Two countries can both treat you as a tax resident at the same time. If those two countries have a tax treaty, its tie-breaker rules can decide which of them counts as your country of residence under that treaty.
The OECD Model Tax Convention forms the basis of more than 3,000 tax treaties, according to the OECD. Its residence article settles a double claim with a short list of tests that tax authorities call the tie-breaker rules.
HMRC, the UK tax authority, describes them as “a series of tests to be applied successively until residence for the purposes of the agreement is allocated to one State or the other.” Once a test gives a conclusive answer, HMRC says the later tests are unnecessary.
HMRC also says you need to read the text of the treaty in question, although its rules usually follow the OECD Model closely. Each country’s own law then decides what the treaty’s answer means at home.
Both countries must claim you as resident
Your two countries start with their own residence rules. IMI has covered how those rules differ from one country to the next, and what happens when no country treats you as resident.
Under Article 4 of the OECD Model, a resident of a country is a person who, under its laws, “is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.”
The tie-breaker applies where, under that definition, “an individual is a resident of both Contracting States.” The definition leaves out a person who is liable to tax in a country “in respect only of income from sources in that State.”
The UAE, which IMI has compared on tax with Singapore, Switzerland and Panama, currently has no personal income tax, according to PwC. Its 2016 treaty with the UK covers any individual who, under UAE law, “is domiciled in the United Arab Emirates or has his habitual abode or centre of vital interest in the United Arab Emirates.”
Where you have a permanent home
The treaty starts by asking where you have a permanent home available to you. If you have one in a single country, the OECD Model treats you as resident only of that country, and the later tests do not apply.
You do not have to own the home, according to HMRC. The OECD Commentary says “any form of home may be taken into account,” including a house or apartment that you own or rent, and a rented furnished room.
The home must be available to you at all times. The Commentary says a house you own is not available to you while it is “rented out and effectively handed over to an unrelated party.”
IMI has also covered the tax traps of owning property abroad, including how a home abroad affects this test.
Your center of vital interests
If you have a permanent home in both countries, the treaty looks at the country with which your personal and economic relations are closer. The OECD Model calls this your “centre of vital interests.”
The Commentary names factors such as your family and social relations, your occupation, your political, cultural or other activities, your place of business, and the place from which you manage your property. It says the circumstances “must be examined as a whole.”
A home in your old country counts here too. The Commentary says a first home you retain, where you have always lived and worked and where your family and possessions are, can “together with other elements” show that your center of vital interests did not move.
Habitual abode, where your days come in
The treaty moves to habitual abode if you have a permanent home in both countries and it is not possible to determine your center of vital interests. It also moves there if you have a permanent home in neither country.
The Commentary says habitual abode refers to “the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life.”
It also says the test “will not be satisfied by simply determining in which of the two Contracting States the individual has spent more days during that period.” You can have a habitual abode in both countries, even if you spend more days in one of them.
Australia’s Federal Court applied that reading in a 2020 appeal, Pike. Mr Pike was resident in both Australia and Thailand, under the laws of each country, in the 2009 to 2014 income years.
He worked in or from Thailand for more than half of each year and lived with his family in Australia whenever he could. The Full Court agreed that he had a habitual abode in both countries, and it rejected the idea that habitual abode is “the place where the individual has spent more days.”
The primary judge found that the next test in that treaty, his personal and economic relations, made him a resident of Thailand for those years. The Full Court dismissed the tax office’s appeal.
Nationality, then the tax authorities
If you have a habitual abode in both countries or in neither, the OECD Model treats you as resident of the country of which you are a national.
A national of both countries or of neither reaches the last step. There, the two tax authorities, which the Model calls competent authorities, “shall settle the question by mutual agreement” under the procedure in Article 25.
Article 25 says each authority “shall endeavour” to resolve a case by mutual agreement. If they cannot agree within two years of having all the information they need, the OECD Model lets you request arbitration in writing, and the Commentary confirms that paragraph 5 of Article 25 covers a residence case they fail to settle.
Your treaty may use a different order
The Australian Taxation Office says the tie-breaker tests in its treaties are “modelled on Article 4(2)” of the OECD Model, “though there are variances between treaties.”
The UK’s 2016 treaty with the UAE applies the tests in the OECD order, ending with mutual agreement.
In the Australia and Thailand treaty from Pike, habitual abode comes second and personal and economic relations third, after the permanent home test. That reverses the OECD order for those two tests.
The same treaty has no separate nationality test and no final step for the tax authorities. It counts your citizenship or nationality as a factor in your personal and economic relations.
What the result changes at home
In the UK, HMRC says a treaty “does not, in the case of an individual, override the fact of UK residence itself for purely domestic law purposes.” You remain UK resident, so you must file UK tax returns.
A year of treaty residence abroad also affects the UK’s temporary non-residence rules. HMRC says you have sole UK residence for a year if you are UK resident and “at no time in that year are you treaty non-resident.”
Those rules can tax some income and gains in the year you return. They apply if you had sole UK residence in four or more of the seven tax years immediately before the tax year you left, and your period of non-residence lasts five years or less.
The Australian Taxation Office says that even if a treaty allocates your residence to another country, “you remain a resident of Australia for Australian tax purposes.” Australia then taxes you as far as the treaty allows.
Canada’s Income Tax Act deems a person who is resident in another country under a tax treaty “not to be resident in Canada.” The Canada Revenue Agency says that under subsection 250(5), this applies “for all purposes of the Act.”
From the time the treaty makes you resident elsewhere, the Canadian rules for people who cease to be resident in Canada apply. They include a deemed sale of certain property, and the agency says you may have to report the resulting capital gain, which it calls departure tax.
IMI has covered Canada’s departure tax in its guide to the countries with exit taxes.
If you are not a US citizen, you can be resident of both the US and another country under each country’s tax laws. The IRS says a dual resident can claim the benefits of an income tax treaty.
Where a treaty places you in the other country, you are treated as a nonresident alien in figuring your US income tax, and as a US resident for other purposes.
The IRS says that if you claim treaty benefits as a dual resident, you must file Form 1040-NR with Form 8833 attached. If you are required to report treaty benefits and do not, you may face a penalty of $1,000 for each failure.
The claim can cost more for a long-term US permanent resident, meaning a lawful permanent resident, generally with a green card, in at least eight of the last 15 tax years. Years spent as a treaty resident of another country, without waiving treaty benefits, do not count toward the eight.
The IRS stops treating you as a lawful permanent resident if you begin to be treated as resident in a treaty country, do not waive the treaty benefits, and notify the IRS.
The IRS says that in certain instances, a tie-breaker claim “can trigger section 877A expatriation tax.” IMI’s series on expatriating from the United States covers the exit tax rules that can apply when you give up a green card.
US citizens face a saving clause in most US tax treaties. The IRS says the clause preserves the right of the United States “to tax its citizens and residents as if the tax treaty had not come into effect,” although many tax treaties have exceptions to it.
Before you rely on a tie-break
Read the residence article in the treaty between your two countries, and note the order of its tests.
Check whether a home in your old country is available to you at all times.
Ask whether your treaty claim needs a certificate of residence. For relief from UK tax, HMRC says you need a certificate from the tax authority of the country where you live.
The UAE’s Federal Tax Authority issues Tax Residency Certificates for treaty use.
Find out what your old country does when a treaty places your residence in the new one. In Canada that can mean departure tax, and a long-term US permanent resident can face the US exit tax.
Tax rules change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions based on the information above.
