Dual Residency -

 The issue of dual residency is becoming increasingly common due to cross-border deputations and frequent international travels. Dual residency occurs when an individual qualifies as a resident of two countries under the respective domestic tax laws, whereby both countries seek to tax the global income of such an individual, leading to double taxation. The conflict of dual residency is resolved by applying Article 4(2) of the tax treaty, which is based on certain tests referred to as 'tie-breaker rules'. These tie-breaker rules help establish the preference of residency of one country over the other country. If an individual shifts his residency at the end or the beginning of the fiscal year of either country, there should not be an issue in determining the tax residential status of the individual under Article 4(2) of the tax treaty.

If someone moves from the US to India permanently in April 2023, they might be considered a tax resident of both countries according to their tax laws. But, if they are considered a resident of India based on the India-US tax treaty, then they would be a resident of the US for the first three months of 2023 and a resident of India for the remaining nine months of 2023.

However, if an individual shifts his residential status from one country to another in the middle of a year and not at the end or the beginning of the fiscal year of either country, it raises the question of whether Article 4(2) of the tax treaty can be applied to resolve dual residency by splitting the period of dual residency from the middle of the fiscal/tax year. This situation is referred to as 'Split Residency.'

India does not recognize split residency under section 6 of the Act, and most of the Indian tax treaties provide supremacy to domestic tax laws of the concerned contracting states for the purpose of determining tax residency under tax treaties. Therefore, if the case of dual residency is established, Article 4(2) comes into play to only resolve the conflict by supplementing and not by overriding the full year-based residency criteria envisaged in the domestic tax law.

It is important to note that the tie-breaker rules envisaged under Article 4(2) of the tax treaties may not be of such nature that could be tested on a particular day, but rather to be tested on a holistic basis with some degree of permanence.

Recently, the Hon’ble Delhi Tribunal upheld the concept of split residency in the case of Sameer Malhotra [TS-1010-ITAT-2022(DEL)], where the taxpayer was employed in India till November 2014 and thereafter relocated to Singapore from 6 December 2014 onwards. Applying the tie-breaker test as per Article 4(2) of the India-Singapore tax treaty, the tax authorities held the taxpayer to be a resident of India for the entire fiscal year

When addressing the issue of tax residency determination in cases of split residency, it may be beneficial to refer to relevant court rulings that support the use of tie-breaker tests in a split manner as provided in Article 4(2) of tax treaties. It should be noted that analyzing tax residency through the application of tie-breaker tests is a nuanced process that depends on specific factual circumstances. Therefore, taxpayers should maintain comprehensive documentation to substantiate their tax residency status in a particular country, which may be supported by claiming treaty benefits.