Tiebreaker Clause in Double Tax Treaty

A tiebreaker clause is a provision in a double tax treaty (DTT) that helps determine an individual’s tax residency when they have connections with two countries, and both countries consider the person to be a resident for tax purposes. The tiebreaker clause establishes a series of tests to determine which country has the primary right to tax the individual’s worldwide income. This helps prevent double taxation on the same income.

The tiebreaker clause typically follows a hierarchical order of tests. These tests usually consider factors such as the availability of a permanent home, the individual’s center of vital interests (economic and personal ties), habitual abode, and nationality. If none of these tests provides a clear outcome, the competent authorities of both countries may need to reach a mutual agreement to determine the individual’s tax residency.
When relying on a tiebreaker clause in a DTT, it may be necessary to repeat the process each year if changes in the individual’s circumstances could affect their tax residency.

For example, the Statutory Residence Test (SRT) is used in the UK to determine an individual’s tax residency status. The SRT considers the number of days spent in the UK, work ties, accommodation availability, and family ties. If these factors change year on year, the individual’s tax residency status may also change, requiring a reassessment of their position under the tiebreaker clause.

According to HMRC guidance, when an individual is deemed a resident in the UK and another country under their domestic laws, they can use the tiebreaker clause in the applicable DTT to determine their tax residency. However, the HMRC advises that the tax residency determination under the DTT should be made for each tax year, as the individual’s circumstances may change. If an individual is determined to be a resident in the other country under the tiebreaker clause, they will still be treated as a resident in the UK for specific purposes, such as for the application of the SRT.

In summary, the tiebreaker clause in a double tax treaty helps to determine an individual’s tax residency when they have connections to two countries. However, the process may need to be repeated each year, as changes in an individual’s circumstances can affect their tax residency status. Therefore, it is essential to consider both the Statutory Residence Test and HMRC guidance when assessing an individual’s tax residency in the UK.

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