What are the tests for residence of the main business structures (including transparent entities)?
Tax (2nd Edition)
In order to prove where a corporate group is residing, the main thing to take into account is where the core of the activity takes place, hence, where the business centre is.
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 became 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.
The main categories of business structures in Australia are:
- Sole traders (i.e. individuals);
- Partnerships; and
An individual is resident in Australia if he or she resides in Australia. An individual can also become resident if he or she is domiciled in Australia (unless their permanent place of abode is outside Australia) or has been in Australia for at least 183 days (continuously or otherwise) in the relevant income year (unless the Commissioner is satisfied that their permanent place of abode is outside Australia and the individual does not intend to take up residence in Australia). Members of certain superannuation funds (and certain members of their family) may also be taken to be Australian tax residents.
A company will be resident in Australia if it is incorporated in Australia, or if it is not incorporated in Australia, then it carries on business in Australia and either has its central management and control in Australia, or its voting power controlled by shareholders that are residents of Australia.
Partnerships and trusts
Partnerships and trusts are tax transparent entities (although there are exceptions). However, these entities may still be characterised as “resident” for specific purposes.
For example, for the purposes of Division 6 of the Income Tax Assessment Act 1936 (Cth) (ITAA36) (the general trust income provisions), a trust will generally be referred to as a “resident trust” for an income year if it had an Australian resident trustee or its central management and control in Australia at any time during the income year.
In contrast, for the purposes of Division 6C of the ITAA36 (the public trading trust provisions), a unit trust will be a resident of Australia if it has:
- property situated in Australia or the trustee carries on business in Australia; and
- the central management and control of the unit trust was in Australia or the majority of the beneficial interests in the income or property of the unit trust are held by Australian residents.
A partnership is not required to pay income tax, but is nevertheless required to file a partnership tax return which is broadly prepared as if the partnership were a resident taxpayer.
A corporate limited partnership, which is taxed as a company, is resident in Australia if it is formed in Australia or carries on business and has its central management and control in Australia.
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.
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.
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.
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.
Under the Bulgarian Corporate Income Tax Act, the following are considered local legal entities:
- legal entities established under Bulgarian law;
- companies established under Regulation (ЕC) No. 2157/2001 of the Council; and
- co-operative societies established under Regulation (ЕC) No. 1435/2003 of the Council, which have their registered office within the country and are entered in a Bulgarian register.
Under the definitions of the double taxation treaties, the tests for determining the residence of incorporated businesses could be the place of effective management or the place of incorporation.
Generally, the test for residency is simply incorporation or formation of the entity in the United States. A corporation formed under U.S. state law is a U.S. resident (domestic) corporation even if it does not carry on a business or own any property in the United States. With respect to a fiscally transparent (hybrid) entity, an analysis of the residency of the owners of such an entity must be undertaken for U.S. tax purposes. The IRS will provide a U.S. residency certification (Form 6166) for an entity upon request that certifies the entity is a resident of the United States for U.S. federal income tax purposes. Such certifications are typically required by treaty partners in order for the entity to claim income tax treaty benefits or certain other tax benefits. In the case of a fiscally transparent entity, a U.S. residency certification, will only be provided if the entity can demonstrate that its partners/members/owners/beneficiaries, as the case may be, filed income tax returns as residents of the United States. Foreign entities that receive payments from U.S. sources provide IRS Form W-8 to withholding agents / payors to certify foreign status for U.S. federal income tax purposes in order to claim reduced rate of or exemption from 30% withholding on such payments.
Resident taxpayers in Ukraine are legal entities registered in Ukraine, which carry out business activities both on the territory of Ukraine and abroad.
The definition of “tax residence” in Ukrainian legislative means mostly a "tax registration", and it is not connected with the placement of a taxpayer`s administrative office, or for example, its fixed place of business, etc. Thus, there are no special governmental tax residency rules in Ukrainian registration.
Also there is no transparent entity as a legal business structure in Ukraine. The most prevalent business structures are limited liability companies and joint-stock companies.
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 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.
A foreign entity is assumed to have a trade or business in Ecuador for tax purposes if it:
a) Maintains places or fixed centers of economic activity.
b) Has an office to engage in consultancy or services.
c) has a person or entity acting on its behalf and regularly holds or exercises in the country
some activity of economic nature.
