Tie breaker Rule in Double Taxation Avoidance Agreement (DTAA)

The Tie breaker rule for residential status refers to the criteria used to determine an individual’s primary place of residence, usually for tax purposes. The primary place of residence is important for tax purposes as it is used to determine where an individual must pay income tax. For individuals who live in multiple jurisdictions, it is important to determine their primary place of residence to ensure that they are not paying taxes in more than one jurisdiction.

In international taxation, the Tie breaker Rule is a provision found in Double Taxation Avoidance Agreements (DTAAs) and applied to resolve cases where a person (most commonly an individual) is regarded as a resident of two Contracting States simultaneously under their respective domestic tax laws. The rule determines a single country of residence for treaty purposes under a Double Taxation Avoidance Agreement (DTAA).

Since most countries tax their residents on worldwide income, being a “dual resident” can lead to the same income being taxed twice. The tie-breaker rule acts as a “referee" to assign residence to just one state for the purposes of the treaty.

Why It Matters

Establishing a single residence is the “gatekeeper” for all other treaty benefits. If the tie-breaker rules you are a resident of Country A:

§  Country A gets the primary right to tax your global income.

§  Country B can generally only tax income you earned within its borders (Source-based taxation).

§  Tax Credits: Country A must usually provide a credit for any taxes paid to Country B to prevent double taxation.

Importance of Tie breaker Rule

§  Prevents double taxation on global income

§  Determines:

o   Which country has primary taxing rights

o   Availability of treaty benefits

o   Applicability of withholding tax rates

§  Critical for:

o    Expatriates

o    Cross-border executives

o    International investors

o    Multinational enterprises

Legal Basis

Tie breaker rules are contained in:

§  Article 4 (Resident) of most DTAAs

§  Based on OECD Model Tax Convention (also largely followed by UN Model)

Domestic tax laws determine residency first; tie breaker rules apply only when dual residence arises under domestic law.

Role of Article 4

(i)          Defines residence broadly (liable to tax).

(ii)        Provides tie-breaker rules to resolve dual residence.

(iii)      Allocates residence of entities through Place of Effective Management (POEM).

Article 4 comprises of the following sub-sections : - 

Article 4(1) – Definition of Resident ;

Article 4(2) – Tie breaker Rule for an Individual ; and

Article 4(3) – Tie breaker Rule for a Company.

 

OECD’s Tie breaker Rule

The OECD’s Model Tax Convention provides a set of criteria to determine which country has the right to tax an individual when they qualify as a tax resident in more than one jurisdiction. This set of tie breaker rules is designed to establish a clear tax residency in such cases, helping to avoid double taxation.

The OECD Tie Breaker Rule is contained in Article 4(2) of the OECD Model Tax Convention (MTC). It is applied only when an individual is regarded as a resident of both Contracting States under their respective domestic laws (dual residence).

Tie Breaker Rules for Individuals (Sequential Tests)

Under the OECD Model Tax Convention (Article 4), which most modern tax treaties follow, the tie-breaker rule uses a specific, sequential hierarchy. You only move to the next step if the current one does not resolve the tie.

How the Rule Works for Individuals

When an individual is resident in both countries, the DTAA assigns residence by applying the following tests in order:

(a)  Permanent Home

      The first criterion focuses on whether the individual has a permanent home in one of the countries in question. If the individual has a permanent home (a place of residence they own or rent) in only one of the countries, that country will generally be considered their tax residence.

The individual is deemed to be a resident of the State in which they have a permanent home available.

§    “Permanent home” means a dwelling continuously available (owned or rented).

§    Temporary accommodation (e.g., hotel stays) does not qualify.

§    Permanent home in only one State → residence allocated to that State.

§    Permanent home in both States → move to the next test.

Example: If you own a home in Country A but rent a temporary apartment in Country B, your permanent home is in Country A, making it your primary tax residence.

 (b) Centre of Vital Interests

If the individual has permanent homes in both countries, the next step is to determine the center of vital interests. Residence is determined by the State with which the individual’s personal and economic relations are closer.

FACTORS CONSIDERED

The location of the individual’s family (spouse and children),

§  Economic: Where their business activities or employment, investments, assets are primarily located,

§  Social ties (friends, social clubs, cultural activities etc.).

§  Overall evaluation (no single factor is decisive)

OUTCOME

§  COI clearly in one State → residence allocated to that State.

§  COI indeterminable → move to the next test.

Example: If an individual has a home in both countries but spends more time with family and has business interests in Country A, Country A would likely be considered their center of vital interests.

If indeterminable, proceed further.

 (c)  Habitual Abode Test

If the center of vital interests is still unclear, the next factor to consider is where the individual has their habitual abode (i.e., more frequent physical presence). This refers to the country where the person regularly resides.

§  Examines frequency, duration, and regularity of stays

§  Not a strict day-count test; qualitative assessment applies

OUTCOME

§  Habitual abode in only one State → residence allocated to that State.

§  Habitual abode in both or neither → move to the next test.

Example: If an individual spends 200 days a year in Country A and 100 days in Country B, their habitual abode would likely be Country A, as they spend more time there.

      If habitual abode exists in both countries or neither, move ahead.

(d) Nationality

      If the individual’s center of vital interests and habitual abode are in both countries or are unclear, the tie breaker rule proceeds to nationality. The individual will be considered a resident of the country where they have nationality.

§  National of only one State → residence allocated to that State.

§  National of both or neither → move to the final test.

Example: If an individual holds Country A’s passport but also has legal residence in Country B, Country A would generally be deemed their country of primary residency.

       If the individual is a national of both or neither, go to the final step.

(e) Mutual Agreement Procedure (MAP)

If none of the above tests resolves residence, the Competent Authorities of both States shall settle the issue by mutual agreement under Article 25 (MAP) of the DTAA.

