A vehicle's tax residence is decided by facts the manager creates every day.

A fund is formed in a centre and its holding companies are formed where the treaties are, and the structure paper says each is resident where it was formed. The structure paper describes an intention. Residence under most tax laws is a question of fact, answered by where the vehicle's central management and control is exercised, and the facts are created every day by whoever actually decides: the manager's principals at their desks, wherever those desks are. A holding company formed in a treaty jurisdiction, with a board there that signs what the manager's desk decided in another country, is resident in the other country under that country's law and under the treaty's tie-breaker, and the treaty the holding company was formed for is not available to it. The manager did not move the residence by a decision; it moved it by the habit of deciding, and the habit is what the tax authority reads.

This note sets out the residence test and its variants, the facts that answer it, the desk and the board, the fund's own residence and the holding companies', the tie-breaker and its evidence, the consequences of residence in the wrong place, the manager's jurisdiction as the default, the daily practice that keeps residence where it was designed, the advisers' reading and the rulings, the onshore vehicles and the register jurisdictions, the Indian position, the lender's reading, a comparison, a worked year as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The residence test

A company is resident, under most tax laws, where it is incorporated, or where its central management and control is exercised, or where its place of effective management is, or any of these. The incorporation test is a fact of the registry and the other two are facts of conduct. Central management and control is the highest level of decision, the board's strategic decisions; place of effective management is where the key management and commercial decisions necessary for the business as a whole are in substance made. The two are close and not identical, and a jurisdiction may apply either to claim residence of a company incorporated elsewhere. A vehicle is resident in its place of incorporation by that jurisdiction's law and resident in the manager's jurisdiction by that jurisdiction's law if the manager's jurisdiction applies a conduct test and the conduct is there, and the treaty between them, if there is one, breaks the tie.

The facts that answer it

The facts are: where the board meets and who attends from where; whether the board decides or ratifies; where the papers are prepared and by whom; where the persons who in substance decide are located when they decide; where the bank accounts are operated from and by whom; where the records are kept; where the company's counsel and auditors are; and whether the company has an office, staff and a presence of its own. A tax authority reads the minutes, the emails, the travel records, the bank mandates and the organisational chart, and it reads them for where the decisions were in substance made. The registered office and the board's nominal composition are facts too, and they are the weakest.

The desk and the board

The manager's principals decide the fund's investments, and the holding companies' boards are asked to approve the steps the fund's decisions need. If the holding company's board receives a paper addressed to it, meets in its jurisdiction with a majority present there, considers the paper on its own company's interest and decides, the decision is the board's and the residence is the board's place. If the board receives a resolution drafted at the manager's desk, signs it by circulation from wherever each director is, and the manager's desk instructed the bank before the signatures arrived, the decision was the desk's and the residence is the desk's place. The difference is not the directors' names but the facts of the decision, and the facts are created each time the manager chooses which of the two to do.

Why the structure paper describes an intention

The structure paper is written before the vehicles exist, by counsel reading the law, and it says where each vehicle will be resident if it is run as the paper describes. The paper cannot create the facts; the manager creates them, from the first board meeting onward. A paper that says the holding company is resident in the treaty jurisdiction is right on the day it is written and is tested every day after by what the manager does. The tax authority does not read the paper. It reads the year, and the year is the manager's conduct.

The email as evidence

The fact most often read, and most often fatal, is the email. An email from the manager's principal to the onshore bank instructing a transfer, dated before the holding company's board resolved to make it, shows who decided and where. An email to the joint venture partner agreeing a variation, before the onshore company's board approved it, shows the same. A tax authority with access to the manager's correspondence, which it obtains by request or by the onshore state's exchange of information, reads the dates, and the minutes that follow the emails are ratifications. The practice's discipline is in the manager's drafting: recommendations to the board, and instructions to counterparties only after the board's decision, in terms that say so.

The principal who travels

A principal who travels to the treaty jurisdiction for each board meeting, sits as a minority director, and decides there with the resident majority is a fact for residence. A principal who travels nowhere and convenes the board by video from the desk, with the residents dialling in from the jurisdiction, is a fact the jurisdiction's law reads variously: some treat the meeting as held where the majority physically is, some where the chair is, some where the decisions are in substance made, which returns to the desk. Counsel in the jurisdiction reads the law, and the practice is designed to the strictest reading: the residents physically present and deciding, the principal present or absent, and the minute recording who was where.

