Place of effective management: key to determining a company’s tax residence

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When effective management determines taxation

In international tax law, the concept of place of effective management is one of the key criteria for determining where a company’s profits are taxed and for avoiding double taxation.

As more corporate groups operate across borders — particularly between Andorra and Spain — understanding this principle is essential both for tax planning and for regulatory compliance.

Definition and scope of the concept

The place of effective management refers to the location where the key management and control decisions for the company’s overall activities are made and implemented.

In other words: the registered office’s location matters less than where strategic and management decisions are actually exercised.

🔹Practical examples

In practice, this often corresponds to where:

• The board of directors or executive management meets.
• Strategic and operational decisions are taken.
• The main executives or operational managers reside.

In many cases, this means that either the management body is predominantly resident in Andorra, or that it carries out its activity in a clear and unequivocal manner within that jurisdiction.

If you wish to understand how individual tax residency is determined, you may read Tax residency in Andorra: requirements and real advantages.

If your interest lies in understanding the differences between administrative residence and tax residence, you may consult Administrative residence and tax residence in Andorra: key differences.

Regulatory framework

Although each country regulates the concept of corporate tax residency differently, below are some examples that most frequently impact transactions involving the Principality: Andorra, Spain and the OECD international standard.

🔹Andorra: Article 7 of Law 95/2010 on Corporate Income Tax

Article 7 of the consolidated Law 95/2010, of 29 December, provides that:

Entities are considered tax residents in Andorra if any of the following criteria apply: (...) (c) Having their place of effective management within the Principality of Andorra. For this purpose, an entity is deemed to have its place of effective management in Andorra when its overall management and control of operations are exercised there.

➡️ Consequently, beyond the standard criteria — being incorporated under a country’s laws or having its registered office there — a company may be regarded as tax resident in Andorra even if incorporated abroad, provided its real management and control are exercised from Andorra.

🔹Spain: Article 8 of Law 27/2014 on Corporate Income Tax

Law 27/2014, of 27 November, defines tax residence in almost identical terms:

(c) Having in Spain its place of effective management, meaning the location where management and decision-making for all activities occur.

It is worth noting that high-tax jurisdictions such as Spain are far more likely to reassess the tax residence of foreign companies than low-tax jurisdictions, for obvious reasons.

🔹International standard: Article 4 of the OECD Model Convention

The OECD Model Tax Convention on Income and on Capital provides the following tie-breaker rule in cases of dual residence:

(…) 3. Where, by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, it shall be deemed to be a resident only of the State in which its place of effective management is situated.

If you would like to learn more about the OECD and Andorra, we recommend The OECD: what it is, how it works and why it influences global taxation.

Practical implications

Beyond its legal definition, effective management has immediate consequences on a company’s tax classification. In practice, it may determine where profits are taxed, which State has audit and inspection powers, and how double tax treaties are applied.

🔹 Determining tax residence

The location of the place of effective management may be decisive when a company:

• Is incorporated in one country but managed from another.
• Transfers its decision-making or administrative centre.
• Centralises its international management in a new country, such as Andorra.

This situation is not unusual for individuals or groups holding companies across jurisdictions. In international law, it is quite common and specific.

Given that foreign capital is prevalent in Andorra, this issue should be analysed with particular attention.

🔹 Risk of double taxation

When two countries claim residence over the same entity, bilateral tax treaties (DTAs) apply the place of effective management as the tie-breaker criterion, as previously discussed.

This principle is especially relevant between Andorra and Spain, whose tax authorities examine economic substance and operational reality in each territory, particularly due to their geographic proximity.

🔹 Double taxation treaties

The fact that a company may be considered tax resident in another jurisdiction renders the benefits provided under double taxation treaties (DTAs) in the jurisdiction of incorporation inapplicable.

To understand how DTAs operate, you may consult Double taxation treaties: the key factor determining where international income is actually taxed.

Additionally, if you wish to review all DTAs currently in force in Andorra, you may consult Double taxation treaties (DTAs) in Andorra.

🔹 Planning and compliance

From an international tax-planning perspective, properly determining the country of effective management involves:

• Aligning decision-making bodies with actual material presence.
• Keeping minutes, records, and documentation evidencing that decisions are made in the relevant country.
• Avoiding nominal or shell structures, which may be challenged under OECD BEPS guidelines.

You can find further details in The board of directors in Andorran companies: composition, functions and liability.

In summary, the artificial nature of certain corporate structures prevents full access to the country’s tax advantages and may even result in their classification as pass-through entities.

Specific considerations in Andorra

The Andorran system fully aligns with international standards:

• It recognises the tax residence of foreign entities effectively managed from within the country.
• It requires consistency between the declared seat and real economic substance (office, employees, banking operations).
• It requires alignment with Andorra’s double taxation treaties.

➤ For a broader understanding of the Andorran tax system, we recommend reading Taxation in Andorra: structure, tax rates and real advantages.

When substance prevails over form

The place of effective management is the key factor determining a company’s tax residence and, consequently, the taxing rights of each State.

Both the Andorran Law 95/2010 and the Spanish Law 27/2014 adopt nearly identical definitions, aligned with the OECD Model.

Beyond formal registration, what prevails is the real exercise of management and control.

For international groups and entrepreneurs with structures in multiple countries, properly defining and documenting the place of effective management is essential to:

• Avoid residence conflicts.
• Ensure legal certainty.
• Optimise tax planning in accordance with current regulations.
• Having certainty regarding the applicable tax framework, particularly in relation to corporate income tax, is essential to avoid unnecessary risks.

📞 Do you need assistance in setting up a company in Andorra or analysing whether you can benefit from the Principality’s tax advantages?

At ELYSIUM, we are accustomed to working with international structures and cross-border operations. Tax optimisation is one of our core areas of expertise, and our purpose is to help our clients achieve their objectives with confidence.

If you wish to review your structure, set up a company in Andorra, or assess whether your arrangements are sufficiently robust, we can assist you, including evaluating real economic substance and the applicable DTA. You may contact us via our form or book a fully confidential advisory meeting just below this article.

Last review: December 2025