At the annual conference of the International Bar Association, that took place in Boston, U.S.A. in October 2013, the Taxes Committee of the IBA presented a panel discussion named “Tax residency: coming or going: do you know where you are?” on tax residency issues and how these are tackled in various jurisdictions.
Theodoros Skouzos was the reporter of the session to the Taxes Committee, and this report was published on Vol. 20 No 1 of the Taxes newsletter issued by the Legal Practice Division of the IBA (February 2014).
This presentation is a summary of what was discussed in the session.
The panel1 reviewed where companies and other entities are treated as being resident for tax purposes, a question which has become more important due to globalization, executive mobility and the growth of online business. Passing or failing the tests for corporate residence has significant implications for the tax position under both domestic law and international treaties. The panel also considered some technical and practical aspects of corporate redomiciliation and migration.
Netherlands- Wendy Moes
The main question is how tax residency is determined. Based on the Dutch law, any company that is incorporated in the Netherlands is considered a Dutch tax resident, unless another country with which the Netherlands has concluded a tax treaty successfully claims its tax residency. The place of effective management is decisive to determine the tax residency. So, we look at where important meetings take place and where the majority of the board of the directors is present. It's not merely finding “flyouts” for meetings; the decision-making should be made in the Netherlands. As an exception to the tie-breaker rule, we also have tax treaties where the tax residency is determined by way of a mutual agreement procedure, and recently we included that in the Dutch-UK tax treaty. But that's really the exception, because it can lead to uncertainty as long as there is no agreement between the countries. So, if a Dutch company is considered a resident of another country with a tax treaty, that company is still regarded as tax payer for Dutch tax purposes, and that means essentially that such a company will still file an annual Dutch tax return and it is still liable to Dutch dividend tax.
Canada - David Fox
When we're talking about residency issues under tax treaties and highlights of the past year from the Canadian perspective, we have to note the Canada-Hong Kong tax treaty. From a Canadian perspective, residency of a party is straightforward because it is based on enumerated grounds. But in Hong Kong, residency has a different significance. So what this point about the place of incorporation, central management and control leads to, is that there are no tie-breaking rules2 in the treaty for residency with respect to corporations. So, if we consider a situation in which a corporation is incorporated in Hong Kong but centrally managed and controlled in Canada or vice versa, the question regarding residency is raised, and to the extent that this corporation is resident in both countries, it has to go to the competent authorities. The anti-treaty shopping3 paragraphs basically provide that the benefits of the reduced withholding rates are not going to apply if a main purpose test is met. However, this main purpose test is extremely broad;
Hong Kong - Steven Sieker
Tax residency is not a concept under Hong Kong domestic law; that's one of the problems with Hong Kong's treaties, that residency has never been used as a basis for taxation, so the fact that you are a resident of Hong Kong is not, strictly speaking, relevant to taxation. When Hong Kong was entering -very recently- into its first double tax agreements with various countries, it needed to adopt a concept of residency for treaty purposes that is foreign to domestic law. So, we have this unique concept under Hong Kong's treaties whereby being incorporated in Hong Kong is sufficient for you to claim treaty benefits; under the normal circumstances, you would not be liable to tax on foreign sourced income. It would be interesting to see how this plays out in practice, because it means that, for many purposes, Hong Kong will be an ideal jurisdiction for holding companies.
Israel – Guy Katz
Under Israeli law, an individual is considered an Israeli resident if the center of his life is in Israel. There is a question which is quite unique, to Israel; it's whether a married couple can have different residency. For a long period of time, the tax authorities thought in Israel that a married couple should reside in one place; "surprisingly", it was always in Israel. Recently, there was a very unique decision in Israel which, for the first time, decided that the husband can be resided in one place and the wife in another place.
UK - Gareth Amdor
From the UK perspective, the relatively recent highlight is that an elective regime has been introduced which concerns the profits of UK foreign permanent establishments. That's part of the UK government's intention to make the UK's taxation regime more territorial based. And it ties in with a new foreign dividend exemption; so it leads to the equal tax treatment between profits being repatriated in the UK from a foreign subsidiary and profits being repatriated in the UK from a foreign permanent establishment. And as with Controlled Foreign Company rules, equally these rules have some anti-diversion, anti-avoidance provisions, so you can't manipulate the situation to shunt profits into your -now exempt- Foreign Permanent Establishment.
