What are the tests for residence of the main business structures (including transparent entities)?
Tax (3rd edition)
Swiss law contains two alternative tests to determine the place of residence of an entity; these are the statutory seat and the effective place of management. The effective place of management is the place where the entity has its effective and economic centre of existence.
A transparent entity is considered a Swiss resident only to the extent that its members are also Swiss residents.
With a limited exception for so-called “inversion” transactions, corporations and other business entities are considered to be residents of the country under whose laws they are created or organized. Place of management and control is not relevant. Foreign corporations engaged in the conduct of business within the United States are subject to US tax, however, on their profits effectively connected with that US trade or business.
Transparent entities, such as partnerships and limited liability companies, are also considered US tax residents if they are created or organized under US laws. Such US resident transparent entities generally have US tax return filing obligations, even if they are not themselves subject US federal income tax.
Corporations that are incorporated under Canadian law are deemed by statute to be residents of Canada. In addition, under common law rules, a corporation that is not incorporated under Canadian law is resident in Canada if its central management and control is in Canada. This is generally considered to occur where the corporation’s board of directors exercises its responsibilities. However, where a shareholder effectively exercises control rather than the Board, the corporation will be considered to be resident where the shareholder resides. A similar central management and control test applies to trusts and their trustees.
A corporation is treated resident under Austrian domestic tax law, if it has its statutory seat or place of effective management in Austria. To determine the place of effective management the place is decisive, where the important decisions for the management of the company are taken and prepared. The vast majority of double taxation conventions concluded by Austria determines residence using the effective place of management as a tie-breaker; Austria has not followed Art 4 of the MLI with its new rules for dual resident companies.
Transparent entities (partnerships) are not regarded as taxpayers in Austria. Therefore the income is allocated proportionately to the direct or indirect partners being individuals or corporations.
French corporate income tax is not based on fiscal residence or registration but on the principle of territoriality: only profits derived from activities carried out in France are taxable in France.
As a consequence, an entity, be it French or not, is to be considered to be carrying out activity in France if:
- it has an establishment in France: the notion of establishment provided for in the French tax code (FTC) is close to that of permanent establishment provided for in international tax treaties;
- it has in France a representative with a dependent professional status. This notion is also close to that of dependent agent provided for in international tax treaties; or
- it performs in France a complete cycle commercial complet (' cycle of business ') separate from the company’s other domestic business.
As the case may be, these criteria could be superseded by the stipulations of a tax treaty dealing with the existence of a Permanent Establishment ('PE').
The French Parliament passed a bill authorizing ratification of the OECD's multilateral instrument (MLI) on 5 July 2018. The MLI allows jurisdictions to transpose into their existing bilateral income tax treaties, measures to prevent base erosion and profit shifting. The MLI should enter into force in France on 1 November 2018 and to be effective beginning 2019. In terms of PE, the MLI has (i) modified the ‘threshold test’ for activities carried out by an enterprise in another territory that would treat it as having a taxable presence and (ii) dealt with agents acting on behalf of foreign enterprises -the so-called 'Dependant Agent Permanent Establishment'. Under the MLI, an independent agent can still be a PE if it is acting exclusively or almost exclusively for ‘closely related’ foreign resident enterprises. The MLI also introduces an additional anti-fragmentation condition to the preparatory or auxiliary activities exemption potentially applicable where an enterprise or closely related enterprise also carries on activity through another fixed place of business in the same territory. These modifications are likely to be automatically applicable in the Tax Treaties signed by France with States which will have opted for similar provisions.
Foreign companies may also be taxable in France, even if they do not perform any activity there, because they have an interest in a French pass-through partnership performing an activity in France.
Individuals will be tax resident in Cyprus if they are physically present in Cyprus for 183 days or more in the tax year, or if during the tax year concerned they maintain a permanent residence in Cyprus, undertake any business or employment in Cyprus which continues until the end of the tax year and are present in Cyprus for at least 60 days. All three conditions must be satisfied and the individual concerned must not be a tax resident of any other country (for example by reason of a physical presence there for 183 days) for the tax year in question.
For companies, residence is based on the locus of management and control. Mere registration in Cyprus is not sufficient to establish residence: the principal decisions affecting the company must be made in Cyprus. The Tax Department’s application form for the issue of a certificate of tax residency gives an indication of the criteria that the Tax Department considers, including where directors’ and shareholders’ meetings are held, where the directors are resident, and where minutes and statutory and other records are kept.
As a general rule, a company is considered resident in Brazil when it is incorporated in the Brazilian territory.
