Tuesday, January 24, 2012

The OECD Model Tax Treaty; Residence, Part I

If you have further questions about international tax, please contact my law office.

Article 1 of the OECD treaty states, "This Convention shall apply to persons who are residents of one or both of the Contracting States.."  As such, for a person to claim treaty benefits, they must be residents.  Today, I'll focus on residence for individuals, which is covered in Article four of the treaty:

Article 1, Section 4 states, 

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.

The above paragraph has several key points as noted in the accompanying commentary.  "The definition refers to the concept of residence adopted in the domestic law."  Put another way, the model treaty melds with the existing domestic law to create a hybrid concept.  Second, "the definition aims at covering the various forms of personal attachment to a State which, in the domestic taxation laws, form the basis of comprehensive liability."  What the treaty is looking for is some outward, easily documented manifestation of an individual's presence in the state.  Also note, this definition does not extend to companies that are taxed in a jurisdiction simply because of their business done in the state.

In the event a person is a resident of both contracting states, the treaty has a comprehensive list of "tie-breaking" provisions:

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.

The criteria start with an easily understood concept: where is the individual's physical home?  If only one exists, the investigation stops.  If there are two homes, then we need to determine where his "center of vital interests" exists -- where he has his closest community.  Here we look at where he has friends, which community he more actively participates in etc... 

The preceding two points are typically where most inquiries stop.  However,  in the event it's difficult to determine, we next look to a "habitual abode."  Habitual abode refers more to the length of time an individual stays in a particular location, regardless of the type of residence (which could even be a hotel).  Finally, if that test doesn't work, we look to nationality and then an agreement between the countries.

In reality, most inquiries are easily handled under these rules.  Typically it stops at at section (a).  

Next, we'll talk about residence for business entities.


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