 

Step	Criterion	Description
1	Permanent Home	Where the individual has a dwelling (owned or rented) available for their continuous use.
2	Centre of Vital Interests	If they have a home in both (or neither), residency is assigned to the country where personal and economic ties (family, job, social life) are closer.
3	Habitual Abode	If the center of vital interests can't be determined, residency is based on where the individual stays more frequently or regularly.
4	Nationality	If they have a habitual abode in both or neither, the country of which they are a national (citizen) prevails.
5	Mutual Agreement	If they are nationals of both or neither, the "competent authorities" (tax officials) of both countries must settle the matter by negotiation.

In some cases, the tiebreaker rule for determining residential status may be determined by the country or jurisdiction where the individual is a resident. The specific tiebreaker rule used can have significant implications for an individual’s tax liability, as they may be required to pay taxes in more than one jurisdiction if they are considered residents in multiple places.

For example, if an individual has a home in one country and is employed in another country, they may be considered a resident in both countries for tax purposes. This means that they will be required to pay taxes in both countries and file tax returns in both countries. In order to avoid this, the individual may need to provide evidence to one of the countries that they are a resident in the other country, such as a copy of their driver’s license, voting registration, or bank accounts in the country where they are a resident.

In addition, if an individual is a resident in multiple countries, they may be subject to taxes on the same income in both countries. To avoid this, they may need to claim a credit for taxes paid in one country on their tax return in the other country. This is known as a reciprocal agreement, which allows individuals to avoid double taxation on their income.

Tie breaker Rules for Persons other than Individuals [Companies / Entities]

Earlier treaties applied place of effective management (POEM).

However, in modern treaties (post BEPS Action 6):

§  Dual-resident companies are resolved through MAP, considering:

o    Place of effective management

o    Place of incorporation

o    Place where key management and commercial decisions are made

No automatic rule applies unless specified in the DTAA.

How the Rule Works for Corporations

For companies, the rule has evolved significantly due to efforts to stop tax avoidance (the BEPS Project).

§  Old Rule (POEM): Historically, the tie-breaker was the Place of Effective Management (POEM)—the location where key management and commercial decisions were made.

§  New Rule (MLI): Many modern treaties now replace the POEM test with a Mutual Agreement Procedure (MAP). This means if a company is a dual resident, the tax authorities of both countries must sit down and agree on where the company is resident based on facts like the place of incorporation and where the board meets.

NOTE : If they cannot agree, the company may be denied treaty benefits (like lower withholding taxes) in both countries.

USA-UK Tax Treaty (Article 4)

The US-UK treaty is unique because the US taxes based on Citizenship, while the UK taxes based on Residence.1 This often creates "dual residency" for US citizens living in the UK.

FOR INDIVIDUALS

The treaty uses the standard sequential tests:

(1)        Permanent Home: If you have a home available in both or neither, move to step 2.

(2)        Centre of Vital Interests: Where your personal and economic ties (family, job, social) are closer.

(3)        Habitual Abode: Where you spend more time regularly.

(4)        Nationality: If you are a national of both or neither, move to step 5.

(5)        Mutual Agreement: The "Competent Authorities" (IRS and HMRC) must decide.

FOR CORPORATIONS

§  The Rule: Unlike many other treaties, if a company is resident in both the US and UK (e.g., incorporated in the US but managed in the UK), there is no automatic tie-breaker rule like “Place of Management.”"

§  The Process: The tax authorities must "endeavour to determine by mutual agreement" the country of residence.

§  Risk: If they cannot agree, the company may be denied most treaty benefits, including lower withholding tax rates on dividends and interest.

Article 4 (Resident) of DTAAs

The Article - 4 [dealing with Residence] of the DTAA between India and USA provides for a ‘tie breaker’ provision as under:

‘Where by reason of the provisions of paragraph 1 of Article-4, an individual is a resident of both Contracting States, then his status shall be determined in accordance with Article 4(2) as follows :

..he shall be deemed to be a resident 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 of the State with which his personal and economic relations are closer (centre of vital interests)’

India-Singapore Tax Treaty (Article 4)

This is one of the most frequently used treaties for investment and cross-border employment.

FOR INDIVIDUALS

Follows the same hierarchy as the US-UK treaty:

§  Permanent Home

§  Centre of Vital Interests

§  Habitual Abode

§  Nationality

§  Mutual Agreement (MAP)

Case Note: In recent rulings (e.g., Ashok Kumar Pandey), Indian tribunals have emphasized that for "Centre of Vital Interests," active income (wages/profits) carries more weight than passive investments (mutual funds/bank accounts).

FOR CORPORATIONS

§  The Rule: The tie-breaker is the Place of Effective Management (POEM).

§  Definition: This is where the key management and commercial decisions necessary for the conduct of the business as a whole are, in substance, made.

§  India’s Stance: India has specific domestic guidelines for POEM that look at where the Board of Directors meets and where the “head office” functions are actually performed.9

§  MLI Update: While many countries are moving toward a "Mutual Agreement" only model for companies, Singapore has opted out of certain parts of the Multilateral Instrument (MLI), meaning the POEM test still largely applies for the India-Singapore treaty.

Summary Comparison

Feature	USA - UK Treaty	India - Singapore Treaty
Individuals	Standard 5-step hierarchy.	Standard 5-step hierarchy.
Corporations	Mutual Agreement only (No POEM).	Place of Effective Management (POEM).
Key Risk	Benefits may be lost if authorities do not agree.	Highly factual; requires proof of where board meetings happen.

Indian Perspective

§   India follows tie breaker rules as per Article 4 of its DTAAs

§   CBDT Circular No. 2/2017 clarified:

o   Tie breaker rules in treaties override domestic law

§   For companies:

o   Section 6(10) of the Income Tax Act, 2025 (POEM) determines residency under domestic law

o   Treaty tie breaker applies only after dual residency is established.

