Tutorials International and European Tax Law (TAX4002)
Residency, Dual Residence, Triangular Cases
Double taxation States can levy taxes by virtue of their sovereignty if there is a personal or an objective
connection between the taxpayer and the state. Since international law places few limits on
the tax sovereignty of states, the same event may be taxed in two or more states. Cross-border
economic relations would be considerably threatened if two or more states subjected the same
income to taxation. Many states therefore enter into bilateral international tax conventions in
order to eliminate double taxation (DTC’s).
Application of the DTC’s (OECD Model)
Residency is important to determine whether a tax treaty is applicable to that person. You
should always first assess whether the person in question is a resident of one or both of the
contracting states. Pursuant to treaty provisions patterned after article 1 OECD Model Convention, Double
Taxation Conventions are applicable to persons who are residents of one or both contracting
states. Article 4 OECD Model serves as a basis for treaty provisions defining the concept of
residence. Under these provisions a resident is ‘any person who, under the laws of that state,
is liable to tax therein by reason of his domicile, residence, place of management or any other
criterion of a similar nature, and also includes that State and any political subdivision or local
authority thereof. In practice, this wording indicates that full tax liability in one of the two
contracting states leads to treaty entitlement. Any taxable person who is liable to tax in one of the two contracting states by reason of his
domicile, residence, place of management or any other criterion of a similar nature is entitled
to treaty benefits. So to determine a resident:
1. National law.
2. This may lead to dual residency.
3. Dual residency: tie-breaker rules.
Case 1 - Place of effective management
Legal entities Until 2014, there was only one single criterion set out in article 4(3) OECD Model for legal
entities. If a person other than an individual is resident of both contracting states, it will be
considered as a resident of the state where its ‘place of effective management’ is situated.
When paragraph 3 was first drafted, it was considered that it would not be an adequate
solution to attach importance to a purely formal criterion like registration, and preference was
given to a rule based on the place of effective management, which was intended to be based
on the place where the company was actually managed. The OECD gave however no further
explanation of this criteria and different countries may interpret this term differently. In the OECD Model 2017 the ‘place of effective management criterion’ is replaced with a
subjective test under which competent authorities determine which contracting state a
taxpayer should be deemed to be a resident of, by taking into account that entity’s place of
effective management, place of incorporation, where the meetings of the board are being held,
where the headquarters are located and other relevant factors. This is also called the MAP tie-
breaker rule. Application to the case Two important questions in international tax law:
1. Who can tax?
a. This is determined by national law.
2. Who may tax?
a. This is determined by a treaty.
It is important firstly to assess whether the OECD Model (treaty between NL-UK) is
applicable to this situation. We have to determine whether Vimeta BV is a resident of one or
both contracting states (according to article 1 OECD Model). We assume this is the case. Article 13 OECD Model deals with capital gains. The capital gains are derived from selling
shares. Article 13 (1) OECD Model states that if you hold real estate in one member state, that
member state may tax any capital gains on this real estate. You could prevent this by saying,
no we are not going to sell the real estate, but we are going to make a company out of it and
sell the shares. This is why article 13(4) OECD Model is in the model. Article 13(5) OECD
Model deals with any other situations that are not dealt with in the previous 4 paragraphs. The
contracting state of which the alienator is a resident, can tax. To see where Vimeta BV is a resident of, we have to check article 4 OECD Model. Based on
paragraph 1 of article 4 OECD Model, we have to determine wheter Vimeta BV is liable to
tax according to national law. Vimeta BV is a company formed by Dutch law (it is a ‘besloten
vennootschap’). Because of the fact is it a ‘Dutch company’ the Netherlands will tax the
company for its world income. The UK will probably want to tax the company because it has
a lot of business activities in the UK. The key decisions are made in the UK. The UK looks at
the place of central control and management of the company. It is about who has the concrete
executive authority. It is about the question who actually makes the relevant decisions. In our
situation, we have to assess whether the opinion of Piet is very important for the decision-
making or that Piet merely signs the papers and has no influence at all. In our situation, the
key decisions are taking place in the UK. Piet has not so much of an influence. The place of
executive authority is the UK, so the UK would want to tax too. We can say that Vimeta is a
resident of both the Netherlands as the UK. To determine the true residency, we have to assess the tie-breaker rules. In our situation, we
have to look at article 4(3) OECD Model, because we are dealing with a corporation. Until
2017, the main criterion to determine the residency was the ‘place of effective management’.
To determine this, various factors can be taken into consideration, such as where the meetings
of the person’s board are usually held, where the chief executive officer usually carries out