DUAL RESIDENCE AND SOLUTION

UNDER TREATY AGREEMENT

Oleh:
Edwin Adrianto S.



Program Pendidikan Profesi Akuntansi
Fakultas Ekonomi Universitas Trisakti
Jakarta
2014

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TABLE OF CONTENTS
TABLE OF CONTENTS ..................................................................................................................................... 2
I. BACKGROUND ....................................................................................................................................... 3
II. THEORY ................................................................................................................................................. 6
III. ANALYSIS ............................................................................................................................................. 22
REFERENCES ................................................................................................................................................ 25

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I. BACKGROUND
The significance of tax residence is important for the determination whether a company is
subject to residence-based taxation (worldwide taxation) or source based taxation (territorial taxation).
Tax residence may also determine whether the company will be subject to gross taxation (usually levied
on non-residents) or net basis taxation and whether there is a possibility to further claim double tax
relief. Determining tax residence and later resolving any residence conflicts plays therefore a crucial role
in determining which set of "rules" are applicable to a company.

Residence taxation of companies requires the application of a test (nexus) for connecting a
company within a certain taxing jurisdiction. In that respect, many tests have been developed. Amongst
the formal tests, one may highlight the place of incorporation (e.g. US) or the statutory seat or head
office (e.g. Sweden). In alternative, other States have developed more substantive factors or tests such
as the central management and control (e.g. UK), place of effective management (e.g. France) and place
of main activity (e.g. Israel before 2003).

Whereas only a few countries consider a single criterion to determine a company's tax
residence, most States apply several tests, both on a cumulative basis or in an alternative manner (i.e.
tax residence exists as soon as one of the requirements is satisfied). The United States for example
applies the incorporation criterion very strictly and uses it to determine domestic companies, which are
defined by the IRC as "any corporation created or organized in the United States or under the law of the
United States or of any State". The place of incorporation, i.e. the place where the articles of
incorporation are filed, determines the nationality of the company and thereby its worldwide tax
liability. Because it is incorporated in the United States, the company will then be subject to tax on its
worldwide income. Any company not incorporated in the United States is, as such, regarded for tax
purposes as a foreign company, with its tax residence outside the United States. The UK uses instead the
place of central management and control as a single criterion to determine tax residence.




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Finally, in the Netherlands, fiscal residence of companies is defined for all taxes as "where an
individual is resident and where a company is resident is determined according to the circumstances".
However, the tax law includes a legal fiction under which companies incorporated under Netherlands
civil law are at all times considered to be subject to corporate tax and dividend tax. The particular
formulations of the Dutch "casuistic" approach, where the circumstances of each individual case will
determine the tax residence, lead the tax courts to develop a number of non-exclusive criteria, amongst
others:
- Place of performance of managing functions (i.e. place where meetings are being held);
- Place where the (principal) office building is located;
- Managing & supervisory board residences;
- Location of the (general) accounting department;
- Currency and place where the books of account are kept;
- Place where the general meetings of shareholders are held; or
- Place where the statutory seat of the company is situated.

Dual Residence of Companies
The most frequent cases of dual residence arise when two States apply simultaneously different
criteria to determine the tax residence of one and the same company. The best-known cases of dual
resident companies were those of companies during the late eighties and beginning of the nineties that
were incorporated in the United States and managed and controlled in the UK. Dual residence may also
occur when tax residence is determined by one State on the basis of the statutory seat and by other on
the basis of the location of the company's management. Deeming provisions that determine domestic
residence on the basis of certain tests, such as voting power controlled by shareholders who are
residents in a particular country, may also potentially give rise to a situation of dual residence.

The consequence, absent of a tax treaty, is dual taxation of the taxpayer's worldwide income. In
cases where a tax treaty, following the OECD Model, is in place between the two countries, the tie-
breaker rule for companies (Art. 4(3)) will generally determine that the dual resident "shall be deemed
to be a resident only of the State in which its place of effective management is situated." This tie-
breaker rule will then determine who is the so-called winner/loser State as regards the claim for
residence taxation. Nevertheless, in triangular situations (i.e. cases involving income flowing from or to
third countries), the interaction of treaties may well leave some issues unresolved.
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Although dual tax residence may and often does result in liability for double taxation, it would
be wrong to assume that dual fiscal residence has only disadvantages. Despite recent countermeasures,
the use of dual resident company has been effective for example in the field of double dipping of losses
(e.g. tax consolidation), financing the purchase of other companies and multiple treaty access (e.g.
withholding tax planning).

