In this article we will discuss about the tax residence for individuals, companies and others.
Residence of Individuals:
The tax residence of individuals is normally decided on factors that can be determined by external observation.
Generally, it is based either on:
(a) The “physical presence” in the country or
(b) The “facts and circumstances” that prove residence in a country.
Unlike the former test, which is objective and relatively easy to apply, “facts and circumstances”, such as a permanent home, habitual abode, life style, etc., tend to be more subjective. More than one residence test is applied in several jurisdictions.
(a) Physical presence test:
The decisive factor is the physical presence for more than a specified number of days (generally 183 days or six months) in the fiscal year, or a 12-month period, or over a period of preceding years. The 1992 OECD Report noted variations in the practices followed by its members.
Many countries use the actual “days of physical presence” method. Some of them prefer the “duration of activity” method or the period of the activity (Examples: France, Germany, Greece, Italy, Luxembourg, Netherlands, Spain).
Moreover, what is defined under the domestic law as a day’s presence varies widely. For example, several countries include part of the day as a day in the calculation; some require presence at midnight (Example: Ireland); some of them even use an hourly basis. Therefore, the period may be computed on the aggregation of part-stays in a day, or even a minute’s stay may count as a full day.
Wide differences exist on the treatment of holidays and vacations, the stays abroad during periods of sickness and short breaks, transit stops, etc. For example, the United States excludes the time spent in the country while in transit, if it is less than 24 hours, when travelling between two points outside the States.
Some countries (Examples: Austria, Ireland, the United Kingdom) exclude the days of arrival and departure, while others (Example: the United States) include both days. Days of arrival are not taken into account but days of departure are when calculating an individual’s residency status in Russia. While some countries use the period of physical presence as the sole test, many countries apply it as one of the factors to decide on tax residence.
There are also countries that do not use this test. For example:
1. The period of physical presence is the decisive factor for tax residence.
Examples: Azerbaijan, Bangladesh, Barbados, Bolivia, Botswana, British Virgin Islands, Colombia, Cyprus, Dominican Republic, Ecuador, El Salvador, Guam, Guernsey, Honduras, India, Isle of Man, Kazakhstan, Malaysia, Mauritius, Pakistan, Russia, Singapore, Solomon Islands, Sri Lanka, Sweden, Thailand, Trinidad and Tobago, Ukraine, Venezuela, Vietnam, Yemen.
2. The physical presence is only one of the criteria for tax residence.
Examples: Antigua, Argentina, Australia, Austria, Bulgaria, Canada, Chile, China, Congo, Costa Rica, Croatia, Czech Republic, Denmark, Egypt, Estonia, Faroes Islands, Fiji, Finland, Germany, Ghana, Gibraltar, Greece, Guyana, Hungary, Indonesia, Iran, Ireland, Israel, Jamaica, Japan, Jersey, Kenya, Korea, Laos, Latvia, Lithuania, Malta, Mexico, Morocco, Mozambique, New Caledonia, New Zealand, Nigeria, Norway, Papua, Peru, Philippines, Poland, Portugal, Puerto Rico, Romania, St Lucia, Senegal, Slovak Republic, South Africa, Spain, Switzerland, Taiwan, Tanzania, Tunisia, Turkey, Uganda, the United Kingdom, the United States, Uzbekistan, Zambia, Zimbabwe.
3. The physical stay does not affect the tax residence.
Belgium, Brazil, Cameroon, France, Gabon, Guatemala, Italy, Ivory Coast, Liechtenstein, Luxembourg, Mexico, Netherlands, Netherlands Antilles, Slovenia.
(b) Facts and circumstances test:
The facts and circumstances of the stay in a country are often used to determine the tax residence of individuals. They include considerations such as the centre of vital interests, family ties, retention of a house or availability of living accommodation, residence of the family, etc. These rules vary widely.
Under this test, the tax authorities examine a variety of factors, such as:
1. Residence or home available:
Residence implies a permanent dwelling place. Residence or home available refers to any property that the taxpayer has for his effective use in a permanent way. The intention to stay is not relevant. This “home test” may include holiday apartments but not hotel rooms unless they are rented permanently.
Examples: Austria, Barbados, Cameroon, Congo, Croatia, Gabon, Guernsey, Guinea, Germany, Hungary, Iran, Isle of Man, Israel, Italy, Ivory Coast, Jamaica, Jersey, Kenya, South Korea, Mexico, Morocco, New Zealand, Norway, Portugal, Slovenia, Tanzania, Uganda.
2. Economic, social or family ties (“centre of vital interests”):
This test is subjective and determines the residence from the taxpayer’s way of life and his family, social, political and cultural links with a country. It is broader than just the place where he resides or stays for any period, or has a home. In some countries, the “centre of family interests” is the location of the family home or the place where the person and his family normally live.
Examples: Argentina, Australia, Belgium, Bulgaria, Cameroon, Canada, Chile, France, Greece, Israel, Italy, Japan, Luxembourg, Morocco, Netherlands Antilles, New Caledonia, New Zealand, Puerto Rico, Spain, Suriname, Switzerland, Zimbabwe.
3. Permanent or principal residence, or habitual, usual or customary place of abode:
This test usually refers to the country where an individual physically stays or normally lives. Habitual abode is more than the place where an individual “stays more frequently” within a short time period, say a tax year.