 Illustrative Example

AN INDIVIDUAL:

§  Resident in India under Indian tax law

§  Resident in UK under UK tax law

Facts:

§  Permanent home in both India and UK

§  Family and employment in India

§  Occasional visits to UK

Treaty Residence: India (centre of vital interests test satisfied)

NOTE

§  Tie breaker rules apply only when dual residency exists

§  Tests are hierarchical and sequential

§  Treaty residence may differ from domestic residence

§  For companies, MAP-based resolution is increasingly the norm

Vital interest of assessee remained in India, assessee was not entitled to tie-breaker test benefit and salary income earned by him in US was includable in total income within meaning of section 5

The assessee was a salaried employee of a US company. He filed his return of income and did not include his salary income earned abroad for the relevant period. The assessee claimed benefit of the tie-breaker test on the ground that during the relevant period he was also a resident of US. He also claimed benefit of article 16 of India US DTAA and contended that the salary income was taxable in the contracting state only.

The Assessing Officer observed that the assessee was having two house properties in India as well as investments in India, therefore the assessee was not entitled for tie-breaker test benefit. The Assessing Officer further observed that the employer of the assessee, the Indian company had included assessee’s US income for the purpose of TDS in India while crediting the salary of the assessee for his US assignment. Considering all these facts the Assessing Officer could not provide benefit of article 16. So far as the claim of the assessee vis-a-vis credit of the taxes paid abroad, the Assessing Officer observed that the assessee had not made any claim before him. On appeal, the Commissioner (Appeals) dismissed the appeal of the assessee. On appeal to the Tribunal :

Held : The two things one has to examine are: (a) whether the income earned by the assessee in USA is taxable in India in the light of the law of tie breaker test; and (b) if the income is assessable in India then whether having regard to the provisions of section 90, credit of taxes paid by the assessee abroad is to be given. So far as the applicability of tie-breaker test is concerned the assessee has relied upon the fact of having property in US, having family in US for that period. However, one cannot lose sight on the following facts also: -

(a)   Assessee was having house in India. Only one house is rented out and the other is shown as self occupied.

(b)   Assessee was having investments in India

(c)   Assessee’s employer, a very big firm having battery of lawyers and CAs has deducted TDS of assessee on income earned abroad, in India.

(d)   In the return filed in US the assessee has shown his residence in India.

(e)   So far as the presence of tax residency certificate that may be helpful for credit of taxes paid.

While examining the test of tie-breaker test one has to see the centre of vital interest, when one see the facts of the present case, it is abundantly clear that centre of vital interest in the present case has remained in India. Hence, no infirmity is seen in the orders of authorities below. It is held that benefit of tie-breaker test is not available to the present assessee and hence the income earned by him in US is includable in total income within the meaning of section 5.

Be that as it may, force is found in the contention of the assessee raised in additional grounds of appeal that is credit of taxes already paid abroad. Therefore, the Assessing Officer is directed to grant the benefits of taxes paid abroad by the assessee vis-a-vis the income earned to avoid double taxation of same income. In the result, the appeal filed by the assessee is partly allowed in in above terms. [Partly in favour of assessee] (Related Assessment year : 2015-16) - [Varghese Paulbove terms. v. ACIT (2025) 170 taxmann.com 129 (ITAT Bangalore)]

Assessee, an Indian citizen, had house in India as well as in USA, however, assessee had an active involvement in a running of business of a private limited company in India and, he did not have any active involvement in USA for earning wages, remuneration, profit etc., assessee was to be held as a resident of India in terms of article 4(2)(a) of Indo-US-DTAA and all his income derived in USA, was chargeable to tax in India by virtue of provisions of section 5 - Assessee deemed Indian resident by virtue of Article 4(2)(a) of India-US DTAA, dismisses appeal

ISSUE: Dual residency of the taxpayer under Indian and U.S. domestic law; treaty tie-breaker application to determine residential status.

Outcome: Tribunal applied the centre of vital interests test (Article 4(2) DTAA) and concluded that the assessee was a resident of India for treaty purposes, given closer personal and economic ties in India.

KEY FACTS:

§  Dual resident of India and United States of America for Assessment Year 2013-14.

§  Held permanent homes in both India and the USA.

§  Claimed his centre of vital interests was in the USA under Article 4(2)(a) of India-US DTAA.

§  Assessed as Indian resident by Revenue based on over 183 days stay in India and active business involvement in India.

TRIBUNAL HOLDING:

§  The Tribunal applied the tie-breaker rule under Article 4(2)(a) of the India-USA DTAA.

§  It found that although the taxpayer had homes in both states, personal and economic relations (including family residing in India, active business involvement and overall economic activity) were closer to India than the USA.

§  Accordingly, the Tribunal held the taxpayer to be a resident of India for treaty purposes, and therefore his US-sourced income was taxable in India.

The assessee filed his return of income for assessment year 2013-14. The assessee was an individual deriving income from capital gains, dividend, interest income and income from house property. The assessee claimed that he was a resident but not ordinarily resident for assessment year 2009-10 and a resident since assessment year 2010-11. For this year, the assessee had claimed that he was resident in India as well as in the United States of America. Thus, the residential status of the assessee was required to be determined in accordance with the provisions of Double Tax Avoidance Agreement (DTAA) between India and USA.

The Assessing Officer found that the stay of the assessee in India was more than 183 days. The assessee was staying with his wife and children in India, and the assessee was a Managing Director and had shareholding of more than 50 per cent in an Indian company. The assessee was actively participating in the affairs of the company. The assessee had made investments in mutual funds and also shares in India deriving dividend and capital gains. Income derived by the assessee from the US such as interest, dividend, house property, and capital gain were passive income for which active involvement was not required. Thus, the Assessing Officer held that as per clause-2 of article 10 of DTAA, the assessee was liable to offer the entire amount as income where he was resident and then avail DTA benefit. No taxes had been withheld and, therefore, the entire dividend income arising in the United States was considered as income of the assessee by applying a conversion rate and certain amount was added back.

