The management control test is a way that tax authorities use to determine in which country a company is liable to pay taxes.
History of the management control test
In the past the origin of the company (the corporate law system under which the company is incorporated) was the main factor to determine where a company is liable to pay taxes. In those times having an incorporation and a mail box was sufficient to pay taxes in another country with more favourable taxes.
To prevent this tax authorities started to set requirements to the place of management of the company. Not anymore only the place of registration counted, but the place of management became the most important factor of consideration and the tax treaties were amended accordingly. This resulted in the introduction of ‘nominee director’ services. A nominee director means that a local director would be appointed in the company. This director would then sign a power of attorney to his client, so that the client would be able to manage the company based on this power of attorney.
For many countries this will still work, however many countries have amended the tax treaties again
Requirements of the current management control test
The nowadays management control test will consider the effective place of management, this means the place there the management activities are actually done and not where it’s done on paper.
So a Bulgarian company with a proper registered office, but with the effective management fully or mainly in, for example, the United Kingdom will be liable to taxes in the United Kingdom and not in Bulgaria according the tax treaty between Bulgaria and the United Kingdom.
The management control test in tax treaties
Many countries nowadays incorporate the management control test bases on the place of effective management in the tax treaties with other countries. The tax treaties perform as the legal foundation of the management control test.
Practical examples of the management control test
Company ABC is incorporated under the companies act of country A, director John Doe lives in country B and performs the effective management from this country
Situation: Country A = Bulgarije, Country B = Germany
In this situation profits will be subject to German taxes. This wouldn’t be a very desirable situation, because the Bulgarian company will most likely not be able to benefit from the Bulgarian tax advantages.
This situation can only be resolved by having effective management in Bulgaria.
Situatie: Land A = Netherlands, Land B = Bulgarije
In this situation the management control test will have a positive effect, because the profits will be subject to Bulgarian tax instead of Dutch tax.
Other important triggers
The management control test answers the question which country will have the primary right to levy taxes to a certain types of income, but there are other factors and triggers that should be considered:
Place of activities (substance)
The general rule is that profits made on activities are subject tot taxes in the country where the activities are being exercised.
Profits generated by a permanent establishment are in principle also subject to taxes there where the permanent establishment is located. The definition of ‘permanent establishment’ differs in the tax treaties. Roughly can be said that supplementary activities in other countries, which only contribute to the actual activities will not be considered to be a permanent establishment. An example a a logistic center in country A which belongs to a company in country B. The logistic center isn’t an enterprise, its there to be able to supply clients in country A faster.
Usually a registering a branch office will be considered a permanent establishment in tax treaties.
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