The term “permanent”, “principal”, “habitual”, “normal”, “usual”, or “customary” would suggest that the individual resides there on a non-temporary basis or is ordinarily resident. Examples: Australia, Austria, Belgium, Botswana, Cambodia, Cameroon, Chile, China, Congo, Czech Republic, Denmark, Estonia, Fiji, Finland, France, Germany, Ghana, Gibraltar, Guyana, Hungary, Israel, Italy, Ivory Coast, Japan, Kenya, Latvia, Liechtenstein, Luxembourg, Malta, New Zealand, Papua, Philippines, Poland, Portugal, Romania, Senegal, Singapore, Slovak Republic, South Africa, Taiwan, Tanzania, Turkey, the United Kingdom.
4. Intention to reside permanently:
The intention to reside permanently, or not on a temporary basis, is used by several countries. Examples: Barbados, Chile, Ghana, Greece, Guyana, Indonesia, Ireland, Japan, Luxembourg, Norway, Philippines, Singapore, Turkey, the United Kingdom, Zambia, Zimbabwe.
5. Official registration:
Some countries regard persons whose names are in their population registers (e.g. for voting purposes) as tax residents. Examples: Belgium, Italy, Netherlands.
The citizenship can affect the residence status in certain circumstances. Examples: Argentina, Botswana, Bolivia, Brazil, Bulgaria, Chile, Ecuador, Iran, Latvia, Liberia, Lesotho, Nigeria, Panama, Peru, Philippines, South Korea, the United States.
7. Immigration status:
The immigration or residence visa can influence the residence status. The visa status may reflect the intention to reside permanently in a country. Examples: Australia, Brazil, British Virgin Islands, Canada, Israel, the United States.
A person is a resident if:
(i) He resides in Australia within the ordinary meaning of the word (“residence test”), or
(ii) He is domiciled under the common law in Australia and does not have a permanent place of abode outside Australia, or
(iii) He stays in Australia for more than 182 days in a tax year (subject to the exception when his usual place of abode is outside Australia and he has no intention of becoming an Australian resident), or
(iv) He is a member, or an eligible employee or a spouse or a minor child of a member of a qualified superannuation scheme.
The residence test considers factors like physical presence, citizenship or nationality, economic and personal ties, and the maintenance of an abode in another country. It is difficult for an individual to demonstrate that they are no longer a resident of Australia if they retain ties in Australia.
This is particularly the case for those working abroad for shorter contracts, where it is not clear that a home has been established in the foreign country. Individuals, who intend to stay for over two years or as immigrants in Australia, are considered as Australian tax residents.
An individual is a tax resident if he is:
(i) Domiciled in Belgium or
(ii) Has his centre of economic interests in Belgium.
Unless otherwise evidenced, an individual is deemed to be domiciled and have his centre of economic interests in Belgium when he is registered in the national civil register. The centre of economic interests is the place from which a person plans and manages his investments and assets or derives most of his income, irrespective of where the assets are situated.
For tax purposes, the domicile is, according to the case law, the place where an individual continuously and effectively resides, where his household is located and where he has his centre of vital interests. Married taxpayers are deemed to have their tax residence where their household is located, i.e. the family home and centre of family life.
A citizen is deemed to be a tax resident unless he leaves the country on a permanent basis. The tax residence for foreigners is based on the type of visa. Besides a tourist visa, a visa can be a temporary (two years) or a permanent visa. A foreigner is considered a tax resident from the date of arrival if he enters the country on a temporary or permanent visa.
However, a temporary visa holder, who is not under a labour contract with a Brazilian company, is considered as a resident only if he remains in Brazil for more than 183 days during a 12-month period. A permanent visa is required for a foreigner to hold a managerial position or directorship in a Brazilian company.
There is no statutory definition of a tax resident for an individual. An individual may be resident, part-year resident or nonresident. An individual is deemed resident for the whole year if he “sojourns” or stays temporarily in Canada for at least 183 days in a calendar year. Residence may also be based on facts and circumstances.
The tax authorities (the “Canada Revenue Agency”) consider an individual as a tax resident if Canada is the place where he regularly, normally, or customarily lives in the settled routine of his life.
The Agency takes into consideration his links or nexus with Canada, such as family members and dependants in Canada, the dwelling place, social and economic ties, home available for use, ownership of property, immigration status, intention to return to Canada, etc. To be nonresident, an individual must sever his ties in Canada and establish residential ties in another country. Canada imposes a departure tax on persons ceasing to be residents of Canada.
The residence of individuals depends on their domicile and habitual abode in China. Individuals resident in China for more than one year are generally taxed on their worldwide income. However, if the stay is intended to be less than five years, individuals may get special approval to pay tax on a limited category of non-Chinese sourced income.
If their stay is less than one year, they are only taxed on their Chinese-source income as nonresidents. In calculating the one-year, temporary absences of less than 30 days at a time or up to 90 days in total are not excluded.
An individual is resident if he either resides habitually in Denmark or stays six months or more continuously (ignoring short stays abroad) in the country.
An individual is resident in Finland if he has a permanent home in Finland or stays in Finland continuously (excluding short breaks) for six months. After emigration, a Finnish citizen remains a tax resident for three years unless he can prove that he has broken all essential ties with the country (3-year rule).
An individual is a tax resident in France if:
(i) His home or principal abode is in France, or
(ii) He is engaged in a professional activity in France (unless it is ancillary to foreign-source activities), or
(iii) The centre of his economic interests is in France, or
(iv) His stay in France exceeds 183 days in a calendar year.
The home is defined as the habitual residence where his family usually lives, even if he is abroad for long periods during the year. The abode test is based on the length of the physical presence in France.
The professional activities may be carried on either as a self-employed person with a fixed base or as an employed individual. The economic interests test involves the place where the individual owns assets or receives investment income to support his lifestyle, or derives most of his income, or manages his work.
