Seperating individual tax residence from corporate tax residence

[Revoltec]

My home country has unclear definitions regarding what is considered to have 'ties' for tax matters. Therefore, I wonder if there is any way to shield myself by investing in stocks through a company from a jurisdiction that doesn't tax this type of income.

That is, can individual tax residence and corporate tax residence be separated in such a way that my home country never can tax me on the income generated within the company?

The company will be managed by me and I will live in the new country so I guess PE rules won't be applicable here. The things I am worried about is if my home country can use 'substance over form' laws to say that this income is actually still generated as individual income and not corporate (from the company abroad).

Can my home country invalidate the corporate structure based on substance even if I do not live nor manage the company from my home country? (Or on some other kind of principle)

 

[Martin Everson]

That is, can individual tax residence and corporate tax residence be separated in such a way that my home country never can tax me on the income generated within the company?

Yes

The company will be managed by me and I will live in the new country so I guess PE rules won't be applicable here. The things I am worried about is if my home country can use 'substance over form' laws to say that this income is actually still generated as individual income and not corporate (from the company abroad).

If you live in new country where company is based and are tax resident there then unless your an American or under tax investigation its not your home countries business.

 

[Revoltec]

Yes



If you live in new country where company is based and are tax resident there then unless your an American or under tax investigation its not your home countries business.

What if you are a tax resident in both countries?

 

[Martin Everson]

What if you are a tax resident in both countries?

No problem. You pay tax according to DTA between both countries. If there is no DTA then you pay tax twice.

 

[Revoltec]

My point was: if they argue that I'm still a tax resident back home, can they attribute the income from the company to me personally by claiming I was a resident and that my company got no substance (because I could trade as an individual the same way) and therefore income should be taxed in my home country.

 

[Martin Everson]

As I mentioned if both countries deem you tax resident then it comes down to the DTA between both countries and any tie-breaker clauses. At that point if the taxation goes in favor of your home country then CFC could apply if present. GAAR rules could also apply and the company may be deemed transparent for tax purposes if its purpose is to reduce taxation in which case the taxation flows through to you. That would be case if home country was UK but you need to look at your home country rules. You would need for the company to have economic substance and its activities done at an arms length from i.e you have no direct control over the company.

 

[Revoltec]

As I mentioned if both countries deem you tax resident then it comes down to the DTA between both countries and any tie-breaker clauses. At that point if the taxation goes in favor of your home country then CFC could apply if present. GAAR rules could also apply and the company may be deemed transparent for tax purposes if its purpose is to reduce taxation in which case the taxation flows through to you. That would be case if home country was UK but you need to look at your home country rules. You would need for the company to have economic substance and its activities done at an arms length from i.e you have no direct control over the company.

There are no CFC rules in my home country. Thanks for mentioning the GAAR rules, I will have a look at them. Are the GAAR rules, substance rules and control rules still relevant if my home country does not have CFC rules?

For my home country: "General anti-avoidance rule is represented by the 'substance over form' principle. In addition to thin capitalization and transfer pricing rules, there are no other specific anti-avoidance rules applicable in a cross-border context"

Considering that there are no CFC rules in my home country, If Im deemed tax resident of both countries, but the company is only resident of, let's say Cyprus, can the income from the company still be attributed back to me as an individual and taxed in my home country?

 

[Martin Everson]

Are the GAAR rules, substance rules and control rules still relevant if my home country does not have CFC rules?

GAAR rules are whatever the ta man decides at their discretion. Meaning they can deem any setup artificial or invalid due to achieving a tax advantage. You would need to check if GAAR exists.

If Im deemed tax resident of both countries, but the company is only resident of, let's say Cyprus, can the income from the company still be attributed back to me as an individual and taxed in my home country?

Depends on DTA and any anti-abuse legislation if it exists. Your best to get professional tax advice.

 

[Revoltec]

GAAR rules are whatever the ta man decides at their discretion. Meaning they can deem any setup artificial or invalid due to achieving a tax advantage. You would need to check if GAAR exists.




Depends on DTA and any anti-abuse legislation if it exists. Your best to get professional tax advice.

I planned to only accumulate profits inside the company. Is the tax treaty still relevant?

Regarding GAAR rules for my home country: "General anti-avoidance rule is represented by the 'substance over form' principle. In addition to thin capitalization and transfer pricing rules, there are no other specific anti-avoidance rules applicable in a cross-border context"

 

[Martin Everson]

I planned to only accumulate profits inside the company. Is the tax treaty still relevant?

Yes.

 

[Revoltec]

Yes.

According to the tax treaty, "Where by reason of the provisions of paragraph (1) of this Article, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated."

Does that mean that if I manage the company from Cyprus, it will only be a tax resident of Cyprus? Is there anything else I need to look at in the tax treaty?

 

[Martin Everson]

Does that mean that if I manage the company from Cyprus, it will only be a tax resident of Cyprus?

If you personally meet the definition of "treaty resident" under DTA then yes if not then no.

---- quote start

How do we determine where you are treaty resident?

Most DTAs has a tie-breaker clause which determines a country of tax residence for this purpose.

Through the application of a series of “tie-breaker” tests the treaty determines an individual’s residence position for the purpose of the treaty (his “treaty residence”).

The following tests are worked through in order until one of them clearly indicates the other country is where you are treaty resident.

· Permanent home
· Personal and economic relations i.e. which country is your ‘centre of vital interests’
· Habitual abode
· Nationality

As these are tiebreaker tests, if you are deemed treaty resident in a country by virtue of having a Permanent Home in that country only, you do not need to consider the later tests.

---- quote end

Is there anything else I need to look at in the tax treaty?

Reading the whole DTA in general is best and making notes for future challenges. There has been cases where home countries failed to understand their own treaties [in the case of Spain] and people won court cases just by citing specific elements of DTA that entitled them to tax benefits. I talked about one example in another thread.

 

[Revoltec]

If you personally meet the definition of "treaty resident" under DTA then yes if not then no.

---- quote start

How do we determine where you are treaty resident?

Most DTAs has a tie-breaker clause which determines a country of tax residence for this purpose.

Through the application of a series of “tie-breaker” tests the treaty determines an individual’s residence position for the purpose of the treaty (his “treaty residence”).

The following tests are worked through in order until one of them clearly indicates the other country is where you are treaty resident.

· Permanent home
· Personal and economic relations i.e. which country is your ‘centre of vital interests’
· Habitual abode
· Nationality

As these are tiebreaker tests, if you are deemed treaty resident in a country by virtue of having a Permanent Home in that country only, you do not need to consider the later tests.

---- quote end



Reading the whole DTA in general is best and making notes for future challenges. There has been cases where home countries failed to understand their own treaties [in the case of Spain] and people won court cases just by citing specific elements of DTA that entitled them to tax benefits. I talked about one example in another thread.

But all of this is related to individual tax, not corporate tax. How can this be relevant to me if the company is managed from Cyprus and I only accumulate profits within that company?