Fiscale Vestigingsplaats

Tax Residence

Tax residence determines which country has the primary right to tax a person or entity's worldwide income. It is the foundational question in international tax planning — residence status under domestic law and treaty provisions shapes the entire tax position.

Domestic Residence Tests

Each country applies its own criteria to determine tax residence. Common tests include:

Individuals

Physical presence (e.g., 183-day rule), domicile, habitual abode, centre of vital interests, nationality/citizenship (e.g., US worldwide taxation).

Companies

Place of incorporation, place of effective management (POEM), central management and control, registered office, place of key decision-making.

Because countries apply different tests, an individual or entity can be tax resident in multiple jurisdictions simultaneously — creating dual residence and potential double taxation.

Treaty Art. 4 — Resident Definition

Article 4(1) of the OECD Model defines a resident for treaty purposes as any person who, under the laws of a contracting state, is liable to tax by reason of domicile, residence, place of management, or any other criterion of a similar nature.

This definition is critical because only a resident of a contracting state can claim treaty benefits. The treaty definition references domestic law but adds the requirement of actual tax liability — mere registration is not sufficient.

Tie-Breaker Rules

When a person is resident in both contracting states under domestic law, Article 4(2)-(3) provides tie-breaker rules to determine a single state of residence for treaty purposes:

Individuals (Art. 4(2))

  1. Permanent home available
  2. Centre of vital interests (personal and economic relations)
  3. Habitual abode
  4. Nationality
  5. Mutual agreement between competent authorities

Companies (Art. 4(3) — pre-MLI)

A dual-resident entity is deemed resident in the state where its place of effective management (POEM) is situated. POEM is generally where key management and commercial decisions are made.

Dual Resident Entities

Dual residence for entities creates complications beyond double taxation — it can trigger issues with controlled foreign corporation (CFC) rules, participation exemptions, and treaty eligibility. Some jurisdictions have specific anti-abuse provisions targeting dual resident entities.

Practical solutions include corporate migration (re-domiciliation), restructuring management functions, or obtaining a competent authority determination under the applicable treaty.

MLI Art. 4 — Changes for Entities

The Multilateral Instrument (MLI) Article 4 replaces the automatic POEM tie-breaker for entities with a mutual agreement procedure. Under the MLI approach, competent authorities must endeavour to determine a single state of residence by mutual agreement, considering the place of effective management, place of incorporation, and other relevant factors.

If no agreement is reached, the entity is not entitled to any treaty relief or benefit except to the extent agreed by the competent authorities. This is a significant change from the pre-MLI position where POEM provided automatic resolution.

Best practice

Dual residence situations require careful analysis of both domestic law and treaty provisions — automatic application of tie-breaker rules may not resolve all cases.