An individual is a tax resident if he has a domicile or habitual place of abode in Germany. An individual has a domicile if he has permanent accommodation available (i.e. at his disposal) in Germany. Habitual abode is presumed when the physical stay exceeds six months (short absences are ignored) continuously in a calendar year or over two calendar years. A nonresident individual may elect to be taxed as a resident if at least 90% of his worldwide income is taxable in Germany, or if his income, not subject to German taxation, does not exceed EUR 6,136.
In India, the residence rules are codified in the domestic law. A person is a resident only if he is physically present for 182 days or more in a tax year, or has stayed for at least 60 days in the present tax year and 365 days or more in the previous four years. An individual who is resident and ordinarily resident is taxed on his worldwide income.
A person is not ordinarily resident if he is nonresident for nine out of the ten previous tax years and the physical stay in India within the past seven fiscal years totals 730 days or more. If a resident is not ordinarily resident, he only pays Indian taxes on domestic-source income, and on foreign source income received in India.
To be a resident, an individual must:
(a) Spend either
(i) 183 days or more in a tax year in Ireland, or
(ii) 280 days or more over two consecutive tax years and spend more than 30 days in each year in Ireland, or
(b) Elect to become a tax resident for the tax year in which he comes to Ireland with the intention to reside permanently.
An individual is treated as resident for the full tax year in the year of arrival or departure. A day counts for residence purposes only if the person is present in Ireland at midnight. An individual must be a resident for three successive years to become ordinarily resident in year four. He ceases to be ordinarily resident if he is not resident for three consecutive years.
An individual is resident if his “centre of life” is in Israel. The centre of life includes the permanent home of the individual, the actual place of abode, the place of his occupation or permanent employment, the location of “active and material financial interests” and the place of associations and organisations of which the taxpayer is an active member.
The mere passive ownership of financial investments or an inactive membership of an organisation is not adequate. It is presumed that an individual is resident if he stays at least 183 days in Israel or spends 30 days or more in Israel during the tax year and 425 days or more during the current and previous two tax years.
Immigrants and returning residents are tax-exempt on their foreign source income for five years after becoming a resident. They are also exempt from capital gains tax for ten years on the sale of assets owned prior to their immigration. The period is three years for returning residents. An exit tax is applicable on emigration.
An individual is a tax resident if he:
(i) Is registered in the Italian population records for more than half the tax year, or
(ii) Has his centre of personal and economic interests in Italy, or
(iii) Has his habitual abode in Italy.
Italians emigrating to low or nil tax jurisdictions remain tax residents unless they can show that they are not resident in Italy.
A resident person is either a permanent or a non-permanent resident depending on his domicile, the intention to reside permanently in Japan, or the period of his stay. The domicile is defined as the place in which a person has the base and centre of his life.
A person, who is domiciled in Japan or has stayed continuously in Japan for more than five years, is a permanent resident. A person, who is non-domiciled in Japan and has no intention to reside permanently, is treated as a non-permanent resident. A nonresident is an individual who has not established a domicile in Japan and has resided in Japan for less than one year.
An individual is tax resident if his domicile or customary place of residence is in Luxembourg. A place of domicile is the place where a person has accommodation that he intends to retain and use on a non-temporary basis. Customary place of abode exists if he is present in Luxembourg for at least six months.
An individual is resident if he has a home in Mexico. To be nonresident, a former resident must stay abroad for more than 183 days in a calendar year and acquire tax residency overseas.
The tax residence is based on the place where the individual usually lives, but the facts and circumstances are also considered. A person is a resident if his centre of personal and economic interests is based in the Netherlands. The relevant factors include a home, duration of stay, family ties and economic factors linking him with the country.
Various judicial decisions suggest that the place where the family resides is a key factor in determining the tax residence. Temporary absences will not make him nonresident, whereas a short assignment in the Netherlands will not make him a tax resident. If a person settles in the Netherlands with his family for employment purposes, he is deemed to be a tax resident.
An individual is a tax resident if he:
(i) Is physically present for 183 days or more in any 12-month period, or
(ii) Has a permanent place of abode in New Zealand, despite having a place of abode abroad. A part of a day is counted as a whole day.
The term “permanent place of abode” refers to the centre of an individual’s domestic life, and not simply a physical place of residence. The tax authorities consider the facts and circumstances of the stay.
The main determining factors include the length of time spent in New Zealand, accommodation arrangements (whether rented or purchased, or an overseas home is retained), type of employment (temporary or permanent), length of the stay in the home country, financial and family ties, children’s education, where annual holidays are taken, social welfare benefits, etc.
An individual ceases to be a resident if he is absent for more than 325 days in any period of 12 months, and does not maintain a permanent place of abode during that period in New Zealand.
An individual is a tax resident if he stays in Norway in aggregate more than either:
(a) 183 days during a 12-month period, or
(b) 270 days during a 36-month period.
A previously resident individual remains tax resident as long as he has a permanent home at his disposal in Norway for himself and his family and his stays in Norway exceed 61 days during the calendar tax year.
As from 2004, a domiciled person remains resident even if:
(a) He is absent for four years or more, or
(b) He is a tax resident in a comparably taxed country overseas.
A resident may claim tax exemption on his foreign salary if he stays abroad because of his employment for at least twelve months. This tax exemption does not apply if the salary can only be taxed in Norway under a tax treaty.
A Peruvian citizen is a tax resident if he is domiciled (i.e. permanently resident) in the country. A foreign individual is a resident only after a continuous stay in Peru of at least two years, or at his request after an initial stay of six months in the country.
Temporary absences up to 90 days in each year are ignored. The tax domicile is lost after two years of residence abroad, or when the individual obtains a foreign resident visa or a contract to work abroad for at least one year. A returning citizen becomes a resident again unless his stay is less than six months in the year of his return.
