Company: where a company is resident and how it links back to you

What this flag means

The company flag is the country where a person holds or runs a business entity. An entity is formed under one country's company law, but its tax residence, its taxable presence and the way its profits are treated in the owner's hands depend on several countries' rules at once: the law of the place of incorporation, the law of the place where decisions are actually made, the controlled foreign company rules of the owner's country, and any tax treaty between them. Ownership is recorded in beneficial ownership registers and checked by banks and service providers.

Separate incorporation from company tax residence

Incorporation creates the company under one country's law. Tax residence is a separate question, and countries answer it in different ways. Many treat every company incorporated under their law as resident. Many also treat a foreign-incorporated company as resident if it is managed or controlled from their territory.

Three examples from official sources show the pattern. UK guidance applies an incorporation rule to UK companies and a case-law test of central management and control to others. Israel's tax code treats a body of persons as resident if it is incorporated in Israel or if the control and management of its business are exercised from Israel. The UAE treats a juridical person as tax resident if it was incorporated, formed or recognized under UAE legislation, excluding a branch of a foreign company, or if it is resident under the applicable tax law. See United Kingdom, Israel and United Arab Emirates.

Find where the company is actually managed

Management tests look at where the real decisions are taken. HMRC describes central management and control as a question of fact about where the highest level of control of the business is exercised. Holding board meetings in another country does not settle it: in one leading UK case, subsidiaries whose constitutions required board meetings abroad were still treated as UK resident because the UK parent in fact made the key decisions.

This is where the company flag meets the owner's own residence. If the owner lives in one country and takes the company's key decisions from there, that country may look at the company as its own resident. A company in one country and an owner deciding everything from another is a combination to put in front of a qualified adviser, with the facts of who decides what, where and how it is recorded.

When a company is resident in two countries under their domestic laws, a tax treaty may settle it. Older treaties based on the OECD Model use the place of effective management as the tie-breaker for companies. Since the 2017 update, the OECD Model leaves the question to the two competent authorities to settle by mutual agreement, having regard to the place of effective management, the place of incorporation and other relevant factors. Read the treaty actually in force between the two countries.

Check controlled foreign company rules in the owner's country

Controlled foreign company (CFC) rules let a country tax its residents on certain income of a foreign company they control, even if that income has not been paid out. They exist so that moving income into a low-tax company does not by itself take it out of the owner's country's tax base.

In the European Union, Council Directive (EU) 2016/1164 requires member states to apply a CFC rule to corporate taxpayers. A foreign entity is in scope when the taxpayer, alone or with associated enterprises, holds more than 50 percent of the votes or capital or is entitled to more than 50 percent of the profits, and the actual corporate tax it pays is lower than the difference between the tax that would have been charged under the taxpayer's member state rules and the tax actually paid. Member states then include either listed categories of passive income, such as interest, royalties and dividends, or income from non-genuine arrangements set up mainly to obtain a tax advantage.

The listed-income approach does not apply where the foreign company carries on a substantive economic activity supported by staff, equipment, assets and premises. Countries outside the EU have their own CFC rules, and some apply CFC-style rules to individual shareholders too. Check the rules of the country where the owner is resident, not the country where the company is.

Expect beneficial ownership to be recorded

A beneficial owner is the individual who ultimately owns or controls a company. Many countries require companies to record their beneficial owners in a central register, and banks and other regulated firms must identify them separately.

In the UK, a company must record its people with significant control with Companies House. A person is usually a person with significant control if they hold more than 25 percent of the shares or voting rights, can appoint or remove a majority of directors, or can otherwise influence or control the company. UK anti-money-laundering rules also require regulated firms to identify a customer's beneficial owner and to understand its ownership and control structure, and they may not rely only on a register entry to do so.

In the EU, central registers were set up under the anti-money-laundering directive. On 22 November 2022 the Court of Justice held that the provision making beneficial ownership information accessible in all cases to any member of the general public was invalid. That ruling concerned general public access, not the existence of the registers. Who may see a register now depends on each member state's law.

Understand economic substance expectations

Substance means real activity: people, premises, equipment and decision-making where the company says it operates. It comes up in several places at once.

The EU's screening criteria for its list of non-cooperative jurisdictions for tax purposes say a jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits that do not reflect real economic activity there, and the absence of a corporate tax or a rate close to zero is evaluated as a possible indicator. The EU CFC directive's carve-out also turns on staff, equipment, assets and premises. Some jurisdictions with no or nominal corporate tax have adopted their own substance rules. Check the current law of the jurisdiction concerned.

Connect the company back to your own residence

A company does not have a passport or a living base of its own in the way a person does. Its position is read together with the owner's. Before forming or moving a company, map these links:

• Owner's tax residence: it decides which CFC rules apply and how salary, dividends and gains are taxed in the owner's hands. See Tax residency.
• Where decisions are made: where the owner and directors actually live and work can affect the company's residence.
• Where the work is done: where staff, customers and premises are matter for substance and for where profits are taxed.
• Banking: under the automatic exchange rules, financial institutions report certain entity accounts together with the entity's controlling persons, so the owner's residence travels with the company's account. See Banking.
• Assets held through the company: property or investments held through an entity raise their own reporting and tax questions. See Assets.

Bring the right facts to a formation provider and adviser

A licensed provider and a qualified adviser can only answer well with full facts. Prepare these before the first meeting:

• What the business does, where its customers are and where the work is performed.
• Who owns it, in what shares, and where each owner and director is tax resident.
• Who will take the main decisions, and from which country.
• Which bank accounts and payment providers it will need, and in which countries.
• What accounting, audit, annual return and tax filing duties each candidate jurisdiction imposes, and who will meet them.

Common misconceptions

Questions to take to a professional

1. Under the laws of the place of incorporation and of the countries where the owners and directors live, where would this company be tax resident?
2. Where would the company's key decisions actually be taken, and how should that be documented?
3. Do the controlled foreign company rules of my country of residence apply to this company, and to me as an individual shareholder?
4. What substance would this company need to have in its jurisdiction, given its activity?
5. Which beneficial ownership register will record me, who can see it, and what do I need to update when things change?
6. If two countries could treat the company as resident, which treaty applies and how does its tie-breaker work?
7. What accounting, audit and filing duties will the company and I each have, and who will carry them out?
8. How would salary, dividends and gains from this company be taxed and reported in my country of residence?

Questions people ask

Where this guide stops

Sources

• Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal marketPrimary law
• INTM120000 - Company residence: contentsOfficial guidance
• INTM120060 - Company residence: the case law rule - central management and controlOfficial guidance
• OECD Model Tax Convention on Income and on Capital: Condensed Version 2017, Article 4 (Resident)Treaty text
• Israel: Information on Residency for tax purposes (jurisdiction sheet published for the CRS)Official guidance
• Cabinet Decision No. 85 of 2022 - Unofficial Translation (Federal Tax Authority)Primary law
• People with significant control (PSCs)Official guidance
• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, regulation 28Primary law
• Court of Justice press release No 188/22: Judgment in Joined Cases C-37/20 Luxembourg Business Registers and C-601/20 SovimOfficial guidance
• Council conclusions on criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes (8 November 2016)Official guidance
• Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxationPrimary law