Introduction
Cesena Sulphur is one of the leading UK tax cases on the residence of Corporations for tax purposes, but behind the scenes is a rather more fascinating story of the struggle for Hungarian independence, and a brave and fearless mine manager who won over a group of murderous Italian Miners.
The Tax Case
Mr. Robert Larchin, Secretary to the Cesena Sulphur Company, Limited, appealed against an assessment of £5,834 under Schedule D. of the Income Tax Acts in respect of the profits of the said Company for the year 1874, and realised by the Company in their business of sulphur miners and manufacturers, at Cesena, in the Province of Forli, in the Kingdom of Italy.
It was contended, on the part of the Company, that the assessment should be restricted to that portion of the profits which is distributed amongst the shareholders of the United Kingdom.
THE Cesena Sulphur Co, LTD.
1, 2. The Cesena Sulphur Co, Ltd, hereinafter called the company, was formed to carry on the trade or business of sulphur miners, manufacturers, or merchants, at Cesena, in the province of Firli, in Italy. It was incorporated under the Companies Acts, 1862 and 1867, on October 27. 1871, with a capital of 350,000 pounds, divided into 35,000 shares of 10 pounds each, and was subsequently registered in Italy, for all purposes, in the following year, viz, on 1 November 1872.
3. By the articles of association (forming part of the Case) the company, so far as its affairs in the United Kingdom are concerned, is managed by a board of eight directors, holding their meetings at the registered office of the company in England. There is an Italian delegation, consisting of two or three members of the board, resident in Italy, by whom all the practical management of the company's properties and affairs is carried on. One of the Italian directors is managing director of the company, and resides at Cesena.
4. All the operations connected with the manufacture and sale of sulphur are wholly and exclusively carried on at Cesena, where the profits of the company (if any) are earned, but the Italian members of the board are in constant correspondence with their co-directors resident in France and England, who meet at the English registered office, No 84, King William Street, in the City of London.
5. Transcripts and copies of the company's books of accounts are sent to London, where the register of the shareholders, prescribed by the English law, is kept, but all the original books of accounts of the company, and all its moneys, are kept in Italy, the dividends required for the English shareholders being the only part of its profits which are sent to this country. The principal banking accounts of the company are kept at Turin and at Paris; the London banking accounts being kept for the payment of offices and administrative expenses and of dividends here.
6. The shares of the company are divided between the English and foreign shareholders in the proportion of 8,924 held in England to 26,076 held abroad.
7. The tax is leviable under Sched D of the Income Tax Acts, 1842 and 1853; under the former of those Acts (see s 1, Sched D) certain duties are granted to Her Majesty on the annual profits or gains arising or accruing to any person residing in Great Britain from any kind of property whatever, whether situate in Great Britain or elsewhere … and on the annual profits or gains arising or accruing to any person residing in Great Britain from any profession, trade, employment. or occupation, whether the same shall be respectively carried on in Great Britain or elsewhere.
8. By s 40 of the Act of 1842 it is enacted that all bodies politic, corporate, or collegiate, companies, fraternities, etc, whether corporate or not corporate, shall be chargeable with such and the like duties, as any person would, under and by virtue of the said Act, be chargeable with.
9. By the Act of 1853, the like duties as are referred to in para 7, are granted to Her Majesty on profits arising from property, profession, trade, and offices (inter alia) s 2.
The question for the opinion of the Court therefore is, whether the Company is liable to make a return in respect of all the annual profits wholly made by its business in Italy, and is chargeable to income tax thereon, or whether, as is contended on the part of the Company, the London directors are only to make a return and to pay income tax in respect of so much of the profits made abroad as is remitted to this country for distribution among the shareholders residing in the United Kingdom.
