Is Your Business Subject to Corporate Tax?

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Date Created: 25 May 2020
Last Update: 12 Jul 2020

As a business owner, the first question you may ask is whether and how corporate tax planning would apply to your business. This is one of the most questions to ask when setting up your business for the purpose of financial and tax planning, especially if your business operates in more than one country / territory (e.g. online business to global customers). By having some basic idea on tax law, a company can then determine where to register their company or claim tax residence in order to maximise financial gains.  For example, registering a company in the BVI might have a lower tax burden in comparison to registering in the United Kingdom. It is therefore important for a company to have some basic understanding of tax law and how it works in general. 

 

There are certain general guiding principles in corporate taxation: 

  • Separate Legal Entity
    Have you registered the business under your own name or as a separate legal entity through the incorporation of a company? Corporate tax would only apply to companies or corporations that are separate legal entities. 

  • Tax residency 
    A country can tax the residence's total income no matter where the income originates. Whether a company is subject to this is based on where the company registers its tax residency as well as where the management and control take place. 


  • Carrying on business
    A country can tax on business activities that carry on within its border. Whether a company is subject to corporate tax is based on whether the company is carrying on business within its jurisdiction. 

 

A. Separate Legal Entity 

 

What does 'separate legal entity' mean?  

In most jurisdictions, corporate tax would only apply if a business has been set up as a separate legal entity (generally a corporation or a limited liability company) to separate the actions of the entity from those of the owner. If the business has not been set up as a separate legal entity, then the profits from the business would generally be combined with the income of the owner and personal tax would be assessed on the individual. 

 

 

 

B. Tax Residency

 

An entity is regarded as a tax resident of a particular common law jurisdiction if –
(a) the entity is incorporated / constituted in that jurisdiction; or

(ii) if the entity is incorporated / constituted outside of that jurisdiction, it is managed or controlled in that jurisdiction.  

 

Following incorporation, entities / companies are generally tracked by the relevant tax authority at the place of incorporation and issued with a tax return for the first anticipated "year of assessment". Even when no tax return has been issued, however, the entity / company has an obligation to notify the tax authority if assessable profits have arisen.

 

The common tax law concept of “normally managed or controlled” does not require that both management and control be exercised in that jurisdiction. “Management” refers to the management of daily business
operations, or implementation of the decisions made by top management, etc. “Control” refers to the
control of the whole business at the top level, including formulating the central policy of the business,
making strategic policies of the entity, choosing business financing, evaluating business performance, etc.

 

It is thus possible for an entity to be a tax resident in more than one jurisdiction. In particular, many companies are set up in tax havens such as the Cayman Islands or the British Virgin Islands but managed or controlled in another jurisdictions where their headquarters are based. These companies will be regarded as tax residents of the jurisdictions where the management or control takes place. 

 

C. Carrying on a Business 

 

Corporate tax is still payable by the entity if it carries on a trade, profession or business in a country / territory (even if it is not a tax resident) on profits arising in or derived locally from that trade, profession or business. Where the entity is not a tax resident, profits that have a foreign source are generally excluded from the territorial scope of the country / territory's taxation system, including those derived by locally incorporated companies.

 

The concept of "carrying on business" is different from "management" or "control". By having a basic understanding of what is 'carrying on business',  a company can then determine where to register its business (preferably at a low tax jurisdiction where offshore incomes are not taxed) or whether a company is subject to corporate tax in a particular country / territory. 

 

What does 'carrying on business' mean?  

The precise definition of 'carrying on business' is rather unclear. However, three general themes that emerge in case law can assist in assessing whether a company is carrying on business in a jurisdiction. 

 

First, there must be a business. Whether an activity is a 'business' is determined on a case-by-case basis. Having a representative office that does not conduct sales in a territory may not constitute carrying on business.  Generally, a passive undertaking that gives rise to property income or capital gains, such as interest rate generated by a company saving account, is not considered as business.

Second, the business must be carried on for a continuation of time
. A business adventure that is otherwise not part of the ordinary business is not considered as ‘carry on business’. 

 

Third, the business must operate within the jurisdiction. If the country’s geographical landmass is precisely defined, then there will be no issue concerning the determination of territorial boundaries. However, territorial issues might arise if a company is registered in the coastal area or near the borders between two jurisdictions.

  

Some other indicia can also help to determine whether a company is  'carrying on business' in a jurisdiction. 

 

 

 

What are some other factors to determine 'carrying on business' in a particular jurisdiction? 
There are a few factors that are often used to determine whether a company is 'carrying on a business' in a jurisdiction. 


(i) Place of contract
 

This term refers to the location where sales and goods contracts are habitually made. The contract must be essential or profit producing. Contracts such as leases, purchases of supplies, and labour contracts are in general not considered as essential contracts.  

 

(ii) Location of operation which profit arises

 This process includes matters that arise before the sales (purchases, manufacture or production of goods, or solicitation of orders) and after the sales (delivery and payment). These matters must be significant business operations or actions to be considered as 'operation which profit arises'. 

