In Haworth v HMRC [2025] EWCA Civ 822 (Haworth)[1] the UK Court of Appeal (CoA) provided much needed clarity regarding the approach to determining the ‘place of effective management’ (POEM) in the context of the UK’s double tax treaties (DTTs). The leading judgment of Newey LJ also provides helpful guidance on the approach to interpreting the UK’s DTTs and role of context in this endeavour.
The scheme
Haworth involved a tax-mitigation scheme devised to avoid UK capital gains tax (CGT) arising in a trust by relying on the Mauritius-UK DTT, which would apply where (a) the relevant disposals were carried out when the trustees of the trust were Mauritian (replacing the former Jersey trustees) and (b) UK trustees were subsequently appointed within the same UK tax year.
The consequences of the various trustee appointments were said, by the taxpayer, to be:
- by having both Mauritian and UK trustees in the same tax year, the provisions of the Mauritius-UK DTT were activated. This was because the trust (absent the application of the provisions of the Mauritius-UK DTT) would be considered both a Mauritian and a UK tax resident in the relevant tax year;
- applying the Mauritius-UK DTT, the trust would be treated as resident in Mauritius based on its POEM being located in Mauritius. This was as a result of the activities of the Mauritian trustees and the application of the tie-breaker provision in article 4(3) of the Mauritius-UK DTT; and
- applying article 13(4) of the Mauritius-UK DTT, Mauritius should therefore have exclusive taxing rights over any putative capital gains (whether or not such right to tax was exercised).
In the CoA, it was accepted that, absent the treaty, the trust was resident in both Mauritius and the UK such that the tie-breaker (article 3(4)) was engaged. The crucial question was therefore: whether the POEM of the trust was in Mauritius at the relevant time?
Interpreting ‘POEM’ in UK DTTs
The taxpayer argued for an approach which starts from the basis that the POEM will be presumptively located where the constitutional organs (in this case, trustees) are located unless the functions of these organs are usurped by or abdicated to other persons located elsewhere. This approach is similar to that applied to identifying the location of ‘central management and control’ (CMC), which is a UK domestic law concept used when determining residency of a company for UK tax purposes.
In rejecting this approach, the CoA departed from the earlier decision of Wood v Holden [2005] EWHC 547 (Ch), finding that the test for POEM can be approached ‘somewhat more broadly’ than that of CMC (at [63]). The relevant question was determining where the ‘effective’ or ‘realistic, positive’ management of the trust was carried out (and there was no presumptive location of such activity based on the organs of the trust) (at [65]).
After citing the Vienna Convention on the Law of Treaties (May 1969), Newey LJ set out the relevant context in the form of the various Organization for Economic Cooperation and Development (OECD) commentaries relevant to the Mauritius-UK DTT (at [42] – [48]), noting that it is clear from this context that POEM was intended to serve as a tie-breaker (at [52]). Crucially, this meant that while CMC can potentially exist in more than one location (at [31][2]), as it is a tie-breaker, there can be only one POEM (at [57]).
In determining whether the ‘effective’ or ‘realistic, positive’ management of the trust was exercised in Mauritius or elsewhere, it was relevant that the settlors of the trust had adopted an 'overall single plan' and that the Mauritian trustees were appointed in the 'confident expectation' that they would implement the plan (by retiring to make way for the UK-based trustees). On this basis, the CoA upheld the conclusion of the First Tier Tribunal and Upper Tribunal that POEM was not located in Mauritius.
Final Thoughts
International double tax treaties, much like creative works, often rely on our capacity to distil concepts into reality. However, unlike the creative arts, tax lawyers are fortunate to have the benefit of courts and tribunals to aid in our quest for meaning.
In Haworth, the CoA provides certainty that, in a UK context, there can be only one POEM (unlike CMC, which may be found to exist in more than one location). The decision of the CoA makes it clear, not least in this regard, that the test of identifying POEM in a DTT is different to locating a company’s CMC. The application of the two tests will not always point to the same location.
Particularly, when there has been an ‘overall single plan’ such that there can be a ‘confident expectation’ of a certain series of events unfolding, the ‘effective’ or ‘positive’ management is likely to be where such a plan has been devised and put into motion (in this case, the UK).
[1] References in square brackets are to paragraphs of the CoA judgment.
[2] See also Swedish Central Railway Co, Ltd v Thompson [1925] AC 495, at 501.