The Judgement of B Huddleston
“Sir Henry James said at this, "I am not going through the different clauses of the case but in substance, they amount to this; in this case of the Cesena Sulphur Company the trading is in Italy; the unrealised property is in Italy; everything is sold in Italy, the fixed property is in Italy; the case states that no goods are ever sent to England; the majority of the shareholders are either in Italy or France, and a small minority only, about one-third, are in England; the original books are kept in Italy, the managing director is in Italy; he is residing in Italy; he is at Cesena; and therefore (said Sir Henry James) you have almost everything in Italy - books, profits, manufactures - altogether." At first I began to think that it appeared that the centre of business was in Italy; but when we came to look at the articles and the memorandum of association, and when we find that the object of the memorandum of association is, no doubt, to purchase sulphur from a company or firm established at Cesena, but that they contemplate "taking concessions of any lands wherever sulphur is likely to be obtained," and that it is not confined to Italy, and when we find that the general powers of the Company are for "selling, leasing, letting, and disposing of any of the lands, mines, and property acquired by the Company," we see by the memorandum, at all events, that the operations of the Company are not to be confined to Italy; and when we take the articles of association, the very first article of association is that "the Company is formed for the purpose of developing and working the mines of sulphur at Cesena aforesaid, and carrying on the business mentioned or included in the memorandum of association;" that is, carrying on the business of a Sulphur Company wherever sulphur may be found. When we look to see what the power is which is to be exercised by the directors, by the office in London, we find what the "board" is; it is "a meeting of the directors duly called and constituted." what is the business? "The working of the Company's mines, the mode of the disposal thereof, and the general business of the Company shall be wholly under the order, direction, and management of the directors, subject only to such control of general meetings as is hereafter provided for." Then the directors have power to register the Company, which they exercised; they registered it in Italy; they have power to accept promissory notes, and so on. "The office shall be at such place in London as the board shall from time to time appoint." A London bank is to be their "first and present bankers." It is true that they had a banker at Turin and a banker at Paris. They may invest their money in a reserve fund. General meetings are to be held; and those meetings which are described as ordinary or extraordinary are to be held in London, some of them by some particular means, but all certainly in London. There is the power of adjourning from place to place, no doubt, given to them. But when we come to consider what the board may do, we find that they may do everything with reference to the Company, and that their minutes recorded in their books are to be evidence. Now it is quite true that it is not said anywhere that the directors must hold their board meetings in London; but is quite obvious from the facts which are found in the case, and from all the requirements of the articles of association, that the books must be kept at the office and the office, according to the articles of association, must be in London; and inferentially, you arrive at the conclusion from the facts stated, and from the case that the directors are to meet in London.
Without going through the other different clauses of the articles of association, it seems that almost every act of the Cesena Company connected with the administrative part of its business is to be done in London. No doubt the manufacturing part may be done and was done in Italy; so supposing that in another part of the world they found sulphur and carried on their business there, the manufacturing part of the business would be carried on there, no doubt; but the administrative part of the business would be carried on at the place from which all the orders came, from which all the directions flowed, and where the appointments were made, where the appointments of the officers were revoked, where the agents were nominated, where their powers were recalled, where the money was received (whatever may have been sent), where the dividends were payable, and where the dividends were declared. We find that all those Acts are performed in London. I cannot help thinking that the main place of business of the Company is in England, and that Cesena is merely an agency, as it were, of the principal house; that agency being confined to the manufacture and sale of sulphur, but under the direction of the principal house.”
Cesena Sulphur was held to be liable to UK tax on all its profits on the basis that management and control were exercised in the UK.
The historical background to Cesena Sulphur
The background to the rather dry proceedings of the Cesena Sulphur Case make it far more interesting read, involving as they do the heroic son of a sometime Hungarian Prime Minister, an attempted murder by rebellious miners and an going struggle to make the sulphur mines a successful going concern against a background of sabotage and industrial strife.
The Cesena Sulphur Company was incorporated on 28th October 1871 , with a capital of £350,000 divided into 35,000 £10 shares, with the scope of acquiring various sulphur mines in the area of Cesena, in Emilia Romagna in Italy. On 28th April 1872, the company acquired as a going concern, the mines at Boratella 1 ( in the Comune of Mercato Saraceno) and 18th Ju;ly 1872, it was allowed by a Royal Decree to start business in Italy.
Sulphur was greatly in demand at the time for gunpowder, bleaching, the manufacture of sulphuric acid and in medicines.
Between 1874 and 1880, there was boom in sulphur production and Boratella 1 produced an average of 10,000 tons of raw sulphur a year; however from 1880 onwards , the sulphur industry went into a period of crisis, caused by a fall in price of about 45% and increasing competition from Sicilian sulphur. Cesena sulphur tried to keep prices up, by restricting supply but was increasingly forced to borrow fro, the Geisser Bank in Turin at sky high rates of interest. By 1887, the inevitable could not be postponed and Cesena Sulphur filed for bankruptcy in the Court at Forli.