 

(iii) Place of Manufacture or Production

If the goods are manufactured or produced in one jurisdiction, then it is likely that a company is carrying on business in the manufacturing country even though those goods were later on exported. 

 

(iv) Location of an Inventory of Goods

If it is not indicative that trade was exercised within the jurisdiction, the location of inventory could be a factor in determining the place of business. 

 

(v) Location of a Bank Account

There are a few incidents where the location of a business bank account as an indication that the business is carried on in that place. However, substantive income generated by the saving might not be considered as business.   

 

(vi) Business Directory 

The place where a business is listed in a telephone or other directory can be a factor in determining whether a business is connected to a jurisdiction.

 

(vii) Location of a Branch Office

The location of a branch office has been considered as one of the factors to determine where a business is being carried on. 

 

Above are some indicators for you to determine whether your business is being carried on in a jurisdiction.

 

A company can be exempted from certain tax if their place of tax residency and place of business (where they carry on a business) are in a double tax agreement (DTA). For instance, for a company that registered its business in Ireland but is carrying on its business in Singapore, then the company may be subject to tax relief from double taxation.  It is therefore important to determine where to set up or register your company at the beginning of your business development. 

 

 

D. Issues to consider when expanding your business into other countries / territories 

 

This section considers tax issues that might arise for a company that is planning to expand its business across the world. 

 

(i) An agent working in another jurisdiction 

A company can be carrying on business via an agent. If the intermediary is a dependent agent of the company, the company is likely to be carrying on business in the jurisdiction via the agent. However, if the agent is an independent contractor or if the relationship is determined by a sales and purchase agreement, then the company is carrying on business with the country rather than carrying on business in the country.  

 

How to determine if the intermediary is an agent or an independent contractor? 

It depends on the relationships between the company and the intermediary. The description of the job title is inconclusive. Whether an intermediary is an agent or an independent contractor usually depends on two factors: the arrangement between the parties, and the degree of control exercised by the company over the agent. 

 

(ii) A subsidiary company as an agent

A subsidiary is a shell or puppet corporation through which its parent company operates a business. A subsidiary is not necessary an agent, but it could be an agent if the parent company completely dominates the business affair of a subsidiary to the effect that the subsidiary business becomes part of the parent company’s own business.  

 

How to determine if a subsidiary company is an agent? 

The agency relationship is determined by practice between the parties. The fact that a company owns a 100% share of a subsidiary company does not mean the parties are in an agency relationship. An agreement between the parties is also inconclusive as to whether the subsidiary is acting as an agent. 

 

E. How to use DocPro for corporate tax planning

 

DocPro has various documents and correspondence for your tax planning including letters for local tax authorities:

 

1. Letter to Tax Office / Inland Revenue Department to extend Tax Deadlines fo COVID-19

https://docpro.com/doc1482/letter-to-tax-office-inland-revenue-department-to-extend-tax-deadlines-coronavirus-covid-19

 

2. Letter to Tax Office / Inland Revenue Department Holdover of Tax

https://docpro.com/doc799/letter-to-tax-office-inland-revenue-department-holdover-of-tax

 

3. Letter to Tax Office / Inland Revenue Department Request for Tax Refund on Cessation of Business

https://docpro.com/doc797/letter-to-tax-office-inland-revenue-department-request-for-tax-refund-on-cessation-of-business

 

4. Letter to Tax Office / Inland Revenue Department Waiver of Late Tax Payment / Filing Penalty

 

https://docpro.com/doc795/letter-to-tax-office-inland-revenue-department-waiver-of-late-tax-payment-filing-penalty

 

5. Letter to Tax Office / Inland Revenue Department Exempt on Transaction / No Transfer of Ownership

 

https://docpro.com/doc796/letter-to-tax-office-inland-revenue-department-exempt-on-transaction-no-transfer-of-ownership

 

F. Tax offices in jurisdiction

 

This entry is intended to be a brief sketch of the principle of tax law. The details of tax law varies depends on the law of different countries, and you may wish to check with your lawyer or accountant to develop a more comprehensive tax strategy.  For your convenience, below is a directory of tax offices in major common law jurisdictions: 

Country 

Web Links

Hong Kong 

https://www.ird.gov.hk/eng/welcome.htm

United Kingdom 

https://www.gov.uk/government/organisations/hm-revenue-customs
India  https://dor.gov.in/
Canada  https://www.canada.ca/en/revenue-agency.html

 

Australia 

 

https://www.ato.gov.au/

 

Newzealand 

 

https://www.ird.govt.nz/

 

Singapore 

 

https://www.iras.gov.sg/irashome/Quick-Links/Tax-Acts/Income-Tax-Act/

 

South Africa

 

https://www.sars.gov.za/Pages/default.aspx

 

Malaysia 

 

http://www.hasil.gov.my/

Pakistan

https://www.fbr.gov.pk/

 

Please note that this is just a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your local lawyer.

 

Keywords:

Carrying On Business, Corporate Tax, Tax, Tax Residency, Tax Presence, Tax Evasion, Tax Avoidance

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Corporate Tax Planning

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Tax Rate

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Tax Rate Reduction

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Business Tax

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