The fund's own residence

A fund formed as a company in a centre is resident there by incorporation and by conduct if its board sits there; a fund formed as a partnership is transparent in most jurisdictions and its residence question is its general partner's or its manager's. The centre's tax regime usually makes the fund's residence there cost nothing, and the question is whether another jurisdiction claims it. The manager's jurisdiction, if the manager is elsewhere than the centre, claims the fund's residence if the fund's central management and control is at the manager's desk there, and the centre's regime does not prevent the claim. A fund managed from a desk outside the centre is a fund whose residence the desk's jurisdiction may claim, and the fund's treaty position, its holders' treatment and its own tax are then that jurisdiction's.

The holding companies' residence

The holding company is formed in a treaty jurisdiction for the treaty with the onshore state: a reduced withholding on distributions, an exemption from the onshore state's tax on the sale of the onshore company's shares, a protection against the onshore state's taxation of the holding company's gains. The treaty applies to a resident of the treaty jurisdiction, and residence is decided under the treaty's own article, which usually looks to the jurisdiction's domestic law and breaks a dual residence by place of effective management. A holding company managed from the manager's desk elsewhere has its place of effective management there, and the onshore state's authority, reading the treaty's article, denies the benefit. The onshore state's authorities read holding company residence with care because the treaty benefit is their revenue.

The tie-breaker and its evidence

When two jurisdictions claim residence, the treaty between them, if any, gives it to the place of effective management, or refers it to the competent authorities to agree. The evidence of place of effective management is the evidence of conduct: minutes, attendance, papers, the location of the deciders. A company with evidence of substance in its place of incorporation wins the tie-breaker; one whose evidence shows the desk loses it, whatever its registry says. Where there is no treaty between the two claiming jurisdictions, both tax, and the relief, if any, is unilateral.

The consequences

A vehicle resident in the wrong place is taxed there on its worldwide income and gains, denied the treaty it was formed for, and exposed to the wrong place's rules on distributions, on interest deductibility and on exit. The holders' treatment changes, because their treatment assumed the vehicle's residence. The onshore state's withholding, which the treaty reduced, is charged in full with interest and penalties for the years the treaty was claimed. The lender's tax gross-up is triggered. And the manager's own jurisdiction, having found one vehicle resident there, reads the others.

The manager's jurisdiction as the default

The place the residence drifts to is wherever the manager's principals sit, because that is where the deciding happens by default. A manager in the centre with holding companies in a treaty jurisdiction and a fund in the centre has the fund's residence in the centre and the holding companies' residence in the centre too, unless the holding companies' boards sit. A manager outside the centre, in a high-tax jurisdiction, has every vehicle's residence drifting there. The default is the structure's risk, and the structure is designed against it by boards that sit and by the manager's discipline in how it decides.

The daily practice

The practice that keeps residence where it was designed: the manager prepares recommendations and the boards decide; the boards meet in their jurisdictions with a majority present there, in person or by means the jurisdiction accepts, on notice, with papers; the directors are persons of standing resident or regularly present there; the bank mandates are operated by the directors or by staff in the jurisdiction; the records are kept there; the company has an address and, where the jurisdiction's substance rules require, staff and premises; the manager's principals do not instruct counterparties or banks on the company's behalf before the board has decided; and the emails say so. The practice is a cost per company per year and a discipline per decision, and it is the residence.

The exchange of information

The onshore state, the treaty jurisdiction and the manager's jurisdiction exchange information under their treaties and under the multilateral arrangements most jurisdictions have joined, and an authority reading a treaty claim can obtain the manager's correspondence, the boards' minutes and the bank records from the other jurisdictions. The practice is designed on the assumption that every authority will read everything, because in most structures every authority can. A manager that keeps its emails disciplined because the onshore authority will read them has the practice right for every authority at once.

The advisers' reading and the rulings

Tax counsel in the place of incorporation, in the manager's jurisdiction and in the onshore state each reads the facts against their own law and the treaty, and each writes what the practice must be for the residence to hold under their reading. Some jurisdictions give rulings on residence or on treaty entitlement on stated facts, and a ruling obtained on the designed practice is evidence the onshore authority reads, provided the facts remain as stated. A ruling on facts the manager then departs from is a ruling on another company.

The onshore vehicles

An onshore holding company in a register jurisdiction is resident there by incorporation under the state's law and is taxed there on its onshore income; its residence elsewhere is the concern of the elsewhere, and the manager's jurisdiction may claim it if the onshore board does not sit. The onshore board's sitting is therefore an onshore substance requirement and a residence fact at once, and the onshore-resident directors the state requires are the facts that keep the onshore company's residence onshore.

