7/23/2019 Importance of the Term Resident for the Application of a DTA

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Importance of the term “resident” for the application of a double taxation treaty

A treaty only apply to residents of one or both contracting states

Most of the substantive provisions of the treaty require the recipient of income (or

owner of capital) to be a resident of a contracting state In certain articles of the treaty (e.g. Article 10 of the !"# Model) it is necessary

to determine where the payer is resident $or the purposes of a ta% treaty a person can only be resident of one contracting

state. &his is important not only to eliminate a ma'or cause of double

ta%ation(where a ta%payer is regarded by both states as being a resident) but also for the application of many of the Articles of the treaty.

  !conomic double ta%ation is the double ta%ation of an ob'ect in the hands of two

  different ta%payers e.g. profits derived by a company and subsequently paid out as a

  dividend to its shareholder may be sub'ected to corporate income ta% in the hands ofthe company and to personal income ta% in the hands of the shareholder.

  uridical double ta%ation*+ on the other hand+ arises where the same ta%payer is ta%ed

twice for the same ob'ect+ for e%ample+ on the basis of his nationality in one state and

on the basis of his residence in another.

(

(a) Tie-breaker rules of the OECD odel

!or indi"iduals

&he following tests are to be applied in serial order,

(1) the state in which the individual has a permanent home available to him-() the state with which his personal and economic relations are closer (centre of vital

interests)

(/) the state in which he has an habitual abode-

() the state of which he is a national-() if none of the above tests point to a conclusion+ the competent authorities shall then

settle the question by mutual agreement.

!or companies

2here a company is regarded as resident of both contracting states by the domestic laws

of both states then for the purposes of the treaty it is a resident where its place of effective

management is situated. &his is slightly different from central management and control*.!ffective management is much more concerned with the day to day management of the

company. It is the place where the chief e%ecutive manages the company i.e. the day to

day decisions.