Residence of Companies under Tax Treaties and EC Law

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1 Residence of Companies under Tax Treaties and EC Law edited by Prof. Guglielmo Maisto Vol.5 EC and International Tax Law Series

2 Acknowledgements Foreword v vii Part One Companies and Private International Law Chapter 1: General principles of residence of companies 3 Peter Behrens 1.1. The function of connecting factors Categories of connecting factors Indeterminate connecting factors Determinate connecting factors Factors relying on the creation of the company as a legal person Factors relying on the internal governance structure and decision-making Factors relying on the business activities of a company The legislative or jurisprudential use of connecting factors Determination of the proper law of companies (private international law) Preliminary observations Grouping of connecting factors Relevant distinctions Autonomous conflict rules Internal conflicts within theec/eea External conflicts outside theec/eea Divergence of "legal seat" and "real seat" (legal consequences) Proof of connecting factors Connecting factors as applied to groups of companies Pseudo-foreign companies Treaty rules 23

3 Determination of the proper laws outside company laws Judicial jurisdiction Insolvency proceedings Corporate taxation Conclusion 27 Chapter 2: Conflict of law rules on companies in the EU 29 Susanne Kalss 2.1. Incorporation doctrine and seat doctrine European Court of Justice Development of the ECJ's case law to date Cartesio Conflict of law rules post Centros, Uberseering and Inspire Art Company law Does the location of the central administration affect the applicable company law? Scope of the lex societatis Law fields closely related to company law Contracts Corporate insolvency Non-contractual obligations Takeover bids Domicile of supranational companies Societas Europaea Societas Europaea Privata Corporate mobility in Europe Meaning of corporate mobility Status quo of European regulation History No further EU legislation on transfer of registered office to come in the near future Societas Europaea Directive on cross-border mergers Draft regulation on Societas Europaea Privata Conclusion 58

4 Part Two Company Residence and EC (Non-Tax) Law Chapter 3: EC law and residence of companies 61 Jan Wouters and Philip De Man 3.1. Introduction The "system" of Article 48 EC Notion of "establishment" Freedom to provide services Free movement of capital International agreements Residence as "corporate seat": Connecting factor for EC entitlement Meaning Analogy with nationality Relationship to private international law Residence restrictions Residence as discrimination General Overt and covert discrimination Application in tax cases Residence as non-discriminatory restriction Measures with discouraging effect Restrictive measures imposed by State of origin Concluding remarks 90 Part Three Tax Residence of Companies under Domestic Tax Laws Chapter 4: Corporate tax residence in civil law jurisdictions 95 Luc De Broe 4.1. Introduction Criteria applied to determine corporate tax residence in the domestic laws of civil law jurisdictions General rules Deemed residence rules 97

5 Criteria of attachment Legal entities covered Tie-breaker for legal entities OECD The second sentence Treaty shopping Interpretation Treaty benefits for third-country residents Commerzbank Crown Forest Industries Should PEs get treaty benefits in the source country? Company residence, treaty shopping and worldwide taxation Dual residents Conduit companies Policy purposes of company residence test and worldwide taxation Giving substance to the company residence test Conclusions 270 Chapter 8: The expression "by reason of his domicile, residence, place of management..." as applied to companies 273 Marcel Widrig 8.1. Introduction Role of domestic law in connection with connecting factors Defining residence Relevance of the criterion "domicile" Relevance of the criterion "place of management" Difference in scope to Article 4(3) OECD MC Difference in scope to Article 5(2)(a) OECD MC Meaning of "other criteria of similar nature" Approach taken in the US Model tax treaty Residence rule in Article 4( I) US MC Place of management according to Article 5 US MC Compatibility of domestic deemed residence rules Conclusion 286 XIV

6 Chapter 9: The meaning of "place of effective management" 287 Jacques Sasseville 9.1. Introduction The Mexico and London Models The OEEC: A different approach but the same problem The 1963 Draft, the 1977 Model and the 1992 Update The 2000 Update The 2008 Update Different views as to the meaning of "place of effective management" The American concept of "primary place of management and control" 300 Chapter 10: Article 4(3) of the OECD Model Convention: An inconvenient truth 303 Stefvan Weeghel Introduction Article 4(3) MC: An inconvenient truth 303 Part Six Country Reports Chapter 11: Australia 311 Michael Dirkis Companies and private international law Conflict of laws rule Corporate governance rules Powers of the directors of a company Independence of directors from shareholders Whether persons participating in the management of a company may be considered directors thereof, even absent a formal appointment to such office Allocation of corporate governance between managing directors and supervisory directors 316

