Entrepreneurs often ask about moving their company’s tax residency to a country with a more favorable tax system while they remain in their home country. This approach is legally and fiscally risky.
Tax authorities worldwide, including HMRC in the UK, use a legal principle called the Central Management and Control Test. It states that a company is a tax resident in the country where its key strategic decisions are made. If a director lives in the UK and makes all business decisions from their home office, the company is likely to be considered a UK tax resident, regardless of where it is incorporated.
The Problem of “Substance”
For a company’s tax residency to be recognized in a new country, it must have genuine substance there. Substance means having real business operations, such as:
- Physical offices
- Local employees
- Directors who live in and make decisions from that country
- Tangible assets and business activities
Without this substance, relocating a company’s registration is considered an artificial arrangement for tax avoidance.
The Consequences
Using a company in another country without genuine substance can lead to:
- Double Taxation: Both the home country and the new country may claim the company as a tax resident, resulting in taxes being paid twice.
- Penalties: Tax authorities can impose significant fines for misrepresenting a company’s tax residency.
- Legal Scrutiny: Such structures are a red flag for tax auditors, potentially leading to full investigations.
- Personal Liability: As a director, you can be held personally liable for a company’s tax avoidance, resulting in fines or other legal action.
Instead of creating a tax structure without substance, focus on legitimate tax optimization. This could involve creating a real, functioning subsidiary in an EU country with genuine operations or working with a tax specialist to improve your existing structure in your home country.
For specific guidance, consult the tax authority in your home country. For example, for UK purposes, refer to the official HMRC guidance on Central Management and Control.
