International Taxation

International Taxation

Order Description
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 amultinational 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.


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