On appeal, the Commissioner (Appeals) held that as per section 5, if an individual was residing for more than 183 days in India, he would be considered as a resident in India and his entire global income would be taxable in India. The assessee would be allowed credit of tax paid in the United States in Indian tax returns. As the assessee had not paid any tax in the USA, the computation of total income made by the Assessing Officer was upheld. Consequently, all other income was found to be chargeable to tax in India. Accordingly, the appeal of the assessee was dismissed. On appeal to the Tribunal:

Mumbai ITAT dismisses Assessee’s appeal observing that on analysis of personal and economic relationship for determination of centre for vital interest, the Assessee is deemed to be an Indian resident in terms of Article 4(2)(a) of India-US DTAA; In the present case, Assessee, an individual filed return declaring total income of Rs. 9,570/- for Assessment year 2013-14, claiming that it was resident but not ordinarily resident for Assessment year 2009-10, but has been a resident since Assessment year 2010-11; For the year under consideration, Assessee contended that although it was a resident of both India and USA, but by virtue of its centre of vital of interest lying in US in terms of Article 4(2)(a) India-US DTAA, it is a resident of US; Pursuant to consideration of facts, Tribunal observes that the Article 4(2)(a) clearly articulates that an individual is a resident where its centre of vital interest i.e. where his personal and economic relations are closer; Outlines that the determination of centre of vital interest is based on factual analysis i.e. consideration of personal and economic relationship of an individual close to a particular state and may not be applicable to other individuals; ITAT opines that for determination of personal relationship its connect with the family members is a factor to be taken into consideration; Simultaneously, highlights that for determination of economic relationship, ambiguous factors are rejected and consideration is given to active involvement in commercial activities than passive investment such as place of business, place of administration of property, and place of earning wages; Observes that for the said Assessment year, the Assessee has been staying for more than 183 days and by virtue of domestic law is an Indian resident; Notes that the Assessee has a residence in the US and earns rental income but with regard to economic interest, Assessee has a private limited company engaged in the distribution of films, and therefore has an active involvement in running of the said business; Asserts that passive investments are not clear indicator of economic relationship as they may flow to any country irrespective of residence if the laws permit based on return; States that analysis of facts indicate that the Assessee does not have an active involvement in the US for earning wages, remuneration, profit; Expounds that on comprehensive appraisal of the personal and economic relationship, the Assessee is deemed a resident of India in terms of Article 4(2)(a) of India-US DTAA; Thus dismisses Assessee’s appeal [In favour of revenue] (Related Assessment year : 2013-14) – [Ashok Kumar Pandey v. ACIT (2024) 209 ITD 274 : 167 taxmann.com 286  : [TS-736-ITAT-2024(Mum)] (ITAT Mumbai)]

Assessing Officer treated assessee as resident of India and had taxed its income at rate provided under Act, however, assessee had claimed that he was a resident of Singapore and was in India only 132 days and had also filed evidences to support its employment outside India and visit passes, matter was to be restored to Assessing Officer for verification of residential status of assessee in view of explanation 1 to section 6(1)(c)

Issue : Interpretation of the tie-breaker rule under Article 4 of the applicable DTAA to determine residence when domestic law suggests dual residency.

OUTCOME : The Tribunal reiterated the hierarchy of tie-breaker tests (permanent home → centre of vital interests → habitual abode → nationality → mutual agreement) and held the taxpayer to be resident of India based on these tests.

The assessee, an individual, filed return of income in the status of non-resident declaring certain amount of income. The Assessing Officer being of the view that the effective management of the companies and subsidiaries controlled and managed by the assessee was in India treated the assessee as resident of India and, accordingly, taxed the assessee’s income at the rate provided under the Act. The DRP held that as per provisions of section 6 the assessee was a resident during the year under consideration. On the assessee’s appeal to the Tribunal :

Held : The sole issue in dispute is in respect of interpretation of the provisions of defining the residential status of assessee. The article 4(1) of the treaty has laid down that the term ‘resident of a contracting state’ has be decided within the taxation laws of that state and article 4(2) says that in case of individual, who is resident of both the contracting state, then resident shall be determined as per sub clause (a) to (d) of article 4(2) of the DTAA. The Assessing Officer has wrongly invoked the provisions of article 4 of the DTAA for determine residential status of the assessee, mainly taking into account the permanent home and business activities of the companies in which the assessee invested. The assessee has submitted that the assessee is resident of Singapore and not resident of India.

As per the provisions of section 6(1), assessee shall be resident conditions, firstly, as per section 6(1)(a) year if he is in India for 182 days or more of India. The assessee submitted that during relevant previous year he was India for 132 days, thus, the assessee does not fulfill this condition. Secondly, as per section 6(1)(c), if an individual, in preceding four years in India for 365 days or more, then if in relevant previous year, he stayed in India for more 60 days, he shall be treated as resident of India. But under the Explanation to said sub section, it is provided that if a person goes out of India for employment purposes then, 60 days shall be substituted by 182 days. Therefore, according to second condition if assessee has remained in India in last four years for more than 365 days and in relevant previous year for more than 182 days, then only shall be treated as non-resident.

The assessee submitted that in relevant previous year, he was in India for 132 days only which is less than 182 days and therefore, assessee is not resident as per either of the conditions section 6(1). The assessee has filed evidence in support of employment outside India and also filed visit passes. In view of the evidences, this issue is restored back to the file of the Assessing Officer for verification of residential status of Singapore as well non-residential state in India particularly in view of the Explanation 1 to section 6(1)(c) and decide the issue in accordance with law. [Matter remanded] (Related Assessment year : 2021-22) – [Raghav Agarwalla v. ITO(International Tax) [2024] 169 taxmann.com 252 (ITAT Mumbai)]

Tie-breaker questionnaire is important in determining residency of a person, but cannot be exclusively taken into consideration as a base for deciding residency and, hence, where assessee shifted to Singapore with his wife and daughters for employment and resided in Singapore and had habitual abode therein only, assessee was to be treated as resident of Singapore

ISSUE : Dual residency (India and Singapore) and determination under India-Singapore DTAA.