Assume for example that a group of companies operating in two different countries forms a
company, which is dual tax resident. The new dual resident company then borrows to finance other
group operation and generating in the process some operational losses. The dual resident company
would then potentially be eligible to be a member of two sub-groups in two different countries, with
losses equally allowable in both countries of residence under a group taxation regime. The losses could
then be set-off against the taxable profits of the other members of the sub-group. In the wake of the use
of dual resident companies, United States, UK and Netherlands are examples of countries that enacted
domestic rules designed to restrict the access to such companies to loss compensation mechanisms.

As mentioned above, the use of dual resident companies has also been directed to achieve
withholding tax benefits, by accessing the more beneficial treaty network of one of the residence
countries. Assume for example the case of dual residence companies (A-B) receiving income from a third
state (C) In that case, the main issue is that of the consequence of the winner/loser (A-B) tax treaty,
especially the residence tie-breaker rule in Article 4(3) of the tax treaty, for the application of the tax
treaties with the third State (C). In addition, one can also assume the inverse scenario of a dual
residence company paying income to third states. The main issue in this case is that both Winner/Loser
(A-B) may want to apply their domestic withholding tax and whether the multiple application of the
three tax treaties may restrict such outcome.





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II. THEORY
Concept of Source
The jurisdiction to impose income tax is based either on the relationship of the income (tax
object) to the taxing state (commonly known as the source or situs principle) or the relationship of the
taxpayer (tax subject) to the taxing state based on residence or nationality. Under the source principle, a
States claim to tax income is based on the States relationship to that income. For example, a State
would invoke the source principle to tax income derived from the extraction of mineral deposits located
within its territorial boundaries. Source taxation is generally justified on the ground that the State has
contributed to the creation of the economic opportunities that allow the taxpayer to derive income
generated within the territorial borders of the State. Of course, jurisdiction to tax is also about power,
and a State generally has the power to tax income if the assets and activities that generated it are
located within its borders.

Income itself does not have a geographical location. It is a quantity, calculated by adding and
subtracting various other quantities in accordance with certain accounting rules. By long standing
convention, however, income is assigned a geographical location by reference to the location of the
assets and activities that are used to generate the income. When all of those assets and activities are
located in one State, that State may be considered to be the unambiguous source of the income. For
example, wages paid to an employee stationed in a State that represent compensation exclusively for
work performed in that State would have a source exclusively in that State. When some of the assets or
activities generating income are located in more than one State, the source of the income is less clear.
For example, business profits derived from the manufacture of goods in State A and their sale in State B
have a significant relationship to State A and to State B. In these circumstances, some rules for
determining source are needed. Those source rules might apportion the income between the two
claimant States, or they may assign it to one State exclusively. In some cases, States may adopt
inconsistent source rules that result in both States exercising source jurisdiction over the same item of
income.




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Income derived from sources in the country and received by taxpayers classified as non-
residents would most often be defined as income from sources in the country. This definition would
be quite an important part of international tax rules, since in absence of such definition; one could argue
that the tax liability on non- resident may not arise. The list of items of income having source in the
country can be both exhaustive and only indicative. Generally such definition would mention: Income
from sources in Contry Z includes the following items of income: (an exhaustive or indicative list would
follow). The sourcing rules may also indicate that the income from sources would also include income,
which was not physically paid from the country in question, but earned there in a way of provision of
services; corresponding expense was claimed as a deduction in this country or otherwise connected to
the taxing jurisdiction.

Concept of Residence
Under the residence principle, a States claim to tax income is based on its relationship to the
person deriving that income. For example, a State would invoke the residence principle to tax wages
earned by a resident of that State without reference to the place where the wages were earned. In
general, a State invokes the residence principle to impose tax on the worldwide income of its residents.
Basing the tax on the taxpayers overall capacity to pay, without reference to the source of income, is
consistent with most theories of distributive justice. Whatever the theory, a State cannot tax the
worldwide income of its residents unless in practice it has the power to do so. A State typically has some
degree of power to compel tax payments from its residents, but only if it has reliable information about
the amount of income they have earned. Bilateral tax treaties containing appropriate exchange of
information provisions or a multilateral agreement on exchange of information for tax purposes may
assist a State in determining the foreign source income of its residents. A bilateral or multilateral treaty
with an assistance-in-collection provision may also be helpful to a State in collecting taxes due with
respect to foreign-source income.



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The reach of a States residence jurisdiction depends on how a taxpayers residency is
determined. Physical presence in a State for an extended period is an important indicator of residence.
Some States also determine residency of an individual by reference to a variety of other indicators of
allegiance to the State, such as the location of the individuals abode, his family, and his fiscal interests.
In other States, physical presence in the State 183 days of the year is enough to establish residence for
that year. Conflicts in residency rules can result in an individual being a dual resident that is, a
resident of two different States. The same issues arise in respect of legal entities. Legal entity can be
considered a resident in the country of its incorporation, place of its head office or based on other
criterion such as place of effective management or control. Tax treaties generally do an excellent job
at resolving problems of double taxation resulting from conflicting residence rules using the tie-
breaker rules in Article 4 paragraphs 2 and 3. 5.

