Seeking residency

The issue of corporate residence arises in a number of areas in fund structuring and may have different criteria and terminology according to the circumstances.

The three principal areas in which the concept arises are those of ensuring treaty relief, VAT planning and avoiding unintended UK residence.

In terms of VAT, the term corporate residence is used to describe what is correctly ‘belonging’ or ‘establishment’ since, for VAT purposes, the place of supply rules are based on where the supplier or customer has its ‘place of belonging’ in UK parlance, or ‘place of establishment’ to use the EU term.

In terms of treaty relief, the term ‘corporate residence’ is used to describe residence for treaty purposes and whether a company is regarded as resident in a particular jurisdiction for the purposes of being eligible for benefits under the terms of a tax treaty.

In general terms, corporate residence describes where a company is located for tax purposes. This generally becomes an issue only when there is a concern that a country other than, or in addition to that intended, will claim that a company is resident there and thus subject to unintended tax liabilities.

In a fund context, the UK tends to be the problematic country. While, in most jurisdictions, a company is simply resident if it is incorporated there, under UK law, a company is not only resident if it is incorporated in the UK but also if it is incorporated elsewhere but has its place of central management and control in the UK. Accordingly, if a UK-managed fund incorporates a holding company in, for example, Luxembourg, it must ensure that this company, even if not the fund itself, is centrally managed and controlled from outside the UK.


Given the foregoing, there are certain general requirements that apply to companies seeking to demonstrate that they are resident in or belong in a jurisdiction, whether for treaty or VAT purposes, or to help establish that their place of management and control takes place in the jurisdiction in which they are seeking to be resident and not in the UK.

Ringing telephones: A company should have certain key evidence of operations in its jurisdiction of residence. It should have a bank account; an office with a proper, postal address and an appropriate occupation agreement; be registered for utilities; and have a telephone, fax and e-mail contact address. Ideally, in this era, it should have a website, giving its residence address and contact details. This establishes a genuine presence in the jurisdiction – a company with real, functioning operations would not, for example, be without a telephone.

Feet on the ground: A company should have certain minimal staff who carry out activities for the company. Employment contracts should be in place for these staff, and the company should evidence payment through payroll compliance. Again, this evidences actual activity in the jurisdiction. Every active company will require someone to perform certain basic tasks.

Local leaders: A company’s board of directors should comprise a majority who are actually resident in the jurisdiction. This helps to show a company has a genuinely local leadership presence in the jurisdiction. The directors in question must be adequately qualified to act as directors and make genuine decisions on behalf of the company. Individuals who do not have the necessary experience and knowledge will not be credible in terms of making company decisions.

On-site decision-making: A company should hold a certain minimum number of board meetings in the jurisdiction each year. The actual number will depend on the nature and activity of the company in question. For example, if a holding company makes only one investment in a year and seven the next then, clearly, the year in which seven investments are made will require more frequent decisions. This means that a greater number of board meetings should be held. Accordingly, this provision will need to be considered on a case-by-case basis.

Home-rule advantage: The governance structure of the company should support its jurisdiction of residence. Articles of association, board minutes and other administration and accounting documents should be kept in the jurisdiction and the correct administrative filing requirements should be complied with. Again, this establishes that the company is genuinely operational in the jurisdiction involved.

Certified presence: A company should obtain from its jurisdiction a certificate of tax residence or similar. Although this certificate will not automatically be respected for all purposes, it will ensure that a company is at least able to present clear evidence that its own authorities regard it as properly resident there.


In reality, it can be difficult from a practical perspective for a fund to comply with all the requirements discussed above. Initially, most are diligent but it is tempting to become complacent over time. It is, however, important to maintain a focus in this area. While one or two omissions are unlikely to result in a problem, over time these can become habitual and render the structure in question a target for enquiry.

This is an area in which it is always important to take specific advice. While general guidance (as given above) can be offered, the specifics must always been seen in the context of the overall fund activity.

It is important to review the current state of play in terms of the European view of the above issues. Tax authorities throughout Europe are becoming increasingly concerned that their tax laws are being abused by the successful management of the rules relating to corporate residence in any context.