Steven Sieker – Hong Kong
Under Hong Kong domestic law, the fact that you have a permanent establishment in Hong Kong does not automatically make you liable to tax. In order to be liable to tax, your profits must arise in or derive from Hong Kong and, moreover, in respect to certain kinds of income, the tax authorities have historically taken an "all or nothing" approach. So you're either wholly taxable or wholly non-taxable. With some kinds of income, like services income, you can have an apportionment, but with trade income it’s all or nothing.
Guatemala - José Quiñones
Guatemala had a comprehensive tax reform, that was finished in January 2013. A lot of provisions that are already in place in other jurisdictions were implemented in Guatemala, such as permanent establishments, the concept of residency, which we did not have, transfer pricing rules. And this is an effort to try to bring Guatemala up to speed in international taxing provisions. But, also, added a lot of uncertainty, just certain loopholes that were being used or try to be fixed by using specific provisions. Regarding PE's, the new income tax law follows article 5 of the model convention, that's pretty straightforward.
Mozambique - Paula Duarte Rocha
The source and residency criteria apply to taxation in Mozambique, with residency being taxed on all income generated, whereas non residents and permanent establishments of nonresident entities are taxed on specific income derived from Mozambique. Non-resident entities usually owe to register ventures or subsidiaries in Mozambique, or they have to appoint a legal, local representative to comply with their tax obligations. And from the moment that they actually register the branch or subsidiary, these entities become liable to taxation in full compliance, as if being a local entity.
The concept of beneficial ownership
UK - Gareth Amdor
In the United Kingdom the main principles of beneficial ownership income were developed in the Indofood's case4 . The key principles to be derived from this case, was that in order to be the beneficial owner of income for UK purposes, you have to be able to demonstrate that you have a full privilege to directly benefit from the income. The UK Court of Appeal effectively said that "you also have to look at the substance of the scheme". And so it applied some form of commercial and practical test as well as a legal test. So, from a UK perspective, the test of beneficial ownership is quite limited to those sets of circumstances where you do not have the full benefit and the full rights to benefit from the income. Interestingly the case law does recognize that not all tax schemes and vehicles will be illegitimate and that they will look in each set of circumstances on its own facts.
Hong Kong - Steven Sieker
Because of the way that Hong Kong's treaties work, which is that you only need to be incorporated in Hong Kong to claim the benefit, what we saw was Hong Kong being used as a holding company, particularly into China. That happened for two reasons. First, of course, Hong Kong is part of China and, secondly, it was Hong Kong's first treaty, so people really got excited. A lot of companies incorporated in Hong Kong to invest into China, with the potential advantage of getting a reduced withholding rate. And so, what we've seen is the Chinese tax authorities were missing guidance on when they would consider a foreign company to be the beneficial owner of income; And what we see the Chinese authorities looking at are concepts like whether there is an obligation to immediately distribute a pay, so looking at some of the same things that we've seen in Velcro5, questions over whether or not the holding company has the right to dispose of the income etc.
Canada - David Fox
The Canadian government has not been successful in the court, by and large, in cases in which they allege treaty shopping or challenge them on the basis of beneficial ownership. And so, the response to this is a treaty shopping consultation paper which will lead to legislation. The paper identified four hallmarks of treaty shopping. The first, being an entity resident in a country with which Canada has a tax treaty, claiming application of the treaty. The intermediary entity is, in turn, owned or controlled by residents of a third country, which are not entitled to, at least, the same treaty benefits. The third being that the intermediary entity pays no or low taxes in its country of residence in respect of the taxable income earned in Canada, having to do with the deduction of amounts payable to the third country residents. And the fourth hallmark is that the intermediary entity does not carry on real or substantial business in its country of residence. Where these hallmarks of treaty shopping exist, that it is strong evidence of the main purpose of the intermediary entity is to treaty shop. And that, in such circumstances, the Canada Revenue Agency would be entitled to deny treaty benefits.
