Corporate tax residency: why registration is irrelevant without effective taxation

In international structuring, few misunderstandings are as common — and as costly — as the belief that incorporating a company in a country automatically makes it a tax resident there.

It does not.

Under tax treaties, corporate tax residency is not determined by registration. It is determined by effective liability to tax.

A recent French court decision illustrates this point with particular clarity.

The case: treaty benefits denied despite formal incorporation

In the case at hand, a French company distributed dividends to its shareholder, a company incorporated in Panama. Relying on the France–Panama tax treaty, the French company applied the reduced 5% withholding tax rate provided by the treaty.

The French tax authorities challenged the application of the treaty.
The court upheld their position.

What the court actually looked at

The court’s analysis did not focus on formal incorporation. It focused on substance and taxation.

Three elements proved decisive.

An offshore entity with no real activity

The Panamanian company was classified as an offshore entity. It had no operational activity, no employees and no meaningful presence in Panama.

No income-based taxation

The company was subject only to a fixed annual tax of approximately USD 300. It was not liable to tax on its income.

This point was critical.

Treaty residency requires effective tax liability

Under the France–Panama tax treaty, a resident is an entity that is “liable to tax” in that state by reason of domicile, residence or similar criteria.

The court held that a company subject only to a symbolic fixed levy, unrelated to its income, does not meet this definition.

The consequence: no residency, no treaty protection

Because the Panamanian entity was not considered a tax resident under the treaty, the reduced withholding tax rate was denied.

The full domestic withholding tax rate of 30% applied.

Once again, the structure failed at the residency gateway. Everything that followed became irrelevant.

The real lesson: tax treaties are about taxation, not flags

This decision confirms a principle that applies far beyond Panama.

To benefit from a tax treaty, a company must be effectively liable to tax in its claimed state of residence.

Not:

• theoretically,
• symbolically,
• or administratively.

But genuinely and structurally.

A company that is registered in a jurisdiction but not meaningfully taxed there does not qualify as a treaty resident.

Why this matters for international structures

Many international holding or operating structures rely on treaty benefits:

• reduced withholding taxes,
• exemptions,
• or favourable allocation of taxing rights.

If corporate residency is fragile, all of those benefits are exposed.

This is especially relevant in jurisdictions with:

• territorial systems,
• offshore regimes,
• or fixed or nominal tax schemes.

Registration alone will not save the structure when tested.

Substance and effective taxation as the new baseline

The trend across jurisdictions is clear.

Tax authorities and courts increasingly test:

• whether a company is genuinely subject to income tax,
• whether taxation is aligned with economic activity,
• and whether treaty definitions are met in substance, not just in form.

Treaty access is no longer assumed. It is earned.

Conclusion: residency must be real to be defensible

Corporate tax residency is not a label.
It is a condition.

If a company is not effectively liable to tax in its country of residence, treaty protection collapses — regardless of where it is registered.

How we can help

At Altara Tax, we assist international entrepreneurs and HNWIs in testing and securing corporate tax residency before relying on treaty benefits.

Our work focuses on:

• analysing treaty residency conditions,
• assessing effective tax liability,
• and aligning substance, taxation and legal form.

Because in international tax, residency that exists only on paper rarely survives scrutiny.