There was one small omission from the August newsletter that I recently sent to you, being the fact that IFS has moved from 44 Southampton Buildings near Chancery Lane to new offices at 83 Baker Street, London, W1U 6AG. After a hectic few days of servers being re-located and internet access denied, we are now up and running in our first week and we are all delighted to be located in such a gastronomically delightful environment. Our telephone number and all other details remain unchanged.
As many readers are aware, IFS has been involved in many corporate re-domiciliations over the past few years, our practical experience supplementing the books and articles we have written about this topic. However, we are often asked what happens if the CEO of a company moves his personal residence, but continues to run his company from his new location. Would this create adverse tax consequences under the management and control concept, or indeed represent a transfer of corporate residence which could have tax consequences in respect of deemed capital gains arising on exiting a country? Or perhaps even create a constructive liquidation of the company in certain jurisdictions? Our article this month examines these issues, with particular practical recommendations to ensure that a company ensures it is tax resident in its preferred jurisdiction.
In fact, most of the article is lifted from the new book we have written entitled ‘Principles of International Tax Planning’, which will be published and available before the end of September. £95 a copy but free for IBSA members!
As usual, I am very involved with the development of the IBSA and have a particularly hectic three months’ schedule to look forward to! If you would like to attend any of the following events please visit our branch events or conference pages on the IBSA website at (click here).
3 September – Asian branch discussion group in Hong Kong – “Relevance of Hong Kong double tax treaties in international planning’ (too late I’m afraid! – but the slides and audio will be available to IBSA members on the website shortly).
16 September – UK branch discussion group in London on ‘Fiduciary relationships in international business structuring to include examination of FATCA, beneficial ownership concept and conduit companies – with HMRC representative on the panel.
18 September – Webinar with John Timpany of KPMG Hong Kong and me examining International Double Tax Treaties and their use in the light of new OECD recommendations. Visit our Bright Talk Channel for more information and to register.
1 October – European branch seminar in Maltareviewing international business structuring and the Malta connection.
7 October – US branch meeting in Washingtonto discuss corporate inversions and the use of UK holding companies, comments in the light of the latest OECD BEPS project developments and IP patent box models.
8 October – US branch meeting in New York to discuss corporate inversions, UK holding companies and CFC legislation in the light of OECD BEPS project development.
19 November – IBSA annual conference in London highlighting trends in corporate acquisitions. There is an excellent early bird discount offer available: 50% discount for IBSA members and 20% discount for non-members when booking by 19th September.
I am thrilled with the quality of speakers that we have been able to attract to the various seminars, discussion groups and conferences, and this has been the hallmark of IBSA’s development since March this year. I really hope that readers of our IFS newsletters will join the IBSA as members in order to help in the development of the organisation. As a not for profit organisation, my motivation in creating the IBSA is to demonstrate the professional integrity and competence of its multi-disciplinary members throughout the world, and to encourage transparency and communication with Tax Administrations through exchange of ideas at discussion groups in particular. The combination of intellectual stimulation with the ability to establish personal relationships with professional colleagues throughout the world, whether they be lawyers, accountants, tax advisors, bankers, corporate finance advisors, IP specialists, corporate service providers, etc., makes the IBSA a unique global organisation for the professional advisory community engaged in international business structuring.
If you have any comments regarding the article below, please do not hesitate to let me know.
With my best regards
The importance of determining corporate residence is that the taxing rights of any particular country are usually defined by reference to whether an entity is resident or non-resident. Depending upon the taxation policy of the country in question, residents will typically be subject to tax on their worldwide income, while non-residents may find that the taxation rights of the jurisdiction concerned are restricted to income, gains or profits derived within the relevant jurisdiction.
Management and control concept
Most readers will be aware that a company is not simply resident only where it has been incorporated, but may also be resident in another jurisdiction as a result of the management and control concept. While the basic concept has been developed over the years, the principle remains the same. The classic UK case of De Beers Consolidated Gold Mines v. Howe  AC 455 considers ‘where the real business of the company is carried on, where the central management and control actually abides’. In this case, a South African company, operating in South Africa but whose affairs were controlled from the UK, was held to be resident in the UK, because that was where it ‘keeps house and does business’ (even though the ‘nuts and bolts’ of the business were, in fact, in South Africa). It was held that since the principal office was in the UK, and the majority of directors met in the UK, the profits were therefore realised in the UK.
In Australia, substantial case law has also established that the real test of central management and control is found in the determination of where the actual business of the company is carried on; not in the sense of where it trades, but in the sense of from where its operations are controlled and directed. This determination can only be made after an examination of the course of the company’s business and trading operations.
Thus, in the case of Koitaki Para Rubber Estates v. FCT  64 CIR 15 criteria considered as secondary tests included: the place where dividends are declared; the place where general meetings are held; the fact that the company operates a bank account in the country; and the place where the company’s books and corporate seal are kept.
Canadian courts have followed the rulings of UK courts that a corporation is resident according to the country where its real business is carried on, and that its real business is carried on where its ‘central management and control’ is actually located. In most cases, the central management and control will be located where the board of directors of the company meets and carries out its responsibilities. It is important to note, however, that de facto control is the determining factor (in this respect, legal control, based on the percentage of voting shares, is not important). In order to establish where central management and control is exercised, factors such as where the effective decision-making relating to the activities of the corporation takes place are considered. The courts have also considered factors such as the place of incorporation, the country of operation, the residence of shareholders, the place where books are kept and bank accounts opened, and the place where shareholders meet.
