WEEK 1: Residency, Dual Residence, Triangular Cases
Case 1 - Place of effective management
Required Reading
Avery Jones, John F., 2008 OECD Model: Place of effective management - what one can learn from the history,
Bulletin for International Taxation 2009, p. 183
Australian Taxation Office, Central management and control test of residency: identifying where a company's
central management and control is located
https://www.ato.gov.au/law/view/document?DocID=COG/PCG20189/NA T/ATO/00001
Dieter Bock, a German resident, formed Vimeta BV in the Netherlands in 2014. He was the
only shareholder and one of the two directors. The other director was Piet Boedelbak, a
business partner of Bock living in the Netherlands. Vimeta’s constitution allowed one
director to bind the company and this was Bock.
Dieter Bock provided Vimeta with cash to enable it to buy a substantial stake in Thomson
plc, an Australian quoted company, in the same year. Neither Thomson, one of the directors
of Thomson plc, nor its other directors were Australian residents. In 2018 Bock became CEO
of Thomson, acquired a flat in Sidney and became Australian resident.
In 2020 Dieter Bock resigned as a director of Vimeta leaving Boedelbak as the sole director.
Shortly afterwards Vimeta sold shares in Thomson and derived a substantial capital gain.
Boedelbak has attended many of the board meetings alone; however, there was a period of 18
months without board meeting and many meetings did not involve strategic decision making
or even any day-by-day decisions. On the contrary, key decisions had been taken when Bock
was in Australia without formal board meeting. Professional advisors were instructed by
Bock who reported to him alone and sent the detailed bills to Bock and only summary bills to
Boedelbak. The latter was often without the absolute minimum information necessary to
make the relevant decisions.
Question: Where are the capital gains taxable? Please consider both first the OECD
Model 2014 and afterwards the OECD Model 2017. In respect of the latter, what can we
say about the outcome of the mutual agreement?
First, we check if the treaty is applicable to the situation.
Art. 1: The subjective scope is fulfilled because the Convention is applicable to persons who
are residents in one or both of the contracting states.
Art. 2: The objective scope is fulfilled because tax on capital gain.
Then, we determine where Vimeta (alienetor the shares) is resident. Here, we face a
residence-residence state conflict.
Art.4(1) provides that a “…resident of a contracting state is a person who, under the laws of
that contracting state, is liable to tax by reason of his domicile, residence, place of
management or any other criterion of a similar nature…”. The doctrine is not straightforward
,in this regard. Some accept that the place of incorporation can be taken into account to
determine the nationality of a company.
- According to Dutch law, Vimeta is resident of The Netherlands because she is
incorporated therein
- According Australian law, Vimeta is resident of Australia because her center
management control is there.
We pursue with art. 4(3) in order to solve the dual residency issue.
- In the 2014 model, the dual resident shall be seen, for treaty purposes, as resident of
the State where his place of effective management is.
From the facts above, Vimeta would be considered as Australian resident. Indeed, the
key decisions are taken by Bock as CEO who is a Australian resident.
In case of formal directors who take no decisions, it can be a problem.
Under the 2014 model, Vimeta is an Australian resident.
- In the 2017 model, Contracting States shall endeavor to determine, for treaty
purposes, where Vimeta is resident. During this MAP, importance should be given to
the effective place of management, place of incorporation or others relevant factors.
(Commentary 24.1 art. 4)
States have to try to achieve, not obliged to find out a solution.
o If agree on place of effective management: Australia
o If not agree double taxation remains
Under the 2017, there is no certainty about where would Vimeta be treated as
resident.
Finally, we apply the provided distributive rule: Art. 13 (5): the contracting state where the
seller company (Vimeta) can tax this capital gain.
under the 2014 model, Vimeta is Australian resident so Australia can tax the
capital gain.
under the 2014 model, 3 situations may occur:
Vimeta is considered as Dutch resident: NL can tax
Vimeta is considered as Australian resident: Australia can tax
No agreement: NL and Australia can tax.