7 Allocation of corporate governance between shareholders and directors The rights (if any) of a parent company to interfere with the decisions taken by directors of a subsidiary Residence of companies under Australian tax law Overview Incorporation test Central management and control test Two-or one-tier test The first element: "Carries on business" test The second element: Central management and control Voting power control test Overview The first element: Carries on business in Australia Defining a business Is there a business in existence being carried on? Is the business in Australia? The second element: Voting power controlled by shareholders who are residents of Australia Voting power Control Resident in Australia Residence of companies under tax treaties Criteria applied in determining residence of companies in Australia's tax treaty practice Overview Consistency with Art. 4( 1) OECD Model Convention The tie-breaker provisions for companies' residence in Australia's tax treaty practice Effects of a tax treaty tie-breaker rule on the company's resident status under both domestic corporate (income) tax law and other tax treaties Overview "Dual resident investment company" test 336

8 "Prescribed dual resident" test Reform of dual resident rules Compatibility of domestic company tax law provisions with tax treaties and Community law 338 Chapter 12: Austria 339 Karin Simader Companies and private international law Conflict of law rules Connecting criteria Implications of the real seat theory and its compatibility with Community law General Austrian treaty practice Company law rules on governance of companies Private limited company Public limited company Residence of companies under domestic company tax law Connecting criteria Interaction between private international law and corporate tax law Corporate tax liability of foreign corporations Residence of companies under tax treaties Relevant criteria for determination of residence The expression "liable to tax" Connecting criteria Article 4 paragraph 1 second sentence Tie-breaker provisions Effects of a tie-breaker rule Compatibility of domestic company tax law provisions with tax treaties and Community law General remarks Particular provisions of domestic company tax law 373 Chapter 13: Belgium 375 Niels Bammens Companies and private international law Conflict of law rules Company law rules on governance of companies 380

9 13.2. Residence of companies under domestic company tax law Connecting factors in corporate income tax law Case law on the determination of the company's residence Other entities Residence of companies under tax treaties Criteria applied in determining the residence of companies in tax treaty policy Meaning of the expression "liable to tax" Tax treaty practice Interpretation Connecting criteria relevant to establish the resident status Tax treaty practice Interpretation Companies liable to tax in a State in respect only of income from sources located therein The tie-breaker provisions for companies' residence Tax treaty practice Interpretation Effects of a tax treaty tie-breaker rule on the company's resident status under both domestic corporate income tax law and other tax treaties Compatibility of domestic company tax law provisions with tax treaties and Community law 405 Chapter 14: Canada 407 Kim Brooks Residence of corporations in Canada An introduction to Canadian corporate law Forming a Canadian corporation Corporate governance Powers and privileges Shareholders Directors Residence of companies under Canadian tax law Tax consequences resulting from Canadian corporate residence 412

10 Central management and control test and the perceived need for a statutory test The statutory place of incorporation test Continued role for central management and control Continuances Tax residence of other entities Residence of companies under Canada's tax treaties Article 4(1) in Canada's tax treaties Liable to tax Connecting criteria for residence Liable to tax in a State in respect only of income from sources located therein Article 4(3) in Canada's tax treaties Compatibility of Canada's domestic company tax law provisions with tax treaties Conclusion: Continued avoidance concerns 439 Chapter 15: France 441 Nicolas de Boynes Companies and private international law Conflict of law rules Company law rules on governance of companies Residence of companies under domestic company tax law Residence and source Consequences of a strict territoriality principle The French approach to territoriality Definition of the "seat" Residence of companies under tax treaties Criteria applied in determining residence of companies in French tax treaty practice Meaning of the expression "liable to tax" Companies liable to tax by reason of their residence Tie-breaker provisions for companies' residence in French tax treaty practice Effects of tax treaty tie-breaker rule on company's resident status Compatibility of domestic company tax law provisions with tax treaties and Community law 458

11 Chapter 16: Germany 461 Joachim Englisch Preliminary questions of company law Rules on governance of corporations in company law Aktiengesellschaft (public limited company) Gesellschaft mit begrenzter Haftung (private limited company) Konzern (corporate group) Conflict of law rules in international company law The (r)evolution of German international company law Unilateral rules Bilateral agreements The concept of "actual centre of administration" as connecting factor Residence of companies under domestic corporate tax law The company as a taxable person Corporation tax Local business tax Tax effects of residence and non-residence Corporation tax Local business tax Criteria applied to determine the place of residence Seat Place of management Substantive dimension: Performance of chief business management Personal dimension: Attribution to the actual manager (s) Functional dimension: Localizing the centre of management Residence of companies under tax treaties Criteria applied in determining the place of residence Liability to tax Connecting criteria relevant to establish resident status 498