The Indian position

India applies a place of effective management test to foreign companies and treats a foreign company whose place of effective management is in India as resident there, taxed on worldwide income. A holding company for an Indian position, formed in a treaty jurisdiction, whose decisions are in substance made by persons in India, is resident in India, and the treaty's benefits on the Indian position are lost. The Indian authorities issue guidance on the test and read the facts the guidance names, and the manager with Indian principals or an Indian adviser who in substance decides has a holding company whose residence the Indian authority may claim. The board's sitting outside India, with the deciding done there, is the practice.

The lender's reading

A lender reads the vehicle's residence for the tax gross-up in its facility and for the withholding on its interest, and requires the manager's representation that each obligor is resident where the facility assumes and that its board sits there. A change in residence is a tax event under the facility, with the gross-up's cost to the borrower, and the lender's counsel reads the boards' minutes at each annual review.

By fact · by practice	Residence holds	Residence drifts	What the authority reads
The board's meetings	In the jurisdiction, majority present	By circulation from wherever	Minutes and attendance
The decisions	Taken by the board on its own papers	Taken at the desk, ratified by the board	Papers, emails, dates
The directors	Of standing, resident or present	Nominees or the manager's staff abroad	Identity and location
The bank mandate	Operated from the jurisdiction	Operated from the desk	Bank records
The records	Kept in the jurisdiction	Kept at the manager	Location
The instruction to counterparties	After the board decided	Before	Emails and dates
Substance	Office, staff where required	Registered office alone	The substance filing

A year, as a type

A fund in a centre holds an onshore position through a holding company in a treaty jurisdiction. The holding company's board is two directors of standing resident in the treaty jurisdiction and one of the manager's principals. In the year the board meets four times in the treaty jurisdiction, with the two residents present and the principal travelling, on papers the manager prepares and addresses to the company. It decides a refinancing, a distribution, the approval of the accounts and the appointment of the auditor, and declines the manager's recommendation to lend upstream until the company's own cash needs are confirmed. The bank mandate is operated by the resident directors. The records are kept at the company's office in the treaty jurisdiction, where it has a part-time employee under the jurisdiction's substance rules. The manager's emails to the onshore counterparties follow the board's decisions and say so. The onshore state's authority reviews the treaty claim on the year's distribution and reads the minutes, the substance filing and the ruling obtained on the designed practice, and allows the reduced withholding. The residence was where it was designed because the facts were created that way every day.

The structure paper's page

The structure paper carries a page per vehicle: its intended residence and the treaty or regime it serves, the tests each claiming jurisdiction applies, the facts each test reads, the practice that satisfies each, the directors and the substance, the rulings, and the annual review. The page is written before the first board meeting, and it is the page the administrator builds the board calendar from and the lender's counsel reads at each review.

The fund manager's own residence

The manager is a company too, and its residence is read by the same tests. A manager licensed in a centre whose principals decide from desks elsewhere has a residence question of its own, and the centre's regulator's substance requirements for licensed managers are written to the same facts: the people who decide must be in the centre. The manager's residence and the vehicles' residence are one practice, because the manager's principals are the persons whose location answers both, and a manager that keeps its own deciding in the centre has kept the default for every vehicle in the centre too.

The second fund's reading

A manager's second fund is raised on the first fund's residence record: the treaty claims allowed, the substance filings accepted, the rulings obtained and kept, the lender's annual reviews passed. A first fund whose holding company lost its treaty to a desk is a fund whose holders' returns were reduced by the manager's habit, and the second fund's anchor reads the habit; one whose practice held for a decade is a fund whose structure the second fund copies. The practice is a manager's cross-border competence in its most tested form, because the tax authority tests it every year and the test is on facts the manager created.

Four cases, as types

A holding company in a treaty jurisdiction has three directors from a corporate services provider who sign resolutions the manager's desk drafts. The onshore state's authority reviews the treaty claim, reads the resolutions' dates against the manager's instructions to the onshore bank, finds the decisions were made at the desk, denies the treaty, and charges the full withholding for four years with interest.

A fund's manager moves its principals from the centre to a high-tax jurisdiction for personal reasons and continues to run the fund from there. That jurisdiction's authority claims the fund's residence on the principals' conduct and taxes the fund's income, and the holders' treatment, built on the centre's regime, changes for all of them.

A holding company for an Indian position has a board abroad and an Indian adviser who in substance decides everything and instructs the board. The Indian authority applies the place of effective management test, reads the adviser's emails, and treats the holding company as Indian resident.

A structure's boards sit, its practice is designed by counsel in three places, its rulings are obtained on the practice, and its manager decides by recommending. Each vehicle is resident where the structure paper says, and each authority that reads the facts finds them.

