Market leading insight for tax experts
View online issue

When is a resident not a resident?

printer Mail

It sounds like a bad joke, befitting of a tax lawyer in lockdown, but it is really just a reminder to check the small print in double tax treaties. 

It was prompted by seeing an Italian Supreme Court decision (cases no. 2617-2618) in relation to a claim by the UK resident trustee of an English law trust to a tax credit refund under article 10(4) of the UK/Italy treaty. The trust had obtained a certificate of UK tax residence from HMRC, which one might think was good enough for article 10(4), which began: ‘A resident of the United Kingdom who receives dividends from a company which is a resident of Italy...’. The Italian tax authority denied the claim on the basis that the trust was not a ‘person’, and the Italian Tax Court and Tax Court of Appeals agreed. However, the Italian Supreme Court disagreed, although it denied the claim for other reasons.

Why did that matter? In short, because ‘resident of a contracting state’ was defined, as it is in most (all?) UK tax treaties, and the OECD model form, in article 4, as a ‘person’ resident in a contracting state and ‘person’ was itself defined in article 3(1)(d) as ‘compris[ing] an individual, a company and any other body of persons, but does not include partnerships which are not treated as bodies corporate for tax purposes in either contracting state’. 

So, if you are not a ‘person’ for treaty purposes, you can’t be a resident of a contracting state for treaty purposes either. Even if you are, in fact, a resident of a contracting state!

That in turn reminded me of the UK Court of Appeal’s decision in IRC v Padmore [1989] STC 493 that the UK could not tax the UK resident individual partners in a Jersey partnership of patent and trademark specialists because the partnership was a ‘person’ for the purposes of the UK/Jersey tax treaty by virtue of being a ‘body of persons’ (as a matter of general English usage and despite, rather confusingly, not being a ‘body of persons’ as that term was defined for either UK or Jersey tax purposes!). And a decision now overridden by ITTOIA 2005 s 858, which restored the UK’s taxing right despite the provisions of any double tax treaty. 

And there’s the rub. Different treaties have different definitions of ‘person’ and so – and I’m struggling for a good word to use here  – ‘something’ which might be a ‘person’ for the purposes of one of the UK’s treaties, and consequently capable of being a resident of a contracting state and entitled to treaty benefits, might not be a ‘person’, and might not be entitled to treaty benefits, under another one of the UK’s treaties. 

Compare the definition of ‘person’ in the UK/Italy treaty above with that in the UK/US treaty, in which ‘person’ includes an individual, an estate, a trust, a partnership, a company, and any other body of persons. 

So it’s a timely reminder that whilst when we are in a rush, the temptation is to skip straight to the dividend, interest or other appropriate article of the relevant treaty, and if it provides for beneficial treatment for a resident of the relevant territory, and the recipient of the relevant income is, as a domestic matter, a resident of the relevant territory, to tick the box and move on (unless, of course, it is a US treaty where we are all now schooled in the need to wade through the limitations on benefits article too!). But we should at least pause and ask whether our resident really is a resident for the purposes of the treaty, albeit that in many cases (looking at a non-pass through company for example), it should be fairly obvious.

Of course, if you are really unlucky, you find that you are entitled to benefits on the face of the relevant treaty but they haven’t actually been given effect under domestic law as once happened to UBS (see UBS AG v HMRC [2007] STC 588). Fortunately, that is a very rare occurrence indeed. 

Issue: 1488
Categories: In brief