RESIDENCE UNDER TAXTREATIES

PRESENTATION BY RAHUL CHARKHA

July 30, 2019

CONTENTS PAGE

1. Function of residence concept

2. Domestic law residence rules

3. Tax treaty residence concept

4. Tie-breaker rules

Function of residence concept

THE FUNCTION OF RESIDENCE

Domestic law

• Various concepts - e.g. resident /ordinarily resident – relevant to

determine scope of tax, rate of tax, availability of reliefs, etc.

Tax treaties

• Determining applicable tax treaty and entitlement to treaty

benefits

• Determining right to double tax relief

• Mutual agreement process

Domestic law residence rules

Residence of Individuals:

Several factors which may include:

• Actual physical presence

• Availability of place to stay

• Centre of vital interests – economic ties (e.g. bank accounts),

social ties, family ties, etc.

• Permanent or principal dwelling place

DOMESTIC LAW CONCEPTS

• Habitual, usual or customary place of abode

Intention to reside permanently may be relevant

Relevance of length of stay (on a 183-days basis)

DOMESTIC LAW CONCEPTS

Residence of Companies:

Substantive factors:

• Place of central management and control

• Place of effective management

• Place of principal activity

DOMESTIC LAW CONCEPTS

Tax treaty residence concepts

SCOPE OF TAX TREATIES

Article 1 - OECD Model

This Convention shall apply to persons who are residents of one

or both of the Contracting States“”

UNITED STATES –SAVINGS CLAUSE

The domestic legislation in the US also provides for certain taxing rights

based on citizenship

Article 1(4) US Model

Except to the extent provided in paragraph 5 of this Article this

Convention shall not affect the taxation by a Contracting State of its

residents (as determined under Article 4 (Resident)) and its citizens.

Notwithstanding the other provisions of this Convention, a former

citizen or former long-term resident of a Contracting State may be

taxed in accordance with the laws of that Contracting State.

“

”

TAX TREATY CONCEPT OF RESIDENCE

Article 4(1) makes reference to domestic law to assess residence of

both individuals and companies

The question of whether or not someone is resident of a state may

differ under a tax treaty and under domestic law – if so, then need to

look to treaty tie-breaker rules

Tie-breaker Rule

TIE - BREAKER RULE – INDIVIDUALS

Permanent Home

Residence Status

Economic Relations

Habitual Abode

Nationality

Resident

Mutual Agreement Procedure

Preference is given to permanent home of the individual – must

have a degree of permanency, any form of home (e.g. house,

apartment, etc.)

Next, look at personal and economic relations (center of vital

interests) - family/social relations, occupation, place of business,

etc.)

Habitual abode – where he stays more frequently (look at stay in his

permanent home as well as other places in the same State)

Nationality

TIE - BREAKER RULE – INDIVIDUALS

Example (Individual):

Malaysian Citizen

Has worked as a commercial representative in Indonesia from 2006

Maintained his home and center of economic interests in Malaysia

Rented an office in Indonesia from 2008

From 2008 also rented an apartment in Indonesia and has stayed in

it for just over 6 months each year

Where is the person resident for treaty purposes?

TIE - BREAKER RULE – INDIVIDUALS

TIE - BREAKER RULE – INDIVIDUALS

Permanent Homes Malaysia, but apartment in Indonesia

Center of Vital

Interests

Place of Habitual

Abode

Nationality

Equally divided or in Malaysia?

6 months in each country

Malaysian Citizen

Resident of

Malaysia

CASE STUDY FACTS (1/2)

Start of subject financial year

2016August 2012April 2012June 200619981986

Moved to USA and

attained citizenship

Joined Accenture USA Joined Delloite USA

Temporary assignment to

Accenture India

Moved back to Accenture

USA

❑ Recently, the Bangalore ITAT in case of Shri Kumar Sanjeev Ranjan (ITA no.1655/Bang/2017) ruled on the issue

of determination of residential status in case of dual residency

❑ The issue under consideration related to a citizen of USA assigned in India for some period. Detailed facts of the

case are as under:• Assessee and is dependent members (Spouse + 2 children) are citizens of USA. He owns a house in USA