12 Relationship to the corresponding criteria in domestic tax law "Place of management" as standard criterion "Seat'V'place of incorporation" as alternative criterion Concurrence of treaty and domestic criteria Criteria expressly excluding resident status Tie-breaker provisions Effects of a tax treaty tie-breaker rule on the company's resident status Compatibility of domestic corporation tax law provisions with tax treaties and Community law 515 Chapter 17: Italy 519 Mario Tenore Companies and private international law Italian company law: a brief overview Residence of companies under domestic company tax law Rebuttable presumptions Residence of companies under tax treaties Compatibility of domestic company tax law provisions with Community law 547 Chapter 18: Netherlands 551 Reinout de Boer Introduction and summary Companies and private (international) law Conflict of law rules Governance of companies (NV and BV) Residence of companies under domestic company tax law Introduction The all-facts-and-circumstances test (Art. 4( I) GSTA) General 561

13 Place of effective management is generally decisive Effective management of a company is deemed to be performed by its (executive) board Relation of the all-facts-and-circumstances test with conflict of law rules under private international law Distinction between "place of effective management" and "place of management" Incorporation fiction Minimum substance requirements in administrative guidelines Residence of companies under tax treaties Criteria applied in the tax treaty practice of the Netherlands The meaning of the expression "liable to tax" Exemptions in respect of income Exempt companies/entities Companies/entities resident for domestic tax purposes that are only partially liable to tax Companies/entities resident for domestic tax purposes that are not liable to tax at all The connecting criteria relevant to establish the resident status Companies liable to tax in a State in respect only of income from sources located therein Tie-breaker provisions in tax treaty practice in the Netherlands Provisions in tax treaties Interpretation of "effective management" in tie-breaker provisions Effects of a tax treaty tie-breaker rule on the company's resident status under both domestic tax law and other tax treaties Domestic tax law 595

14 Tax treaties (triangular cases) BNB 2001/ BNB 1992/ Compatibility of domestic company tax law provisions with tax treaties and EC law in respect of residence 600 Chapter 19: South Africa 603 Johann Hattingh Introduction The legal conception of "residence" The legal conception of a "company" Chapter overview Companies and private international law Conflict or choice of laws Residence as a jurisdictional connecting factor South African incorporated companies Foreign incorporated companies Property as connecting factor: Movable incorporeal things and "residence"-based fictions Connecting criteria located in two or more States in respect of the same dispute Connecting criteria transferred from or to South Africa Concluding remarks concerning jurisdictional law Investment protection treaties Corporate governance of companies The general meeting of a company as far as management is concerned The board of directors and the management of a company Who is a director? Different classes of directors Acting collectively Acting collectively only at board meetings? 654

15 Directors acting as managers The managing director The chairman of the board of directors The influence of directors' fiduciary duties on the management of a company The effect of liquidation on the management capacity of directors Other functionaries of a company Employees Secretary Managers of a company Sole shareholder also director Dominant shareholder or directors Residence of companies under domestic income tax law Statutory residence definition Companies Entities other than companies and natural persons The place of effective management criterion under South Africa's domestic income tax law Interpretive approach The approach of the South African Revenue Service Questionable aspects of Interpretation Note 6 in the light of South African law "Effective" management of a company as opposed to "management of a company" "Place" of effective management Guidance from related tax case law Robinson v. COT: The contextual scene of tax residence Rhodesia Railways v. COT: Dual corporate tax residence and tax policy considerations Estate Kootcher v. CIR: A return to the analogue of human residence A Company v. CWand ITC 1054: The role of dominant shareholders South African commentators' views on the meaning of "place of effective management" Guidance from foreign tax case law 711 XXIV

16 19.5. Residence of companies under tax treaties The meaning of the expression "liable to tax" The connecting criteria to establish resident status Companies liable to tax only in respect of income from sources within South Africa "Place of management" for purposes of Art. 5(2) of the OECD Model Tie-breaker provisions for companies under South Africa's tax treaty network Does the meaning of "place of effective management" differ under South African tax treaty law as opposed to domestic tax law? Overview of international sources on the meaning of "place of effective management" Historical tax treaty development Common tax treaty meaning? Guidance from the Commentary on the OECD Model before the 2008 amendments Guidance from the Commentary on the OECD Model after the 2008 amendments Foreign case law of the tax treaty meaning of "place of effective management" Wensleydale 's case: The place "where the shots are called" Woodv.Holden The Indofood case The Smallwood case The South African effect of a tie-breaker for a dual tax resident company The relationship between tax treaty law and domestic tax law South Africa and the European Union 752 Chapter 20: Spain 753 Luis A. Martinez Giner Spanish companies and private international law "Nationality" of Spanish companies Special rule for "pseudo foreign corporations" 755