An individual is a tax resident if:
(i) His physical stay exceeds 183 days in a calendar year, or
(ii) He visits Portugal for a shorter period but has a permanent or habitual residence or dwelling place on December 31 of that year, or
(iii) He is a crew member of a ship or aircraft operated by a resident legal entity on that day.
A Portuguese citizen remains resident for four years if he emigrates to a listed tax haven, unless the main purpose is not tax avoidance.
Individuals are tax resident in Russia if they are present within the Russian Federation for at least 183 days in a tax year.
An individual is a tax resident if:
(i) He is physically present or exercises employment (other than as a director of a company) in Singapore for 183 days or more in a tax year, or
(ii) He resides in Singapore (i.e. he has settled or intends to settle in Singapore).
If an individual is physically present or working in Singapore for three consecutive years or more, he is deemed resident for all the years, even if his stay is less than 183 days in the first or last tax year of stay.
In 2003, Singapore introduced the Not Ordinarily Resident (NOR) Taxpayer scheme to tax-exempt remittance of foreign income previously earned by individuals who were not tax resident in the previous three years. The NOR scheme is valid for five years.
As from the tax year beginning March 2001, South Africa taxes resident individuals on their worldwide income.
An individual is resident if either:
(i) He is ordinarily resident in South Africa or
(ii) He meets the “physical presence” test.
A person is ordinarily resident in a country where his most fixed or settled residence is located. It is the country to which he normally returns (i.e. his real home). The physical presence test requires a person to spend
(a) More than 91 days during the current tax year and in each of the previous three tax years, and
(b) More than 549 days in aggregate during the previous three years.
Under the physical presence test, an individual would become resident from year four. Immigrants into South Africa are tax residents from the day of arrival in South Africa. An individual must stay abroad for a continuous period of 330 days immediately after leaving South Africa to claim non-residency under the physical presence test.
He will be deemed nonresident from the day on which he left the country. A person deemed as nonresident in the other contracting state under the tie-breaker (Article 4(2)) of the treaty is treated as nonresident under the domestic law as well.
An individual is a tax resident if either:
(i) His physical stay exceeds 183 days in a calendar year, or
(ii) The main centre of his professional or business activities or economic interests is based in Spain. A married person may be deemed resident if his family reside in Spain.
Temporary absences are ignored, unless the individual is habitually resident in another country for more than 183 days in a calendar year. Tax residence can be changed during the year but an individual can only be resident in one country in a given year. Spanish nationals who emigrate to a listed tax haven under Royal Decree 1841/1991 remain tax resident for four subsequent years.
An individual is tax resident if either he has his principal home in Sweden or stays in Sweden continuously for at least six months. Swedish nationals and foreigners who have been resident in Sweden for previous ten years are deemed resident for five years after they emigrate, unless they do not maintain essential ties with Sweden (“five-year rule”).
An individual is resident if he:
(i) Works in Switzerland temporarily for more than 30 days in a year or
(ii) Intends to stay for at least 90 days in a year or
(iii) Takes up permanent residence in Switzerland.
The intention to stay is based on the centre of personal and business interests in Switzerland.
There is no statutory definition of residence. It is based upon a mixture of statutes, case laws and tax practices. A person may be either a resident or ordinarily resident or both.
(a) A person is a resident in a tax year if he satisfies one of the following requirements:
(i) He intends to stay as a temporary visitor (less than two years) and his physical presence exceeds an aggregate of 183 days or more in that year. If the stay is likely to last for two years or more, the individual is a resident from the date of arrival.
(ii) If the annual visits to the United Kingdom average 91 days or more over four consecutive tax years, he is resident from the fifth year. If the visits are planned, the individual may be regarded as resident from the start of the visits.
(b) A person is ordinarily resident, if he intends to reside or resides habitually in the United Kingdom. The ordinary residence depends on the intention when entering the country, the type of accommodation (permanent or temporary) and the actual period of his stay. He is ordinarily resident from the date of arrival if he intends to stay in the country for three years or more.
Otherwise, he is ordinarily resident in the tax year after the three-year period in the country is over, provided he lives in temporary accommodation. A person will also be ordinarily resident if he makes annual visits to the United Kingdom averaging three months or more over a four-year period.
All US citizens and permanent resident aliens (“green card holders”) are treated as tax residents, regardless of their actual residence. In addition, an individual is a resident, if he is physically present for either
(i) 183 days or more in a calendar year, or
(ii) Spends at least 31 days in a calendar year and 183 days based on a weighted average over a three-year period (“substantial presence test”).
The presence is based on the physical stay at any time during the day. A resident individual is taxed on his worldwide income. The “substantial presence test” does not apply if the presence is less than 183 days in the current year, and the individual has a “tax home” (as defined) with which he has a closer connection in a foreign country. There are also exceptions to this test for foreign government officials, teachers, trainees, students, professional athletes, persons in transit for less than 24 hours, etc.
Tax Residence of Companies:
Companies can have a variety of connecting factors for their tax residence. For example, the tax residence can be based on their place of incorporation or registered office, or the place of residence of shareholders, directors or managers, or the place of management or administration.
Most commonly, it is decided by either:
(i) The place of incorporation or legal seat, or
(ii) The location of management or real seat.
In the former case, the status is determined by the country of incorporation or registration, or where its legal or statutory seat (“registered address or office”) is located under the country’s civil or commercial law. Generally, the legal or statutory seat is also the country of incorporation.
However, the statutory seat may or may not be at the same place as the real or effective seat, i.e. the location of management or the place where the central administration is located. Since a company can be incorporated and have its legal seat abroad, and still be effectively managed in the country, several jurisdictions use both criteria. Some countries also apply multiple tests.