• He has got voting rights and driving license in USA

• He pays car property tax and makes investments and insurance is USA

• He is willing to settle down in USA

CASE STUDY FACTS (2/2)

• April 1, 2012 to August 10, 2012 – Owned a house in US, however, the said house was given on rent during his stay in India. Resided in India in a rented house

• August 11, 2012 to March 31, 2013 - Resided at his house in US. However, retained the rented house in India. So he had two homes for this period

Permanent home test

• Dependent members (Spouse + 2 children) are citizens of USA

• House property with other personal belongings in USA

• Voting rights allotted in USA

• Driving license and car property tax in USA

• Designated country of residence is USA

• Social ties are in USA

• Investments and insurance is USA

• Willing to settle down in USA

Center of vital interest test

• Moved to US in 1986 and became permanent resident since 1992. Spent aggregate of 30 years in US

• Contributing to social security since 1988

• Himself, spouse and children are all citizens of US

• Spent summer vacations in US during period of assignment in India

• Willing to settle down in US

Habitual abode

SUBJECT TO TAX vs LIABLE TO TAX

Some tax treaties use the term ‘subject to tax’ and ‘liable to tax’

simultaneously

Partnerships, estates or trusts will qualify as ‘residents’ if income

earned has been ‘subject to tax’ in the home state, either in their

hands or in the hands of their partners or beneficiaries

‘Liable to tax’ does not mean that tax is actually paid; ‘subject to tax’

means that income has actually suffered tax

Article 4(3) OECD Model

Where by reason of the provisions of paragraph 1 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.

What is place of effective management?

TIE - BREAKER RULE –COMPANIES

“

”

Para 24 – OECD Commentary on Article 4

Place where key management and commercial decisions that are

necessary for the conduct of the entity’s business as a whole are in

substance made.

Factors

where key decision making is made in relation to the entity’s actions

must take into account relevant facts and circumstances

“”

TIE - BREAKER RULE –COMPANIES

Article 4 – Dual Resident Entities

1. Where by reason of the provisions of a Covered Tax Agreement a person other

than an individual is a resident of more than one Contracting Jurisdiction, the

competent authorities of the Contracting Jurisdictions shall endeavour to determine

by mutual agreement the Contracting Jurisdiction of which such person shall be

deemed to be a resident for the purposes of the Covered Tax Agreement, having

regard to its place of effective management, the place where it is incorporated or

otherwise constituted and any other relevant factors. In the absence of such

agreement, such person shall not be entitled to any relief or exemption from tax

provided by the Covered Tax Agreement except to the extent and in such manner as

may be agreed upon by the competent authorities of the Contracting Jurisdictions.

MLI –ARTICLE 4

“

”

Effective April 1, 2016, a company is considered to be 'resident' in

India in any financial year if its place of effective management, in

that year, is in India

The term ‘place of effective management’ is defined to mean “a

place where key management and commercial decisions that are

necessary for the conduct of the business of an entity as a whole

are, in substance, made.”

Indian Government has also issued certain guidelines vide a circular

for determination of Place of Effective Management of a company

INDIA CONTEXT

INDIA CONTEXT

Determination of POEM:Foreign Company

Active Business Outside India

- passive income < 50 % of total income; and

- total assets in India /total no of employees in India or residents in India < 50 %; and

- Payroll expense incurred on such employees in < 50 % of total payroll expenditure

No Active Business Outside India

- Identification of persons who take key management and commercial decisions

of the company

- Determination of place where these decisions are in fact being made

Majority meetings of BoD are held outside India

Does the BoD stand aside & the powers of the BoD are exercised by person/s resident in India

Yes

Yes

POEM is outside India POEM is in India

No Yes

- BoD provided they retain & exercise its authority to govern the company;

- Executive committee where BoD delegate some of its authority to it

- Decision made by shareholders on matter reserved for them under company law would not be relevant

- Location where BoD regularly meets

- Location of HO - place where key decisions are being made;

- Where BoD /executive committee meeting takes place through video conferencing - physical location of meeting may not be relevant

No single principle will be decisive in itself; determination of POEM will have to be done on a case-to-case basis

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