,Case 2 - Dual resident persons: The tie-breaker rule
Required Reading
• Kees van Raad, 2008 OECD Model: operation and effect of Article 4(1) in dual residence issues under updated
commentary, (2009) 63 Bulletin for International Taxation 5, pp. 187-190;
Piet Boedelbak is seconded by his Dutch employer to the Brazilian subsidiary for a period of
two years. He is well married but after 12 years the relationship became “fragile” and his
wife refused to follow him to Brazil. She remains living in the common dwelling located in
the Netherlands. Piet feels that he will not move in again after the period abroad has expired.
Piet owns a patent for which he receives royalties from a US taxpayer. The US tax authorities
want to apply the domestic rate of withholding tax on royalties of 30% arguing that no tax
treaty exists between the US and Brazil. Piet is of the opinion that the treaty between the
Netherlands and the US should apply that corresponds in this respect to the OECD Model
2017. A treaty exists between the Netherlands and Brazil that equally corresponds to the
OECD Model 2017.
Are the US entitled to levy a withholding tax of 30% or are they obliged to apply a
lower rate or are they not allowed to levy tax at all?
Please solve the case alternatively arguing first that the Netherlands are the “winner”
country or second, that the Netherlands are the “loser” country.
First, we check if the treaty is applicable to the situation
The subjective scope (art.1) is fulfilled because Boedelback is resident of one or both
contracting states (NL and Brazil).
The objective scope (art.2) is also fulfilled because it relates to taxes on royalties.
Before going to the specific distributive rule addressing the tax treatment of this kind of
income, we have to determine where Boedelback is resident.
Here we have a dual residency issue about an individual. It is clear from the facts above that
both NL and Brazil would consider Boedelback as his resident.
- In Brazil, once you enter in Brazil to work you need a work visa and you are a tax
resident
- In the Netherlands, Piet can be also considered as a resident (home and wife)
According to art. 4(1), Boedelback would be resident of NL and Brazil.
Therefore, we have to apply the tie breaker rule of art.4(2) to assess of which contracting
state is Boedelback resident for treaty purposes.
a) 1. Resident of the State in which he has a permanent home available
Boedelback has a dwelling in NL
Boedelback has a place to sleep after his work in Brazil
Permanent test home failed
2. The place of the center of his vital interests (economic and
personal relations).
, At the one hand, his wife is still in NL. It is worth nothing that
their relation seems to be cloudy. We note it would be difficult to
prove it. At the other hand, Boedelback works in Brazil
Place of center of vital interest failed
b) Habitual abode
Boedelback has lived 12 years with the same wife in Nl but things
seem to change. We don’t know what the future would be
In Fernando’s view, we take into account of the future. His habitual
abode will automatically be in state P.
Test passed (Fernando)/ Test failed
c) Nationality
The facts don’t precise his nationality
d) Mutual agreement between NL and Brazil
It will depend on the tie-breaker rule
- NL is the winner state: Boedelback is as Dutch resident for treaty purposes
- Brazil is the winner state: Boedelback is a Brazilian resident for treaty purposes
Finally, we go to the distributive rule regarding royalty. According art. 12 (1), royalties can
only be taxed in the residence state.
- NL is the only one who can tax the royalties USA may levy a WHT
- Brazil is the only one who can tax the royalties USA may not levy a WHT
What is the consequence for the US? What would like the US to demonstrate?
There is no dual residency issue between the Netherlands and the US. So, US would like to
demonstrate that, as potentially agreed in the MAP between NL and Brazil, Boedelback is a
resident of Brazil. Therefore, situation of Boedelback would not be covered by the DTC
between US and NL.
In other words, for the purposes of the treaty between Netherlands-US, is the tie-breaker-rule
of the treaty between the Netherlands-Brazil treaty applicable?
If the Netherlands is the looser state, it will be advantageous for US. In this way, US can
argue that Boedelback is not one of its residents.
Accepted by the OECD and based on article 4.1, second sentence (commentary 8.2), the
winner and looser doctrine means that once a State is a loser State (source State) according to
a MAP (if there is no further agreement) that State will forever remain a loser State regarding
the situation agreed.
In other words, Boedelback, a resident of NL and Brazil but who, under the tax treaty
between NL and Brazil, is a resident of Brazil only. The consequence is that Boedelback has
no access to the treaty NL-US even if he is a domestic law resident of NL.
