Case Study:
You have been asked, as a tax advisor, to provide advice to Alfa Plc and to some of its employees. Alfa Plc is a parent company of a multinational group and is currently tax resident in country X, where the corporate tax rate is 30%. Country X has the same case-law as the UK on corporate tax residence. However, this country does not apply an exemption on foreign intercompany dividends (which are subject to the tax credit method) and it applies a 60% exemption to dividends that Alfa Plc distributes to its shareholders, which are natural persons and are tax resident also in country X. It wishes to move its tax residence to bordering country Y, where the company already has a branch, where some of its employees are tax resident, despite working in country X, and where the corporate tax rate is 20%: further advantages would arise from the transfer as country Y full exempts foreign intercompany dividends and does not apply a withholding tax on dividends distributions by holding companies to final individual shareholders. According to Art. 4(3) of the double tax convention (DTC) between X and Y, the tie-breaker rule for corporate tax residence is
still the "place of effective management" (despite the final report on OECD's BEPS action 7 recommended contracting States to endeavour to reach "mutual agreement" to determine tax residence under DTCs based on the OECD Model), and, under Art. 9 and 23A of this DTC, branch income is taxable only in the State where the branch is located. The Board of directors of Alfa Plc, which takes the key strategic decisions concerning the company's policies, is currently composed of 10 highly qualified professionals, and only two of them reside in country X; two other reside in country Y, two in country Z, two in country K and two in country W. Although the statutes of Alfa Plc indicate a geographical location for the meetings of the Board of directors, the current directors - who, in addition to the directorship of Alfa Plc, carry out self-employed consultancy activities and have directorships also in noncompeting companies - never meet physically, but always communicate via skype, e-mails and videoconferencing, and take all the key strategic managerial decisions in this way. Furthermore, the taking of decisions exclusively via electronic means is recorded in the minutes of the Board of directors meetings. The current directors will remain in office until 2018.
In light of these circumstances, please advise Alfa plc as to whether it could actually manage to move its tax residence to country Y - in terms of "place of effective management" - during the term of office of the current directors, and as to whether the same outcomes, in terms of tax benefits that the company would get from the transfer, could be totally or partially be achieved through an alternative course of action.
Furthermore, advise the employees who are tax resident in country Y - but who carry out their activity in country X - as to whether a transfer of the tax residence of Alfa Plc to country Y would have any consequence as regards the tax treatment of their cross-border employment income.