Under German domestic law the tax residence of a corporation is determined on the basis of where its effective place of management is located. To determine the effective place of management the decisions for the operation of the day-to-day business with some importance are decisive. Also, the vast majority of the double taxation agreements concluded by Germany determine residence using the effective place of management. In addition, the corporation’s statutory seat is used for the determination of the tax residence.
In case of tax transparent entities, the place of effective management and the place where the business is operated apply as criteria for the determination of the tax residency for trade tax purposes should the entity be subject to trade tax. For income tax purposes of the partners their place of residence or the habitual abode is decisive in case the partner is an individual. In case the partner is a corporation, the effective place of management and the statutory seat are decisive.
Companies incorporated in Ireland are considered tax resident in Ireland unless they are resident in another jurisdiction in accordance with the terms of the relevant double taxation agreement (“DTA”). Companies incorporated outside Ireland may be Irish resident where they are centrally managed and controlled in Ireland (subject to application of a DTA).
Companies incorporated in Ireland before 1 January 2015 may also be resident outside Ireland until 31 December 2020 where they are managed and controlled, and tax resident, in another jurisdiction. Such companies may become Irish tax resident before 31 December 2020 where there is a change of control and a change in the nature of their business.
Individuals are resident in Ireland where they are present in Ireland for 183 days in any calendar year or for 280 days over two calendar years (and at least 30 days in each year).
Partnerships are transparent for Irish tax purposes so one must consider the tax residence of the individual partners.
Under Israeli domestic law, entities are generally deemed residents of Israel for tax purposes if they are either (i) incorporated in Israel, or (ii) managed and controlled from within Israel (disregarding the place of incorporation). The management and control test is a facts and circumstances test, determined based on the location whereby strategic decisions pertaining to the entity are made.
The ITA’s interpretation of management and control is relatively broad and is not limited, for example, to the location of board meetings. A more substantive examination is conducted which considers the locations where the need for decisions arose, the decisions were deliberated, alternatives were considered, preparatory work for the implementation of such decisions was performed, consultations with professionals were made, and the location where the decision was finally shaped and crystallised. The place where the board of directors holds its meeting is an important factor, although not determinative.
The main test would be the “management and control test”.
Under Section 8 of the ITA, a company or a body of persons carrying on a business or businesses is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its business or of any one of its businesses, as the case may be, are exercised in Malaysia; and any other company or body of persons is resident in Malaysia for the basis year for a year of assessment if at any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority.
Pursuant to article 9 of the Federal Fiscal Code, a legal entity will be deemed to be a resident in Mexico for tax purposes if its main business administration is established in Mexico or its place of effective management is established in Mexico. Further, article 6 of the Regulations to the Federal Fiscal Code provides that a legal entity will be considered to have established its main business administration or place of effective management in Mexico, when the place in which the person or persons that take or execute the control, direction, operation or management decisions of the entity in question and the activities it engages in are located in Mexico.
Under most of Mexico’s double taxation treaties, the residence tie breaker rule for persons other than individuals that are residents of two States will be determined by the place in which they have established their place of effective management.
It is important to mention that Mexico treats foreign entities or vehicles as tax transparent if (i) they are not considered to be a taxpayer in the country in which they are incorporated or have their headquarters or place of effective management; and (ii) their income is attributable to its members, partners, shareholders or beneficiaries.
For Mexican investment structures held by U.S. partnerships, for instance, Mexico and the U.S. have signed a Mutual Agreement Procedure that generally specifies the cases where fiscally transparent entities are entitled to treaty benefits and clarifies the procedure for claiming benefits from Mexico. In general, a fiscally transparent entity organized in the U.S., such as a U.S. limited liability company that has elected to be treated as a partnership for federal tax purposes, will be treated as a U.S. resident and entitled to claim treaty benefits, to the extent that the income it derives is subject to tax as the income of a U.S. resident in the hands of its members, owners, partners or beneficiaries.
Limited liability companies and partnerships incorporated under Norwegian law and registered in the Norwegian Register of Business Enterprises, and foreign companies whose effective management and control at board level are carried out in Norway, are considered tax resident in Norway.
In order for foreign incorporated companies to avoid tax residency in Norway, the board meetings and other decisions beyond the day-to-day management of the company must take place outside Norway.
Norwegian domestic tax legislation does not define a permanent establishment (PE), and as a general rule a foreign incorporated company conducting or participating in business in Norway will be considered having a taxable presence in Norway.
Most Norwegian bilateral tax treaties are based on the OECD Model Convention and generally companies that are conducting, participating and carrying out business in Norway from a fixed place in Norway, will be considered having a PE in Norway.