For example, Suriname determines the corporate residence based on the following factors:
1. The place where central management is located;
2. The place where its statutory seat is located;
3. The place where its business is conducted;
4. The place where its general meeting of shareholders is held; and
5. The place where its books and records are maintained.
Tax residence based on incorporation or legal seat is fairly obvious. The criteria relating to the location of management, however, are not so clear. The definition of management varies widely under the domestic law and practices in different countries. For example, the management could be defined as management and control (“policy making”) or operational management (“policy execution”).
The head office could be the registered office (“legal head office”) or the principal place of control or operational management (“administrative head office”). Some countries use the place of principal activity to indicate the place where the business is managed.
Generally, central management and control signify the ultimate level of policy decision-making or superior control (e.g. board of directors), while operational management denotes day-to-day management of the business (e.g. top-level executives). Day-to-day management deals with administrative tasks.
The principle of central or superior management is used in several countries (Examples: Australia, British Virgin Islands, Canada, Hong Kong, Isle of Man, Israel, Jersey, Malaysia, New Zealand, Norway, Portugal, Singapore, Sri Lanka, the United Kingdom). The decision in the De Beers case of 1906 is still applied.
The place of management or effective management is also used to decide the tax residence in many countries. For example, in Austria, Denmark, the Netherlands and Spain it means operational or day-to-day management.
New Zealand defines effective management as practical day-to-day management, irrespective of where the overriding control or superior management is exercised. Switzerland defines effective management as either the place of day-to-day activities or the place where the management decisions are taken.
In Germany, a place of management is the place where management actually makes its important policy decisions. It is the centre of top level management. A place where a business is merely supervised would not qualify.
Dual tax residence can arise if:
(a) The same criterion leads to residence in both countries;
(b) The two countries interpret the same criterion differently; or
(c) The two countries use different criteria.
The definitions of corporate tax residence under domestic tax laws may satisfy the residence requirements in more than one country.
A common reason for dual residence is incorporation in one country, and management and control in another country. For example, an overseas branch may satisfy the location of management criteria and decide the tax residence of the company.
In the UK case of Swedish Central Railway Co., the Court held that a company may have two residences under a single criterion, namely the central management and control. Unlike the De Beers case, this company was incorporated in the United Kingdom.
The Court held that the company was also resident in the United Kingdom since it conducted “vital organic operations incidental to its existence as a company” such as keeping its statutory records, having a bank account and being audited, besides its English incorporation.
This ruling differed from the decision in a later case where the De Beers decision was followed for a UK incorporated company. In the Egyptian Delta Land case, the company was held not to be UK resident since the administrative functions performed were considered insufficient to result in the central management and control being exercised in the United Kingdom.
The English company carried on its entire business operations abroad. The judge also mentioned that corporate residence must relate to the corporate business and not to acts of corporate administration.
The issue of dual residence was also considered in the United Kingdom in the 1950s. In the Union Corporation case, the Court of Appeal gave its view that the company could have split central management and control if the superior or directing authority was found in both countries.
It concurred with the view of the Australian Court in Koitaki Rubber v FCT, that a company may be dual resident where the central authority is divided. In Canada, the Courts have held that, except in very unusual circumstances, a corporation may only have its central management and control in a single jurisdiction.
Dual fiscal residence does not only occur when the criterion of incorporation and the test of central management and control are used simultaneously. As mentioned above, residence may also be based on other tests. A company incorporated under foreign law that carries on business in Australia and has its voting power controlled by shareholders who are residents of Australia may be dual resident.
These conflicting rules under the domestic tax law lead to companies that are tax resident in more than one tax jurisdiction or not resident in any jurisdiction. The OECD MC Article 4(3) provides a tie-breaker based on the place of effective management for dual resident companies.
The term “effective management” in the Model treaty is now defined in the OECD Commentary Update 2000. The Commentary mentions that it is “the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made”.
Moreover “the place of effective management will ordinarily be the place where the most senior person or group of persons (for example, a board of directors) makes its decisions”, and “the place where the actions to be taken by the entity as a whole are determined”. Thus, it should normally be the location where the top management, in fact, makes key decisions affecting the entity as a whole.
The relevant consideration is the place where the key management and commercial decisions are made. Although the place of effective management will ordinarily be based at the place where the directors’ meetings are held, in certain situations these strategic decisions may be exercised by others. In these cases, the key management and commercial decisions may be made in one place, but formally finalised somewhere else by the board or by another person or group of persons.
The OECD Committee on Fiscal Affairs has currently issued two proposals, as follows:
(a) In the first proposal it has refined the concept of “the place of effective management” by expanding the Commentary explanations as to how the concept should be interpreted.
It suggests that when key decisions are made in one State but formally finalised in another State the place of effective management should be decided as follows:
1. If decisions are formally finalised at board meetings held in the other State, the State where the management and commercial decisions are made in substance.
2. If the decisions are made by a controlling interest holder (e.g. a parent company or associated enterprise), the State where these key decisions are made by that person.
3. Where the board of directors routinely approves commercial and strategic decisions of its executive officers, the State where these executives perform their functions.
(b) In the second proposal, there is a revised paragraph 4(3) in the Model treaty using four hierarchical rules that apply in succession (similar to paragraph 4(2) for individuals). The first test is the State where the effective management is situated. As a second test, the current proposal offers three different options to determine the place of effective management.
These options refer to:
(i) The State with closer economic relations,
(ii) The State where business activities are primarily carried on and
(iii) The State where senior executive decisions are primarily taken.
Failing this test, the place of effective management is determined by the State from which it derives its legal status. If this test also fails, it is finally determined through mutual agreement between the competent authorities of the Contracting States.
