Substance: why a company is not tax residency

Registering a company in a low-tax jurisdiction is the most common structuring move an internationally mobile person makes, and the most commonly misunderstood. The assumption is that where the certificate of incorporation was issued decides where the profit is taxed. It does not, and it has not for some time.

What authorities actually look at

Modern rules — domestic and treaty — attach taxation to where the business is really run and where the value is really created. The tests differ in wording and converge in substance.

• Where management decisions are taken. If the directors sit and decide somewhere else, that somewhere else has a claim.
• Where the people are. A company with no staff in its jurisdiction of registration is a company that does nothing there.
• Where the premises are. A registered address that is a mailbox is evidence against you, not for you.
• Where the risk is borne and where the assets that generate the income actually sit.

Why this tightened

Two things changed. Jurisdictions that were listed as insufficiently cooperative introduced economic substance requirements to get off those lists — which is why the requirements exist even in places that market themselves on low tax. And information exchange made the underlying facts visible: where accounts are held, who controls them, and what flows through them.

The practical consequence is that a structure has to be able to explain itself. Not to survive an argument, but to describe honestly what it does and where.

What this means for a property owner

Most people reading this are not building a trading group. They own property, receive rent, and wonder whether a company helps.

• For a single apartment, usually not. A company adds reporting, accounting and annual cost, and where an individual pays no tax on rent, a company can introduce one.
• Where a company genuinely helps is in specific situations: several properties run as a business, joint ownership between unrelated parties, succession planning, or a jurisdiction that restricts land ownership by individual foreigners and permits it to local companies.
• The choice is made before the purchase. Transferring a property into a structure afterwards is a second transaction with its own costs and, in some places, its own tax.

The honest test

Ask what the structure does other than change a tax outcome. If the answer is nothing, the structure is fragile — not because someone will necessarily challenge it, but because it depends on nobody looking, and the direction of travel is towards everybody looking. A structure that would survive an explanation to a tax authority is one you can build a decade on. One that would not is a liability with running costs.