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Mattsohn & Mattsohn (M & M) is a major European supplier of cosmetics, health care products and toiletries under many well-known brands. It has parallel listings in Frankfurt and London. In 1975 it acquired a 50% stake in Empire Essences Ltd (EEL), a British company with extensive interests in essential oils throughout what had been the British Empire. EEL is perhaps the leading European supplier of essential oils (used for fragrances and flavourings) and was a key part of M & M's supply chain. M & M accounted for nearly 40% of EEL's turnover.

EEL had been a family company based in Tunbridge Wells since 1775, but in 1995 when the then Chairman approached retirement and there was no family member to succeed him, it was decided among the shareholders (M & M and 30 or more EEL family members) to seek external management, and to prepare the company for flotation. A firm of consultants was asked to recommend the best route.

Most of EEL's activities take place in ex-colonies, where oils are sourced either from proprietary farms or externally, refined, packed and shipped to the UK. In Europe, there is a certain amount of re-packing to break bulk and a small amount of mixing; but essentially it is just a warehouse and shipping operation. There are more than 2,000 customers, and more than 1,000 product lines; little sales and marketing takes place, because EEL has more or less a stranglehold on the market due to its control of oil sourcing. It is a highly profitable business.

EEL used to have a multinational force of 'order-takers' but in recent years most customers have installed inventory control software (developed for EEL by a European consultancy) which automatically generates orders monthly or in some cases weekly; these are faxed to the Tunbridge Wells offices and generate picking lists, despatch notes, invoices, etc. A further project, begun in 1997, is moving this ordering chain onto a corporate extranet using IP, implemented with a mixture of standard and bespoke e-commerce tools and packages. EEL's consultants put together a project team consisting of Internet host, e-commerce systems supplier, and telecommunications provider; the resulting integrated system was tested successfully with a group of M & M plants in 1998, and in 1999 was rolled out to cover the whole of EEL's client base. A very few clients are not yet equipped to join the new system, and for them the fax-based system is maintained; their orders are coded into the new system by EEL personnel.

The consultants saw immediately that with an Internet-based ordering and inventory control system in place, EEL did not need to be in the UK at all, and it was decided to set up a Jersey listed company (Channel Islands Stock Exchange) which would buy a 40% holding in EEL with the proceeds of an IPO. The Jersey branch of a major London issuing house easily placed the £40m issue. M & M tendered a 20% holding to the offer; the family also tendered 20% of its holdings (mostly from UK-resident members who were going to benefit less than those living in Jersey and other offshore jurisdictions); and in 1998 EEL became a public company in Jersey. M & M's remaining stake of 30% in the new company is owned through a Netherlands holding company, ensuring maximum tax efficiency for dividends received from EEL.

(NB The Finance Act 2000 abolished the use of overseas 'mixer' companies which were used to blend foreign income streams which had suffered taxation at rates above and below the UK mainstream corporation tax rate so that foreign tax paid in excess of 30% did not go unrelieved against UK tax. The result of the new rules was that mixing could be done onshore, with foreign income taxed at up to 45% being mixed with lower-taxed income - but the rule only applied to tax paid at one subsidiary level below the UK holding company.)

EEL now processes customers' orders in Jersey; EEL's systems control the warehousing and despatch operation in EU member states, and invoices are sent from Jersey, carrying VAT at local rates as they did before the move (EEL needed to re-register in those countries where it had significant business, but apart from that the VAT situation remained unchanged). The ordering information received in Jersey is fed into an inventory control package where it is combined with stock level data from the warehouses (received daily) and sourcing data (availability, cost and shipping time). This package generates least-cost ordering patterns from EEL's world-wide network, and sometimes from external sources if necessary. Needless to say, these re-stocking orders are sent out on the company's extranet. Supply lead-times are in fact quite short, since essential oils are very high-value but concentrated, and are invariably air-freighted.

In terms of Jersey taxation, EEL is an International Business Company*, paying a maximum rate of 2% tax on its net income, reducing to 0.5% on income over £10m. It is allowed to have an office in Jersey; but due to the high level of technical sophistication in its systems, the Jersey staff is considerably smaller than it used to be in Tunbridge Wells. Annual turnover is more than £30m.

EEL's dividends are paid without deduction of any withholding tax; however, the IBC is not entitled to use the Double Taxation Agreement between Jersey and the UK, meaning that UK shareholders in EEL will be taxed in the UK on their dividends. Jersey residents receive their dividends franked at 20% (the standard rate of income tax in Jersey); residents of other offshore jurisdictions will not normally have a tax liability in any event.

EEL's various shareholders are very pleased with the changes. The company itself has been transformed in ten years from a sleepy, if magnificent colonial relic into a highly efficient modern electronic corporation; and the new tax structure benefits everyone.

*NB In accordance with Jersey’s commitment to the ‘Rollback’ provisions of the EU Code of Conduct for Business Taxation, the International Business Company vehicle was abolished to new entrants with effect from 1st January, 2006. Benefits for existing beneficiaries of the International Business Company regime will be progressively extinguished by no later than the 31st December 2011.