Behind the operations of the Cesena Sulphur Company at Boratella was a very remarkable man indeed. The Managing Director in Italy referred to in the tax case was Francesco (Ferenc) Kossuth. He was the son of Lajos Kossuth, the great Hungarian Patriot, a journalist and member of the Hungarian Diet who had long been an advocate of Hungarian national identity within the Austro-Hungarian Empire. Lajos Kossuth was arrested for High Treason in 1837and on his release from prison he married Teresa Meszleny. Ferenc was born in 1841. In 1848, following an uprising in France, revolutions spread all across Europe including Hungary and in 1848 Kossuth demanded parliamentary government for Hungary. In April 1849 he issued the Hungarian Declaration of Independence and was appointed Regent-President of Hungary. After the intervention of the Russians, the Hungarian Revolution was crushed and Ferenc headed across the Ottoman Frontier into exile. Eight year old Ferenc and his younger siblings were detained by the Hungarian authorities in the fortress of Pressburg (Bratislava) After widespread protests Ferenc and his siblings were released and put on a Danube steamer by the Hungarian Police to be sent to join their father in Asia Minor, they were later joined by their mother who had a price put on her head by the Hungarian authorities.
In 1851, the whole family were evacuated from Smyrna (Izmir) on the USS Mississippi, having been granted asylum in the USA. While Lajos toured the US and gradually fell out with the American Government, Ferenc quietly got on with his studies in London and Paris. Ferenc graduated in engineering and commenced his career a railway engineer in Devon. By this time, Lajos had fallen out with the Americans, contributed to the downfall of Lord Palmerston and ended up in Italy. The Kossuths were a close knit family and Ferenc followed his father to Italy, where he resumed his career as a railway engineer on the La Spezia- Genova- Nervi route.
After some time, Ferenc married an English heiress Emily Hoggins and moved to Cesena. He was ambitious and determined to make his own way in life, without using his father’s Italian political connections, and came to the notice of the English entrepreneurs who were trying to develop the Cesena Sulphur industry. In 1873, they asked Ferenc to become the Managing Director of Cesena Sulphur. Ferenc’s unusual background and his training in industrialised England, coupled with his strong personality allowed him to set about trying to make a success of the sulphur mines. It was literally a job made in hell. According to a contemporary description:
“The miners were stubborn and savage men who fought with both the mine-owners and local authorities. Although there were some 2,000 miners in the sulphur mines at Boratella, the Italian |Government was unable to maintain a barracks for the Carabinieri, because the miners had threatened to kill them. Many times a whole battalion of Carabinieri had to be sent into Boratella to confront the restless miners. When Kossuth first went to visit the mine, the miners decided to eliminate him
Ferenc had to go on an inspection of the mine, which involved descending an 80 metre shaft in a cage with the Chief Engineer. When the two men arrived at the bottom, they found that two out of three of the cables supporting the cage had been cut. With no choice, they went back to the surface supported by one cable only and mercifully survived. Back on the surface, Kossuth confronted the miner’s ringleader, out his arm on his shoulder and said ‘You wanted to cut the cable, you wanted to kill me. From now on, when I go into the mine, it will always be with a miner- but you will not know in advance which one.’
Kossuth started to win over the hard-bitten miners but his problems were by no means over. He continued to have persistent problems with Natale Dellamore , a local landowner who controlled the horse railway which was the only means of exit for the mine and who demanded extortionate tolls. That dispute rumbled through the Court in Forli for years.
Having one the respect of the miners, they continued to be personally loyally to Ferenc. On one occasion they stayed below ground in considerable peril to fight a fire which was at risk of destroying a large part of the mine. Notwithstanding, their personal respect for Kossuth, the miners continued to behave in murderous fashion towards their supervisors. After the murder of another supervisor, when the Carabinieri were unable to catch the killer, Ferenc followed him into the mountains, fought with him hand-to -hand and delivered him to the chief of the Carabinieri.
However, even Kossuth could not win his last struggle to sustain the profitability of the mine and on 27th May 1887, after a turbulent 14 years he was forced to take to books to the Court in Forli and declare the mine was bankrupt. Soon after, his beloved Emily became very ill and they moved way for health reasons, but she died in October 1887. Ferenc continued to work in Italy as the managing director of a company which constructed iron and steel bridges in Naples. In 1894 his father died and Ferenc returned to Hungary where he became Head of the Independence Party and later Minister of Foreign Trade. Ferenc Lajos Kossuth died on 25th May 1914, a few months before the war which finally led to an independent Hungary
The story of Ferenc Kossuth is largely adapted from material on the excellent Italian website
http://www.miniereromagna.it/pag_kossut3a.html
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