These proposals have not yet been finalised by the OECD Committee on Fiscal Affairs.
Some examples of the corporate residence rules used by various countries are given below:
(a) Incorporation or legal seat:
1. Incorporation or registration is the sole decisive factor:
Antigua, Argentina, Bolivia, Bulgaria, Cameroon, Chile, Colombia, Congo, Costa Rica, Ecuador, Egypt, El Salvador, Estonia, Faeroes Islands, Finland, France, Gabon, Greece, Guatemala, Honduras, Hungary, Iran, Ivory Coast, Latvia, Lithuania, Macao, Mozambique, Myanmar, Namibia, Netherlands Antilles, Nicaragua, Nigeria, Panama, Peru, Philippines, Puerto Rico, Russia, San Marino, Senegal, Slovak Republic, Slovenia, Sweden, Taiwan, Ukraine, the United States, Uzbekistan, Yugoslavia, Zimbabwe.
2. Incorporation or registration is one of the criteria:
Australia, Austria, Barbados, Belgium, Belize, Botswana, Brazil, Brunei, Cambodia, Canada, Czech Republic, Denmark, Dominican Republic, Fiji, Germany, Guernsey, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Kazakhstan, Kenya, Lebanon, Liechtenstein, Lesotho, Luxembourg, Malta, Mauritius, Mexico, Myanmar, Netherlands, New Zealand, Norway, Pakistan, Papua New Guinea, Poland, Portugal, Romania, St. Lucia, Saudi Arabia, Solomon Islands, South Korea, Suriname, Spain, Sri Lanka, South Africa, Spain, Switzerland, Tanzania, Thailand, Turkey, Uganda, the United Kingdom, Venezuela, Yemen, Zambia.
(b) Location of management or real seat:
1. Location of management is the sole decisive factor:
Bahamas, Bangladesh, Barbados, Botswana, British Virgin Islands, Cyprus, Gibraltar, Ghana, Grenada, Guyana, Hong Kong, Malaysia, Montserrat, Paraguay, Singapore, Swaziland.
2. Management and/or control is one of the criteria:
Australia (superior directing management), Austria (effective top management), Belgium (de facto management), Brunei (de facto control), Belize (central management and control), Canada (central mind and management), Denmark (effective management), Dominican Republic, Egypt (central management), Fiji (practical management), France (effective management), Germany (day-to-day management), Honduras, Ireland, India, (wholly managed and controlled), Isle of Man, Israel, Italy, Jamaica, Jersey, Kazakhstan (governing body), Kenya (management and control), Lesotho (management and control), Liechtenstein (effective management), Luxembourg, Malta (management and control), Mauritius, Mexico, Netherlands (effective management and control), New Caledonia, New Zealand (centre of management), Norway, Papua New Guinea, Pakistan (wholly managed and controlled), Poland (seat of management), Portugal (effective management control), South Africa (effective management), Spain (place of administration), Sri Lanka (management and control), Suriname, Switzerland (effective or day-to-day management), Tanzania (management and control), Trinidad and Tobago, Turkey, the United Kingdom, Yemen (wholly managed and controlled), Zambia, Zimbabwe.
(c) Other criteria:
1. Head office or main office:
Belgium, Brazil, China, Greece, Indonesia, Italy, Japan, Luxembourg, Mexico, Mozambique, Netherlands, New Zealand, Norway, Poland, Portugal. Romania, Saudi Arabia, South Korea, Sri Lanka, Spain, Taiwan, Tunisia, Turkey. In certain countries, the location of head office is the sole factor that determines the tax residence (Examples: Brazil, South Korea).
2. Principal activity:
Cambodia, Ghana, Israel, Italy, Tunisia, Mexico, Netherlands, Suriname, Uganda, Uruguay.
3. Nationality or tax residence of controlling shareholders or directors:
Australia, Fiji, Guernsey, Lebanon, New Zealand, Papua New Guinea, Solomon Islands, Spain, Sweden.
As mentioned, the definition of management or effective management could be either central management and control or operational management, or both. The other criteria also use some measure of management or control. Several countries require that the locally incorporated companies must have their management in the country.
A company is tax resident in Australia if:
(i) It is incorporated in Australia, or
(ii) It carries on business in Australia with either the central management and control in Australia or the voting control by resident shareholders.
Central management and control is more than day- to-day operational control. It represents the place where the real business of the company is conducted and the policy decisions are taken, i.e. the location of superior directing authority. Generally, it would be the place where the directors’ meetings, or sometimes even the shareholders’ meetings, are held. What matters is the place of effective business direction, and not the legal form.
A company is tax resident if its registered office (“siege social”), or the principal establishment, or the seat of management is in Belgium, and it is engaged in profit-making activities. In practice, the tax residence follows the place of de facto or effective management. It is the place where the meetings of the board of directors are held, the accounting functions are performed and the company records kept, the managers’ offices are located, etc.
The tax residence follows the location of the head office. Under Brazilian civil law, a domestic company must be incorporated and have its administrative head office in Brazil. The head office is the place where the management exercises its duties, either at the level of the board of directors or at the administrative level, or as defined by its bylaws. A company with its head office abroad is nonresident.
A company is tax resident in Canada if it is either incorporated in Canada, or if the central management and control (“mind and management”) is in Canada. It does not depend on the day-to-day management or principal business or residence of shareholders. It is generally based on the place where the directors meet to manage the affairs.
Tax residence in Denmark is based on either incorporation and registration or management and control. The latter is defined as the actual place of day-to-day management and head office activities. It does not necessarily depend on the place where the supervisory board of directors exercises the general strategic management and stewardship functions or where the annual meetings of the company are held.
