Louis Philippe Dandenault
Harry Standjofski

Principle of international taxation

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International Tax
Lesson 1 – Taxation Principles
– Residence and source Corporations

Agenda
• Residence and Source as principles of taxation
• Special case 1: The Hong Kong case
• Example of tax planning based on the principle
of source
• Special case 2: the USA case

Agenda
• Residence and Source as principles of taxation
• Special case 1: The Hong Kong case
• Example of tax planning based on the principle
of source
• Special case 2: the USA case

Introduction
• Taxation for individuals
• Taxation for corporations
– We are going to focus in this lesson in
taxation for corporations
– We will consider the structure parent
company-subsidiary company in our analysis
of withholding tax and double taxation

Residences vs. Source
There are two approaches to levy taxes on
Companies and individuals:
-

Residential approach (worldwide
approach or national approach)
Territorial or source approach

a) Residential approach
- The key point is place of “residence” of the
company: Government will levy taxes on
the income earned by firms that are
resident in the his country (i.e. “country of
residence”), regardless of where the
income has been earned (domestically or
abroad).

a) Residential approach
- Which income?
Company’s worldwide income is taxed in
the “country of residence”.

b) Territorial or Source approach
- Focuses on “where the income has been
earned” rather than on the “country of firm
incorporation”
- A country will include in its taxable base
income arising within its jurisdiction
regardless of the residence of the taxpayer,
i.e. residents and non-residents alike are
taxed on income derived from the country

Which of these two principles
a) Residence approach
b) Territorial or source approach
is more commonly used by nations?

Most of the countries adopt BOTH!

Residential approach &
Territorial or Source approach
Example: China: Article 3 Enterprise Income Tax:
“A resident enterprise shall pay the enterprise income tax on its incomes derived from both inside and outside China.
“For a non-resident enterprise having offices or establishments inside China, it shall pay enterprise income tax on its incomes derived from China as well as on incomes that it earns outside China but which has real connection with the said offices or establishments”.

In general, most of the countries levy taxes based on both
principles.

Residential approach &
Territorial or Source approach
Example: China: Article 3 Enterprise Income Tax:
“A resident enterprise shall pay the enterprise income tax on its incomes derived from both inside and outside China.
“For a non-resident enterprise having offices or establishments inside China, it shall pay enterprise income tax on its incomes derived from China as well as on incomes that it earns outside China but which has real connection with the said offices or establishments”.

In general, most of the countries levy taxes based on both
principles.
Principle of
residence

Principle of source or
territorial

What is “Residence”?
What is “Source”?

What is “Residence”?

Residence
-Two approaches:
- Formal approach: a company will be resident in a
country if it is incorporated or registered there
- Substantive approach: a company will be resident
in a country if it is “effectively managed” in that
country:
-

Central administration
Effective management
Head office
Principal place of business

Which of these two approaches
a) Formal approach
b) Substantial approach
are more commonly used by nations?

Most of the countries adopt BOTH!

Residence: example of formal
and substance approach
-Example: Article 2 CIT Law China:
“Enterprises are classified into resident and non-resident enterprises. “The term "resident enterprise" as mentioned in this Law refers to an enterprise that is established inside China, or which is established under the law of a foreign country (region) but whose...