Why securing corporate tax residency must come first

In cross-border structures, tax discussions often start with pricing, services, or transfer pricing documentation.

That sequence is increasingly dangerous.

A recent decision of the Lyon Court of Appeal serves as a clear reminder: without a solid corporate tax residency, treaty protection collapses — regardless of how carefully the rest of the structure is designed.

The case: when treaty protection disappears

In this case, a French company purchased goods from its Hong Kong subsidiary. In addition to the purchase price, it paid separate amounts for so-called “support services”, including:

• order follow-up,
• production monitoring,
• and quality control.

The French tax authorities treated these services as separate from the sale of goods and considered that they were used in France. As a result, they applied a withholding tax under Article 182 B of the French Tax Code.

The taxpayer challenged this analysis on several grounds. None succeeded.

Why the court rejected the taxpayer’s arguments

The Court of Appeal confirmed the reassessment, relying on a factual and formal analysis.

Three points proved decisive.

Separate invoicing meant separate services

Although the taxpayer argued that the services were inseparable from the purchase of goods, the court focused on the structure of the invoices.

Separate line items meant separate services.
Once services are invoiced independently, they are analysed independently for
withholding tax purposes.

Services benefiting France were taxable in France

The court also examined where the services were economically used.

Production checks and quality control carried out to meet French standards were considered to benefit the French company directly. The fact that they were performed abroad did not prevent their taxation in France.

VAT treatment was irrelevant

The taxpayer attempted to rely on the concept of a “single operation” under VAT law. The court dismissed this argument, confirming that VAT characterisation has no bearing on withholding tax analysis under Article 182 B.

But the most decisive point came next.

The real issue: lack of corporate tax residency

The company attempted to rely on the France–Hong Kong tax treaty to avoid withholding tax.

The court refused.

Why? Because the Hong Kong entity was not considered a true tax resident within the meaning of the treaty.

Under Hong Kong’s territorial tax system, the entity was not taxed on foreign-source income. As a result, it did not meet the treaty definition of a resident “liable to tax” in Hong Kong.

Treaty protection was therefore denied in full.

The consequences: no treaty, no protection

Once treaty benefits were denied, the outcome was mechanical.

The payments were subject to the full domestic withholding tax rate of 33.3%, with no reduction, no exemption and no relief.

All other discussions — pricing, substance, economic rationale — became secondary.

The structure failed at its first gate.

Key lesson: corporate tax residency is the cornerstone

This case illustrates a point that is still underestimated in many international structures.

Tax residency is not a formality. It is the condition that determines whether a company can even access treaty protection.

If residency collapses:

• treaty benefits disappear,
• domestic withholding taxes apply in full,
• and downstream structuring choices become largely irrelevant.

Why sequence matters in cross-border structuring

Entrepreneurs often focus on:

• transfer pricing,
• service descriptions,
• operational justifications,
• or governance frameworks.

All of this matters — but only after residency is secured.

The correct sequence is:

• establish and document true corporate tax residency,
• confirm treaty eligibility,
• then structure flows, pricing and services.

Reversing that order exposes the entire structure.

Conclusion: lock residency before everything else

A foreign entity that is not a genuine tax resident is not a shield. It is a vulnerability.

Before assuming that a treaty will protect cross-border payments, entrepreneurs should ask a simpler question:

does the entity truly qualify as a tax resident under the treaty — or only on paper?

How we can help

At Altara Tax, we assist international entrepreneurs in securing corporate tax residency before structuring cross-border flows.

Our work focuses on:

• analysing treaty residency conditions,
• testing exposure under domestic withholding tax rules,
• and ensuring that residency, substance and taxation are aligned from the outset.

Because without a solid corporate tax residency, everything else eventually crumbles.