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CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Mr. Arvind, an Indian resident, is also treated as resident of Country Z under its domestic law. Under the India-Z treaty, the tie-breaker rule applies. He has a permanent home available in both countries. His family and economic interests are closer to India, where he runs his business, and his vital interests are centred in India. Applying the usual tie-breaker sequence in treaties based on the OECD and UN Models, how is his treaty residence determined?

Mr. Arvind is a treaty resident of India. The permanent home test is inconclusive since he has homes in both countries, so the next test, centre of vital interests, applies, and his personal and economic ties are closer to India. Mutual agreement is only needed if all tests fail.

  1. AResident of Country Z because he spent time there
  2. BResident of India, because the centre of vital interests is in India once permanent home test is inconclusiveCorrect
  3. CResident of both countries, taxed twice
  4. DDetermined by the mutual agreement procedure directly without applying tests

Explanation

The tie-breaker sequence is: permanent home available, then centre of vital interests, then habitual abode, then nationality, and finally mutual agreement. A permanent home exists in both, so the test is inconclusive. Next is the centre of vital interests, which is in India. Hence he is treated as resident of India for treaty purposes. Mutual agreement is only the last resort.

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