The tax residency of a foreign company is the country that, as a general rule, has the right to tax its income, usually its worldwide income. It is determined by the place of incorporation, by the place of actual management, or by both criteria at once, so an offshore company run from another country may turn out to be resident in that country. A mistake about residency leads to taxes, returns and penalties in a country the owner did not think about in advance.
Two basic tests: incorporation and management
Most countries apply one or both criteria:
- Place of incorporation. A legal entity incorporated in a country is treated as its resident. This is how the UK rule works: under section 14 of the Corporation Tax Act 2009, a legal entity incorporated in the UK is a UK tax resident, subject to limited exceptions.
- Central management and control. Residency is determined by the place where key decisions are actually made. The test developed in UK case law: in De Beers Consolidated Mines v Howe, the court held that a company's real business is carried on where its central management and control actually abides. HMRC applies it to companies incorporated outside the UK.
How this works in individual countries
Canada. The CRA relies on common law: residency is determined by the place of central management and control, usually where the board of directors meets; what counts is where control is actually exercised, even if the articles name a different place. In addition, under subsection 250(4) of the Income Tax Act, any company incorporated in Canada after April 26, 1965 is treated as a resident. In cases of dual residency, the tax treaty applies.
Russia. Under Article 246.2 of the Tax Code of the Russian Federation, a foreign organization is recognized as a Russian tax resident if its place of management is Russia, unless an international treaty provides otherwise. This is the case when the executive body regularly acts in relation to the organization from Russia, or when its senior executives mainly manage it from Russia. Preparing and making decisions that fall within the competence of the general meeting of members is not in itself treated as management in Russia.
United Kingdom. In addition to the incorporation rule, HMRC checks central management and control for foreign companies. Under many UK tax treaties, dual residency is resolved by the place of effective management or by agreement between the competent authorities.
What happens with dual residency
If a legal entity is resident in two countries, the treaty between them applies. Article 4 of the OECD Multilateral Convention (MLI) proposes resolving such cases by mutual agreement between the competent authorities, taking into account the place of effective management, the place of incorporation and other factors. Until an agreement is reached, the company receives no treaty benefits or exemptions other than those agreed by the authorities. A specific treaty may contain its own wording, so its text needs to be checked for each pair of countries.
What facts tax authorities examine
- Who makes decisions on pricing, investments, hiring and major contracts, and from where.
- Where board meetings take place and who actually participates in them.
- Who controls the bank accounts and signs payments.
- Where the directors live and whether they have the qualifications and authority to make independent decisions.
- Correspondence, minutes, IP addresses used to log in to the bank, business trips.
This body of evidence overlaps with the economic substance requirements, which also assess where the company is managed and where its people work.
A business scenario
A founder lives in Canada and single-handedly runs a firm incorporated in a jurisdiction with no profit tax. He makes all decisions from home and signs payments and contracts himself. Under the Canadian central management and control test, such a firm risks being recognized as a resident of Canada. In addition, the owner may have separate obligations under the controlled foreign company rules.
Common mistakes
- Treating a nominee director and a virtual office as sufficient proof of foreign management when the real decisions are made by the owner in their country of residence.
- Signing template board minutes that contradict the correspondence.
- Forgetting about permanent establishment: even with foreign residency, a company can create a taxable presence where its people work.
How Offshora helps
Banks ask for the tax residence of a company and its controlling persons in a CRS self-certification form; see CRS 2026: a note for the owner of a foreign company. For a holding company, residence also affects tax on dividends, as covered in the guide to an international holding company. We set up corporate governance for the chosen model under our offshore company formation and maintenance service.
Offshora helps choose a jurisdiction based on where the owners live and where the company will be managed from, and set up corporate governance for the chosen model. You can compare options in the offshore jurisdictions section. To assess your situation, submit a request and state the country of residence of the managers and where the team works.
Tell us about your task, and we will propose a jurisdiction, the scope of services and the order of work.
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