2nd part of the panel
UK - Gareth Amdor
In the UK corporate residency is still a very much hot topic; the United Kingdom Revenue are interested because, obviously, they are interested in getting all the UK tax of any of these entities are actually resident to the United Kingdom under our rules and, equally, they are interested in terms of denying claims for treaty benefits if they can’t take the benefit of our treaties, which are not actually UK tax resident. We have two tests in the United Kingdom, we have an incorporation test as you'd expect, and we also have a test which is a case law, factual test based on what we call central management and control of a company. And that is looking at the, sort of, the strategic highest level of control. It's not looking at day to day control but where strategic decisions in terms of the business itself are taken.
Netherlands - Wendy Moes
Going back to the matter of Dutch tax residency and when a company is considered a Dutch tax resident : we already discussed is that any company that is incorporated under Dutch law is considered a Dutch tax resident. And we call that the kind of the "deeming provision" which applies to those entities. And, now that it is possible that foreign companies can be converted into a Dutch entity and the Dutch entity can be converted in a foreign legal entity, then the question arises whether these deeming provisions still apply to those entities.
Uruguay -Isabel Laventure
Up until the entry into force of the 2006 tax reform, Uruguay had no corporate tax residency definition. The tax reform introduced the concept of tax residency which, for domestic purposes, is basically relevant in order to determine which kind of income tax the company will be subject to and the way in which these taxes have to be paid. The test for corporate tax residency essentially reads that all legal entities and other entities incorporated under Uruguayan law shall be considered to be tax residents. That is, we don't have any central management or control test.
Portugal - Guilherme Figueiredo
If the head office or the place of effective management of the company is located in Portugal, then the company would be considered to be tax resident in Portugal. So you just need to have one of those located in Portugal for the company to be considered tax resident in Portugal. There is no legal definition of what is considered to be the head office or the place of effective management in the Portuguese tax laws. So each time you need to interpret the terms. And for the definition of head office you just have to recourse to the corporate law meaning, that will be the corporate and legal seat of the company.
Italy - Valerio Cirimbilla
The Italian exit taxation6 regime has been recently amended by the Italian legislator, with the specific goal of making this regime consistent with the European Court of Justice very recent jurisprudence. The general rule is that the transfer of a company's tax residency abroad is considered to be a taxable event, unless the assets of the company are located in a permanent establishment located in Italy. The rule for determining when a company is considered to be tax resident in Italy is quite strong; it's not that easy not to be considered tax resident in Italy for a company. The rule is that a company is considered to be tax resident in Italy if, for the greater part of the fiscal year, 183 days in one year, the company has alternatively the legal seat, the place of effective management or “the main business purpose in Italy”. The last requirement is quite strange; Italy is one of the few countries in the world that uses this kind of prerequisite for establishing the tax residency in Italy.
Portugal - Guilherme Figueiredo
In general, Portuguese companies, instead of migrating, they just incorporate another company in another jurisdiction. Because, first of all, they don't want to attract the attention of the authorities, they might be subject to an inspection or tax audit or something like that. And second, they don't want to get the attention of the public either, from the public opinion. Companies don't want to go all through this public execution and having to explain why they do it and facing the possibility of having damage to their image and to their activities.
Uruguay - Isabel Laventure
Redomiciliation in Uruguay: In 2009, a Panamanian company filed a request with the tax authorities. Their company was in the process of redomiciliating to Uruguay, they have already changed the bylaws of the company and they had updated them to Uruguayan corporate law. And they requested the tax authority to be covered by a tax exemption that was applicable to resident entities. The answer of the tax authority was that the tax exemption did not cover the Panamanian company, they would never be a tax resident, because they had not been initially incorporated under the Uruguayan law. To address the issue, in 2011 a law was passed that says that foreign legal entities not incorporated in accordance to national legislation that set their domicile in the country shall be considered residents in national territory as of the finalization of the formal procedure. And this works the other way around: you will cease to be a tax resident in Uruguay if you decide to move your corporate domicile abroad, once you finalize all the procedures set in force in the rules and regulations. As we imagine, exiting is not as easy. We don't have an exit tax, but that doesn't mean that you won't have to pay any taxes on exit. Because, one of the things the Uruguayan company will have to do in order to redomicile is to request redomiciliation certificates from the tax authorities and this will certainly trigger a tax audit.