The Ministry of Finance issued a consultation paper on 16 March 2017, where it proposed certain amendments to the requirements for tax residency in Norway. According to the proposal, companies incorporated in Norway shall always be considered tax resident in Norway even though the company no longer has a connection to Norway. The only exemption will be in situations where it follows from a tax treaty with a another country that the company is tax resident in that other country and not Norway. For companies incorporated in foreign countries, the place of effective management will be decisive. In this assessment not only the management on board level will be relevant, but also day-to-day management, where the board members normally work and stay, and where the company's offices are placed and business carried out. The Ministry of Finance has not yet presented a proposal to the Parliament.
A company is resident if it is incorporated under Panamanian law or if its central management and control is exercised in Panama.
The following factors are necessary for the determination whether a legal entity is a resident in Panama: (1) meetings of the members of the board of directors, in which decisions that affect the directions, management and administration of the company are take and carry out in Panama, there should be a proof of evidence that the directors were in Panama at that moment of the meeting; (2) business activities, commercial or support activities to other companies are carried out from Panama, regardless of the source of income. In order to provide evidence to the tax authority that the company is carrying out activities within and from Panama, it must be necessary to present the following information:
a. That the company has an office or a place where the activities are perform (own or by a lease agreement)
b. That the company have employees registered in the Panama Social Security, or people in Panama that perform the company’s operation in the country.
c. Evidence that in and from Panama some activities are perform even though this activities generates its effects abroad.
Companies with no operation within Panama and with no substance will not be allow to obtain the tax residency.
For tax purposes, an entity is considered a resident if it is incorporated in the Philippines, or if incorporated abroad, it is licensed to transact business in the Philippines (making it a resident foreign corporation).
An entity is deemed to be tax resident in Portugal whenever its head office or place of effective management is located in Portuguese territory.
To establish that, notwithstanding the registered head office abroad, the place of effective management is in Portugal may not be an easy task for the tax authorities.
Persons other than individuals are considered resident of Italy for income tax purposes if (at least) one of the following criteria is located in Italy, for the for the major part of the tax year:
a. legal seat (sede legale). It consists of the location where, according to the deed of incorporation of the company, its registered office is located,
b. main object (oggetto principale). It is located where the company undertakes its overall activity including the day-to-day operations (not only the highest management functions under the seat of management criterion). The assessment of the location of the main object is a question of fact;
c. place of management (sede dell’amministrazione). This criterion is generally understood as the place where the management and control functions of the company are actually localized and the managerial decisions concerning the company or the entity are taken (the criterion is broadly similar to the OECD notion of place of effective management). The assessment of the location of the seat of administration is a question of fact.
Italian legislation does not envisage a part-year residence rule. Consequently, it is sufficient to meet one of the criteria above for the major part of the year to be considered tax resident for the whole tax year. On the other hand, if none of the three criteria is met for the major part of the year, the company is considered non-tax resident for the whole tax year.
A statutory domicile or place of management of a company (such as a capital company, cooperative, public economic enterprise, commercial enterprise, etc.) which is established in Turkey is considered to be resident in Turkey. Therefore, a registered head office which is established according to law is important for determining residency in Turkey.
Non-resident companies are subject to limited tax liability and are only liable to pay tax on their income derived in Turkey.
In Turkey, joint ventures, unlimited companies and ordinary limited partnerships are not considered to be taxable units under the Income Tax Law. Shares that shareholders of an unlimited company and unlimited partners in a limited partnership receive from the partnership are characterized as commercial earnings under Article 37 of the Income Tax Law. In the case of ordinary limited partnerships, the shares that limited partners receive from the partnership are earnings on movable assets. As per the contracts that we are party to, if these partnerships are subject to tax in the same manner as in other contracting states the profits derived by these partnerships fall within the scope of Double Taxation Treaty if these partnerships are residents of a contracting state.
Main business structures used in Japan are overwhelmingly a corporation. Whether a corporation is a Japanese or foreign resident is classified by whether the corporation is incorporated under Japanese corporate and other laws, rather than the principal place of management and control. For example, a kabushiki kaisha (KK) or a godo kaisha (GK) is classified as a Japanese corporation for Japanese tax purposes, even if the Japanese corporation has a principal place of management and control outside of Japan.
Similarly, a corporation incorporated under the laws of countries other than Japan is classified as a foreign corporation for Japanese tax purposes, even if the foreign corporation has a principal place of management and control within Japan. This typically means that it is a foreign corporation that has a permanent establishment in Japan. In other words, Japanese tax laws only look to the jurisdiction of incorporation of the corporation, and give no regard to the principal place of management and control. Foreign companies that may not technically be a corporation under local law, such as U.S. limited liability company, German GmbH and Dutch BV, are also treated as a foreign corporation in practice for Japanese tax purposes.
