Difference between tax domicile and place of operation and why it matters for tax purposes

In the world of international business, there are two concepts that are often confused: tax domicile and place of operation.

At first glance, they seem synonymous, but they are not. And the difference can determine where the company pays taxes, what rules it must comply with, and even whether it runs the risk of double taxation.

In this article, we will explain what distinguishes each concept, give practical examples, and show why it is so important to correctly define these elements in an international structure.

What is a tax domicile?

A tax domicile (also called a tax residence) is the official address registered with a country's tax authorities.

In simple terms, it is the place where the company is considered a resident for tax purposes.

Main characteristics:

• It is the address used by the tax authorities for official communications;

• It determines in which country the company pays its taxes;

• It defines the applicable tax legislation;

• It usually coincides with the country where the company is incorporated.

Example:

A company incorporated in Malta has, in principle, its tax domicile in Malta, even if most of its customers are in other countries.

What is the place of operation?

The place of operation is where the company actually carries out its business: where management, employees, customers, or even production are located.

Main characteristics:

• It may be in a different country from the tax domicile;

• It includes offices, factories, decision-making centers, or even remote teams;

• It is where economic activity is actually generated.

Example:

A company registered in Malta (tax domicile), but whose team work in Lisbon, has its place of operation in Portugal.

Why do some companies face issues?

The distinction between tax domicile and place of operation must be carefully navigated because tax authorities may look at both elements to determine where a company should pay taxes. Some tax authorities consider that if a company is actually being managed in their country (residence of the directors), then said company should be paying taxes in that country and not where it was incorporated.

If a company has its tax domicile in one country but its management and operations are clearly in another, there is a risk of:

• Double taxation: two countries claiming tax on the same income;

• Loss of tax benefits: the company may now have to pay full tax in the country of operation;

• Enhanced scrutiny: tax authorities may consider the structure to be merely a “front”;

• Fines and penalties: non-compliance with the rules may result in penalties.

The role of double taxation agreements

There are also Double Taxation Agreements (DTA): treaties between countries that prevent the same income from being taxed twice - See DTA between Portugal and Malta here.

These agreements consider both tax residence (tax domicile) and the place of effective management (operation) to decide who has the right to tax and when.

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In the end… 

The difference between tax domicile and place of operation is not just technical. It is crucial to the fiscal and legal health of a company.

Economic substance rules dictate that a company must demonstrate that it has an actual and reasonable presence in the country where it pays taxes, including major decision making and effective management. This can take many forms, such as UBO´s meeting in the place of incorporation of the company to sign accounts and do quarterly meetings, or even appointing local directors.

International businesses that do not have this clear distinction may face compliance risks, additional costs, and fiscal penalties.

At Ancilia, we assist international companies precisely in these matters, from defining their tax domicile to analyzing their place of operation, ensuring clear, secure structures that comply with legislation. 

Our goal is for entrepreneurs to be able to focus on growing their business, while we take care of the regulatory aspects.