Japan - Shimon Takagi
The Japanese principle applicable to the corporate taxpayer is that residency is defined by the place of incorporation. So, if it's a Japanese corporation, even if it's operating from Hong Kong it's a Japanese corporation. About exit tax for corporations migrating outside of Japan, when the structure involves countries like the Netherlands, UK or Ireland, that have over 20% corporate tax rate, generally are considered as legitimate structures. But when the country is Asian, like Hong Kong, Singapore which has lower than 20%, we need to see some substance in order to admit it. In terms of individuals, a non-resident will only be subject to Japan source income. The definition of non-resident is a person who lives for one year or less and does not have domicile in Japan.
Indonesia - Freddy Karyadi
Indonesia has income tax law and corporate tax is based either incorporated in Indonesia or place of effective management in Indonesia. The location of place of effective management in Indonesia depends on various factors: the shareholders meeting or Directors' meeting, the domicile of the directors, the domicile of shareholders, or the physical presence of the central office. There is no exit tax. If Indonesians corporate tax residents lose their residency and become nonresident, it is unclear whether they have to pay a certain tax for losing the residency. For an individual to be recognized as non-resident they must not be residing in Indonesia for more than 183 days per year.
Su-Mei Ban – KattarWong, Singapore
Ron Choudhury – Aird & Berlis, Toronto, Ontario, Canada
Henrique Lopes KLA, Sao Paolo, Brazil.
Soo Jeong Ahn, Yulchon, Seoul, South Korea
Gareth Amdor SJ Berwin, London, England
Valerio Cirimbilla Di Tanno, Romme, Italy
Paula Duarte Rocha Mozambique Legal Circle, Maputo, Mozambique
Guilherme Figueiredo Eurofin Capital SA, Lausanne, Switzerland
David Fox Fasken Martineau, Toronto, Ontario, Canada
Freddy Karyadi Ali Budiardjo Nugroho Reksodiputro, Jakarta, Indonesia
Guy Katz Herzog Fox & Neeman, Tel Aviv, Israel
Isabel Laventure Ferrere, Montevideo, Uruguay
Catarina Levy Osorio Angola Legal Circle, Luanda, Angola
Robin Minjauw Tiberghien, Brussels, Belgium
Wendy Moes Hamelink & Van den Tooren, The Hague, the Netherlands
Javier Robalino Orellana Paz Horowitz Robalino Garces, Quito, Ecuador
José Quiňones QIL, Guatemala City, Guatemala
Publio Ricardo Cortes Sucre Arias & Reyes, Obarrio, Panama
Steven Sieker Baker & McKenzie, Hong Kong SAR
Shimon Takagi White & Case, Tokyo, Japan
2 The `tie-breaker' or ‘tie-breaking ” rules consist of a series of tests to be applied successively until residence for the purposes of the agreement is allocated to one State or the other. In other words, once a test is conclusive it is unnecessary to apply subsequent tests.
3 “Treaty shopping” is the practice of structuring a multinational business to take advantage of more favorable tax treaties available in certain jurisdictions. A business that resides in a home country that doesn't have a tax treaty with the source country from which it receives income can establish an operation in a second source country that does have a favorable tax treaty in order to minimize its tax liability with the home country. Most countries have established anti-treaty shopping laws to circumvent the practice.
4 Indofood International Finance Ltd v JP Morgan Chase Bank [NA 2006 AllER (D) 18 (Mar)] Velcro Canada Inc. v. The Queen, 2012 TCC 57 (February 24, 2012)
5 An “exit tax” is a tax on persons who cease to be tax resident in a country. This often takes the form of a capital gains tax against unrealized gain attributable to the period in which the taxpayer was a tax resident of the country in question. In most cases, expatriation tax is assessed upon change of domicile or habitual residence; in the United States, which is one of the only countries to tax its overseas citizens, the tax is applied upon renunciation of citizenship instead.
Publication date: 26/2/2014