17 International transfer of company headquarters Spanish companies in the reciprocal investment promotion and protection treaties Organizational structure of companies in Spain Residence of legal persons in Spanish corporate tax legislation Residence as a criterion defining taxable persons for company tax purposes Criteria determining the residence of companies Incorporation of a company under Spanish law Location of the registered office of the company Place of effective management Presumption of tax residence of companies in Spain Tax treaties and the residence of companies Residence of companies for tax treaty purposes according to Spanish treaty practice Scope of tax liability: Worldwide tax liability Criteria determining residence in tax treaties signed by Spain Exclusion of persons with territorial tax liability Tie-breaker rules and dual residence of companies in Spanish treaties Effects of the tax treaty tie-breaker rule on a company's resident status Compatibility of domestic company tax law with tax treaties and community law 792 Chapter 21: Switzerland 795 Jean-Frederic Maraia Companies and private international law Conflict of law rules Company law rules on governance of companies Corporations In general Shareholders'meeting Board of directors 797

18 Relation between shareholders and directors New rules improving the corporate governance Limited liability company Comment Residence of companies under domestic company tax law Federalism system Scope Tax residence Criteria Relation between the two criteria (conflict) Registered office in Switzerland Effective management in Switzerland Introduction of the effective management criterion and first definition Interpretation of the effective management concept in the intercantonal context Application of the jurisprudence related to intercantonal double taxation to international situations Importance of the criteria depending on the specific circumstances of the case Residence of companies under tax treaties Criteria applied in determining the residence of companies under Swiss tax treaties Meaning of the expression "liable to tax" Companies liable to tax in a State in respect only of income from sources located therein Tie-breaker provisions for companies' residence OECD Model and treaties concluded by Switzerland Concept of effective management in the treaties Effects of a tax treaty tie-breaker rule on company's resident status Compatibility of domestic company tax law provisions with tax treaties 815

19 Chapter 22: United Kingdom 817 Christiana HJI Panayi Companies and private international law Domicile, residence and other connecting factors for companies Domicile of companies Residence of companies Other connecting factors under non-tax instruments Rules on corporate governance The powers of directors Delegation of the powers of directors De facto and shadow directors The interaction between directors and shareholders Group companies and the piercing of the corporate veil Residence of companies under domestic company tax law Introduction The common law test: Central management and control The old cases: De Beers Consolidated and Unit Construction Statement of Practice 1/ Recent cases: Wood v. Holden and News Datacom The place of effective management The statutory test: The incorporation rule Residence of other non-corporate entities Residence of companies under tax treaties Company residence criteria under UK DTCs The tie-breaker rule The tie-breaker rule under the OECD Model The tie-breaker rule in UK DTCs: The place of effective management Effects of the tie-breaker rule Corporate immigration Compatibility of domestic tax law provisions with tax treaties and Community law Compatibility with tax treaties Compatibility with Community law (primary and secondary) 851

20 Chapter 23: United States 855 Yariv Brauner Companies and private international law Private international law of the United States Corporate governance law of the United States Residence of companies under domestic company tax law The residence of companies under tax treaties Criteria applied in determining the residence of companies in the State's tax treaty practice The meaning of the expression "liable to tax" The connecting criteria relevant to establish the resident status Companies liable to tax in a State in respect only of income from sources located therein The tie-breaker provisions for companies' residence in the State's tax treaty practice The tie-breaker rules Effects of a tax treaty tie-breaker rule on the company's resident status under both domestic corporate (income) tax law and other tax treaties Denial of treaty benefits for certain payments through hybrid entities Conduit financing regulations Compatibility of domestic company tax law provisions with tax treaties and Community law Compatibility of the domestic tax provisions with tax treaties Compatibility of the domestic tax provisions with Community law 885 Part Seven Round-Table Discussion Chapter 24: Round Table: The issues, conclusions and summing-up 889 August o Fantozzi, Jean Pierre Le Gall. Kees van Raad. Yariv Brauner. Angelo Nikolakakis Is it possible to avoid conflicts of companies' tax residences? Domestic provisions What about treaty provisions? 892

21 24.2. A brief analysis of the operation and effect of the application of Art. 4.1 OECD Model in dual residence cases Concluding thoughts The unbearable lightness of being incorporated: The diminishing relevance of corporate residence The taxation of corporations Corporate taxation in theory and in practice Conclusions Summing-up and conclusions 928 Contributors 935 XXX

Table of Contents. Part One Residence of Individuals and Non-Tax Law

Table of Contents. Part One Residence of Individuals and Non-Tax Law Acknowledgements Foreword v vii Part One Residence of Individuals and Non-Tax Law Chapter 1: Residence and domicile of individuals in private international law 3 James J. Fawcett 1.1. Introduction 3 1.2.