When income is derived within a State by a resident of that State, both the source principle and
the residence principle can be invoked to support a tax on that income. A State can invoke only the
source principle to tax income derived within its territorial boundaries by a non-resident. It can invoke
only the residence principle to tax income derived by a resident from activities conducted outside the
States territorial boundaries. Most States utilize both the residence principle and the source principle.
All States utilize the source principle.

A few States tax on the basis of the source principle alone (so-called territorial system). The
number of States using a territorial system has diminished, because countries have recognized that the
failure to tax residents on income derived from foreign activities undermines the fairness of the tax
system and provides residents with a tax incentive to invest abroad. Such an incentive is almost certainly
contrary to the national interests of a State in need of capital for domestic investment. Nevertheless, if
only a tiny percentage of the population of a State derives any foreign source income, the residence
principle may have little practical importance to that States.


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States that invoke only the source principle are typically concerned about the ability of their tax
department to determine the amount of foreign source income derived by their residents. In some
cases, an exemption for foreign source income can complicate tax administration, due, for example, to
legal disputes that may arise over the source of particular items of income or to the difficulties the tax
administration may encounter in determining whether a deduction claimed by a taxpayer properly
relates to domestic or foreign income. In some cases, a State exercising only source jurisdiction may be
tempted to adopt source rules that may conflict with the source rules of other countries in order to tax
income that does not present them with significant enforcement problems. They may be inclined, for
example, to treat the income of government employees earned abroad as domestic source income.

A few States consider nationality as establishing a sufficient relationship between the taxpayer
and the taxing State to justify taxation on worldwide income. Because it is based on the connection of
the tax subject to the taxing State, this principle is best understood as a variation on the residence
principle. The overwhelming majority of citizens of a State are also residents of that State. As a result,
residence jurisdiction and nationality jurisdiction overlap considerably. The United States of America is
the only State where tax jurisdiction based on nationality is important, although a few other States,
including Bulgaria, Mexico and the Philippines, have used citizenship as a basis for taxation in the past.
The United States of America generally does not tax its citizens on foreign earnings below a high
threshold amount if they have established a foreign residence. Many countries take an individuals
citizenship into account in determining whether that person is a resident. Tax treaties, including Article
4.2.c of the United Nations Model Double Taxation Convention between Developed and Developing
Countries, use citizenship as a tie-breaker in resolving problems of dual residency.

The jurisdictional principle based on the tax object (source, situs) and tax subjects (residence,
nationality) were developed initially for individuals in the context of the personal income tax. States also
invoke those principles, at least by analogy, in asserting the right to tax juridical persons or other
entities, such as corporations and trusts. All States invoke the source principle in taxing corporations and
other taxable legal entities. Many States also invoke an adapted version of the residence or nationality
principle to tax certain corporations and other legal entities on their worldwide income.

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Some States determine the residence or nationality of a corporation based on its place of
incorporation. Other States determine the residence of a corporation by reference to its place of
management. As a practical matter, most States using a place of management test employ some
objective standard, such as the place where the boards of directors meet, to determine place of
management. Otherwise, the place of management would be indeterminate in many important
situations. Some States use both a place-of-incorporation test and a place-of-management test. A
corporation that is subject to tax on its worldwide income may be able to avoid taxation on foreign-
source income by creating an affiliated foreign corporation and arranging for that affiliated corporation
to earn the foreign-source income it otherwise would have earned. Most developed countries and
some developing countries have adopted rules to tax their domestic companies on certain categories of
income deflected to a foreign affiliated corporation for tax avoidance purposes.

Concept of International Double Taxation
Double Taxation can take different forms and occur in different situations. Sometimes double
taxation is being distinguished based on the number of taxpayers involved. Cases where the same
income is being taxed twice in the hands of the same taxpayer are being referred to as juridical double
taxation. For example, the dividend is being taxed in the country of source by a way of withholding tax
and then one more time in the country of residence of the shareholder by a way of tax assessment.
Cases where the same income is being taxed twice in the hands of two different taxpayers are being
referred to as economic double taxation. Continuing with previous example, the profit earned by the
company, which paid the dividend may be subject to corporate income tax. Economically, the corporate
profits and the dividends are the same income, however taxed in the hands of two different taxpayers
company paying the corporate income tax and the shareholder subject to the taxation on the
distributed profits. Double taxation may happen both in the domestic and cross-border situations.





