Double taxation – Denmark/USA double tax treaty – Article 4

In a recent Binding Reply, SKM2023.86.SR, the Danish Tax Council (“Skatterådet”) has ruled on tax residency (“Skattemæssigt hjemmehør”) in respect of the double tax treaty between Denmark and USA.

Binding Reply

The Danish Tax Council has issued a Binding Reply regarding the tax residency status of an individual who rented an Airbnb apartment in Denmark for a period of five to five and a half months. The tax authority found that the individual had acquired a residence in Denmark and exceeded the maximum limit of a continuous stay of three months.

As a result, the individual was deemed fully liable to pay taxes (“Fuld skattepligt”) in Denmark from the time they took up residence in the Airbnb apartment. The tax authority took into account that the individual’s stay in Denmark was temporary and expected to be less than six months. The individual’s entire family was expected to return to their usual residence in the United States after the temporary stay in Denmark.

The tax authority assumed that the temporary stay in Denmark would not exceed six months and that the individual’s stay in Denmark was not indicative of a long-term connection to the country. Therefore, the individual was considered to have tax residency in the United States according to the double taxation agreement’s article 4, section 2, a).

This binding reply highlights the importance of understanding the tax residency rules of a foreign country when planning to stay for an extended period. It is essential to seek professional advice to ensure compliance with tax laws and regulations in the relevant jurisdiction.

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.

Key takeaway

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, as well as providing insights in whether an Airbnb rented apartment can establish a residence.

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.

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