The concept of tax residence in tax treaties

If an individual is considered tax resident in Norway under Norwegian domestic law and is also considered tax resident in another state under that state's domestic law, the individual will, under the respective domestic laws of the two states, be regarded as resident in both jurisdictions. Where a tax treaty exists between the two states, the question of where the individual is deemed tax resident must be determined in accordance with the treaty.

Tax treaties’ reference to domestic legislation

The tax treaties concluded by Norway generally provide—typically in Article 4—that a person shall be regarded as resident in a state if he or she is “liable to tax therein by reason of domicile, residence, place of management or any other criterion of a similar nature” under the laws of that state. This wording is derived from Article 4 of the OECD Model Tax Convention, which defines residence as follows:

”For the purposes of this Convention, the term ”resident of a Contracting State” means any person who, under the laws of the 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. …”

Accordingly, tax treaties generally provide that tax residence is, in principle, determined by reference to the domestic law of the relevant state. However, this rarely resolves the issue, since the reason for consulting the tax treaty is often that the individual is regarded as resident in both contracting states under their respective domestic laws.

Independent treaty rules for resolving dual-residence conflicts

Article 4(2) of the OECD Model Tax Convention contains tie-breaker rules for determining in which state an individual shall be deemed resident when he or she is considered resident in both contracting states under Article 4(1).

Permanent home

Under Article 4(2)(a), the taxpayer is deemed resident in the state where he or she has a permanent home available. There is no requirement that the individual own the home. Accordingly, rented accommodation may also qualify. In determining where a permanent home exists, considerable weight is generally given to where the individual’s spouse and minor children reside.

The term “permanent home” implies that accommodation intended only for short-term use is excluded. In addition, the individual must have the home available for his or her use.

Centre of vital interests

If the taxpayer has a permanent home in both states, he or she is deemed resident in the state with which personal and economic relations are closer, commonly referred to as the centre of vital interests. This follows from Article 4(2)(a) of the OECD Model Convention. The Commentary to the Model Convention elaborates on this criterion:

“If the individual has a permanent home in both Contracting States, it is necessary to look at the facts in order to ascertain with which of the two States his personal and economic relations are closer. Thus, regard will be had to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention.”

This criterion requires a broad and multifaceted assessment in which the individual’s personal ties play a central role. The following statement from the Commentary provides more practical guidance:

“If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State.”

The centre of vital interests test does not apply if the taxpayer does not have a permanent home in either state. In such cases, the decisive factor is where the taxpayer has a habitual abode.

Habitual abode

If it cannot be determined in which state the taxpayer has his or her centre of vital interests, or if the taxpayer has no permanent home in either state, Article 4(2)(b) of the OECD Model Convention provides that the taxpayer shall be deemed resident in the state where he or she has a habitual abode.

The Model Convention assumes that an individual may have a habitual abode in both states. Therefore, it is not necessarily decisive that the taxpayer has spent more time in one state than the other. The situation may differ where the taxpayer has a permanent home in both states. In such cases, the Commentary suggests that the relative duration of stays in each country may become relevant.

Nationality

If the taxpayer is considered to have a habitual abode in both states—or in neither of them—Article 4(2)(c) provides that the taxpayer shall be deemed resident in the state of which he or she is a national. This criterion rarely becomes decisive in practice.

General observations

As follows from the foregoing, the criteria set out in Article 4(2)(a)–(c) of the OECD Model Convention must be applied sequentially when determining the taxpayer’s state of residence. The treaty does not call for an overall balancing of all the criteria simultaneously. In practice, however, there may be some overlap between the different criteria.

When interpreting these criteria, their international meaning—not their meaning under the domestic law of the contracting states—must be applied. The natural exception is the term “national” in Article 4(2)(c), which is determined by the domestic law governing nationality.

Obtain a certificate of residence

If the conclusion is that the residence conflict should be resolved in favour of the other state, it is advisable to obtain a certificate of residence from that state. Such a certificate is a declaration issued by the local tax authorities confirming that they regard the taxpayer as tax resident in that jurisdiction.

Ideally, the certificate should not merely confirm residence under domestic law but should also refer specifically to the residence article of the relevant tax treaty.

Mutual agreement procedure

If the taxpayer is a national of both states—or of neither—Article 4(2)(d) provides that the question of residence shall be resolved by mutual agreement between the competent authorities of the contracting states: “… the competent authorities of the Contracting States shall settle the question by mutual agreement.”

Accordingly, where the taxpayer’s residence cannot be determined by applying the criteria in Article 4(2)(a)–(c), it is the responsibility of the competent authorities of the contracting states to determine the taxpayer’s residence status through a mutual agreement procedure.