In this article we will tell you about the requirements that a European company should meet in order to eliminate negative aspects with taxation.
The EU countries (such as Malta, Austria, the Netherlands ext.) have no specific requirements for confirmation of company substance for tax purposes. However, there are certain rules, non-compliance to which may lead to the company’s problems with residence determination that can be a reason of a double taxation.
Under the general principle of the international law, the company is considered a resident of the country where it is registered. Although, in practice, the company with business running in different jurisdictions may have problems with determination of country of residence and, accordingly, with determination of where the company will have tax liabilities.
In order to avoid claims from tax authorities of the other countries with regards to payment of taxes, the company should prove where a place of effective management and control is located.
The company will be considered the resident of the jurisdiction, where it has more and closer economic interests.
Further, we will talk about how to ensure the company has an economic substance.
A REGISTERED ADDRESS AND COMPANY OFFICE
One of the main things while determining the company’s substance is the registration address. In order to be considered as a resident of EU country a company should not only have a registration in this country, but also should maintain a proper office. Aside the condition of the office rent/purchase, there are also requirements for company’s activity such as: the office should have the employees; company’s correspondence have to be processed at the office address, there should be a separate telephone line. In general, the company’s office should not be on a paper, it should be real.
MANAGERS OF COMPANY
The director and secretary of the company (if such is required by law) should be individuals. In case the director of the company is a legal entity, it may raise a number of suspicious and undesirable questions from regulatory authorities.
Although there are no direct legal prescriptions for the director residence in many jurisdictions, in practice there is a rule that the director’s residence place should be the same as the country of company incorporation.
If several persons manage the company, in order to avoid doubts about the company residence, the board of directors must meet the following requirements:
- Members of the board should be residents of the country where the company is tend to be a resident. If non-residents are the members of the board, there should be a proportion that the majority of the directors cannot be a tax resident in any other jurisdiction other than the EU country where the company operates.
In any case, the company’s article of association should state that a quorum of board meetings can not consist of directors, whose residence is outside the country of operation.
- It is important that the board of directors to be formed as of the moment of establishment of the company. The company should not be a tax resident outside the country of purpose during the moment of its incorporation, as this may lead to further disputes with the tax authorities regarding the place of residence.
In addition to the above requirements, managers must be qualified for the management position. In other words, they must have an appropriate knowledge, skills, work experience and education to properly manage the company.
Board of directors meetings
One of company substance’s factors is a place of decision making by the management of the company.
Thus, to prove that a company is operating in a certain EU country, the board meetings have to comply with the following rules:
- Board meetings should be appointed and held regularly (at least once a year and whenever strategic decisions have to be made) in the country of company’s residence.
- The majority (by voting right or by numbers) of directors should be physically present at a board meeting, which is held in the country of the company’s residence. Sometimes, a minority can participate online.
- Decisions of the board should be brought into accordance with company needs and the board should apply all strategic management decisions in the country of company’s residence.
- All meetings of the board have to be recorded, the documentation has to be in the EU country’s official language. The minutes shall indicate the duration of the meeting, including the beginning and end of the meeting, the place of meeting, the names of attendees and a summary of the issues discussed.
- Non-resident directors do not have a right to oblige the board to take certain decisions.
In order to prove the place of management and control in EU country, the company should follow next rules:
- all agreements, contracts and other documents should be signed by an authorized director in the specified country, where company is resident
- the directors with the right to manage the company’s bank accounts should be members of the board and have the power to authorize payments without the approval of those directors, which are non-EU residents. The best option is to open an account and manage it in the specified country, where the company is registered.
Strategic decision making
To account a company as a resident of a certain EU country, the board of directors should discuss and make strategic decisions on the territory of such EU country.
For example, the company’s issues on restructuring, incorporation new subsidiaries, other issues significantly effecting the company’s ability to make a profit should be fully considered by the directors meeting in this EU country. However, such a requirement does not exclude the possibility for the board to receive recommendations and advices from third parties and take them into account when making decisions.
Such recommendations or any other documentation to be discussed at a meeting should be presented to the directors well in advance of the meeting so they have time to properly review the relevant information.
In addition to the above main factors of determination the company’s country of residence, we would like to share with you some tips that in the future can help to prove the substance of the company in the country of desired residence:
- A compliance with all the above requirements should be proved by documents.
- The company office should be located in commercial buildings.
- The company should keep its documents, records, agreements in its office; the company’s correspondence should be send from the office address; it is recommended to have a separate telephone line.
- Audited accounting statements should be prepared and submitted in the country of company residence (these are the general requirements of tax law in all EU countries).
- Company staff should be employed and to be in presence in the office of the company, in order to perform the operational activities of the company.
Thus, in order to eliminate negative aspects with tax offices in a specific country of incorporation, we recommend you to take proper steps regarding prove of substance of a company that operating in different jurisdictions by completing abovementioned requirements.
In addition, we recommend you to get professional advice of our tax advisor or any other professional regarding additional requirements of local tax authorities for the company residence in a selected EU country.
Our experts at Aston Financial Services are always ready to provide a professional advice on business compliance with international and tax law.
Prepared by Evgenia Krykhtina