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

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🏁 Introduction

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.

➤ To understand how a similar issue arises for individuals — where administrative and tax residence do not necessarily coincide — we recommend reading Administrative residence and tax residence in Andorra: key differences.

🇦🇩 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.

➤ You can learn more in our article Double Taxation Agreements (DTAs) in Andorra.

🌍 Practical implications

🔹 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.

🔹 Double taxation risk and tax treaties

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.

🔹 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.

🇦🇩 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.

🧩 Conclusion

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.

If you wish to review your structure or properly document your company’s place of effective management, we can assist you in assessing real substance and the applicable DTA.
Book a meeting or contact us through our form.

Last review date: November 2025