The following activities do not create a permanent establishment in Ecuador:
(i) The use of facilities to display goods or merchandise;
(ii) The maintenance of a place for the sole purpose of collecting and supplying information; and,
(iii) Engaging in activities through broker, agent, representative, distributor or any independent intermediary.
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.
There is no outright test for residence of business structures in Gibraltar. This is always a matter of fact and degree. In general terms, the residence of a company in Gibraltar is determined by establishing the place of its ‘management and control’. This is usually where ‘mind and management’ of the company occurs- typically where board meetings are held, where a majority of directors are resident etc.
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.
Swiss law contains two alternative tests to determine the residence of an entity, which 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 Swiss residents as well.
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 legal entity is a tax resident if its legal seat or place of effective management is in Portugal.
An individual is resident in Kenya if: (a) he has a permanent home in Kenya and is present in Kenya for any time during the year; (b) he has no permanent home in Kenya but is present in Kenya for at least 183 days in the tax year; or (c) he has no permanent home in Kenya but has been in Kenya for an average of 122 days in the tax year and the previous two years of income.
A body of persons is resident in Kenya if:
(i) it is incorporated under the laws of Kenya;
(ii) the management and control of the affairs of the body was exercised in Kenya in a particular year of income; or
(iii) the body has been declared by the Minister, by notice in the Gazette, to be resident in Kenya for any year of income.
The factors determining the tax residency of a corporate entity is the location of its registered office, or the place of management in Poland. Fulfilling either one of these two conditions results in the entity being treated as a Polish tax resident. If two or more countries treat this entity as its tax resident and a so-called conflict of residences occurs, according to OECD guidance (followed by the majority of double tax treaties) the tax residency is determined under the effective management test, i.e. with reference to the place where the management board or equivalent meets and takes key decisions (therefore not where the day-to-day management activities are conducted).
Transparent entities, i.e. partnerships (excluding limited join-stock partnerships) are not subject to CIT, therefore the matter of residency does not apply to them. Income earned by partnerships is allocated to the partners and subject to taxation at their level.
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. 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 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 be technically a corporation, such as U.S. limited liability company, German GmbH and Dutch BV, are also treated as a foreign corporation 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.
An entity incorporated under Dutch law is in principle considered a resident of the Netherlands for Dutch tax purposes. In the event based on factual circumstances a Dutch company is deemed to be a resident of another country with which the Netherlands has concluded a tax treaty, the profits of the company may become taxable only abroad.
For holding and financing companies, additional so-called substance requirements are applicable e.g. (i) at least half of the managing directors reside in the Netherlands (ii) the managing directors resident in the Netherlands have the professional knowledge required to properly perform their duties, (iii) all management board meetings are held in the Netherlands, (iv) the main bank account is maintained in the Netherlands and (v) the books and accounts are kept in the Netherlands.
If an entity is transparent from a Dutch tax point of view, such as a "closed" limited partnership where the limited partners cannot transfer their partnership interest without the approval of all other partners, the limited partnership will not be subject to tax in the Netherlands. In the event the general partner is a resident of the Netherlands, it may be taxable over the proceeds derived from its interest in the limited partnership and under certain circumstances the profits attributable to the limited partners may be taxable in the Netherlands as well even if they are not residents of the Netherlands.
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, distributions of profits or 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 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 locates 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.
Residence is not defined in the Norwegian Tax Act. Limited companies incorporated in Norway and foreign companies with their effective management and control in Norway are treated as resident. A company incorporated according to Norwegian law with its effective management and control outside of Norway, and with no/few other functions performed in Norway, may be considered to be non-resident. There are few examples of the latter situation in tax practice.
In a consultation paper of 16 March 2017, the Ministry of Finance has proposes amendments to the provisions of the Income Tax Act concerning where a company is tax resident.
Pursuant to the proposal, a company will be resident for tax purposes in Norway if it is incorporated in Norway or if the real management takes place in or from Norway.
If the company pursuant to a tax treaty with another country is a resident of that other country, it will not be deemed resident in Norway baes on the proposal. The new rule, which also includes tax residency based of place of incorporation, may be effective from next year.
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.
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.