What are the tests for residence of the main business structures (including transparent entities)?
Tax (4th edition)
Companies that are incorporated, domiciled, or have their place of effective management in Angola are deemed to be resident in Angola for tax purposes and are taxed on their worldwide income. The law deems the place of effective management to be the place in which the acts of the company's global management are executed.
For individuals there are residence tests that are more objective, whereas for legal entities such tests are less objective and guided by more encompassing principles and concepts (e.g., permanent establishment, substance over form, etc.).
The test for residence is by and large inspired by the common law rule pursuant to which a corporation will be resident where its central management and control is located; in practical terms, the board of directors. In addition, there is a deeming rule found in the Income Tax Act to the effect that a corporation that is incorporated in Canada is deemed to be a Canadian resident.
Trusts used to be resident for tax purposes wherever their trustees resided. It is now recognized that the Canada Revenue Agency can look beyond the trustee’s residence and apply to trust substantially the central management and control test applied to corporations. In that case, the Canada Revenue Agency will try to identify who is the real decision-maker and where does he or she reside.
An entity is deemed to be Colombian for tax purposes if: (a) it is incorporated in Colombia; (b) it is domiciled in Colombia; or if (c) its place of effective management is located in Colombia.
Double taxation treaties to which Colombia is bound have typically adopted OECD residence rules.
As a rule, entities that are deemed Colombian for tax purposes are subject to Income Tax on their worldwide income, while entities that are deemed foreign for Income Tax purposes are subject to Income Tax on their Colombian-source income.
Trusts are transparent for tax purposes and thus, only its beneficiaries are subject to Income Tax (should a given trust not have beneficiaries, the trustor shall be subject to taxation).
Colombia has adopted permanent establishment rules, which are based on OECD guidelines.
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 and should not be physically present in any other country for more than 183 days for the tax year in question.
For companies, residence is based on the locus of effective management and control. Mere registration in Cyprus is not sufficient to establish residence: the key decisions which are necessary for the conduct of the business of the company must be made in Cyprus. The Tax Department’s application form for the issue of a certificate of residency gives an indication of the criteria that the Tax Department considers, including the location where the directors’ and shareholders’ meetings are held, where the directors are resident, and where minutes and statutory and other records are kept.
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 treaties 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.
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.
Legal persons and entities are deemed to be resident in Greece if formed in accordance with Greek law or if their registered seat or place of effective management is in Greece. In determining the place of effective management, all facts and circumstances shall be examined, with material factors being the place of exercise of the day-to-day business and strategic decision-making, the place where the annual shareholders’ meetings and meetings of executive bodies are held, the place where books and records are kept and the directors’ place of residence. The state of residence of the majority shareholders may be taken into account along with the other factors. The rules on residence do not apply to certain companies operating under special shipping regimes.
An Indian company is treated as resident based on its incorporation in India whereas a foreign company is treated as resident where its ‘place of effective management’ (“POEM”), in the relevant FY, is in India.
A partnership firm, limited liability partnership and association of persons are treated as Indian resident where their control and management is situated in India (wholly or partly).
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.
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 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 that 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.
The main business structures used in Japan are corporate forms such as a Kabushiki Kaisha and Godo Kaisha. Transparent entities such as Kumiai (partnerships) are not common in business in Japan, although they are used for investment vehicles.
The residence of the main business structure is judged by the location of incorporation under Japanese corporate tax law. If a corporation is incorporated in Japan, it is regarded as having Japanese residence. 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.
According to Article 159 of the Luxembourg income tax law (“LITL”), an entity is treated as a resident of Luxembourg for direct tax purposes if it has (i) its registered office (siège statutaire) in Luxembourg, or (ii) its central administration (administration centrale, i.e. the place of effective management) located in Luxembourg.
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.
In terms of article 9 of the Income Tax Law, a legal entity could be deemed as a Mexican tax resident whenever they establish their main seat of business or effective management within national territory. In this regard, a legal entity could be considered as a Mexican tax resident when the parties entitled to decide its business strategies, policies, distribution of profits, dividends or other core subjects are located within Mexican territory.
On the other hand, individuals could be deemed as Mexican tax residents whenever: (a) they establish their dwelling home in Mexico; (b) they have their centre of vital interests therein (when more than 50 per cent of the total income received by such individuals is Mexican-sourced); (c) the centre of their professional activities is in Mexican territory; (d) Mexican nationals that are public servants (even if their centre of vital interests is located elsewhere).
Foreign legal entities could need a tax residency certificate or official documentation issued by competent authorities confirming that they filed their annual tax return in order to evidence their tax residence before Mexican tax authorities.
Furthermore, the tax residency of a given foreign resident could be determined in terms of the procedures or conditions set forth in the applicable double taxation agreement concluded by Mexico and the respective country or jurisdiction.
Generally, a legal entity must first be qualified as opaque (itself subject to taxation) or transparent (its partners subject to taxation) for Dutch tax purposes. A number questions/elements relating to the legal form (e.g. can the entity own property? Is the liability of the investors limited? Does it have a capital divided into shares) must be answered in order to determine the qualification.
If the qualification of the entity leads to the conclusion that it is a limited partnership-like legal form, it may or may not be subject to Dutch taxation, depending on the question whether the limited partnership is an open limited partnership (opaque) or a closed limited partnership (transparent). A limited partnership is a closed limited partnership if all partners (both the limited partners as well as the general partners) have to give prior permission for the accession or replacement of limited partners.
The tax residency of legal entities is determined by all relevant facts and circumstances. The most important factor in determining the tax residence of an entity is the place of effective management.
Entities incorporated pursuant to Dutch law are tax residents for Dutch corporate income tax and dividend withholding tax purposes by legal fiction.
