Understanding and applying the ‘central management and control’ principle in authorised companies

As part of the 2019 reform of the Global Business sector with a view to eliminate ring fencing within our tax regime and to adhere to international standards, the Category 2 Global Business Licence (‘GBC2’) ceased to exist with effect from 1st July 2021. With the expiry of the grandfathering period, the new regulatory environment is now fully implemented.

Existing GBC2 have either lapsed or their holders have applied for a conversion to another form of entity, to a large extent for an authorised company.

The main features of authorised companies¹ are:

The majority of shares or voting rights are held, or controlled, by a person who is not a citizen of Mauritius;

The company proposes to conduct, or conducts, business principally outside Mauritius, or with such category of persons as may be specified in Financial Services Commission (FSC) Rules; and;

It has its central management and control’ outside Mauritius.

This concept of ‘central management and control’ has, since decades, raised substantial issues of interpretation and implementation for the purpose of tax residence determination.

As opposed to trusts and foundations where ‘central management and control’ has recently been defined by the authorities ², no such definition or guidance has been issued by the Mauritius Revenue Authority for companies.

The Genesis

The initial text for the reform of our Global Business sector did not provide, with regards to an authorised company, for the concept of ‘central management and control’ but rather for the ‘place of effective management’ ³ condition.

One year after its introduction, the Mauritian legislator chose to replace the ‘place of effective management’ by the concept of ‘central management and control’ not only for authorised companies ⁴ but also for the purpose of determination of residency in the Income Tax Act ⁵.

Why this change? When we consider the parliamentary debates, we note that the Leader of the Opposition, when intervening on the Finance (Miscellaneous Provisions) Bill 2019 ⁶, referred to the “complaints” made by the Global Business sector with the introduction in 2018 of the concept of ‘place of effective management’ to determine tax residency of companies. Those complaints related to the uncertainty that arose from the criteria of the place of effective management, thus the change to the ‘centrally managed’ criteria.

Though it is accepted that both terms are essentially similar, yet they serve different purposes. Whilst the place of effective management is a treaty term, a tie-breaker rule to resolve questions of dual residence by considering what happens in the two states (dual-country test), the central management and control is focused on the determination of corporate residency in a single country by only considering what happens in that state (one-country test) ⁷, thus the ‘uncertainty’ that could arise. In addition, the concept of place of effective management has not been subjected to much judicial scrutiny.

The concept

Central management and control as residency test was first authoritatively expressed in the landmark case of De Beers Consolidated Mines Ltd v Howe[1906] AC 455 as follows:

“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”

The determination of the central management and control is however not an easy task. It is essentially a question of facts rather than any requirement of the law or of the company’s regulations.

For Mauritian corporations, such central management and control ought to be with the Board of Directors. The Companies Act does provide that “The business and affairs of a company shall be managed by, or under the direction or supervision of, the Board”  ⁸. However, it also acknowledges that central management and control may be held by other persons through the commonly known concept of shadow directors. In that connection, a director is defined as including, inter alia:

‘(a) a person in accordance with whose directions or instructions a person referred to in subsection (1) [a director] may be required or is accustomed to act;

(b)  a person in accordance with whose directions or instructions the Board of the company may be required or is accustomed to act;

(c) a person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the Board; …’ ⁹

To determine the ‘true’ central management and control of a corporation, the following general guiding principles are relevant:

1. There is no set test to be applied;
2. It is essentially a question of facts;
3. It relates to the highest level of control of the business of the corporation; and
4. It may be exercised by any person such as a parent company, an individual shareholder or an ultimate beneficial owner.

The concept has, since the case of De Beers, been subject to judicial scrutiny and several pronouncements have given more insight to the concept. The following are particularly relevant to Global Business:

(a) For subsidiaries formed for a particular purpose, such as to make investments according to policies and instructions from a parent company, they will not relinquish management and control where they do not merely rubber stamp instructions but would make judgments on such instructions;

(b) Irrespective of the legal arrangements, where a parent company takes all major decisions and leaves only the day-to-day operations to the subsidiary, central management and control will lie with the parent company;

(c) Where there is a dominant/majority shareholder giving instructions, the Board of Directors/the Director may retain central management and control where they/it consider(s) same and make(s) a decision. For a decision to be effective, the matter must (i) be considered, (ii) with a minimum level of information and (iii) be adjudicated upon. It should be an informed decision; and;

(d) The demarcation line will be that it is effectively parent policy and influence as opposed to power to direct how to vote or act. For example, directors may do what they were told to do as long as they would exercise their discretion when it comes to decisions and would refuse to carry out improper or unwise transactions;

The same rationale may apply to ultimate beneficial owners or shareholders giving instructions in respect of  corporations registered in Mauritius under the numerous legal arrangements that may exist such as pursuant to consultancy agreements.

It is therefore important that the decision-making process be clearly defined, the right profile and competence be appointed at the office of Director and holding of Board Meetings be wisely carried out. These questions have become even more relevant with the advent of new technologies and forthcoming post Covid-19 new normal.

Disclaimer: The contents of this article do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.

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[1] Section 71A of the Financial Services Act 2007

[2] Statement of Practice SP 24/21 – Trusts & Foundations issued by the MRA 0n 24 August 2021

[3] Section 29 (q) of the Finance (Miscellaneous Provisions) Act 2018

[4] Section 21 (m) of the Finance (Miscellaneous Provisions) Act 2019

[5] Section 73A of the Income Tax Act 1995

[6]SIXTH NATIONAL ASSEMBLY, PARLIAMENTARY DEBATES (HANSARD) (UNREVISED), FIRST SESSION TUESDAY 16 JULY 2019 at page 168

[7] Trevor Smallwood Trust v HMRC [2008] UKSPC SPC00669

[8] Section 129(1) of the Companies Act 2001

[9] Section 128 (2) of the Companies Act 2001

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