HELD : The tribunal clarified that tie-breaker questionnaires alone cannot be the sole basis to decide treaty residency; the qualitative/quantitative assessment of available facts (permanent home, centre of vital interests, etc.) is essential in applying the treaty rules.

The assessee filed its return of income and declared a total income of Rs. 1.59 crores earned from DBOI in India during 01.04.2014 to 25.11.2014 and from JPMC, Singapore during 15.12.2015 to 31.03.2015. Subsequently, the assessee e-filed its revised return of income, whereby the assessee restricted its income to amount as earned only in India and claimed that income earned in Singapore was not taxable in India and therefore, he was entitled to get relief under section 90 and consequently, the refund. On scrutiny assessment, the Assessing Officer observed that the assessee admittedly was physically present and employed in India for more than 182 days and shifted to Singapore only in December, 2014 upto the end of financial year for employment with JPMC. The Assessing Officer, on the basis of tie-breaker questionnaire as per article 4 of India-Singapore DTAA, held that the assessee was actually a resident of India for the purpose of taxation of global income. The Assessing Officer, thus, rejected the revised return and concluded the scrutiny assessment as per the original return at Rs. 1.59 crores. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.

The case of the assessee was that he was resident of both India and Singapore and have Tax Residency Certificate from Singapore Revenue Authorities for the calendar year 2014-15. Also, the assessee is having Singapore Driving License and Overseas Bank Account and house in India was not available to the assessee during Singapore assignment period, as the same was on rent. Therefore, the permanent home test for the period i.e. 06.12.2014 to 31.03.2015 went in favour of the assessee. Further vital interest of assessee was also lying in Singapore, because he shifted there with his family and started employment and earnings and savings therefrom. Accordingly, the assessee qualified as ultimate Tax Resident of Singapore from 15.12.2014 onwards as per article 15(1) of the Treaty. On appeal to the Tribunal :

Held : The specific provisions made in DTAA having importance and would prevail over the general provisions contained in the Income-tax Act unless and until the same are in derogation of the laws of the land. The assessee along with his family members shifted to Singapore on 06.12.2014 and thereafter remained there during the period under consideration and earned the income while serving in Singapore itself.

It is a fact that in the Tie-Breaker Questionnaire, the assessee specifically mentioned to have apartment on rent in Singapore as well and his wife and two daughters were also living along with him in the country of assignment, i.e., Singapore. The assessee also held Driving License in both the countries and both the countries have been shown as country of residence on various official Forms and documents for the period from December, 2015 to June, 2016, further paid taxes in Singapore while working therefrom. Further mentioned that all income which will be paid in future (i.e., bonus for period January 2016 to June 2016) for the work period in Singapore, will be taxable in Singapore.

It is viewed that no doubt the tie-breaker questionnaire having importance in determining the residency of a person, but cannot be exclusively taken into consideration as a base for deciding the residency. The permanence of home can be determined on qualitative and quantitative basis. It is not in controversy that the assessee for the period under consideration has shown the income earned in Singapore and paid the taxes in Singapore. Therefore, as per Treaty, he cannot be subjected to tax in India in order to avoid double taxation.

It is pertinent to mention herein that both the authorities below have not doubted the tax residency certificate issued by the Singapore authorities for the period under consideration and on the basis of that, the Income-tax has already been paid by the assessee in Singapore. Further, may be, the assessee has stayed more than 182 days in India, however, he also qualified as resident of both India and Singapore under article 4(1) of the Treaty. As per clause (a) of article 4(2) of the Treaty, a person shall be deemed to be a resident 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 of the State with which his personal and economic relations are closer (centre of vital interests). The Commissioner on the basis of tie-breaker questionnaire held that there is no doubt that even the centre of vital interest of the assessee are with India only and not with Singapore, as the majority of the savings, investments and personal bank accounts are in India, whereas it is a fact that the assessee has worked in Singapore during the period under consideration and stayed therein only. Therefore, his personal and economic relations (Centre of vital interests) at that particular time/period cannot be brushed aside, as the assessee went to Singapore along with his family for earning income and consequently his personal and economic relations remained in Singapore only.

As per article 4(2)(b), habitual abode is also available for consideration in deciding the residency of a person. Habitual abode does not mean the place of permanent residence, but in fact it means the place where one normally resides. During the period under consideration, the assessee resided in Singapore and had habitual abode therein only. Therefore, on this reason as well, the assessee could be treated as resident of Singapore. Section 90(2) says clearly where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to the assessee. Further, sub-section (4) of section 90 prescribes, an assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory. It is not the case here that the provisions of section 90(2) are not applicable to the instant case and the provisions of the Treaty and actions of the assessee are contrary to the laws of the land and the assessee has failed to produce the Tax Residency Certificate issued by the Singapore Authorities and not paid the relevant taxes in that country for the income earned during the period under consideration.

On the aforesaid deliberations and analyzations and in the cumulative effects, the addition under challenge cannot be sustained. Consequently, the addition is deleted and the Assessing Officer is directed to accept the revised return of income filed by the assessee. In the result, the appeal filed by the assessee stands allowed. [In favour of assessee] (Related Assessment year : 2015-16) – [Sameer Malhotra v. ACIT (2023) 199 ITD 317 : 146 taxmann.com 158 (ITAT Delhi)]

Holds tie-breaker inapplicable; Confirms Dutch Co.'s Canadian residency, applies central management and control test

ISSUE: Corporate residence and application of treaty tie-breaker rule concerning place of effective management.