Pursuant to section 9 of the Income Tax Law, an entity is deemed to be resident in Peru if it has been either incorporated or established in our country.
On the other hand, section 14 of the Income Tax Law sets forth a list of the vehicles which are deemed to be entities for tax purposes, and the criteria from the Tax Authorities is that any vehicle which is not specifically designated in that list is not deemed to be an entity for tax purposes. It is worth noting that there are no specific rules in our law on dealing with foreign vehicles regarded as transparent entities in their country of incorporation, for which it will be necessary to analyze, on a case by case basis, whether they are regarded as legal entities in their respective countries (in which case it will be treated as such in our country).
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).
There are two types of tax obligation in Poland: unlimited and limited.
Unlimited tax obligation is constituted when:
a. individuals (PIT taxpayers) with their place of residence in Poland are taxed on their worldwide income, regardless of where the income is earned.
b. entities (CIT taxpayers) with their head office or place of effective management is the territory of Poland are taxed on their worldwide income, regardless of where the income is earned. Thus, Polish subsidiaries of foreign companies are treated as residents of Poland for CIT purposes.
The test for residence for:
a. entities is the place of effective management. 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. Most double tax treaties concluded by Poland determines residence using the effective place of management as a tie-breaker rule.
b. individuals is the place of residence. An individual with a place of residence in the Republic of Poland is a person who:
- is physically present in the Republic of Poland for more than 183 days during a tax year, or
- has a centre of personal or economic interests in the Republic of Poland (centre of vital interests). The above rules are applied taking into account the provisions of relevant double tax treaties. Therefore, even if, in the light of Poland’s national legislation, a person passes the residence test for Poland, the appropriate criteria contained in a double tax treaty must be applied to determine what country is that person’s actual place of residence for tax purposes.
The limited tax obligation arises when individuals do not have a place of residence in Poland or entities do not have head office or place of effective management in Poland, and they are taxed solely on their income derived from Polish sources.
As for transparent entities – such as partnerships, they are not regarded as taxpayers in Poland. Therefore the income is allocated proportionately to the partners being individuals or corporations.
A legal entity is a tax resident if its legal seat or place of effective management is in Portugal.
The Income Tax Act, 1962 defines "resident" in the context of a person other than a natural person (for example companies and trusts) as any person which is incorporated, established or formed in South Africa or which has its place of effective management in South Africa. The definition expressly excludes any person deemed to be a resident of another country under an agreement for the avoidance of double taxation in place between South Africa and that country.
The term "place of effective management" is not defined in the Income Tax Act, 1962 and should be determined in terms of its ordinary meaning and the common-law principles of interpreting statutory provisions. Guidance from SARS and commentary published by the Organisation for Economic Co-operation and Development (the "OECD"), provide that the term "an effective place of business" is generally interpreted to mean the place where the day-to-day activities of the relevant business take place and where key managerial and commercial decisions, which are necessary for the conduct of the relevant business, are on an on-going basis and in substance taken.
Practically, a foreign company incorporated outside South Africa may be classified as being a South African tax resident if SARS is able to prove that the company concerned is effectively managed from South Africa. As a result, tax may arise in both the foreign country and South Africa if there is no double taxation agreement in place between the foreign country and South Africa to resolve the issue of residence.
A partnership is not a separate juristic person in South African tax law and is fiscally transparent from an income tax and capital gain tax perspective. This means that partnerships are not recognized as separate taxpayers but rather the individual partners are taxed separately based on their fractional interest in the partnership. The tax residency of the partners in the partnership should be established in order to determine whether tax will be payable in South Africa.
There are three tests for determining whether a company is resident for tax purposes in Spain:
- It has been constituted under Spanish law.
- The registered office is located in the Spanish territory.
- The effective management (direction and control of the activity) is located in the Spanish territory.
Under certain conditions, Spanish Tax Authorities can assume that an entity, located in a tax heaven or a country with no-taxation, is a tax resident in Spain. In order for this assumption to be applicable, the main assets and rights of the entity must be, directly or indirectly, located in Spain or its main activity is carried out in Spain.
Regarding transparent entities, such as partnerships, the taxation would depend on the partner’s residency. Spanish resident partners are liable to tax in Spain on their share of the worldwide profits of the partnership. Non-resident partners are only liable to tax on profits that arise in Spain.
Swiss law contains two alternative tests to determine if an entity has a place of residence in Switzerland; 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, the place where the company is effectively managed on a daily basis (day-to-day business).
Swiss partnerships without legal personality are not tax subjects. Taxation therefore takes place in the hands of the partners. In other words, since the partnership is considered transparent, fiscally speaking, the liability will depend on the position of the partners. A transparent entity is considered a Swiss resident only if its members are also Swiss residents.
With a limited exception for so-called “inversion” transactions, corporations and other business entities are considered to be resident for tax purposes in the country under whose laws they are created or organized. Place of management and control is not relevant for determining corporate residency. 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.
The test for residency is set out in section 4 of the Income Tax Act as follows:
“4. (1) An individual is, for the purposes of this Act, not treated as a resident in the Republic who is in the Republic for some temporary purpose only and not with any view or intent of establishing his residence therein, and who has not actually resided in the Republic at one time or several times for a period equal in the whole to one hundred and eighty-three days in any charge year, but if any such individual resides in the Republic for the aforesaid period he shall be treated as resident for that year.
(3) In this Act, a person other than an individual is resident in the Republic for any charge year
(a) if the person is incorporated or formed under the laws of the Republic; or
(b) central management and control of the person's business or affairs are exercised in the Republic for that year.”
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 must be treated as resident in another country under the tiebreaker provisions of a double tax treaty. Companies incorporated outside the UK 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.
According to Belgian tax law a corporation is resident of Belgium if it has its legal seat, main establishment or place of effective management in Belgium.
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.