As for transparent entities, Japanese transparent vehicles include kumiai, a Japanese partnership, although it is not an entity but is an aggregate of partners. Given the transparency, technically there is no concept of residency of a kumiai itself, but it boils down to the residency of each partner of the kumiai. Foreign transparent entities (e.g., Cayman Islands or Bermuda limited partnerships) are likely to be treated in the same manner. It should be noted, however, that some seemingly transparent foreign partnerships, such as U.S. limited partnerships, are likely to be treated as a foreign corporation (but not as a transparent entity) for Japanese tax purposes. The Japanese tax classification of foreign transparent entities is still not crystal clear in practice, even after the recent Supreme Court decisions that effectively held that a Delaware limited partnership is a foreign corporation but a Bermuda limited partnership is not, and the position of the Japanese tax authority may differ depending upon the specific structure of the partnership and the context (i.e., tax-avoiding or not) in which such partnership is used.
Dutch tax law contains an incorporation fiction. Pursuant to this fiction a company incorporated under the laws of the Netherlands will in principle be considered to be a resident of the Netherlands for Dutch corporate income tax and dividend withholding tax purposes, unless another jurisdiction rightfully claims that the company is tax resident in that other jurisdiction under a tax treaty concluded with the Netherlands.
However, this Dutch incorporation fiction does not apply for all Dutch tax provisions. For example for the fiscal unity rules, this fiction does not apply. This means that if the place of effective management of the entity (that is part of the Dutch fiscal unity in place) would be outside of the Netherlands, the Dutch tax authorities could unilaterally take the view that the entity is not a resident of the Netherlands. This could lead to the consequence that the fiscal unity would be broken up.
Similarly, a company not incorporated under the laws of the Netherlands will be a tax resident in the Netherlands for Dutch tax purposes if its place of effective management is located in the Netherlands.
In the Netherlands a limited partnership, a CV, can either be transparent for Dutch tax purposes (i.e. so-called “closed CV”) or be subject to Dutch corporate income tax and dividend withholding tax to the extent of the interest of the limited partners (i.e. a so-called “open CV”).
In practice, CVs are generally established in such a manner that they qualify as transparent entities for Dutch tax purposes. In order to accomplish this Dutch tax transparency, it is essential that the admission or replacement of limited partners in the CV is subject to written consent of all partners of the CV.
Typically, Romania is following OECD guidelines in respect of tax residency tests. Basically, a legal entity is tax resident in Romania, if it is incorporated in Romania. Additionally, a foreign legal entity may become tax resident in Romania if it has the place of effective management in Romania. The residency concept related to place of effective management is becoming very important starting 2016 since a foreign legal entity having the place of effective management in Romania has also become subject to corporate income tax. There is no specific definition of residence in the context of transparent entities. Furthermore, the concept of transparent entities is not very well defined in terms of tax law and rarely arise in practice. In Romania, most often it arises in the context of SPARL - limited liability partnership, which are generally used by law firms. Apart from these, the transparency concept was recently elaborated in case of payments made by Romanian legal entities to foreign entities, which can be considered as transparent or not, under the law of that respective state.
In order to be considered ordinarily resident in Gibraltar a company must either be managed and controlled in Gibraltar, or where the management and control is exercised outside Gibraltar by persons who are ordinarily resident in Gibraltar.
In order for an individual to be considered ordinarily resident in Gibraltar (irrespective of whether such individual is domiciled in Gibraltar or not) for any year of assessment must be present in Gibraltar for a period of, or periods together amounting to at least 183 days, or must be present in Gibraltar in any year of assessment which is one of three consecutive years in which the total days on which the individual is present in Gibraltar exceeds 300 days.
There are two tests for determining whether a company is resident for tax purposes in the UK: (1) the incorporation test (the process is also referred to broadly as company registration), or (2) the central management and control test. A company will automatically be resident in the UK for tax purposes if it is incorporated in the UK, unless it has to be treated as resident in another country under the tie breaker provisions of a double tax treaty. For companies incorporated outside the UK, they will be deemed UK tax resident if they are centrally managed and controlled in the UK.
Regarding transparent entities, such as partnerships, one looks at the partner level. An individual’s residence status is determined by the application of a statutory residence test. UK resident partners are liable to UK tax on their share of the worldwide profits of the partnership. Non-UK-resident partners are only liable to tax on profits that arise in the UK and their share of partnership investment income, to the extent that it arises in the UK. Where a partnership is managed and controlled abroad, UK resident partners may be entitled to be taxed on the remittance basis for their share of the profits that arise overseas.