5.1.3 The tiebreaker rule for individuals (Article 4(2))

Article 4(2) of the model contains a tiebreaker rule that aims to address dual fiscal domicile conflicts, i.e. situations where both Contracting States consider the deceased or the donor to be fiscally domiciled in their territory. More specifically, “[w]here by reason of the provisions of paragraph 1 an individual is domiciled in both Contracting States, then his status shall be determined as follows:

It follows that the OECD IHTMTC’s tiebreaker rule for individuals is similar to that of the OECD ICTMTC, thereby adopting the same connective criteria (permanent home, centre of vital interests, habitual abode, nationality and mutual agreement procedure) with the latter for the determination of the deceased’s or the donor’s fiscal domicile, and affording the primary taxing right to the Contracting State which the connective criterion indicates. The fact that the Commentary on Article 4(2) of the OECD IHTMTC closely mirrors that of Article 4(2) of the OECD ICTMTC confirms the above.1 Both tiebreaker rules, thus, give preference to the Contracting State of the person’s permanent home, his centre of vital interests, his habitual abode, his nationality and, as a last resort, to what the Contracting States will decide following a mutual agreement procedure. It follows that through the application of these connective criteria, the Contracting States aim at identifying the attachment of the individual with a state and at affording primary taxing rights to the Contracting State with which this person is the most attached. As a result, the attachment of a person with a Contracting State is examined alike in both models as also shown by the similarities of the commentaries on both OECD tiebreaker rules.

Nevertheless, it could be argued that the assessment of the attachment of a person with a Contracting State under the same connective criteria for both inheritance/gift and income tax treaty purposes may be problematic in some cases. In my view, the OECD IHTMTC’s tiebreaker rule seems to counter the manner in which certain states establish the lifelong attachment of a person with their territory and the third element of the proposed inheritance and gift tax (connection with civil law). For example, the deceased’s or donor’s intention to fiscally domicile in a Contracting State – an essential element of some inheritance and gift tax legislations – seems to be deliberately ignored. Under paragraph 22 of the Commentary on Article 4, “[t]he determination of the individual’s intention can result in endless disputes and, what is more, to manipulation on the part of the heirs.” One would expect, however, that those who drafted the OECD IHTMTC would have explicitly mentioned in the Commentary on Article 4 of the OECD IHTMTC that states are free to insert an intention test into the tiebreaker rule of their inheritance and gift tax treaty.

Likewise, the requirement of a minimum period of presence of a person in a Contracting State – usually forming part of the assessment of his lifelong attachment to the state – does also not seem to be reflected in the wording of the tiebreaker rule. For example, the determination of the fiscal domicile based on the availability of a permanent home without a minimum period of presence in a Contracting State seems again to contradict the manner in which certain states establish the lifelong attachment of a person with their territory and the proposed inheritance and gift tax. Sonneveldt (2001) stated in that regard that a minimum period of presence might need to be specified before the individual acquires a fiscal domicile in the Contracting State in which he is living.2 In that regard, I note that the interpretation of the terms “permanent home” and “habitual abode” under the Commentary on Article 4 seems to favour such an approach.3

One could argue that due to the lack of an option for an intention test and of a minimum period of presence in a Contracting State Article 4(2) of the OECD IHTMTC, the tie-breaker rule counters a) the manner in which certain states aim to establish the lifelong attachment of a person with their territory and b) the third element of the proposed inheritance and gift tax (connection with civil law). In that regard, I observe that the tax treaty practice seems to have already recognised the lack of these two elements from the OECD IHTMTC’s tiebreaker rule of individuals. Some treaties, thus, include a specific tiebreaker rule that takes precedence over the general one. This rule includes, amongst others, an intention and minimum presence test. Furthermore, other treaties include a requirement for a minimum period of presence in a Contracting State in the existing tiebreaker rule for the assessment of whether the deceased or the donor has maintained a permanent home there. Reference is made in that regard to section 6.1.3 of this study.