The “Place of Effective Management” as a Connecting Factor for Companies' Tax Residence Within the EU vs. the Freedom of Establishment: The Need for a Rethinking?

Abstract

The determination of the tax residence of companies – as a fundamental issue of (international) tax law – emerged between the end of the 19thcentury and the start of the 20thcentury. This emerged as an issue in cases where companies which were found to have their place of management, in the sense of a decision-making centre, in the United Kingdom (UK), carried out all their business activity, in terms of production and commercialization, in another country. At a time when the UK was establishing its tax system earlier than other countries, the tax courts of this country began to develop the “central management and control test” as a test for establishing companies' tax residence in these situations and to consider the companies at stake as tax residents in the UK on the ground that their decision-making centre was located there. Such decisions appeared to have been driven by an interest to prevent companies carrying out their business abroad from escaping UK taxation on their worldwide income, and thus to have been motivated by a specific anti-avoidance purpose. Nonetheless, the “central management and control” test formed the basis of the “place of effective management” test which, under the Organization for Economic Cooperation and Development (OECD) Model for bilateral conventions against double taxation, is currently adopted as a tiebreaker rule,i.e.as a criteria for allocating the tax residence of companies in cases where both contracting