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Double tax conventions are an established way for States to agree at the international level on a
method for reducing or eliminating the risk of double taxation. Double taxation may occur for any of the
following reasons:
a. Residence Residence Conflict: Two States may tax a person (individual or company) on his
world-wide income or capital because they have inconsistent definitions for determining
residence. For example, a corporation may be treated by State A as its resident because it is
incorporated therein, whereas State B may treat that corporation as its resident because it
is managed therein. As another example, State A may treat an individual as its resident for a
taxable year under its domestic tax rules because that individual was present in the State for
183 days during that year. That same individual may be treated as a resident of State B
under its domestic laws because the individual has lived in that State for many years and
maintains close financial and social ties to that State. Residence-residence conflicts can
occur rather frequently with respect to corporations, unless a corporation has intentionally
made itself a dual resident to obtain the benefit of a loss in more than one State. This type
of double taxation can be eliminated on the basis of tax treaties using the tie-breaker rules
contained in Article 4 paragraphs 2-3 of the tax treaties, which determine the states, which
would qualify as the only country of residence of the person in question.
b. Source Residence Conflict: One State may tax income derived by a person by application of
the residence or nationality principle, whereas another State may tax that same income by
application of the source principle. For example, Company A, a resident of State A, may earn
income in State B from extensive activities therein. State A would tax Company A on its
worldwide income, which would include the income earned in State B. State B would tax the
income arising from the activities conducted within its territorial boundaries. A major
objective of bilateral tax treaties is to provide for relief from such source- residence double
taxation, typically by requiring the residence State either to give up its claim to tax or to
make its claim subordinate to the claim of the source State. This type of double taxation can
be eliminated by the tax treaties, either on the basis of the exclusive taxing right where
the treaty permits only one country to tax the income, or on the basis of the methods for
double taxation relief, where the country of residence will have the obligation to provide
the relief (exemption or credit) in the way prescribed by the treaty to eliminate double
taxation.
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c. Source-Source Conflict: Two States may invoke the source principle to tax the same item of
income, due to conflicts in the way the source of income is determined under their domestic
legislation. For example, the domestic tax laws of State A may provide that sales income of a
non-resident corporation is taxable in that State if the sale was made through an office
located in that State. In contrast, the tax laws of State B may tax income derived from sales
by a non-resident corporation if the transfer of possession of the goods sold takes place
within that State. Given this conflict in the tax rules of State A and State B, income derived
from a sale made through an office located in State A for delivery in State B would be taxed
in both States. Tax treaties may eliminate some of these situations, by providing sourcing
rules, which will help to determine only one country of source.
d. Triangular Cases: In some cases, a State may have a source- residence conflict with one
State and a source- source conflict with another State. For example, assume that Company
A is a corporation resident in State A. It has an office in State B and makes sales from that
office into State C. Under their domestic laws, State A taxes income from those sales under
the residence principle and State B and State C both tax that income under the source
principle. A bilateral tax treaty between State A and State B is likely to solve the residence-
source conflict but probably would not solve the source- source conflict. If State B and State
C also have a bilateral tax treaty, however, the source- source conflict may also be solved.

A major goal of bilateral tax treaties is to remove impediments to international trade and
investment by reducing the threat of double taxation that can occur when both Contracting States
impose tax on the same income. This goal is advanced in four distinct ways. First, a bilateral tax treaty
generally increases the extent to which exporters residing in one Contracting State can engage in trading
activity in the other Contracting State without attracting tax liability in that latter State. Second, when a
resident of a Contracting State does engage in a sufficient activity in the other Contracting State for that
State to have the right to tax, the treaty establishes certain guidelines on how that income is to be
taxed. For example, those guidelines may assign to one Contracting State or the other the primary right
of taxation with respect to particular categories of income. They may, in certain cases, provide for the
allowance of deductions in measuring the amount of income subject to tax. They may require a
reduction in the withholding taxes otherwise imposed by a Contracting State on payments made to a
resident of the other Contracting State. Third, a bilateral tax treaty provides a dispute resolution
mechanism that the Contracting States may invoke to relieve double taxation in particular circumstances
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not dealt with explicitly under the treaty. Fourth, where income or gains remain in principle taxable in
both Contracting States, the State of residence of the taxpayer will relieve the double taxation that
results either by allowing a credit for the tax paid in the other State or by exempting the income or gain
from its own tax in practice.

Although a State may address the issue of double taxation unilaterally through domestic tax
laws, it typically cannot achieve unilaterally many of the goals of a bilateral tax treaty. Domestic
legislation is a unilateral act by a State. Such a unilateral act can reduce or eliminate double taxation
only if the State is prepared to bear all of the financial cost of granting that relief. A bilateral tax treaty,
by definition, is a joint act of two Contracting States, typically resulting from some negotiations. In that
context, the financial costs of relieving double taxation can be shared in a manner acceptable to the
parties. In particular, the domestic legislation of a State typically addresses tax issues without reference
to the particular relationship that the State may have with another State. In a bilateral tax treaty, that
relationship can be taken into account explicitly and appropriately. For example, a State may use a
bilateral tax treaty to fashion a particular remedy for double taxation when the flows of trade and
investment with the other Contracting State are in balance. It may adopt a different remedy, however,
when the trade and investment flows favour one State or the other.

