In a recent Binding Reply, SKM2023.79.SR, the Danish Tax Council (“Skatterådet”) has ruled on tax residency (“Skattemæssigt hjemmehør”) in respect of the double tax treaty between Denmark and Germany.
The Danish Binding Reply concerns the determination of tax residency for an individual who is fully taxable in both Denmark and Germany. The individual has personal interests in both countries, with his spouse and youngest child residing in Denmark and the individual’s job as a director for a Danish subsidiary of a German company being primarily in Germany.
The ruling concludes that it cannot be determined with certainty where the individual’s strongest personal and economic interests lie, and therefore the individual is considered a tax resident in Germany under the double taxation agreement between Denmark and Germany.
OECD Article 4
Article 4 of the OECD Model Tax Convention on Income and on Capital provides guidance on the determination of tax residency for individuals. It sets out two tests for determining residency: the “permanent home” test and the “centre of vital interests” test. The latter test considers factors such as personal and economic ties to each country and habitual abode.
Article 4 outlines various criteria for determining a person’s tax residency, including the place where the individual has their permanent home, the place where they have the center of their economic interests, and the place where they regularly stay. The tax treaty also allows the tax authorities in each country to consider other factors, such as the duration and nature of the individual’s stays in each country, the individual’s family ties, and their social and cultural ties.
The OECD tax treaty is designed to provide guidance and certainty to individuals and companies who have a business or personal interests in multiple countries. The treaty aims to ensure that individuals and companies are taxed fairly and efficiently by establishing a clear set of rules for determining tax residency.
Determining tax residency can be a complex process, especially for individuals with personal and economic ties in multiple countries. The OECD Model Tax Convention provides guidance on the factors to consider in determining tax residency, but ultimately, each case must be considered on its own merits. The Binding Reply highlights the importance of understanding international tax treaties and how they can impact your tax residency.
Article 4 of the OECD tax treaty provides the rules for determining tax residency, based on the individual’s personal and economic interests in each country. In situations where it is not clear which country has the strongest ties, United Tax Network can provide valuable assistance to ensure you are properly taxed and avoid double taxation. We can help you understand the provisions of the tax treaty, navigate complex regulations and requirements, identify opportunities, and ensure compliance with all relevant laws and regulations.