In relation to the UK, HMRC has been vigilant in terms of endeavoring to identify companies which are incorporated offshore but which, in reality, are run from the UK. In 2006, HMRC lost two cases on this point, which broadly speaking, reiterated the requirements above in relation to majority of directors and board meetings.

However, a subsequent “First Tier Tribunal” case on the same point, that of Laerstate BV v HMRC [2009] UKFTT 209, resulted in a victory for HMRC. In Laerstate, HMRC reviewed and analyzed the paperwork in much more detail and specifically identified evidence of decisions being directed from the UK, albeit rubber stamped by an overseas board. Board meetings were held outside the UK in Laerstate but, crucially, HMRC considered the actual position in much more depth than in the previous cases. This suggests that they have increased their expertise in this area and that they are prepared to review the details in a particular scenario. This gives rise to a greater need for care.

In the context of treaty relief, the focus has, perhaps, shifted from corporate residence to beneficial ownership which is a different concept. Countries now seem less inclined to be concerned with whether or not a company is resident in a jurisdiction and more inclined to question whether or not they actually receive the benefit of the income or gains upon which they are claiming relief.

Recently, the Danish tax authorities successfully challenged the use of a Swedish double holding structure, not by arguing that the two Swedish companies were not technically resident there but by asserting that they did not genuinely own the sums under review and were merely a conduit through which the true owner in Jersey received such amounts.

In 2013, the OECD released further guidance on the interpretation of beneficial ownership for the purposes of the OECD Model Treaty. This states that the beneficial owner of an item of income or gains must have the full power to enjoy it and there must be no legal or contractual obligation to pass that benefit on to another person.

From a practical viewpoint, the new attention to beneficial ownership results in new requirements for fund holding structures. Holding companies should not, as stated above, enter into contracts which automatically require that they pass on income or gains received to the fund. There should be a degree of discretion and proper procedures should be implemented to show exercise by the board of that discretion.

Additionally, it would be desirable for the holding company to receive money from a variety of investments and to mix those funds in a single bank account. This avoids the appearance of identifiable sources of money simply passing through the holding company to the fund.

There should also be some economic risk to the company. The company should hold the money in its own account for as long as possible so that it bears the risk of loss in the event of, for example, a banking collapse. As stated above, it should also accrue interest and pay local tax on that interest. Some of these requirements may be unpalatable to investors but this area is becoming important and more attention needs to be paid.

In relation to VAT, tax authorities are becoming more aware of the somewhat complex issues which pertain to VAT and funds. In the past, many assumed that the authorities did not fully understand how the VAT rules applied to fund structures but this is clearly no longer the case. Although there has been no challenge to the basic structure to date, it is prudent to be vigilant in this field, since it is one of interest to European tax authorities.


The impact of further regulation of the fund industry in the form of the Alternative Investment Fund Managers Directive (AIFMD) adds a further element to the area of residence. Although AIFMD is not technically concerned with tax, its application depends on the residence of a fund manager and the location where a fund is established.

In particular, it is currently possible for a manager resident outside the EU to manage an EU resident fund without the need for such manager to become authorized under AIFMD. Although this position may well alter after 2015, many managers are considering relocating to non-EU jurisdictions to avoid the immediate remit of the Directive.

Again, this will involve considerations of ensuring that the chosen location of residence is supported by the actual operations of the manager. Similarly, under AIFMD the place of establishment of the fund is important. This is given a very wide definition and caution is advised, especially in the case of limited partnerships. Again, many limited partnerships are considering organization in Jersey or Guernsey to limit the remit of AIFMD.

In conclusion, the issue of where a company is regarded as resident is important in a number of fund structuring areas and can make a significant difference in terms of tax consequences. To achieve the most desirable result, certain measures need to be taken and, while they can seem somewhat burdensome, they are necessary to ensure tax exposure is limited. As stated, specifics are important in this area generally and everything must be considered in its overall context.

Jenny Wheater focuses her corporate practice on the tax aspects of a broad range of issues. She has significant experience in structuring private equity, venture capital and other funds, including holding companies, carried interest and deal structures.