HELD (TCC LEVEL): The court looked at where control/management was exercised (Canada vs Netherlands) to attribute residence under the Canada-Netherlands tax treaty.

Tax Court of Canada (TCC) holds that capital gains on alienation of partnership interest by Dutch company is taxable in Canada under the domestic law, holds insufficient evidence produced to prove residency in Netherlands under Article 4(1) to attract treaty benefits; Taxpayer/Appellant, a limited liability company resident in Netherlands purchased a dairy farm in Canada in partnership with its shareholders (Backxes), two Dutch nationals who migrated to Canada in 1998 after the taxpayer sold its dairy farm in the Netherlands to a third party; In 2009, the taxpayer sold its partnership interest to a Canadian company incorporated by Backxes, did not offer the resultant capital gains in Canada as it claimed treaty benefits; Canadian Revenue Authorities taxed the gains by assessing the taxpayer as Canadian resident, not eligible for treaty benefit; TCC applies the test of central management and control and holds that taxpayer is a resident of Canada for 2009 under domestic law since management and control was exercised by Backxes and not the director (resident of Netherlands) of taxpayer who merely discharged clerical duties; On application of Canada-Netherlands tax treaty to contend that competent authorities must reach a mutual agreement w.r.t. taxpayer’s residential status since the  taxpayer is resident of both the countries, TCC highlights that an application should be made to the competent authority within the time prescribed in Article 25 of the Treaty, which was not complied with by the taxpayer on the grounds that Article 25 is merely a permissive provision, holds that the taxpayer “cannot then argue that ‘an agreement between the competent authorities is a condition precedent to any assessment’”; Remarks that, based on Article 4(1) of the treaty, taxpayer must prove that he is ‘resident of one of the states’ i.e., Netherlands and ‘liable to tax’ therein; Holds that taxpayer failed to adduce expert evidence on Dutch law to prove it is a resident and liable to tax in Netherlands and as a result, “a resident of both States” for purposes of Article 4(3); Clarifies that Article 4(3) of the treaty, which states that ‘in the absence of mutual agreement between competent authorities, a person would be deemed not to be a resident of either State’, means that the taxpayer is not entitled to treaty benefits and does not mean that he is not subject to taxation in Canada. Before the Minister, taxpayer contended that its partnership interest is a ‘treaty-protected property’ and accordingly, as per Canada-Netherlands Treaty withholding tax on payment to taxpayer would not be applicable; Minister held that partnership interest is not a treaty-protected property since taxpayer was not a resident of Netherlands, but Canada; TCC rejects taxpayer's contention that if the taxpayer is held as Canadian resident for the tax year 2009, the effective date of deemed disposition u/s 128.1(1) of Canadian Income Tax Act, 1985 for the purpose of establishing cost base of partnership interest would be December 31, 2008, resulting in no gains on sale since the cost would be equivalent to sale consideration; Holds that based on test of central management and control, the taxpayer would be held Canadian resident for the tax years 1998 to 2009 and as a result the disposition test would be inapplicable for the impugned year; TCC rejects taxpayer's contention that principle of estoppel precludes an enquiry into taxpayer’s residency, since the Minister accepted taxpayer’s residential status as non-resident for the years 1998-2008; Holds that the Canadian tax system is one of self-assessment and self-reporting, which was accepted by the Minister as filed, remarks that there is no evidence that the Minister applied the test of central management and control for the aforementioned years. [In favour of revenue] – [Landbouwbedrijf Backx B.V v. Her Majesty The Queen [TS-124-FC-2021(CAN)] – Date of Judgement : 02.02.2021 (Foreign Court Canada)]

Note: This case is widely referenced in tax treaty literature as an example of applying the tie-breaker rule for entities (place of effective management) under treaty context.

Australian Federal Court upholds Primary Judge order on 'tie-breaker' test regarding residency

The Federal Court of Australia [Three Judges bench] upholds Primary Judge order in case of Pike [assessee] on application of the tie-breaker test under Article 4(3)(c) of the Australia-Thailand DTAA, confirms assessee-individual’s status as a deemed resident of Thailand for the impugned years 2009 to 2014 and dismisses Revenue's appeal; Assessee is a native of Zimbabwe who moved with his family to Australia in 2005 and thereafter he moved to Thailand (alone) for employment and subsequently obtained permanent residency of Australia in 2014; Rejects Revenue's [I.e. the Commissioner] stand 1) that Primary Judge had applied the personal and economic tests disjunctively and not conjunctively and 2) that assessee has equal personal and economic relation with Australia based on his request for gaining citizenship of Australia, buying house in Australia and his reference to family home; Court rules that 'Art 4(3)(c) poses a composite test and in each case it will be a matter of fact and degree as to whether a taxpayer's personal and economic relations, viewed as a whole, support ties closer to one contracting state over the other contracting state.'; Upholds Primary Judge's conclusion that though assessee had a closer personal relationship with Australia (as his family resided there), the economic relationship with Thailand (where he lived and earned) was much closer as he supported his family financially out of his earning from Thailand and hence the '.... personal and economic relations were, ... closer to Thailand than Australia, between 2009 and 2014. [In favour of assessee] – [Commissioner of Taxation  v. Bradley Titus Pike [TS-729-FC-2020(AUS)] – date of Judgement : 22.09.2020 (Foreign Court Australia)]

 

NOTE:

Article 4(3) of Australia - Thailand DTAA reads as under:

Where by reason of the preceding provisions, an individual is resident of both Contracting States, the status of the person shall be determined in accordance with the following rules, applied in the order in which they are set out:

(a) the person shall be deemed to be a resident solely of the Contracting State in which a permanent home is available to the person;

(b) if a permanent home is available to the person in both Contracting States, or in neither of them, the person shall be deemed to be a resident solely of the Contracting State in which the person has an habitual abode;

(c) if the person has an habitual abode in both Contracting States, or in neither of them, the person shall be deemed to be a resident solely of the Contracting State with which the person's personal and economic relations are the closer. 

