A company is typically deemed to be tax resident in the jurisdiction where it is incorporated. However, a number of countries also attach importance to the place where the company is managed, and deem a company to be tax resident in the place of effective management (‘POEM’) even if this is not the same as the place of registration.
Whilst situations dealing with the dual residence of individuals are normal due to the fact that individuals move around more frequently and easily than companies do and can, there have been, and still are, a number of dual-residence issued for companies.
As with any case of dual-residence, these need to be solved through the respective tax treaty, typically Article 4 of the treaty dealing with residence. Prior to the 2017 changes, any dual-residence issue of companies was solved by determining where the POEM was situated. As per the Commentary to the Article, tax authorities were expected to take into account a number of factors, such as where the board of directors’ meetings were held, where the CEO and other senior executives usually carry on their activities and other similar matters.
During 2017, the Committee on Fiscal Affairs (‘CFA’) recognised that although dual residence conflicts for companies were rare, there have been a number of tax avoidance issues involving dual residence companies. The CFA therefore determined that, rather than applying the POEM blanket rule, such issues should be dealt with on a case-by-case basis. In November 2017 the wording of both Article 4 of the OECD Model Tax Convention (‘OECD MTC’) and the Commentary have changed such that the tax residence for dual residence persons, other than individuals, is determined by mutual agreement of the Contracting States having regard to its POEM, the place where it is incorporated and any other relevant facts. It is also important to note that, Paragraph 3 of Article 4 of the OECD MTC proceeds by saying that in the absence of such mutual agreement, the company shall not be entitled to any relief or exemption provided for by the specific treaty. This was a material change from ‘simply’ determining the POEM.
One has to keep in mind two important factors. Firstly, the above changes have been made to the OECD MTC, and not to specific treaties. For such changes to come into force, a number of specific treaties would need to be re-negotiated. What’s certain, is that, new treaties will take the above changes into consideration.
Secondly, and because of the issues mentioned in the previous paragraph, the above-mentioned changes have also been included in a multi-lateral instrument, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (‘MLI’), which was signed by almost 100 jurisdictions. Having said that, a number of countries opted out from certain provisions of the MLI as a result of which, not all of the articles within the MLI would apply to every existing treaty. One would need to understand which country opted out of which article, in order to determine whether the mutual agreement clause is applicable.
The writer is a co-founding partner of Seed, an international research driven advisory firm with offices in
Europe and the Middle East.
www.seedconsultancy.com |
nicky@seedconsultancy.com