Tax residence and tax liability (2) Flashcards
What determines tax residence of individuals
1) Time spent in country
2) Connection with particular country (Personal and econoimic relationship w the country)
3) Other rules such as citizenship
Tax residence of corporations
1) Legal approach: incorporation/registration
(Place of registration)
2) Ecomic approach:
Place of effective management (principle business location)
3) Dual test (either registration or place of effecive management)
DTC double tax convention
OECD & UN: developed model convention for bilateral tax treaties
Priority of DTC over domestic tax law
Example: OECD
Where by reason of the provisions of paragraph 1 an individual is a resident ofboth Contracting States, then his status shall be determined as follows:
OECD Article 4: for individuals
he shall be deemed to be a resident only of the State in which he has apermanent home available to him; if he has a permanent home available to himin both States, he shall be deemed to be a resident only of the State with whichhis personal and economic relations are closer (centre of vital interests);
if the State in which he has his centre of vital interests cannot be determined,or if he has not a permanent home available to him in either State, he shall bedeemed to be a resident only of the State in which he has an habitual abode;
if he has an habitual adobe in both States or in neither of them, he shall bedeemed to be a resident only of the State of which he is a national
if he is a national of both States or of neither of them, the competentauthorities of the contracting States shall settle the question by mutualagreement
OECD Model Tax Convention (2017) Article 4:
Where by reason of the provisions of a Covered Tax Agreement a
person other than an individual is a resident of more than one
Contracting Jurisdiction, the competent authorities of the Contracting
Jurisdictions shall endeavour to determine by mutual agreement
the Contracting Jurisdiction of which such person shall be deemed
to be a resident for the purposes of the Covered Tax Agreement,
having regard to its place of effective management, the place
where it is incorporated or otherwise constituted and any other
relevant factors. In the absence of such agreement, such person
shall not be entitled to any relief or exemption from tax provided by
the Covered Tax Agreement except to the extent and in such
manner as may be agreed upon by the competent authorities of the
Contracting Jurisdictions.
Mutual agreement procedure (MAP) steps
(double taxation)
Apply MAP from its tax authorities
Tax authorities of the two states of the DTC
Make an agreement on the residence of the corporation
e.g. how to define effective place of management
Methods for mitigating double taxation
Exemption method: Resident state does not tax foreign income
Credit method: Resident state gives a credit for the foreign tax paid at source state and the taxpayer still pays a tax at resident state
Corporation vs partnership
Recognition of entities is important because they are taxed differently
both are responsible for all debts and legal liabilities but while corporations are independent legal personalites partnerships are not. This means corporations pay a corporate income tax and parnerships pay separate personal income tax
Hybrid entities
Enteties that are considered transparent in one state but non-transparent in others (CIT vs PIT)
Double non taxation
When tax is exempted in both states
E.g. Hybrid entities
If company A is non transparent in NL but transparent in Germany then there would be no tax in germany but the NL would think the tax was paid and would exempt tax in NL
