INTM120085 - Company residence: standard treaty tie-breakers
In several double taxation agreements such as those with the Netherlands, the United States and Canada the question of dual residence can only be answered following discussions between the Competent Authorities of the two States, (see INTM120080).
Often the United Kingdom and the other State will not use the same criteria when considering if a company is resident. For instance the UK considers both a company incorporated in the UK and a company centrally managed and controlled from the UK to be resident here. In contrast the United States uses the sole criterion of the place of incorporation (there are some exceptions but these are very rare). If a UK incorporated company claims to be resident in the US then advice should be sought from CSTD Business, Assets & International Base Protection Policy team.
Due to the different criteria used it is not possible to say which factors will be used by the Competent Authorities when discussing the question of residence. However the factors that are likely to be considered are as follows:
- Legal connection to the State (where it is incorporated)
- Place of central management and control
- Place of effective management
- Where the company’s business activities are
- Its economic linkages to each State
- Does it have a factory, office or shop in a State?
- Where are its employees based?
- Where is its business carried on?
- Where would its customers contact it?
- Is there actually any double taxation?
- What is administratively the simplest route for the company?
These will all be viewed in the round by the UK Competent Authority when deciding their view upon residence. The company is not able to attend or take part in the discussions between the two Competent Authorities but they are encouraged to make representations regarding the country in which they consider they are actually resident.
The UK Competent Authority will then discuss and usually agree an outcome with their counterpart. This could be one of the following:
- The company is solely resident in the UK
- The company is solely resident in the other State
- The company is dual resident because either the two Competent Authorities could not reach agreement or dual residence is the agreed outcome.
Example scenarios:
- A company incorporated in State A has only a “brass plate” in State A and all its staff, directors and business is in State B. In this case the UK would normally expect State A to cede residence to State B. Although the company has a legal connection to State A the place of central management and control and effective management is in State B. Also the major economic linkages are in State B. So for treaty purposes the company would be resident solely in State B.
- A company incorporated in State A and with a real business there using State A resident employees and premises has its central management and control and place of effective management in State B. In this scenario the two major criteria are split between State A and B with the legal connection to State A and the control in State B. However the major economic linkages are in State A as it has a real business there involving premises and staff. Therefore its connection to State A is stronger than that to State B. In such circumstances the UK would expect State B to cede residence to State A.This scenario usually arises where a group in State B is trying to import losses from its subsidiary in State A. This is often denoted by claims being made several years after the relevant year and where residence is now said to be in State B with group loss claims. Contrast this with the situation where the company contacts the authorities in State B as soon as its management moves to State B. The UK Competent Authority will take such situations into account when considering their position and will generally expect to take the position that residence should be with State A.
- A company incorporated in State A, is centrally managed and controlled from and has its place of effective management in State B but has factories in both States with near equal work forces and customer bases. In this scenario the UK would look for State A to cede residence to State B. As in Example 2 the main criteria are split between the two States but unlike Example 2 the economic linkages are equal. Whichever State cedes residence there will be an enterprise in the other State through a Permanent Establishment. It is also unlikely that residence will have been contrived in order to seek a tax advantage. As the UK uses central management and control as one of its own criteria and uses place of effective management as a tie-breaker in many DTA’s then in such a finely balanced scenario the UK would place greater weight on the place of effective management than legal connection. Alternatively the company may be dual resident.
- A company incorporated in State A is centrally managed and controlled in State B. There is very little income and/or activity in either State. Here the situation will be finely balanced and until the two Competent Authorities make a decision the company will remain dual resident, and therefore resident in the UK.