29 NewsQuarterly 1 (2009-2010)

handle is hein.journals/newsqtrly29 and id is 1 raw text is: OPINION POINT

Management Based Definition
for Domestic Corporations
By Jonathan Schwarz*
T his article is to consider proposals to adopt a management based definition for
U.S. domestic corporations from a United Kingdom perspective and, in particu-
lar, to respond to the article by Sarah Giddings (Should a Mailbox Be Enough? A
Proposal to Redefine Domestic Corporation Status, NEWSQUARTERLY, Winter 2009,
at 7).
The expressions domestic corporation and foreign corporation as the basis for
determining whether an entity is liable to tax on worldwide or only U.S. sources, stand
in contrast to the traditional U.K. approach. Historically, worldwide taxation in the U.K.
has been by reference to residence. This term has largely remained undefined by
statute and accordingly, U.K. taxing jurisdiction has been based on the interpretation of
the word by the courts. The challenge in this respect was identified already in the 19th
century in Calcutta Jute Mills Co Ltd v Nicholson (1876) 1 TC 83 when Baron
Huddleston observed at 103:
Now the definition of the word residence is founded upon the habits and relations
of the natural man and is therefore inapplicable to the artificial and legal person
whom we call a corporation. But for the purpose of giving effect to the words of the
Legislature an artificial residence must be assigned to this artificial person, and one
formed on the analogy of natural persons.
The definitive formulation of this analogy was by Lord Loreburn in De Beers
Consolidated Mines v Howe (1906) 5 TC 198, at 213, at the beginning of the 20th
century as follows: A company resides, for the 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 (CMC) test has since been adopted not only in
the United Kingdom but throughout the Commonwealth as the criterion for corporate
residence. The place where central management and control is to be found is where
the directors of the company meet in order to transact their business. This test has not
been without its difficulties. Identification of such a place requires meaning to be given
to the notions of management and control and a determination as to who exercises
them. This was not straightforward even at the time of the De Beers case.
That case concerned a South African incorporated company, listed on the London
Stock Exchange, whose head office was in South Africa, where the shareholders
meetings were held. Profits were made out of diamonds mined in South Africa, and
* Barrister, Temple Tax Chambers, London, UK.

Opinion Points                  1
Management Based Definition for
Domestic Corporations
Saving Private Ryan's Tax Refund  17
What's Next in the Section 6501(e)
Overstated Basis Controversy?  19
From the Chair                 3
Stuart M. Lewis
Interview                      5
Irwin Treiger
Readers Respond                8
To the Editor
Focus on Pro Bono & Public Service
The Tax Literacy Project       9
Vijay Raghavan - 2009 Public
Service Fellow                11
News Briefs                   12
Tax Bites                     13
A Tax Lawyer's Interpretation
of Shakespeare
CLE Calendar                  14
Boxscore                      15

AiSection of the American Bar Association

continued on page 16

Section of Taxation
NEWSQUARTERLY

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