Preventing Treaty Abuse

I. S. 128Introduction

The possibility of a company being a resident in two contracting states was recognized in the middle of the 20^th century. Dual residence cases have always been of importance because the concept of tax treaties, although applicable to residents of one or both contracting states, requires the residence to be allocated to one contracting state only. The tie-breaker rule contained in Art. 4(3) of the OECD Model provides that residence should be attached to the state in which the place of effective management (hereinafter: POEM) of a company is situated. This has been the OECD’s stance since 1963, when the first OECD Draft was issued. Nevertheless, Art. 4(3) as proposed by the BEPS Action 6: ‘Preventing the Granting of Treaty Benefits in Inappropriate Circumstances’, (hereinafter: Action 6) is completely different from the current one. The proposed Art. 4(3) does not contain a tie-breaker rule, but it provides that dual residence should be resolved by mutual agreement procedure (hereinafter: MAP), on a case-by-case basis.

This change completely alters the nature of the current Art. 4(3) and the mechanism for resolving cases of dual residence. Having in mind that a tax trea...