Place of management rules exist, primarily, to prevent the use of foreign registered legal entities to gain a tax advantage. While they vary from country to country, they generally work by awarding a legal entity’s tax residency to the jurisdiction where the entity actually operates. In this guide, I provide a detailed summary and present case scenarios.
A number of rules exist to prevent the use of foreign registered legal entities to gain a tax advantage. These include place of management rules, CFC rules and general anti-avoidance rules. Each set of rules apply when different sets of circumstances exist.
CFC rules will usually apply when a foreign company is used as a holding structure, to shelter foreign-sourced profits from local taxation. They will also apply, sometimes, when an active company retains foreign-sourced profits instead of distributing them, to protect foreign shareholders from local taxation. For example, an Australian resident who owns 40% of a Hong Kong holding company that conducts active business in SE Asia will be taxed in Australia at the personal level on his / her share of the foreign-sourced profits even if said profits are not distributed, and even if the Australia resident had no involvement in the business.
General anti-avoidance rules will usually apply when a structure is setup in a fully compliant manner, but for the sole purpose of gaining a tax advantage. This set of rules is the most complex and will usually involve a case-by-case approach.
Most importantly for the purpose of this guide, place of management rules will usually apply when a company is actively managed from a country different from where it is registered. For example, a UK LTD actively managed from Germany. They may also apply when a company is actively managed from multiple foreign countries. For example, a UK LTD actively managed from Germany, Canada and New Zealand.
As you can imagine, things can quickly become complicated when multiple countries and tax systems are involved.
Present rule of thumb
Present resources available to IC members
Estonian OU + Single owner in Spain
While an Estonian OU is generally deemed a tax resident of Estonia by virtue of being registered there, the Estonia-Spain tax treaty in this case will award tax residency to Spain where the OU will be taxed as a Spanish company. This negates all tax benefits of registering in Estonia, but may still be an advantageous setup due to Estonia’s lower setup and maintenance costs.
UK LTD + Single owner in the UAE
While a UK LTD is generally deemed a tax resident of the UK by virtue of being registered there, it can also elect to be treated as a non-resident if certain conditions are met. The primary condition is that the LTD is registered for taxation in a treaty country, with proof to substantiate this registration. The UAE is a treaty country and so in this case the election would likely be accepted and the LTD would be treated as a tax resident of the UAE (and a treaty non-resident of the UK). This is an example of how place of management rules can be used to gain an advantage (running a UK company tax-free or at a lower rate than the UK’s).
HK LTD + Single owner in Thailand
Hong Kong does not have a concept of tax residency in its tax law, it instead taxes income generated locally and exempt income generated abroad, for both individuals and legal entities.
UK LTD + Multiple owners
UK LTD + Single owner, digital nomad