Bilateral tax treaties help to reduce the risk of double taxation by establishing the minimum
level of economic activity that a resident of one Contracting State must engage in within the other State
before the latter State may tax the resulting business profits. The bilateral tax treaty lays out ground
rules providing that one State or the other, but not both, will have primary taxing jurisdiction over
income derived from the branch operations in one Contracting State by a corporation that is resident in
the other Contracting State. Similarly, the treaty may specify which Contracting State may tax income
derived from the performance of services in one Contracting State by an individual who is a resident in
the other Contracting State. In general terms, the tax treaty may assign primary (but not exclusive)
jurisdiction to tax to the Contracting State in which the economic activities occur if those activities have
substance and continuity that exceed some threshold level. When the economic penetration is
relatively minor, however, exclusive jurisdiction to tax may be assigned to the Contracting State where
the corporation or individual is a resident.

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The scope of a bilateral tax treaty typically is not limited to commercial and business activities.
Treaties may remove tax impediments to desirable scientific, educational, cultural, artistic and athletic
interchanges. In addition, a treaty may address issues arising in the tax treatment of pension plans and
Social Security benefits, of contributions to charitable organizations, of scholarships and stipends paid to
visiting scholars, researchers, and students, and even of alimony and child support payments.

A bilateral tax treaty cannot anticipate every income tax issue that is likely to arise between
Contracting States. Some issues, such as issues relating to the growth of electronic commerce, are
difficult to address currently by tax treaty because the international community has not yet reached a
consensus on the appropriate standard for taxation. The international community generally recognizes
that the current treaty rules relating to the definition of a permanent establishment were based on
premises about how commerce is conducted that may not hold for electronic commerce. What is not
yet well understood is the changes, if any, that the development of electronic commerce will require in
the treaty definition of a permanent establishment. To deal with such emerging issues, the parties to a
bilateral tax treaty may wish to agree to consult on those issues within a stipulated period after the
treaty enters into force. The length of the period with respect to a particular issue might be chosen so
as to allow time for an international standard on that issue to emerge, for example, from the
Organization for Economic Cooperation and Development (OECD).

The typical tax treaty provides a mechanism enabling the tax authorities of the two States to
adopt ad hoc rules to eliminate double taxation when it occurs. In tax treaty parlance, the tax
authorities responsible for negotiating a solution to particular cases of double taxation are the
Competent Authorities. Each Contracting State appoints one or more Competent Authority in
accordance with its domestic laws. The Competent Authorities are particularly useful in relieving double
taxation that occurs because the States do not agree on the facts underlying the imposition of their
taxes. States may disagree, for example, on whether a particular deduction claimed by a taxpayer
relates to income earned in one or the other Contracting State. In some cases, the factual dispute might
arise because the taxpayer himself took inconsistent positions on the tax returns filed in the two
countries as part of a plan to minimize its taxes. In many cases, the potential for double taxation arises
because States do not agree on how prices should be established on transfers or other transactions
between related persons.

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European Double Taxation Convention
As part of its general strategy of addressing the cross-border tax problems facing individuals and
business operating within the Internal Market, the Commission is currently considering closely the
possible conflicts between the EC Treaty and the bilateral double taxation treaties that Member States
have concluded with each other and with third countries.

In relation to company taxation the Commission is in the process of assessing the various
options for tackling the problems set out in the Commission's 2001 study on company taxation. Issues
include the question of equal treatment of EU residents and the application of bilateral treaties in
situations where more than two countries are involved (triangular situations).

In June 2005 the Commission presented in a working document a general legal analysis of
problems regarding tax treaties, especially the consequences of certain rulings of the Court of Justice
(ECJ) in this area together with possible solutions such as the creation of an EU version of the OECD
Model Convention on which Member States' bilateral tax treaties are based or a multilateral EU tax
treaty.

These issues were discussed with Member States in a workshop that took place in Brussels in
July 2005. Several experts in this matter contributed to the workshop.

The double-taxation agreements of Member States will continue to be subject to review by the
ECJ. In particular, the problems resulting from the current lack of co-ordination in this area, notably in
triangular situations and with regard to third countries, will increase even further. Without Community
action, there may be important political and economic repercussions for Member States' policies in this
area. Therefore, the Commission hopes that its approach of gradual and measured co-ordination of
treaty policies will eventually gain support and meet with a constructive attitude from Member States.
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Discussions among Member States on this subject will be resumed in 2006 in the framework of a
working group. The Commission intends to present a communication in 2006 explaining its short and
long term strategy.

