Article 4 OECD MC: RESIDENTS of a contracting State
Significance of the concept of ‘residence’ in tax treaties:
The concept of “residence” is significant for three reasons:
1) In determining a convention’s personal scope of application (entitlement to treaty benefits is
available only to a person who is a resident of one or more contracting states)
2) In solving cases where double taxation arises in consequence of double residence
3) In addressing double taxation issues arising from a taxpayer, resident in one state, deriving
income from sources in another state
PARAGRAPH 1: the definition of residence
Article 4(1) OECD MC -> defines the concept of a ‘resident of a contracting state’.
o Essential characteristics of the concept of ‘resident’ in paragraph 1
According to the definition, these are the following essential conditions for the determination of
a ‘resident’:
1) The concept of ‘liable to tax’
2) The (national) criteria for taxation (ie attachment criteria for full tax liability)
3) The concept of ‘by reason of’
4) Inclusion of ‘governments, local authorities and political subdivision’
5) The exception for source-only taxation (and excluded persons)
, A. The meaning of ‘liable to tax’:
a resident of a contracting state must be liable to tax there “by reason of his domicile,
residence, place of management or any other criterion of a similar nature”.
The taxpayer must therefore be subject to comprehensive taxation (full liability to tax) in a
State (para 8.3)
Exempt persons -> es ‘charities and other organizations’ -> depends on the approach taken by
the individual states. Can be seen both as liable to tax (but exempted if they meet specific
criteria) and not liable to tax -> the latter would NOT have access to treaties
Collective investment vehicles (CIVs) -> Commentaries on Article 1. Do they fulfil
the scope of application of the convention (subjective -> persons; objective ->
residents)? -> (see para. 23-25 on Art. 1)
Person -> the starting point should be the legal form of the CIV. In most
cases the CIV is treated as a taxpayer or a ‘person’ in domestic law
Resident -> CIV is a resident if (in theory) subject to comprehensive
taxation. Important that in case exemption applies, there are specific
criteria to be fulfilled. Transparent entities cannot be residents because
they are not liable to full taxation
An individual as a ‘person’ who is ‘liable to tax’
- Person -> Article 3(1)(a) of the OECD Model provides that a “person” includes an individual,
a company and any other body of persons -> individuals are therefore ‘persons’ for the
purposes of the definition of “resident of a Contracting State”
- Liable to tax -> as mentioned above they shall be subject to full tax liability under domestic
law
A company as a ‘person’ that is ‘liable to tax’
- Person -> Article 3(1)(a) of the OECD Model provides that a person includes an individual, a
company and any other body of persons
Other forms of legal persons:
o Article 3(1)(a) of the OECD Model provides that a person includes an individual, a
company and any other body of persons. Commentary -> the definition of person
includes an unincorporated person that is treated as a body corporate for tax
purposes. Such bodies would therefore satisfy the requirement of being a person
for the purposes of the tax treaty
o Transparent entities -> can they qualify as ‘residents of a contracting state’ (despite
falling under the broad definition of ‘persons’ under Article 3)? This comes down to
the concept of “liable to tax”. The OECD view (which is by no means universally
accepted) is that a fiscally transparent partnership (although recognized as a
person) is not a resident of a contracting state because it is itself not liable to tax.
The liability actually rests on the partners. (para. 8.13)
B. Criteria of taxation
Attachment criteria relied on in domestic law for full tax liability
o The determination of residence must be based on certain attachment criteria (i.e.
domicile, residence, place of management and similar criteria) so as to give rise to
comprehensive taxation in that state
o Treaties do NOT prescribe which particular criterion should apply in which case
Reference is made to national law instead –> what is important is that these
criteria must subject the taxpayer to full liability to taxation
C. By reason of
One must look at the basis of the taxpayer’s “claim” to residence.
Significance of the concept of ‘residence’ in tax treaties:
The concept of “residence” is significant for three reasons:
1) In determining a convention’s personal scope of application (entitlement to treaty benefits is
available only to a person who is a resident of one or more contracting states)
2) In solving cases where double taxation arises in consequence of double residence
3) In addressing double taxation issues arising from a taxpayer, resident in one state, deriving
income from sources in another state
PARAGRAPH 1: the definition of residence
Article 4(1) OECD MC -> defines the concept of a ‘resident of a contracting state’.
o Essential characteristics of the concept of ‘resident’ in paragraph 1
According to the definition, these are the following essential conditions for the determination of
a ‘resident’:
1) The concept of ‘liable to tax’
2) The (national) criteria for taxation (ie attachment criteria for full tax liability)
3) The concept of ‘by reason of’
4) Inclusion of ‘governments, local authorities and political subdivision’
5) The exception for source-only taxation (and excluded persons)
, A. The meaning of ‘liable to tax’:
a resident of a contracting state must be liable to tax there “by reason of his domicile,
residence, place of management or any other criterion of a similar nature”.
The taxpayer must therefore be subject to comprehensive taxation (full liability to tax) in a
State (para 8.3)
Exempt persons -> es ‘charities and other organizations’ -> depends on the approach taken by
the individual states. Can be seen both as liable to tax (but exempted if they meet specific
criteria) and not liable to tax -> the latter would NOT have access to treaties
Collective investment vehicles (CIVs) -> Commentaries on Article 1. Do they fulfil
the scope of application of the convention (subjective -> persons; objective ->
residents)? -> (see para. 23-25 on Art. 1)
Person -> the starting point should be the legal form of the CIV. In most
cases the CIV is treated as a taxpayer or a ‘person’ in domestic law
Resident -> CIV is a resident if (in theory) subject to comprehensive
taxation. Important that in case exemption applies, there are specific
criteria to be fulfilled. Transparent entities cannot be residents because
they are not liable to full taxation
An individual as a ‘person’ who is ‘liable to tax’
- Person -> Article 3(1)(a) of the OECD Model provides that a “person” includes an individual,
a company and any other body of persons -> individuals are therefore ‘persons’ for the
purposes of the definition of “resident of a Contracting State”
- Liable to tax -> as mentioned above they shall be subject to full tax liability under domestic
law
A company as a ‘person’ that is ‘liable to tax’
- Person -> Article 3(1)(a) of the OECD Model provides that a person includes an individual, a
company and any other body of persons
Other forms of legal persons:
o Article 3(1)(a) of the OECD Model provides that a person includes an individual, a
company and any other body of persons. Commentary -> the definition of person
includes an unincorporated person that is treated as a body corporate for tax
purposes. Such bodies would therefore satisfy the requirement of being a person
for the purposes of the tax treaty
o Transparent entities -> can they qualify as ‘residents of a contracting state’ (despite
falling under the broad definition of ‘persons’ under Article 3)? This comes down to
the concept of “liable to tax”. The OECD view (which is by no means universally
accepted) is that a fiscally transparent partnership (although recognized as a
person) is not a resident of a contracting state because it is itself not liable to tax.
The liability actually rests on the partners. (para. 8.13)
B. Criteria of taxation
Attachment criteria relied on in domestic law for full tax liability
o The determination of residence must be based on certain attachment criteria (i.e.
domicile, residence, place of management and similar criteria) so as to give rise to
comprehensive taxation in that state
o Treaties do NOT prescribe which particular criterion should apply in which case
Reference is made to national law instead –> what is important is that these
criteria must subject the taxpayer to full liability to taxation
C. By reason of
One must look at the basis of the taxpayer’s “claim” to residence.
