In her recent post, Tanja Velling highlights some of the uncertainties in the UK around the tax residence of a company. This is not just a UK issue, as it is far from being clear in many other countries.

For companies not belonging to a group, agreeing on their country of residence is relatively easy. A “solo” company generally carries on business only in one country, normally that in which it is incorporated. It is frequently managed by its shareholders. Managers usually live close to the company’s offices, which are close to where the employees work and live. The principal place of business of that company, as well as its management and control, can easily be located in one specific physical place. If that physical place is in country A and the company is incorporated in country B (and it pretends to be fiscally resident in B), the tax authorities in A would easily convince any judge that the company is resident in A and not in B. If that company expands its activity within national borders, nothing changes: it would remain fiscally resident in that country.

When a company decides to expand internationally, things get more complicated. Operating in another country with a branch or a subsidiary is often an open choice. If the company opts for a branch, it will entrust management responsibilities to one or more branch managers. If it chooses a subsidiary, it would appoint a board of directors. In both cases, the managers would be subject to the same stringent controls by someone else, the hierarchical superior on the branch manager, the controlling company on the management body of the subsidiary. A subsidiary never does anything that the parent would disapprove. If it does, the directors get sacked, as would the branch manager who does not comply with his superior’s instructions.

Focusing on “management and control” to determine the tax residence of a subsidiary in a MNE may lead to absurd consequences. MNEs have centralized “strategic” management and control. Subsidiaries are satellite entities, managed by executives that are chosen, directed and controlled by the parent, subject to stringent reporting rules and financial targets. Branch managers are no different. But a branch does not have a residence of its own. Therefore, why should a subsidiary have a residence different from that of its parent when (a) management and control determine tax residence and (b) its governing body is managed and controlled by the parent in the same way a branch is managed and controlled by the boss from the head office? Can the country of residence of the ultimate parent claim that all the offshore subsidiaries are resident there because management and control comes from the parent? The answer is negative. Therefore, management and control is decisive to establish where a “solo” company is resident, but not when it comes to a subsidiary.

In a recent case (no. 15184 of 2019), the Italian Supreme Court had to rule on the tax residence of a Dutch holding company (Agusta Holding BV) which was 100% owned by another Dutch company (Agusta Westland NV) which was in turn owned by an Italian group (Finmeccanica) and a UK group (GKN), each holding 50%. Agusta Holding BV owned 100% of Agusta SPA, an Italian operating company. The Tax Office and the Appellate Court stated that Agusta Holding BV was not resident in the Netherlands but in Italy, because (a) its directors were Italians and British (b) it did not carry out any business activity in the Netherlands and (c) there was no evidence that management and control were in such country. The SC rightly quashed the Appellate Court's decision since it omitted to consider that board meetings and shareholders’ meetings were regularly held in the Netherlands and that the company had a local structure consistent with its business activities (no active business, no structure). The fact that the directors were appointed by the two shareholders (Finmeccanica and GKN) was not even considered by the SC. A new Appellate Court shall review the relevant facts and reach a conclusion.

Like the UK's Upper Tribunal in the Development Securities case, the Agusta Westland case confirms that the exposure of a subsidiary (or joint venture) to central management and control is not decisive in determining the tax residence.

The pendulum seems to have swung from the starting formalistic end (where does the board formally meet?), reached the opposite substantive end (who is the boss and where does he or she operate from?) and it is now moving back again.

To achieve stability, we need to stop the pendulum and find a comfortable medium. Considering the amount of controversies, this is not an easy task. Perhaps it is time to focus more on where income is generated, rather than wasting efforts in determining where its “apparent” owner is resident.