Double taxation
Cross-border double taxation occurs when two different countries subject the same item of
income or property to tax for the same period and in the hands of the same taxpayer.

There is no general EU measure to eliminate double taxation. Most EU countries have bilateral
tax treaties in place with each other to relieve double taxation when it occurs.

The Court of Justice of the EU has ruled that, in the absence of an EU-wide measure to eliminate
double taxation, EU countries retain the power to define by double taxation treaty, or unilaterally, the
criteria for allocating their power of taxation between them, particularly with a view to eliminating
double taxation. Furthermore, EU countries are not obliged under EU law or international law to
conclude tax treaties with each other

EU countries double tax treaties are generally based on the Model Convention drafted by the
Organization for Economic Co-operation and Development (the OECD). The basic principles explained
below are based on that OECD Model Convention. Please note that an actual double tax treaty between
two countries may depart from the Model so you should consult relevant national websites for more
information. It should be noted that tax treaties may not all cover the same set of taxes (some treaties
cover income only, others income and capital and so on). There can also be separate tax treaties relating
to specific taxes such as inheritance tax.

Please note also that tax treaties are subject to re-negotiation and amendments. Sometimes
new tax treaties are concluded to replace the existing ones and certain countries may have other, local
or regional arrangements with each other that may influence your tax position if you are a cross-border
worker.

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We do not advise you to analyze the double tax agreements yourself, if you are not a tax expert.
Please rather consider the consultation of specialists in EURES. To reach the appropriate EURES expert,
please see the EURES advisers web site (the advice is free of charge).

Please also consult Your Europe for information on the likely tax rules applicable to individuals in
different cross-border situations (e.g. migrant employees, cross-border workers, self-employed persons,
directors of foreign companies, artistes, and researchers).

Please also note that if you do business in another country you might be subject to other
obligations such as VAT registration and compliance or keeping accounting records.

General Principles in double taxation treaties
Tax residence
To determine where you should pay your taxes it is important to establish in which country you
are tax resident. Usually a country will tax a resident of that country on his income from all sources
domestic or foreign whereas it will only tax a non-resident on his income arising in that country. The
tax treaty normally contains rules to establish residence in cases where two countries regard someone
as resident.

Double tax relief
If you are taxed in two countries, the country where you are deemed resident will probably
grant you double taxation relief in the form of either a tax credit for any tax paid abroad or else an
exemption for your foreign income so that the tax paid in the foreign country is the final tax on your
foreign income. Note that the credit which the country of residence allows will only be for the amount
of tax due in that country. If the tax in the other country is higher the excess over the amount of tax due
in the country of residence will not be refunded. In addition, you may need to be able to prove that you
have paid tax abroad.

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In order to claim double taxation relief or a refund of tax which you have paid you may be
required to provide certain documents proving your place of residence or place where taxes have been
paid.


Mutual Agreement Procedure
Mutual agreements are instituted by most bilateral tax treaties and the standard provision can
be found under Article 25 of the OECD Model Tax Convention. The procedure is intended for resolving
difficulties arising out of the application of tax treaties. The purpose is for the authorities of the two
countries to agree on solutions to individual cases in application of the bilateral treaty. The problems in
question could concern the interpretation or application of the treaty or the elimination of double
taxation. This procedure can be used instead of or in addition to procedures in the courts of the two
countries concerned. The advantage of the mutual procedure is that both countries administrations are
involved.

Pensions
Tax treaties distinguish between public pensions, private pensions and social security pensions.
In most cases public pensions are taxed in the source country (the country that pays out your pension)
and private pensions are taxed in the country of residence.

Savings income (interest)
Interest that you earn, whether on a savings account or otherwise, could be taxed in the EU
country where the payer of the interest is based. Normally, the payer a bank or other financial
institution is obliged to withhold and pay tax to the authorities of the state where it is based.
However, the interest income could also be subject to tax in your country of residence.
You should note the fact that under EU rules your bank will report interest paid on your savings
to the tax authorities of your EU country of residence (unless your bank is based in Austria or
Luxembourg).
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Dividends
You may receive dividends from another EU country. In this case that country may, depending
on the tax treaty with your country of residence, be entitled to apply a withholding tax to the dividends;
you will then only receive an amount net of tax. Furthermore, the country may apply a higher
withholding tax rate than the rate applicable under the tax treaty. In that case you will have to claim
back the excess withholding tax from that country by providing proof of residence in your country.

Capital gains
If you sell a property (such as your house or a car or securities) you may be subject to tax on
capital gains (profit) you make on such a sale.
Most often capital gains from the sale of a house (immovable property) could be subject to tax
in both the country where it is located and the country of your residence whereas movable property
(such securities) might be taxable only in the country of your residence.

