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.
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)]
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