A company is tax resident if it is incorporated under Finnish law and registered in Finland.
A company is tax resident in France if it is incorporated in France, or it has its registered address (“siege social”) in France. The siege social is stated in the articles of registration and denotes the right to occupy the office premises at the registered address.
The business must be managed and operated from the location. It is, therefore, the place where the company has its main establishment, its managerial and administrative personnel and its place of effective management. Generally, both legal and effective seats would be located in the same State.
A company is tax resident if its statutory seat (or registered address), or its place of management is in Germany. A German incorporated company must have its place of management in Germany. It is the centre from which the activities are actually directed by the directors.
Based on judicial decisions, it is the place of the day-to-day management where the usual business activities and the organisational measures necessary for the ordinary administration of the company are executed. A foreign company managed and controlled in Germany would be taxed as a corporation.
A company is tax resident in India if it is either incorporated in India, or wholly managed and controlled in India.
The tax residence of a company is based on:
(i) Central management and control, or
(ii) Incorporation in Ireland.
The central management and control is the place where the ultimate directing authority of the company is exercised. Normally, it will be the place where the directors’ meetings are held and the fundamental policy and business decisions are taken. The directors should supervise and guide the company’s policies, and they must be the highest decision-making authority.
Until 1999, the central management and control was the sole basis for corporate residence. Incorporation is an additional test of tax residence in Ireland. This provision does not apply in certain circumstances.
To be nonresident, an Irish incorporated company (or a related company) must actively trade in Ireland and be either ultimately controlled by persons resident in the European Union or a treaty country, or be traded actively on a recognised stock exchange. Alternatively, the company must be deemed as a nonresident company under the tie-breaker clause in a treaty with Ireland.
A company is defined as resident if either:
(i) It is incorporated in Israel, or
(ii) Its business is controlled and managed in Israel.
The definition includes a “foreign professional corporation” established by residents to provide the same services abroad as those they provide in Israel.
Tax residence of companies is based on:
(i) The legal seat (i.e. registered office) or
(ii) The administrative headquarters (“place of central management”), or
(iii) The place where the principal business activities are performed.
Therefore, a company is resident if it is incorporated in Italy, or administered in Italy, or has its principal activities in Italy.
A company is tax resident, if
(i) It is incorporated in Japan, or
(ii) If incorporated abroad it has its headquarters (registered office) or principal office in Japan.
A company incorporated in Japan must have either its headquarters (Commercial Code) or its registered principal office (Civil Code) in Japan. The place of effective management or management and control is not relevant.
A company is resident if its registered office (i.e. legal seat) or principal place of management is in Luxembourg.
A company is tax resident if either it is incorporated in Mexico, or its administration or principal place of management is located in Mexico. The administration or place of management is deemed to be located in Mexico if
(i) The shareholders’ or board meetings are held in Mexico; or
(ii) The individuals that make day-to-day management, control or administrative decisions for the legal entity are tax resident in Mexico or have their offices in Mexico; or
(iii) The entity has an office in Mexico at which the administration or control of the entity is carried out; or
(iv) The accounting records are maintained in Mexico.
The determining factor of tax residence for companies is incorporation or based on facts and circumstances. A Dutch incorporated company is always deemed to be a tax resident and generally it must have its seat or domicile (registered office) in the Netherlands under its statutes. The Netherlands applies the real seat or “management test” for foreign companies.
Their tax residence is determined “according to the circumstances”.
The key factor is the place where the day-to-day management meets normally, performs its management functions and takes decisions. Other factors may be used to provide supportive evidence of this place of management. They include the location of board meetings, main offices, shareholders’ meetings, the currency or the place where the corporate records are kept and financial accounts prepared, etc.
A company is tax resident if:
(i) It is incorporated in New Zealand, or
(ii) It has its head office in New Zealand, or
(iii) It has its centre of management (e.g. where the company as a whole is managed from on a day-to-day basis) in New Zealand, or
(iv) The control by the directors is exercised in New Zealand.
The head office would generally be at the place where the real business of the company is carried on, or where its central management, administration and control take place.
The corporate tax residence is based on:
(i) Incorporation or registration, or
(ii) The effective place of central management and control in Norway.
The place of central management is usually where the board meetings are held. Normally, the place of management is the same as the place of incorporation and the place of registration. A company incorporated in Norway must have its principal place of business or central management in Norway under its statutes.
The corporate tax residence is based on its head office (“legal seat”) or the place of effective management.
Legal entities established under Russian law are taxed on their worldwide income effectively as resident corporations.
A company is tax resident only if its management and control is exercised in Singapore. It is the place where the directors habitually meet and exercise superior control. The location of its trading activities or physical operations is not necessarily the place of management and control. The location of incorporation does not affect the tax residence of a company.
A company is resident if:
(i) It is incorporated in South Africa, or
(ii) If it has its place of effective management in South Africa.
A company is either domestic or foreign. A domestic company has its principal office or head office in South Korea.
A company is tax resident if
(i) It is established or incorporated under Spanish law, or
(ii) It has its legal headquarters or registered office in Spain, or
(iii) Its place of effective management is in Spain.
Effective management is defined as the place where the administration and management (e.g. general contractual activity and main accounting) are actually conducted. In doubtful cases, the residence is decided by the location of the most valuable capital assets. An exit tax based on a deemed sale of all Spanish assets is levied when a company ceases to be resident unless it maintains a branch in Spain, to which the assets are allocated.
A company is tax resident if it is incorporated and registered in Sweden.
A company is tax resident if it is:
(i) Domiciled in Switzerland under its statutes or
(ii) Effectively managed and controlled in Switzerland.