Some questions that may therefore be relevant are as follows:
- Does the board of directors have a majority of residents in a particular country?
- Are all the strategic decisions affecting the company made, and can they be shown to have been made and implemented, by the board of directors and in that country?
- Does the company maintain its headquarters in the country in question?
- Does the company operate a local bank account?
An interesting document was issued by the Israeli Tax Office in connection with this topic. The Israeli Circular 4/2002, Guidelines for Determining Control and Management, makes clear that the substantive issues of who is really responsible for the conduct of the entity are key. The most significant issues are where the most important decisions are made, business strategies are set and the decisions that allow the company to function are taken. Important aspects of the decision-making process that should be examined include:
- the whereabouts of the source prompting the need for a decision,
- the place where the alternatives were prepared and discussed,
- and where the final decision was agreed.
The location of certain decisions is particularly important, including entering into certain dealings which impact heavily on a company’s future, certain financing decisions, and those concerning large investments. It is clear that the Israeli position bears a close resemblance to the concept of management and control in the UK.
Case law in the Netherlands highlights that the most important factor is the place of effective management. This is considered to be the place where the managing directors pass management resolutions, which is usually where they meet and carry out their management duties. It has, however, been recognised that there are instances where management cannot be considered to be in the hands of the managing directors, such as where their functions are restricted to management of day-to-day matters, with more important aspects lying within the domain of the shareholders’ meeting which must then be approved by the board of directors. In particular, management is deemed not to be carried out by the managing directors in the following scenarios:
- where the type of business in which a company is engaged requires specialist knowledge (which they do not have); or
- where one individual acts as managing director of numerous companies and cannot therefore be considered to have the specialist knowledge required for all of them.
The latter case must clearly sound a warning note to trust companies which generally will not have the specific skills or knowledge required to manage each Dutch company under their ‘management’.
In contrast to the management and control principle, the US has the concept of taxable income ‘effectively connected’ with a US source, and if a foreign corporation has effectively connected income, then the foreign corporation will be subject to US tax on such income.
Ensuring non-residence in a particular country
Taking all of the above into account, it is clear that if an overseas incorporated company is to remain non-tax resident in a particular country (country A), but resident in its country of incorporation (country B), it is necessary to ensure that:
- no country A resident director takes decisions or gives instructions affecting the business of the company in country A, nor even really considers the business of the company while in country A;
- there is a majority of non-country A resident directors, some of whom have expertise in the commercial business of the company;
- regular board meetings take place outside country A and preferably in the same location where the company is incorporated (country B);
- agendas and minutes of board meetings are accurately recorded and clearly reflect the decisions effected at the meetings;
- the statutes of the company reflect, wherever possible, that the company operates in the desired manner;
- the administration of the company, separate from policy decisions affecting the company, is conducted as far as possible in country B, being the country of desired residence, including inter alia the maintenance of an office, employment of local individuals, operation of a local bank account, keeping statutory books and conducting accounting operations there.
It is therefore rather short-sighted to give advice which involves the incorporation of a foreign company in order to save tax where that foreign company is obviously only incorporated for tax avoidance reasons and has no substance in actual effective management.
Place of effective management under the OECD Model Treaty
It may be that two countries consider a particular company to be tax resident, perhaps one on the grounds of its place of incorporation and the other on the grounds of where its management and control are located. In such circumstances, a relevant double tax treaty would be helpful in clarifying which country has the applicable taxing rights. The Commentary to Article 4 of the OECD Model Treaty considers the overriding intention to be the ‘place of effective management’, which is considered to be the place where:
… key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made. The place of effective management will ordinarily be the place in which the most senior person or group of persons (for example, a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant factors and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can only have one place of effective management.
The OECD has further refined the ‘place of effective management’ concept by expanding the Commentary explanations as to how the concept should be interpreted and by introducing the ‘hierarchy of tests’, which provides for different tests applying in succession. In addition, much of the above Commentary has been replaced with wording indicating that the place of effective management will usually be the place where the most senior person or group of persons makes its decisions. Where key decisions are made in one place but formally finalised in another, the place of effective management of a company would be where the key decisions are made. Also, the place where a person or entity with a controlling interest makes key decisions in respect of the company may be deemed to be the place of effective management. Where a board of directors routinely approves the strategic decisions made by the executive officers, the place where the latter make their decisions is important in determining the place of effective management of the entity.
Ascertaining information relevant to determining where a company is effectively managed and controlled is much easier nowadays as a result of the exchange of information between tax authorities. Having nominee directors acting under the instructions of the UBOs is likely to lead to unwanted investigations and adverse tax consequences. Having said this, it must be stated that there is a considerable difference between the degree of effective management required for say a holding company or an IP owning company as opposed to a trading entity. The concept of effective management is applicable to all companies, but the requirements of personnel, office accommodation and other functions will be different.
Roy Saunders, Chairman, IFS and IBSA. IBSA is the network for international business advisors and their clients, bringing together specialist advisors to enable businesses to optimise the structure of their international operation by enhancing resilience in tax planning, mitigating regulatory and market risk and enabling sustainable multi-jurisdiction growth.