Property income (rent)
Income from immovable property such as income from renting a house or income from
agriculture and forestry situated in an EU country different from your country of residence may be
subject to tax in the country where that property is situated.

UK Double Taxation Relief
Convention with the UK
This Convention covers Capital Acquisition Tax in Ireland and Inheritance Tax (formerly capital
transfer tax) in the UK. The Convention determines taxing rights based on the domicile of the disponer.
However the Treaty recognizes the right of each country to levy tax according to its own law.




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The Capital Acquisitions Tax charge is based on the residence/ordinary residence of either the
disponer or beneficiary, while the U.K. charge is based on the domicile of the disponer. The Convention
ensures that the country where the property is not situated gives a credit for tax paid in the country
where the property is situated. This usually results in the country where the disponer is domiciled giving
the credit for the tax paid in the other country, on property situated in that other country. Credit is given
only when the same property is taxed in both countries, on the same event. As in the case of unilateral
relief, the amount of the credit cannot be greater than the Irish tax on the foreign property.

Who gets the credit?
The credit is given to the person liable to the UK tax who is normally the residuary legatee, i.e.
the person who takes the remainder of the estate after all bequests have been distributed and debts
and administration costs discharged, who must of course be liable to CAT. Tax on pecuniary legacies, i.e.
cash legacies in the U.K. is borne by the residuary legatee. Accordingly, when the amount of the credit to
be given in respect of the pecuniary legacy has been calculated, such amount will be offset against the
Irish tax, if any, payable by the residuary legatee. This is in addition to a credit for the U.K. tax referable
to the residuary legatees own benefit. In the event that the residuary legatee pays no Irish tax no credit
is given.

Specific Bequest
There is one circumstance where credit for U.K. tax is not allowed against the liability of the
residuary legatee. Where a specific bequest of foreign property is made to a beneficiary, that benefit
bears its own share of the foreign tax. Therefore, where there is also an Irish CAT charge on the benefit,
the credit for U.K. tax is applied against that beneficiary's Irish tax.







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Valuation used to calculate credits
As a tax on an estate, U.K. inheritance tax is charged on the valuation of the assets at date of
death. As a tax on a benefit, Capital Acquisitions Tax is charged on the valuation of the assets at the
valuation date. The valuation date for a benefit can be other than the date of death. As a result of these
discrepancies the credit given is, to an extent, a notional credit as it does not always correspond
precisely with the U.K. inheritance tax paid. In practice, therefore, both date of death valuations and
valuation date valuations are used in calculating the credit for U.K. tax. As the U.K. tax is based on date
of death valuations these valuations are used in calculations concerning the U.K. property.

Double Domicile
It is usually the country claiming domicile which gives a credit for foreign tax. In view of the
shared common law concept of domicile between Ireland and the U.K. this area does not usually cause
difficulties. The U.K. has however the concept of a statutory or deemed domicile. The result is that, in
some cases, both jurisdictions may claim to be the disponer's place of domicile.

When this occurs Ireland gives credit for UK tax on UK property and the UK gives credit for Irish
tax on Irish property, subject again to the proviso about the amount of the credit being restricted as is
mentioned above. However, in the event that there is property which is situated in a third country, the
credit is given by the country which has "subsidiary taxing rights".

Points to Note
a. It should be noted that the UK tax is not deductible as a liability in calculating the amount of
CAT payable - it can be used only as a credit against CAT.
b. A credit is given only for U.K. tax - no allowance is made for interest or penalty charges.
c. Credit is given only when the same property is taxed on the same event in both jurisdictions.
d. The credit given is limited to the tax on the benefit at the lower of the U.K. and Irish
effective rates. In effect this means that the credit given for U.K. tax cannot be greater than
the Irish tax on the same property.
e. Any claim for credit (or for a related refund of tax) must be made within six years from the
date of the event in respect of which the claim is made.

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III. ANALYSIS
Remedies for dual residence in tax treaty situations
According to Art. 4(1), the term "resident of a contracting State means any person who, under
the laws of that State, is liable to tax therein by reason of its domicile, residence, place of management
or any other criterion of a similar nature. But this term does not include any person who is liable to tax
in that State in respect only of income from sources in that State or capital situated therein". As
mentioned above, in treaty situations in most instances dual residence will be solved, namely by the
application of Art. 4(3) of the tax treaty, i.e. the company "(...) shall be deemed to be a resident of the
State in which its place of effective management is situated".

It is important to note that there are differences in real tax treaties, which may impact the
resolution of dual resident conflicts. In this regard, a distinction can be between treaties, which conform
entirely to the OECD Model, and treaties that have their own concept of residence or establish other
ways of resolving dual resident situations.

