seal to share and stock certificates; and, (iii) signing cheques on the London company bank account.⁹

Since 1920, the company had not convened any meetings in the UK. All corporate dividends had been declared in Sweden; no company profits had been transmitted to the UK, with the exception of dividend payments made to the company’s UK shareholders.¹⁰ Further, the annual rents collected under the traffic company lease had been paid to the company’s Swedish offices.¹¹

The Special Commissioners found that the company CM&C had been in Sweden since 1920, where it remained at the time the UK tax proceedings were initiated.¹² The Commissioners held, consistent with Lord Sumner’s judgment in Mitchell v Egyptian Hotels,¹³ that the company remained a UK resident person (and thus liable to pay income tax), notwithstanding its 1920 company resolution.¹⁴ This determination was affirmed by the reviewing High Court judge (Rowlatt J), and then affirmed by subsequent Court of Appeal and House of Lords majorities.¹⁵

Outcome

Swedish Central was immediately recognised by English judges and tax law practitioners as an important component within an evolving corporate income tax evolution that had commenced in 1906 with De Beers v Unit Construction. In De Beers, the House held that a company resides where its real business is carried on, and “…. the real business is carried on where the central management and control actually abides….”¹⁶

The 1913 American Thread v Joyce decision had also built upon this proposition, with its holding that limited company CM&C must not be equated with day-to-day business operations.¹⁷ Mitchell v Egyptian Hotels added a further interpretive dimension on which the Swedish Central reasoning was constructed.¹⁸ The House ruled that the location of a company’s controlling ‘brain’ (in today’s corporate language, the ‘head office’, or management team) is the epicentre from which “…..profits and gains arise is in this country the trade or business is, at any rate partly, carried on in this country….”¹⁹

Soon after its Swedish Central judgment, the House held in Egyptian Delta v Todd that whilst place of incorporation was a factor to be taken into account in determining corporate residence, it did not displace the over-arching De Beers rule.²⁰ The House found that the place where a company’s central management and control (CM&C) actually abides remains paramount.²¹

The following language employed in De Beers was pivotal in the Swedish Central majority reasoning. Viscount Cave observed, citing De Beers that whilst a company “….cannot eat or sleep …. it can keep house and do business. We ought, therefore, to see where it really keeps house and does business….”²²Lord Atkinson expressed the minority view that a company’s ‘acquisition’ of more than one legal residence for Income Tax Act purposes was illegal.²³ He strongly contends that notwithstanding an English company has undoubted separate legal personality from that of its management,²⁴ “….unless a thing can have two or three different and separate centres, it would appear to me to be quite impossible, ^{in literal language} that ^CM&C can at the same time abide in two or more different and separated places….”²⁵

Union v IRC was the first notable post-WWII English decision to apply Swedish Central.²⁶In a typically closely reasoned income tax decision, where individual phrase interpretations may have far-reaching financial implications for the subject enterprise, the House of Lords held that the Finance Act 1947 provision, “ordinarily resident outside the United Kingdom” was synonymous with the phrase, “not ordinarily resident in the United Kingdom”.²⁷ In Unit Construction v Bullock, the House of Lords arguably brings the entire case law progression in which Swedish Central played an important part to its logical conclusion.²⁸ The case stands for the proposition that limited company residence for tax purposes is established in the country where CM&C is exercised, even though its company memorandum and articles state CM&C ought to be exercised in a different country.²⁹

As Jones notes in his 2008 analysis, the primary influence exerted by Swedish Central on all subsequent UK legal evolution was the manner in which policy-makers revised applicable corporate income tax residence definitions. Jones argues that these later definitions were crafted to prevent the Swedish Central ‘alternative test of incorporation plus carrying on business’ application in later tax treaties.³⁰

This House of Lords decision is also noted as influential in the eventual structure of the Australia-UK tax treaty residency provisions.³¹ A Westlaw UK search suggests that Swedish Central has not been expressly cited in a leading English decision since 2002.³² However, in a subsequent Jones article, Swedish Central and its corporate residency reasoning is cited as having influenced the ultimate ‘place of effective management’ definitions provided in the Economic Co-operation and Development (OECD) Model Tax Convention.³³ This OECD initiative plays an important role in how 30 leading global economies devise fairer tax treatments in ever-changing international corporate environments.³⁴ In this indirect way, the Swedish Central reasoning continues to contribute to how present day corporate taxation residency rules are devised and enforced.

