Is Incorporation Really Better than Central Management and Control for Testing Corporate Residency? An Answer to Corporate Tax Evasion and Inversion
Charles Edward Andrew Lincoln IV, Is Incorporation Really Better Than Central Management and Control for Testing Corporate Residency? An Answer to Corporate Tax Evasion and Inversion, 43 Ohio N.U. L. Rev. 359 (2017).
14 Pages Posted: 17 Feb 2017 Last revised: 28 May 2017
Date Written: February 16, 2017
Central management and control is the best test for determining corporate residency, because it is most likely to reflect economic reality of a corporate entity. The place where decisions are made that affect the core of the business, not where incorporation exists ought to be the most important factor in the tax assessment process.
These two tests are a legal test — incorporation — and a substantive test — management or some variation of that — used to determine residency. Many countries combine the two tests. An argument running through this essay is that the substantive test is more akin to the economic reality.
The importance of finding corporate residence is that the resident country can tax the company on its worldwide income. It becomes a magnate to attract income and business profits from other countries, unless it is a permanent establishment in the other countries or subject to source state taxation, such as dividends or interests. This test for residency can be determined by the incorporation test or the central management test (or a derivative thereof).
Having these various tests can lead to abuse, such as a jurisdiction that only has incorporation test — and then has a 0% or low tax — then the structures can draw world wide income to a low tax jurisdiction. This would be considered abuse. Anti-abuse rules are put into place to respond to these clever scenarios of tax planning.
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