DUAL RESIDENCE AND SOLUTION UNDER TREATY AGREEMENT

8/12/2019 DUAL RESIDENCE AND SOLUTION UNDER TREATY AGREEMENT

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DUAL RESIDENCE AND SOLUTION

UNDER TREATY AGREEMENT

Oleh:

Edwin Adrianto S.

Program Pendidikan Profesi AkuntansiFakultas Ekonomi Universitas Trisakti

Jakarta2014


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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 useof 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 arelocated 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 isbased 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

criterionsuch 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 taxpayerand 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.

ResidenceResidence 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 canoccur 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.

SourceResidence 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 sourceresidence 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 rightwhere

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 sourceresidence conflict with one

State and a source- source conflict with another State. For example, assume that CompanyA 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 referenceto 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 notyet 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 Stateshave 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 foreignwhereas 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 doubletaxation. 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

institutionis 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 higherwithholding 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 debtsand 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 thesediscrepancies 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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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 StateSecretary 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 wherethe 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/
http://ec.europa.eu/http://ec.europa.eu/http://www.revenue.ie/http://www.revenue.ie/http://www.taxand.com/http://www.taxand.com/http://www.un.org/http://www.un.org/http://www.un.org/http://www.taxand.com/http://www.revenue.ie/http://ec.europa.eu/

DUAL RESIDENCE AND SOLUTION UNDER TREATY AGREEMENT

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