Corporate tax-residence is a foundational notion in our federal income tax system. Whether a corporation is classified as “domestic” or “foreign” for U.S. federal income tax purposes determines the extent of tax jurisdiction the U.S. has over such corporation and its affiliates. Unfortunately, tax scholars seem to agree that the concept of corporate tax-residence is “meaningless”; Corporations, being imaginary entities, cannot have “real” residence. Moreover, taxpayers can easily manipulate corporate tax-residence tests, and effectively elect where corporations reside for tax purposes. Commentators try to deal with the perceived meaninglessness by either trying to identify a normative basis to guide corporate tax-residence determination, or, by minimizing the relevance of corporate tax-residence to the calculation of tax liabilities.
I argue that the search for an independent normative reasoning for corporate tax-residence is largely an irrelevant undertaking, as it ignores the policy purposes underlying the taxation of corporate-entities. I also argue that corporate tax-residence cannot be made less relevant for purposes of calculating tax liabilities. Therefore, I suggest we abandon the normative discussion, and instead I develop a cohesive functional model of corporate tax-residence. Under my suggested model, corporate tax-residence tests are designed to support the policy purposes for which corporations are taxed, and the tests are not independently justified in normative terms.
Using the developed model, I review corporate tax-residence determination in the United States, which is based on the place-of-incorporation. I conclude that under a functional approach the United States should reform the way it defines “domestic” corporations for tax purposes, by way of adopting a two-pronged corporate tax-residence test: the place where the corporation’s securities are listed for public trading, or the place of the corporation’s central management and control.