Your Place of Effective Management
International Entrepreneurs can often get confused when they are learn that incorporating an entity in a so-called tax haven (eg Panama, Cook Islands, Liberia or a Dubai IBC) may be useless if they in turn operate this company in a high tax jurisdiction.
The issue is the definition of tax residence for corporations. There are essentially 3 models for corporate tax residence -
1. Some countries determine the residence of a corporation based on formal criteria such as place of incorporation. An example in Taiwan, as at the time of writing in early 2019, corporate residence is determined based on where the corporate entity is incorporated, regardless of the place of effective management. Please note that this is expected to change as a result of a new regulation soon to be enacted.
2. In other countries, the residence of a corporation is determined by reference factual criteria such as place of effective management or similar concepts. In Singapore and Hong Kong eg, tax rules test "management and control" to determine whether a corporation should be considered tax resident there. Conversely, rules allow for corporations to be incorporated in Singapore and Hong Kong but be considered non resident companies (and taxed at 0%) because no management and control is exercised there.
Singapore - http://www.mooresrowland.tax/2019/11/tax-planning-in-singapore.html
Hong Kong - http://www.mooresrowland.tax/2019/07/corporate-tax-guide-hong-kong-special.html
3. Some countries have mixed systems, where there is both a place of incorporation test and a place of effective management test. In Indonesia and the USA, either of these could lead to worldwide tax on corporate income.
Indonesia - http://www.mooresrowland.tax/2019/04/npwp-for-all-foreign-businesses.html
USA - http://www.mooresrowland.tax/2019/03/foreign-businesses-permanent.html
Let's use the UK as a case study.
A company that is not incorporated in the UK may be treated as UK tax resident if it is centrally managed and controlled here. Much careful tax planning can be undone if this point is not well understood and continually monitored.
Over the years, the concept of 'management and control' has been examined in case law and certain key features have emerged. HM Revenue & Customs (HMRC) has also published guidance on the topic which can be found here.
How it began