This first possible solution for the use of dual resident companies can be found in the treaty
practices of United States and Canada. These countries retain in their tax treaties the right to use the
place of incorporation as the preference criterion or to leave it expressly or implicitly to the competent
authorities of the jurisdictions involved to determine the dual resident fiscal residence, either by special
proceedings or by mutual agreement.

A second solution is the explicit denial of treaty benefits for dual resident companies. For
example, the 2001 US-UK tax treaty clearly states that first the competent authorities shall seek to
determine a winner State. Notwithstanding, if the competent authorities do not reach an agreement the
dual resident company may generally not claim any benefit provided by the tax treaty.

The third solution to curtail the use of dual resident companies is to deny residence under
domestic law. For example UK and Canada have in place provisions in their domestic law that provide
that a resident company is deemed not to be a resident if under a tax treaty it is resident in the other
country and not in UK or Canada See (UK Section 249 and Subsection 250(5) of the Canadian ITA).

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Finally a last possible solution is to argue on the basis of interpreting Article 4(1) of the tax
treaty in order to achieve the denial of tax treaty benefits to dual resident companies. In this particular
point two sub-arguments must be distinguished:
a. In first place, it may be argued on the basis of the second sentence of Art. 4(1), that the
term resident of a State (i.e. loser State) does not include any person who is liable to tax in
that State (i.e. loser State) in respect only of income from sources in that State (i.e. loser
State) or capital situated therein.
b. In second place, it may be argued on the basis of the first sentence of Art. 4(1) that the term
resident of a contracting state means any person who is "liable to tax" on its worldwide
income.

With regards the first line of reasoning it is important to note that in 1989 the Netherlands State
Secretary for Finance issued a letter (No. IFZ 320) in which the view was expressed that Art. 4(1), second
sentence, does in fact prevent the application of a tax treaty where a Netherlands incorporated
company has its tax residence elsewhere based on the Art. 4(3) tie-breaker rule in a tax treaty with a
third state. This meant in cases that the Netherlands would be the loser state, the tax authorities would
not issue a certificate of residence for a dual resident company receiving income from third countries.

As regards the second type of argumentation based on the term liable to tax, it should be
mentioned that the Dutch Supreme Court in a decision of 2001, used that same argument and held that
a dual resident company that is, under the "tax treaty" between the Netherlands Antilles and the
Netherlands, considered to be a resident in Netherlands Antilles (i.e Netherlands would be the loser
State) and therefore not fully liable to tax anymore in the Netherlands is not a tax resident for the
purposes of the treaty between Netherlands and Belgium. It should be noted that this Supreme Court
case dealt with the scenario of a dual resident company paying an income to a third country and not the
inverse scenario of a dual resident company receiving income from a third country.

Recently the US also changed its approach concerning dual resident companies deriving income
sourced in the Revenue Ruling 2004-76 underscores the significance of liable to tax element of the
definition of a resident. Under the new position, the tax treaty between the United States and the loser
state (i.e. the State which is considered not to be the residence state under Art. 4(3) of the treaty with a
third country) is not applicable and therefore lower treaty rates will be only available under the treaty
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between the US and the winner State. The previous position contained in Revenue Ruling 73-354, was
that the fact that a company deriving income form the United States had a dual residence would not
influence the position of that company as regards the applicability of tax treaties concluded by United
States.

A last mention to refer that dual residence may also be approached from a different angle,
namely the Loser state may still have a claim for the existence of a permanent establishment, which
would result in a significant part of the profits of the enterprise being taxed in the Loser/PE State. This
issue was evidenced by a Dutch Court decision of the Netherlands concerning the place of residence
under the 1951 treaty with Switzerland. According to Article 2(4), of the treaty with Switzerland,
residence of a company "shall be determined in accordance with the tax legislation of each of the two
States. If residence in both States results therefrom, the residence is deemed to be in the State where
the juridical person has its registered seat." Since in this treaty the statutory seat is decisive, a dispute
was raised on whether a legal entity incorporated under Swiss law maintained a permanent
establishment, as defined in the treaty. In that regard, Article 4, paragraph 2, of the treaty lists as
permanent establishment, inter alia, "the place of management" of the business. A 1982 decision of the
Supreme Court determined that "the place of management" of the enterprise of a Swiss Society?
Anonym was found to be in the Netherlands. The Court based its decision specifically on the activities of
the managing director resident in the Netherlands (1 out of 3 directors; the other 2 were "nominal"
directors resident in Switzerland), and of a managing clerk (officer authorized to sign on behalf of the
company) who directed and were able to direct the project that was being carried out by the Society?
Anonym and who often performed their work and activities with respect to the project abroad, but at all
times from the Netherlands.


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REFERENCES
http://ec.europa.eu/
http://www.revenue.ie/
http://www.taxand.com/
http://www.un.org/