A domestic company incorporated, organised or registered in the commercial register in Switzerland is domiciled under the tax laws. A foreign company is tax resident if it is effectively managed and controlled from within Switzerland. The place of effective management may be either the place where important decisions are taken, or the place of day-to-day management.
A company is tax resident if:
(i) It is incorporated in Thailand or
(ii) It carries on business in Thailand as a foreign company.
The “carrying on business” includes the presence of an employee, representative or other persons to derive income or gains in Thailand.
A company is tax resident if it:
(i) Has its legal seat or business headquarters under its statutes or
(ii) The place of central management in Turkey.
The place of management refers to the highest level of management (i.e. policy-making management).
A company is tax resident if it is:
(i) Incorporated in the United Kingdom or
(ii) The central management and control is based in the United Kingdom.
The United Kingdom still follows the old De Beers decision to determine the place of central management and control. Thus, the test of control is determined by whoever exercises “superior and directing authority”. Control does not demand any minimum standard of active involvement, e.g. it could be passive oversight.
The place where the board of directors meets is important but not conclusive. The UK Inland Revenue has clarified that a foreign company may become tax resident if the central or overriding management and control is deemed to be in the United Kingdom.
The tax authorities would look at factors such as:
1. Where the highest level of control is exercised;
2. Where the actual management control is exercised (e.g. the use of shadow directors);
3. Where the directors have board meetings;
4. Where the decision making processes and management meetings take place; or
5. Where the controlling individual/s or shareholder/s exercise their powers.
Corporate taxation in the United States depends on whether a company is domestic or foreign, based on its place of incorporation. A company is domestic if it is incorporated under the laws of any of the states in the United States or the District of Columbia. Tax residence is unaffected by the place of management and control.
Tax Residence of Other Entities:
For legal entities that are unincorporated businesses, residence is generally determined under either a place-of-organisation test or a place-of-management test. However, unlike corporations they may or may not be treated as separate legal and taxable persons.
Determining the residence of a partnership may also be difficult because of the informality with which a partnership can be established. Similar problems arise when determining the residence of trusts.
Generally, corporate residence rules apply to business organisations that operate as companies, e.g. partnerships limited by shares, limited liability companies, trust companies and co-operative societies. Special rules apply to the residence of general partnerships. Some countries treat them as a separate taxable entity, whereas in other jurisdictions they are fiscally transparent.
Where partnerships are treated as companies, generally their tax residence is based under the corporate rules. In jurisdictions where partnerships are fiscally transparent entities, the tax residence follows the residence of the partners (individual or corporate).
The residence of trusts is not so clear. It may be determined by the residence of the majority of the trustees or the place of management or administration of the trust, or the place where it is organised. However, it could also be based on the location of the trust assets, the residence of the beneficiaries or the residence of the settler or grantor.
For example, a trust is resident in Australia if a trustee is resident or the central management and control of the trust is in Australia. In the United Kingdom, for a trust to be resident the trustees must be resident, but if the majority of trustees are nonresident and the general trust management is carried out abroad it is treated as nonresident.
The residence of the trust in Canada is based on the place of superior management and control.
A branch or permanent establishment does not have a separate legal existence and normally retains the same tax residence as its head office. However, if the location of management is based at the branch, it could satisfy the residence requirements in certain jurisdictions. In such cases, the company may become resident at the location of the branch.
Domicile under Common Law:
The term “domicile” is used in several countries. This concept of domicile under the common law differs from the term as used in civil law countries, where it usually refers to the place of permanent residence or home.
Domicile under common law is difficult to define. An old UK case law held that “a place is properly the domicile of a person in which his habitation is fixed without any present intention of removing there from”. Thus, the term “domicile” signifies a permanent home or place where a person is a permanent resident with the intention of remaining there for an indefinite period “unless and until something (which is unexpected or the happening of which is uncertain) shall occur to induce him to adopt some other permanent home”.
Once established the domicile can continue even if the person is away for a long period as long as the intention remains of returning to the domicile as a permanent residence. Therefore, it implies a permanent home or residence and “if that was not intelligible by itself no illustration could help to make it intelligible”.
Two elements are necessary for the existence of domicile under common law, namely:
(i) A residence of a particular kind, and
(ii) An intention of a particular kind.
The residence must answer “a qualitative as well as a quantitative test”. The person must reside in the country where he takes up residence and must intend to stay there permanently. There must be a fixed intention at that relevant time to regard the place of residence or settlement as the permanent home forever.
Everyone must have a domicile. One cannot be without a domicile and a person can be domiciled only in one place at any time. An individual acquires the domicile of the father as his domicile of origin at birth. It does not depend on the father’s nationality, the country where he was born or the country of residence of the parents.
A posthumous or illegitimate child follows the domicile of the mother. A foundling has his domicile in the country in which he was found. The domicile of origin stays with the person until abandoned by him for a domicile of choice.
A person can adopt a domicile of choice by the combination of residence and the intention of permanent or indefinite residence, but not otherwise. The domicile of choice continues until the former domicile is resumed or another is acquired.
A person can give up his domicile of choice by not residing there and not intending to reside there permanently or indefinitely. Since a person cannot be without a domicile nor have more than one domicile, he then either acquires a new domicile of choice, or he reverts to the domicile of origin.
The third kind of domicile is the domicile of dependency. A domicile of a dependent person follows the domicile of the person on whom he is legally dependent. For example, an adopted child takes up the domicile of the adopting parents, while the domicile of the wife is that of her husband.
In the United Kingdom, a wife acquired the husband’s domicile if married before January 1.1974. If married after that date, her domicile status is dependent on her origin or choice.