Footnotes

¹ Swedish Central Railway Co Ltd v Thompson ¹⁹²⁵ AC 495 (HL), cited throughout as Swedish Central.

² See e.g. Australian Taxation office, ‘Taxation Ruling TR 2004/15, Income tax: residence of companies not incorporated in Australia – carrying on business in Australia and central management and control’ (2004) ^Online Available: here, citing Swedish Central, and the later Egyptian Delta Land and Investment Co Ltd v Todd, 1928; see also a former Commonwealth member, Hong Kong Tax Alert ‘Determining the source of director’s fees – place of business/listing or location of board meetings of Payor Company?’ (17 September 2014) 16 ^Online Available: here ^{24 September 2015}, and in Canada, Bathurst Assessors v. The King, ¹⁹⁵¹ SCR 872 (SCC).

³ The predecessor tribunal to the current Tax Chamber of the First-tier Tribunal, as established under the Tribunals, Courts and Enforcement Act 2007.

⁴ Income Tax Act 1920, Sch. D, Case V.

⁵ Companies Act 1867.

⁶ Swedish Central, 495.

⁷ Ibid.

⁸ Ibid, 496.

⁹ Ibid.

¹⁰ Ibid.

¹¹ Ibid, 497.

¹² Ibid.

¹³ Mitchell v. Egyptian Hotels ¹⁹¹⁵ AC 1022 (HL), 1039.

¹⁴ Swedish Central, 497.

¹⁵ Ibid.

¹⁶ De Beers Consolidated Mines v Unit Construction Co Ltd (1906) 5 TC 198 (HL).

¹⁷ American Thread Co v Joyce 1913 6 TC 163 (HL).

¹⁸ Mitchell v Egyptian Hotels Ltd (1915) AC 1022 (HL).

¹⁹Ibid, 1037.

²⁰ Egyptian Delta Land and Investment Co Ltd v Todd 1928 14 TC 119 (HL).

²¹ Ibid, 126.

²² De Beers Consolidated Mines Ltd v Howe (Surveyor of Taxes) ¹⁹⁰⁶ A.C. 455 (HL), 468, (Lord Loreburn), cited by Viscount Cave in Swedish Central, 501.

²³ Swedish Central, 503 (Lord Atkinson).

²⁴ Although not expressly mentioned, the well-known Salomon v Salomon Brothers ¹⁸⁹⁷ AC 22 (HL) principle is clearly echoed here.

²⁵ Swedish Central, 503 (Lord Atkinson).

²⁶ Union Corp v Inland Revenue Commissioners ¹⁹⁵² 1 All E.R. 646 (CA); affirmed ¹⁹⁵³ A.C. 482 (HL).

²⁷ Ibid, 488, discussing Finance Act 1947 s. 39(1).

²⁸ Unit Construction Co Ltd v Bullock (Inspector of Taxes), ¹⁹⁶⁰ A.C. 351; ¹⁹⁵⁹ 3 W.L.R. 1022 (HL).

²⁹ Ibid,

³⁰ John Jones, ‘The definition of company residence in early UK tax treaties’ (2008) 5 B.T.R. 556, 570.

³¹ Richard J. Vann and J.D.B. Oliver, ‘The new Australia-UK tax treaty’ (2004) 3 B.T.R., 194, 198.

³² Latchin (t/a Dinkha Latchin Associates) v General Mediterranean Holdings SA ²⁰⁰² C.L.C. 330, QBD (Comm).

³³ John Jones, ‘The United Kingdom’s influence on the OECD Model Tax Convention’ (2011) 6 B.T.R. 653, 560.

³⁴ See Mary Bennett, ‘The OECD Model Tax Convention’ (2009) ^Online Available: here ^{30 September 2015}.