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

Zeta Ltd., a company incorporated in Country Z, has its place of effective management in India and a treaty with India applies. The treaty provides, as the tie-breaker for dual resident non-individuals, that residence is determined by mutual agreement of the competent authorities. Pending such agreement, the position that best reflects treaty interpretation is:

Residence is settled by mutual agreement between the competent authorities, and treaty benefits are not automatically available until then. The treaty tie-breaker uses mutual agreement rather than place of effective management or place of incorporation, so neither factor alone decides the company's treaty residence.

  1. AThe competent authorities decide through the mutual agreement procedure, and treaty benefits are not automatically available to Zeta Ltd. until residence is settledCorrect
  2. BZeta Ltd. is automatically treated as resident of India because its place of effective management is in India
  3. CZeta Ltd. is automatically treated as resident of Country Z because it is incorporated there
  4. DZeta Ltd. is treated as non-resident of both countries and so taxed in neither

Explanation

Where the treaty tie-breaker for a dual resident company is mutual agreement, neither place of effective management nor incorporation decides automatically. The competent authorities settle the question, and absent agreement treaty relief may be denied. Options B and C wrongly apply a test the treaty did not adopt.

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