What each party holds

The manager holds the practice: recommendations rather than decisions, and the discipline in its emails and instructions.

Each board holds its sitting, its decisions and its minutes.

The directors hold their residence, their standing and their operation of the mandates.

Tax counsel in each place holds the reading of the facts against each law and the treaty.

The administrator holds the records in the jurisdiction and the substance filings.

The lender holds its representation and its annual reading of the minutes.

Where it surfaces

It surfaces at the first board meeting, when the resolutions arrive drafted and the directors sign. It surfaces at the onshore bank, when the manager's principal instructs a transfer the board has not approved. It surfaces at the substance filing, when the jurisdiction asks where the board met. It surfaces at the treaty claim, when the onshore authority asks for evidence of residence. It surfaces at the manager's relocation, when the principals move and the deciding moves with them. It surfaces at the lender's annual review of the minutes. And it surfaces at exit, when the buyer's tax diligence reads the holding company's residence for the years the treaty was claimed and prices the risk of a denial.

The cost of getting it wrong

Residence in the wrong place costs the treaty for every year it was claimed, with the withholding, interest and penalties; the wrong place's tax on the vehicle's income and gains; the holders' changed treatment; the lender's gross-up; and the buyer's discount at exit. The cost of the practice is directors of standing, meetings in the jurisdiction, an office where substance rules require one, and the manager's discipline, per vehicle per year. The comparison is made once at design and the practice is the answer.

The committee's reading

The committee reads the residence practice annually as part of the structure's governance: the boards' meeting records, the substance filings, the rulings and their facts, tax counsel's annual confirmation that the practice holds, and any change in the manager's own location. A manager whose principals have moved has a structure whose residence the committee asks about, and a committee that asks before the authority does has time to design the answer.

A timeline, as a type

At design, counsel in the treaty jurisdiction, the centre and the onshore state write the practice. At formation the boards are constituted and the substance is put in place. In year one a ruling is obtained on the practice. In each year the boards meet in their jurisdictions on papers addressed to them, the mandates are operated by the residents, the records are kept there, and the manager's instructions follow the decisions. In year three the onshore authority reviews the treaty claim and reads the minutes and the ruling, and allows it. In year five the manager's founder moves to a high-tax jurisdiction; the committee asks; counsel reads the founder's new jurisdiction's test; the founder's role is restructured so that the boards continue to decide and the founder recommends; the founder's emails are drafted accordingly. In year eight the buyer's tax diligence reads eight years of minutes and prices nothing for residence.

The sequence

1. The residence each vehicle needs is stated in the structure paper with the treaty or regime it is for.
2. Tax counsel in the place of incorporation, the manager's jurisdiction and each onshore state writes the practice the residence needs under each law.
3. The boards are constituted with directors of standing resident or present, and the substance each jurisdiction requires is put in place.
4. Rulings are obtained on the practice where available.
5. The manager recommends, the boards decide, the mandates and records are in the jurisdiction, and the emails follow the decisions.
6. The practice is reviewed annually against the facts, and the lender reads the minutes.

Questions a manager asks

Is a resident director enough. A resident director who signs what the desk decided is a fact against residence, not for it; the test is who decided.

Can the principal sit on the holding company's board. Yes, in the minority, travelling to the meetings; the principal deciding alone from the desk is the drift.

How many meetings a year. As many as the company's decisions need, with a minimum the substance rules fix; a holding company that decides four things a year meets four times.

What if the manager's jurisdiction has no treaty with the place of incorporation. Both may tax and the relief is unilateral or none; the practice matters more, not less.

Do video meetings count. Under most laws, if the majority is physically in the jurisdiction and the decision is in substance taken there; counsel in the jurisdiction says.

Who reads the practice annually. The administrator against the facts, tax counsel against the law, and the committee against the structure paper.

Terms used

Central management and control: the residence test looking to where the highest-level decisions are made.

Place of effective management: the treaty tie-breaker looking to where key management and commercial decisions are in substance made.

Tie-breaker: the treaty article resolving dual residence.

Drift: the movement of residence to the manager's jurisdiction by the habit of deciding there.

Practice: the designed conduct that keeps residence where the structure paper says.

Substance: the jurisdiction's requirements of directors, decisions, office and records.

What to read

Each jurisdiction's residence test in its tax law; the treaty's residence article and tie-breaker; the substance rules in the place of incorporation; the Indian guidance on place of effective management; the boards' minutes and the manager's emails; any ruling obtained. On this site, the holding room under Structures, the development structures room and the page on our role.