1. RESIDENCE UNDER TAX TREATIES
PRESENTATION BY
RAHUL CHARKHA
July 30, 2019

2. CONTENTS PAGE Function of residence concept
Domestic law residence rules
Tax treaty residence concept
Tie-breaker rules

3. Function of residence concept

4. 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

5. Domestic law residence rules

6. DOMESTIC LAW CONCEPTS 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

7. 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)

8. DOMESTIC LAW CONCEPTS Residence of Companies: Substantive factors:
Place of central management and control
Place of effective management
Place of principal activity

9. Tax treaty residence concepts

10. “ ” 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 “ ”

11. 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. “ ”

12. 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

13. Tie-breaker Rule

14. TIE - BREAKER RULE – INDIVIDUALS
Residence Status
Permanent Home
Economic Relations
Resident
Habitual Abode
Nationality
Mutual Agreement Procedure

15. TIE - BREAKER RULE – INDIVIDUALS
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

16. 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?

17. TIE - BREAKER RULE – INDIVIDUALS
Permanent Homes
Malaysia, but apartment in Indonesia
Center of Vital Interests
Equally divided or in Malaysia?
Place of Habitual Abode
6 months in each country
Nationality
Malaysian Citizen
Resident of Malaysia

18. CASE STUDY FACTS (1/2)
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
Start of subject financial year
2016
August 2012
April 2012
June 2006
1998
1986
Moved to USA and attained citizenship
Joined Accenture USA
Joined Delloite USA
Temporary assignment to Accenture India
Moved back to Accenture USA

19. 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, 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 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

20. 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

21. TIE - BREAKER RULE – COMPANIES
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? “ ”

22. 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 “ ”

23. “ ” MLI – ARTICLE 4 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. “ ”

24. INDIA CONTEXT
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

25. Active Business Outside India No Active Business Outside India
INDIA CONTEXT
Determination of POEM:
Foreign Company
Active Business Outside India
No 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
Identification of persons who take key management and commercial decisions of the company
Determination of place where these decisions are in fact being made
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
Does the BoD stand aside & the powers of the BoD are exercised by person/s resident in India
Majority meetings of BoD are held outside India
Yes No
Yes
POEM is outside India
POEM is in India
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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