Double taxation agreements: residence: Dual residents
A claimant of the type referred to in INTM154010 above may be resident in the United Kingdom under its domestic law as well as resident in the other country under its law. The continuing growth and globalisation of business and commerce means that individuals now frequently find themselves resident under the domestic law of more than one State. Such an individual is potentially a resident of both countries for the purpose of the double taxation agreement between them.
The residence Article in modern double taxation agreements (except for the agreement with The Gambia) provides `tie-breaker’ rules for determining residence, for the purposes of the agreement, where an individual is resident in both countries under their respective domestic laws.
The `tie-breaker’ rules consist of a series of tests to be applied successively until residence for the purposes of the agreement is allocated to one State or the other. In other words, once a test is conclusive it is unnecessary to apply subsequent tests. As with all double taxation matters, it is essential to look at the text of the particular agreement in point. Nevertheless, the rules usually follow closely those in the OECD Model (see INTM152040). Generally the tests appear in the following order.
- Permanent home.
An individual is a resident of the State in which they have a permanent home available to them (though not necessarily owned by them). If they have a permanent home available to them in both States it is necessary to look at the next test:
- Centre of vital interests.
An individual is a resident of the State to which their ‘personal and economic relations’ (a wide expression intended to cover the full range of social, domestic, financial, political and cultural links and relationships) are closer. If it is not possible to determine this, or they have no permanent home available in either State, then it is necessary to look at the next test:
- Habitual abode.
An individual is a resident of the State in which they have their habitual abode. If they have a habitual abode in both States or in neither, then the final test is:
An individual is a resident of the State of which they are a national.
Finally, since all these tests may in theory be inconclusive (even the last, since a person may have dual nationality or may be a national of neither state) there is normally provision for the two competent authorities to decide the position by negotiation. (See INTM154030.)
If the tie-breaker rules allocate residence for the purposes of an agreement to the other country the effect on United Kingdom liability is significant.
An individual who is ‘treaty resident’ in the other country is entitled to make claims to relief from United Kingdom tax as provided for under the agreement on the basis that they are a `resident of’ the other State. As a result:
- Income or a gain of a type which is dealt with in the agreement and which arises in the other State is always exempt from United Kingdom tax.
- Income arising in other overseas territories is exempt if the agreement has an `other income’ Article.
- Only UK source income can be taxed and then only to the extent that such income can be taxed in the hands of a sole resident of the other State. Special rules may however apply where any income (including foreign income) is connected with a business or profession which the individual carries on in the UK.
Although the agreement overrides some of the normal consequences of being a United Kingdom resident, it does not, in the case of an individual, override the fact of UK residence itself for purely domestic law purposes. Even though an individual may be resident for agreement purposes elsewhere, they (as a resident of the United Kingdom for United Kingdom tax purposes) still have to complete returns and fulfil any similar obligations imposed by the Taxes Management Act. They will also remain entitled to any personal allowances which may be due on account of their UK residence status.
The type of individual dual resident most frequently encountered is the foreign executive employed by a multinational group who is seconded to the UK for a period. If the UK assignment is relatively short the individual may still be regarded as resident in their home State under its tax laws while having acquired UK residence status under UK domestic rules. Frequently, the fact of dual residence only comes to light when a claim is made for exemption of employment income from UK tax in accordance with an agreement Article. These taxpayers, like other dual resident individuals who claim an agreement benefit available to residents of an agreement partner, should be dealt with as outlined at INTM154040.
Substantial amounts of tax often turn on the determination of dual residence problems and it is important that a claim to be `treaty resident’ in the overseas country is not accepted uncritically. CTIAA Business International, Tax Treaty Team should be consulted in any case where there is doubt or difficulty in relation to the claim made. In these cases, it is important that the basis on which treaty residence in the other State is claimed is clear. All the relevant facts relating to that claim need to be assembled in order for a proper judgement to be made.
See INTM154030 where agreements do not contain a residence Article in this form.