Residence definition issues – for tax treaty purposes

Tax treaties give residents of the contracting countries the security that they will not experience double taxation. Unfortunately in some cases, an individual may be in a situation where it is unclear which country he is a resident of – and hence which country will tax him. In these cases, Article 4(2) of the U.S. Model Treaty provides the following tie-breaker rules for individuals:

•The taxpayer is a resident of the country in which he or she has available a permanent home.

•If the taxpayer has a permanent home available in both countries, the taxpayer is a resident of the country in which his or her personal and economic relations are closer (center of vital interests).

•If the country in which the taxpayer’s center of vital interests cannot be determined, or if the taxpayer does not have a permanent home available to him or her in either state, the taxpayer is a resident of the country in which he or she has a habitual abode.

•If the taxpayer has a habitual abode in both countries or in neither country, the taxpayer is a resident of the country in which he or she is a citizen.

•If the taxpayer is a citizen of both countries or of neither country, the competent authorities of the two countries will settle the matter by mutual agreement.
Tie-breaker rules also are provided for corporations and other types of entities (Article 4(3) and (4) of the U.S. Model Treaty).

There is an exception to the principle that residence determines the availability of treaty benefits. Under so-called savings clause provisions, a treaty country saves the right to tax its own citizens as though the treaty did not exist (Article 1(4) of the U.S. Model Treaty).

Leave a Reply