Written by- Saloni Bansal
Article by: CA. Harsh Mathur
Around the globe, the word “Residence” is generally understood as home or a place where a person lives. A person may have multiple residences in multiple cities or even countries and its significance is often considered in an emotional sense. However in the world of taxation, the term "Residence" holds much more significance as it brings about much wider tax implications than what is generally understood.
The domestic law of every State provides its own definition of the term Resident and generally imposes a comprehensive liability to tax - the global income- of that resident in that State. But what happens when an individual is considered as a Resident by two or more States for the same period?
Take for example, an individual who has his permanent home in State A, where his wife and children live. He has had a stay of more than six months in State B and according to the legislation of the latter State he is, in consequence of the length of the stay, taxed as being a resident of that State. Thus, both States claim that he is fully liable to tax.
Therefore, this conflict has to be solved by the Convention i.e. by referring to the Double Taxation Avoidance Agreement signed between the two relevant States.
Double – taxation avoidance agreements provide relief by reference to the country of residence by two methods. Relief may be given in the country of origin on income arising to a resident of the other country. Alternatively the recipient of income may be able to claim a credit in his country of residence of tax suffered in the other country or in some instances may qualify for exemption in his country of residence on income taxed in the other country. Consequently it is crucial to define where a person is resident.
In this article, I have discussed the relevance and use of Article 4- Residence of OECD Model Convention in solving the various conflicts arising in case of double residence.
Importance of Article 4 – Residence
A person qualifies for the benefits of tax treaty if he is a resident of either or both of the contracting state.
The concept of "Resident of a Contracting State" under Article 4 is of importance in three cases:
a) In determining a convention’s personal scope of application;
b) In solving cases where double taxation arises in consequence of double residence;
c) In solving cases where double taxation arises as a consequence of taxation in the State of residence and in the State of source or situs.
Criteria for determining Residence for Individual:
Para 1 of Article 4 of OECD Model defines the term “Resident of a Contracting State” as follows:
For the purposes of this Convention, the term "Resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof.
This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
Now, coming back to our example - where an Individual is resident in both of the Contracting States as per para 1 of article 4, his status under Article 4 shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
b) If the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
c) If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
d) If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
Note: The above tests have to be considered in strict order of priority: if one of the earlier tests resolves the matter there is no need to consider the later tests.
Criteria for determining Residence for Other Than Individuals :
It may be rare in practice for a company, body of persons, etc. to be subject to tax as a resident in more than one State, but it is, of course, possible if, for instance, one State attaches importance to the registration and the other State to the place of effective management.
However, it would not be an adequate solution to attach importance to a purely formal criterion like registration. Therefore paragraph 3 attaches importance to the place where the company, etc. is actually managed.
Therefore in case a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Question & Answers:
Q1. Can a place taken on Rent be considered as Home for the purpose of first criteria- permanent home?
Ans. As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential. This means that the dwelling must be available at all times continuously, and not just for the purpose of a stay which, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.).
For example, if an employer makes a room in a company flat available whenever an employee visits the UK he would not be treated as having a permanent home in the UK. This is because the flat is not available for his use outside his visits to the UK for work purposes.
Q2. In case a person has permanent home in two states, how is his Center of Vital Interests decided?
Ans. In this case it is necessary to look at the facts in order to ascertain with which of the two States his personal and economic relations are closer. Thus, regard will be given to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc to determine his "center of vital interests".
For example, the commentary to the OECD Model at para 15 states:
"If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State."
Q3. If the individual has a permanent home in both States and it is not possible to determine his centre of vital interests or where he has no permanent home, how shall his Habitual Abode be determined ?
Ans. In the first situation, where the individual has a permanent home in both States & there is doubt as to where he has his centre of vital interests- it tips the balance towards the State where he stays more frequently. For this purpose regard must be had to stays made by the individual not only at the permanent home in the State in question but also at any other place in the same State.
In the second situation, where the individual has no permanent home in either States, as for example, a person going from one hotel to another, all stays made in a State must be considered without it being necessary to ascertain the reasons for them.
Q4. Over what length of time the stay should be made to determine Habitual Abode?
Ans: The agreements do not specify any length of time over which the comparison must be made, but the commentary makes it clear that it must be over a sufficient length of time for it to be possible to determine whether the residence in each of the two states is habitual.
Q5. What is the main aim of Article-4 in DTAA?
Ans. It aims to address the conflict of Dual Residence.
Q6. Whether Residence determined as per Article-4 will override the scope of residence provided in Domestic Law?
Ans. No, the residence determined by Article 4 is effective for the purpose of the treaty only. It is important to note, and the commentary on the OECD model makes it clear, that the purpose of Article 4 is only to resolve issues of conflict between the domestic law of the contracting states. The article does not mean the domestic law is ignored. In a case of conflict a choice must be made between the two claims to tax.
Ref: ICAI module on diploma in international Tax, OECD Guidelines, OECD Commentary