Grants treaty exemption to ‘dual-resident’ US citizen, applies ‘centre of vital interest’ test - Assessee succeeded in establishing that he was a resident of US under article 4 of DTAA between India and USA for period he was on Indian assignment, assessee would be entitled to treaty exemption and accordingly, his income for aforesaid period could not have been brought to tax in India

For the Assessment year 2013-14, the assessee-individual filed return of income declaring total income of Rs. 1,05,38,260. The assessee is a citizen of the United States of America (USA/US) and has been living and working in the USA since 1986. The assessee was working for Accenture USA continuously since 1998 till 2016 and was assigned on a temporary cross border assignment to Accenture India starting from June 2006 to August 2012. On 10.08.2012 the assessee completed his assignment in India and moved back to Accenture US where he is now residing with his family and continued his career with Accenture US.

Based on the assessee's physical presence in India, he qualified as a Resident of India for the period 01.04.2012 to 31.03.2013, as per the Income Tax Act, 1961. He also qualified as a Resident of USA as per the US domestic tax laws, for the above mentioned period, as the assessee is a US citizen. The Tax Residency Certificate [TRC] from US tax authorities was filed before the CIT(Appeals) by the Assessee for the year 2012 & 2013.

Since assessee was a resident in India as per Indian tax laws, Assessing Officer had taxed the salary received by assessee in the US for the period August 2010 to March 2013, in India. However, CIT(A) allowed the treaty exemption. CIT(A) noted that assessee has a permanent home in both India and US and hence there was tie while applying ‘availability of Permanent home’ condition. Based on the details provided by assessee pertaining to the second tiebreaker test for ‘Centre of Vital Interests’,  CIT(A) held assessee’s social and economic interests were closer to US. Aggrieved, Revenue filed an appeal before Bangalore ITAT.

Bangalore ITAT rules that salary received by assessee-individual (a US citizen) in the US for the period pertaining to August, 2012 to March 2013 (i.e. period post his India assignment) is not taxable in India for Assessment year 2013-14, despite him being a resident in India as per Indian domestic laws, grants treaty exemption by applying the tie-breaker test as per Article 4 of India-US DTAA and holds that assessee’s centre of vital interest was closer to US; Pursuant to assessee's deputation to Accenture India from June 2006 till August 2012, he qualified as a Resident of India for subject Assessment year based on his physical presence in India, further he also qualified as a Resident of USA as per the US domestic tax laws; ITAT notes that since the assesse had a permanent home available in both countries, there was a tie while applying the ‘Availability of Permanent Home’ test, upholds CIT(A)'s order in applying the 2nd tie-breaker test of closer personal and economic relations (i.e. centre of vital interest); Based on the details provided by the assessee,  relating to dependent members, personal belongings, voting rights, driving license, better social ties, investments, social security, CIT(A) had held that assessee's social and economic interests were closer to US and thus assessee was a Resident of US under the DTAA for the period August, 2012 to March, 2013. [In favour of assessee] (Related Assessment year : 2013-14) – [DCIT, Bangalore v. Kumar Sanjeev Ranjan (2019) 177 ITD 17 : 104 taxmann.com 183 (ITAT Bangalore)]

Income of assessee-resident in India earned on capital gains on sale of immovable property situated in Sri Lanka shall be chargeable to tax only in Sri Lanka under DTAA of India and Sri Lanka  - Resolves dual residency conundrum via ‘habitual abode’ test; DTAA rescues Sri-Lankan national

Whether capital gains arising from sale of immovable property situated in Sri-Lanka and owned by a Sri-Lankan assessee (before marriage) taxable in Sri-Lanka; or in India, where the assessee permanently resided after being married to an Indian National?

Shalini Seekond (‘assessee’) is a Sri Lankan national who is married to an Indian National and living in India since her marriage. During assessment for Assessment year 2007-08, the Assessing Officer observed from the CASS details that assessee had purchased units of Mutual Funds amounting to Rs. 2.44 Crores, upon asked about source of the same, assessee submitted that she had one-half right, title and interest in a property at Sri Lanka. The other half right, title and interest was held by her father.  She had sold her immovable property owned by her which was situated in Sri Lanka. The Assessing Officer ruled that the capital gains from such sale of property shall be taxable in India. The assessee submitted before the Assessing Officer that she is resident of India under the provisions of the Act, but for the purposes of DTAA she is resident of Sri Lanka. The assessee referred to Article 4(2)(c) of the DTAA which stipulated the fiscal domicile of a person and it was the contention of the assessee that the assessee is deemed to be a resident of the State of which she is a national, namely Sri-Lanka, and if the fiscal domicile is Sri Lanka, the capital gain must be deemed to have arisen in Sri-Lanka and taxable only in Sri-Lanka. On appeal, CIT(A) upheld the order of Assessing Officer.

