CA Final · Direct Tax Laws & International Taxation · Overview of Model Tax Conventions
Aarav, an Indian resident, works in State Y for Indian employer Kaveri Ltd from 1 July to 31 December of the calendar year (184 days), and his salary is borne by Kaveri Ltd, which has no PE in State Y. Under the OECD Model Article 15(2), which is correct?
State Y may tax Aarav's salary. The Article 15(2) exemption needs all three conditions, including presence not exceeding 183 days in the 12-month period. With 184 days the first condition fails, so the source State retains taxing rights for work performed there.
- AState Y may tax because the stay exceeds 183 days in the periodCorrect
- BState Y cannot tax because the employer is non-resident of State Y and does not bear the cost through a PE, only if the stay is under 183 days, which is not the case here
- CState Y cannot tax because all three conditions are met
- DOnly India may tax, because salaries are always taxed in the employer's State
Explanation
Article 15(2) exempts source State taxation only if all three are met: presence not exceeding 183 days in any 12-month period, employer not resident of the source State, and no PE bearing the cost. Here the first condition fails with 184 days, so State Y may tax the income for services performed there. The claim that all three are met is wrong because of the day count.
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