We all know the individual who wishes to take relief under the Double Taxation Avoidance Agreements (or treaties) has to qualify as a tax resident of one of the countries of the treaty. But how do you assign or determine residency? By applying the Residency Test or following the Residency Tie Breaker Rules as detailed below.

Most tax treaties have a provision of residency rules/tie-breaker tests for resolving the conflict of dual residency. Residency tests are special rules where one can establish his residency of preference over one state and the other state. Article 4 of the tax treaties lay Residency Tie Breaker Rules for the residency test.

But Why do You Need Residency Tie Breaker Rules?

Imagine an Indian IT professional moves to Canada and spends six months there. His employer is an Indian subsidiary. For that year will the Professional pay taxes on the income earned in Canada?

A sailor who is on ships spends his entire year in 4-5 different countries including some time in India too with his family? What will be his residency?

Many times employees or professionals move around the globe fulfilling terms of tax residency of more than one country. So where does he belongs for Tax Benefit purpose?

To provide relief to a taxpayer, India has entered into a double taxation avoidance agreement (DTAA) with more than 90 countries including the US, UK, UAE, etc. The tax treaties in India are commonly based on Organization for Economic Co-operation and Development (OECD) or UN Model.

Article 4 of the OECD Model Tax Convention defines the term ‘resident’ as any who, under the laws of that country, is liable to tax therein because of his domicile, residence, and place of management or any other criterion of a similar nature. However, if a person qualifies as a resident of more than one country, the tiebreaker test must be applied.

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These tie-breaker rules are called the residency test rules.

The Residency Tie Breaker Rules

How do Residency Test or Residency Tie Breaker Rules help?

Illustration 1:

Mr. Anand has a permanent home in Country A, where his wife and children live. However, he stayed for more than 7 months in Country B. However, he does not have a permanent home in Country B. As per the residency rules of Country A and Country B, he qualifies as a resident of both countries. There exists a double taxation avoidance agreement between Country A and B. In such a case, how will be the residency of Mr. Anand be determined?

To determine the residency of Mr. Anand, the tie-breaker rule shall be applied. Mr. Anand shall be regarded as the resident of Country A as he has a permanent home available to him i.e. Country A in the present case.

Illustration 2:

The Finance Bill 2020 has introduced a Sub-section (1A) in Section 6 deeming an Indian citizen to be resident in India if he is not liable to tax anywhere else.

Many Indian citizens have a permanent home in the UAE and have employment or business in the UAE and most of the time stay in the UAE. They would be hit by a new provision in the Finance Bill 2020.

But Government of India Clarified – “An Indian citizen who is having a permanent home in UAE and have his employment or business in UAE and most of the time stay in UAE would not be hit by this provision and would remain resident of UAE” (Source Business Standard dated Feb 02, 2020)

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To clear doubts about the new provision, the government says that “there is an Indian citizen who stays in UAE. As per UAE law, if a person stays there for 183 days or more in a calendar year, he becomes a resident of the UAE. If under Sub-section (1A), he also becomes a resident in India. It becomes a case of a tie-breaker. The tie-breaker rule is applied following Article 4 of India UAE DTAA.”