Mumbai ITAT uses tie-breaker tests to rule Sri-Lankan woman married to an Indian, as an Indian tax resident, however grants DTAA relief on capital gains from alienation of property situated in Sri-Lanka; Rejects assessee's contention that she be treated a Sri-Lankan tax resident on the basis of her nationality, questions her u-turn (after declaring herself as a 'resident' in her Indian tax return) without bringing any cogent material/evidences on record; Since the assessee satisfied residency tests under Indian Income-tax Act and also simultaneously qualified for Sri-Lankan residency under DTAA provisions, Tribunal uses ‘habitual abode’ & ‘vital interest’ tests as tie-breakers, observes that the assessee post-marriage was staying in India permanently, her ‘vital economic interests’ had also shifted as could be evidenced by her sale of Sri-Lankan property and consequent buying of Indian Mutual Funds and property in Goa to the tune of Rs. 2.44 cr & Rs. 78 lacs respectively; Peruses Article 4 of DTAA to draw distinction between availability of a ‘permanent home’ in the state of residence (as stipulated by Article 4 of DTAA) and ‘owning’ an house, rules that ‘...The word ‘habitual abode’ in our considered view requires actual living habitually, consistently and regularly in the State as contemplated under Article 4 of the DTAA. Mere ownership of one immovable property in the State or living of parents of a married women in that State will not make her habitual abode of that State... ’; On the issue of capital gains, peruses Article 13(1) of DTAA to rule that it is Sri-Lanka that has the right to tax the sale of immovable property situated in its territory and that India cannot tax the same since the provisions of DTAA are beneficial; Rejects Revenue’s argument that since the rate of capital gains tax in Sri-Lanka is ‘nil’, the same ought to be taxed in India as per Notification no. 91 of 2008 dated 28.08.2008 issued by CBDT; The Notification states that where any DTAA provides that any income of a resident ‘may be taxed’ in any other country, the same shall be included in his income chargeable to tax in India and relief shall be granted as per DTAA provisions; While interpreting the Notification as being clarificatory and hence having a retrospective effect, however holds the same as being merely ‘procedural’ in nature and that the notification does not seek to fasten any additional liability;  On the aspect of  assignment of meaning in respect of a term used in a treaty , ITAT holds that ‘the notification  under section 90(3) of the Act gives a legal frame work for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force’, even if the treaty has been entered into prior to coming into force of Section 90(3). Thus ITAT allowed DTAA benefits to assessee, with respect to capital gains. [In favour of assessee] (Related Assessment year : 2007-08) – [Shalini Seekond v. ITO (2016) 180 TTJ 1 : 159 ITD 905 : 71 taxmann.com 120 : [TS-366-ITAT-2016(Mum)] – Date of Judgement : 07.07.2016 (ITAT Mumbai)]

Salary earned in USA exempted from tax as employee was held as resident of USA under tie-breaker rule of DTAA

The assessee, an individual, derived income from salary and income from other sources. The Assessing Officer noted that during year 2010-11, the assessee was working in USA from 01.04.2010 to 01.07.2010 and the assessee claimed exemption as per article 16(1) of DTAA between India and US. Assessing Officer observed that since the period of assessee's stay in India was more than 183 days, his entire global income was to be taxed in India and as such assessee's claim for exemption under article 16(1) was disallowed and said sum was added back to the total income of the assessee. Based on above disallowance, the Assessing Officer initiated penalty proceeding under section 271(1)(c) and levied penalty. The Commissioner (Appeals) had upheld said order. On appeal:

Held : As the assessee may be considered liable to tax both in India and US as per the tax laws in each jurisdiction, a determination of the residential status as per the India - USA Double Taxation Avoidance Agreement (Treaty) has to be done based on the tie breaker analysis as contained in Article 4(2) of the Treaty. Based on the tie breaker analysis as contained in article 4(2), the assessee is tie-breaking to USA for the period 01.04.2010 to 30.06.2010. Accordingly, the assessee shall be considered as a resident of USA for the period 01.04.2010 to 30.06.2010 as per the Treaty. Since the assessee was a resident of USA for the period 01.04.2010 to 30.06.2010 and had exercised his employment in USA during the above period, he was entitled to claim exemption of salary in India as per article 16(1). Accordingly, the assessee had claimed an exemption on remuneration received in India in respect of the services rendered in USA. Section 271(1)(c) postulates imposition of penalty for furnishing of inaccurate particulars and concealment of income. On the facts and circumstances of this case, the assessee's conduct cannot be said to be contumacious so as to warrant levy of penalty. In the background of the aforesaid discussions and precedents, the levy of penalty in this case is not justified. Accordingly, the orders of the authorities below are set aside and the levy of penalty in dispute is deleted. [In favour of assessee] (Related Assessment year : 2011-12) – [Raman Chopra v. DCIT (2016) 158 ITD 904 : 69 taxmann.com 452 : 48 ITR(T) 164 (ITAT Delhi)]

A man who has a home in one Contracting State(Canada) sets up a second home in another country(Egypt)where he goes to work on a 4-year contract while retaining his Canadian home can be said to have permanent homes in both States in those 4 years; for sake of “centre of vital interests” tie-breaker rule for test of residency under Article 4(2)(a) of Canada-Egypt DTC , he can be said to have retained his centre of vital interests in Canada and, hence, resident of Canada and not of Egypt for those 4 tax years when he was having a job in Egypt

Tie-break rule for determining whether individual is resident in Canada or in Egypt when he has permanent homes at both places. Appellant did not frequently come to Canada while he was working in Egypt. However, it is clear from evidence that appellant and his wife left Canada on a temporary basis only. Appellant kept all his assets in Canada and before leaving Canada made all necessary arrangements to have someone look after those assets. His purpose in accepting contract in Egypt was not to give up his ties with Canada but mainly to earn a living. Appellant agreed to go there on a contractual basis and did not sever his attachments to, or his links with, Canada. Appellant did not in mind and fact abandon his general mode of life in Canada. As a matter of fact, ties in Egypt were temporarily undertaken and abandoned on his return to Canada. Hence, assessee 'ordinarily resident' in Canada. A man who has a home in one Contracting State(Canada) sets up a second home in another country(Egypt) where he goes to work on a 4-year contract while retaining his Canadian home can be said to have permanent homes in both states in those 4 years. For sake of “centre of vital interests” tie-breaker rule for test of residency under article 4(2)(a) of Canada-Egypt DTC, he can be said to retained his centre of vital interests in Canada and hence resident of Canada and not of Egypt for those 4 tax years when he was having a job in Egypt - Appeal dismissed. – [Norman Gaudreau v. Her Majesty The Queen (2012) 20 taxmann.com 72 (TC-Canada)]