The question regarding the determination of the tax residency is of first importance from a tax standpoint and therefore requires a detailed analysis; Indeed, the answer to this question determines the country in which the tax is due and therefore the applicable tax rate, as said rate is different for tax residents and non-residents from a tax point of view.
Since the determination of the tax residency depends on the Law of each State, along with the application of signed bilateral Conventions, it is possible that a given company be treated as a tax resident of various countries, generating a situation of double taxation.
This article deals with the question of determination of companies’ tax residency, in application of Andorran tax law and International tax doctrine.
First of all, pursuant to article 7.1 of Law 95/2010, of 29 December on corporate tax, the criteria that determines the tax residency of corporations based in Andorra are as follows:
“Are considered tax residents in Andorra the companies that comply with one of the requisites below:
a) Having been incorporated according to the Laws of the Principality of Andorra.
b) Have their headquarters in the Principality of Andorra.
c) Have their effective place of decision in the territory of the Principality of Andorra. For this purpose, it is understood that a company has its place of effective decision in Andorra when the general management and production control of its business are located in Andorra.
d) Have transferred their residency towards the Principality of Andorra, as of the moment that such transfer produces its effects, pursuant to the applicable law”.
On the basis of these legal provisions, Andorran law sets out connexion points to determine the tax residency of a company: any one of the above-mentioned criteria is sufficient to establish a company’s tax residency in Andorra since there is no pre-determined order of application.
Moreover, as mentioned, a company could be considered as a tax resident of various States pursuant to their respective Law. In such cases, the Conventions to avoid double taxation signed by Andorra within the frame of the Organisation for Economic Co-operation and Development (OECD) would apply; the latter aim at delimitating the States’ tax sovereignty and avoid situations of International double taxation.
Indeed, in front of situations of double tax residency, the OECD – through the Conventions to avoid double taxation – has established a “tie-break” rule to determine the tax residency of corporations. In that respect, unlike what is applicable for physical persons for whom successive criteria must be dealt with, a corporation will be considered as a tax resident of the country in which it has its place of effective management.
Therefore, from the tax administration’s standpoint, no relevance is granted to a purely formal criteria such as the recordal at a corporate registry. What is taken into consideration over all is the place where the company is effectively managed. This is why the “place of effective management” has been chosen as the preferred criteria for companies, which must be understood as the place where the key commercial decisions are taken along with the management decisions that are necessary to carry through the business or professional activities of the company. Logically, in order to determine the place of effective management, must be taken into consideration all relevant facts and circumstances. As a consequence, depending on the interpretation of the tax authorities a company could simultaneously have more than one place of management but it can only have one place of effective management that will be where the “centralized management and control of the whole activities of the company” is located.
As it can be noticed, this criteria is eminently practical: it involves the place where the decisions of the company are taken which allow for its normal development. This is why it is a factual element that can be evidenced by:
– the domicile of the Managers;
– the place of meetings;
– the location of the offices;
– Etc.
The Comments regarding the Model of Convention to avoid double taxation can be mentioned, according to which:
“The place of effective management is the place where the key commercial decisions are taken and the management decisions that are necessary to carry through the business and professional activities of the company. In order to determine the place of effective management, must be taken into consideration all relevant facts and circumstances. A company can simultaneously have more than a place of management but will only have one place of effective management. (…) The competent authorities that have to apply this provision to determine the (tax) residency of a company within the Convention will have to take into consideration various factors, such as the place at which the meetings of the Board or equivalent are usually held, from where are usually carried through the functions of the managing director and other high executives, from where is conducted the high level management on a daily basis, where is the main office located, etc…”.
Therefore, as highlighted above, one of the defining criteria of the place of effective management is the place where the strategic direction (“key management”) or the place where the substantial decisions of the whole company are taken.
As a conclusion, Andorran law, following the OECD’s guidelines, contains anti-evasion clauses that aim at avoiding artificial delocalisation of companies’ tax residency. For this reason, will only be subject to Andorran corporate tax the companies that present a clear economical link with the Principality, either because their main assets are located in Andorra or because the main activity is conducted from Andorra along with its management.
Karima Sliman
Augé Legal & Fiscal
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