ARTICLE 4

Residence

This Article sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. Determination of residence is important because, as noted in the explanation to Article 1 (General Scope), as a general matter only residents of the Contracting States may claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention.

The determination of residence for treaty purposes looks first to a person's liability to tax as a resident under the respective taxation laws of the Contracting States. A person who, under those laws, is a resident of one Contracting State and not of the other need look no further. That person is a resident for purposes of the Convention of the State in which he is resident under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Article proceeds, where possible, to assign one State of residence to such a person for purposes of the Convention through the use of tie-breaker rules.

Paragraph 1 defines a “resident of a Contracting State”. In general, this definition incorporates the definitions of residence in U.S. and Indian law, by referring to a resident as a person who, under the laws of a Contracting State, is subject to tax there by reason of his domicile, residence, citizenship, place of management, place of incorporation or any other similar criterion. Residents of the United States include aliens who are considered U.S. residents under Code section 7701(b). U.S. citizens are treated as resident in the United States for purposes of the Convention. Even though they are not residents of the United States under the Code, it is appropriate for them to be treated as residents under the Convention because they are taxed by the United States in the same manner as residents, i.e., on their worldwide income.

If, under paragraph l(a), a person is liable to tax in a Contracting State only in respect of income from sources within that State, the person will not be treated as a resident of that contracting State for purposes of the Convention. Thus, for example, an Indian consular official in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention. Similarly, an Indian enterprise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with respect to its income which is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as is a U.S. resident.

Under paragraph l (b), a partnership, estate or trust will be treated as a resident of a Contracting State for purposes of the Convention to the extent that the income derived by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the income or in the hands of its partners or beneficiaries. Under U.S. law, a partnership is never, and an estate or trust is often not, taxed as such. Under the Convention income received by a partnership, estate or trust will be treated as income received by a U.S. resident only to the

extent such income is subject to tax in the United States as the Income of a U.S. resident. Thus, for U.S. tax purposes, the question of whether income received by a partnership is received by a resident will be determined by the residence of its partners rather than by the residence of the partnership itself. To the extent the partners (looking through any partnerships which are themselves partners) are subject to U.S. tax as residents of the United States, the income received by the partnership will be treated as income received by a U.S. resident. Similarly, the treatment under the Convention of income received by a trust or estate will be determined by the residence for taxation purposes of the person subject to tax on such income, which may be the grantor, the beneficiaries or the estate or trust itself, depending on the circumstances. This rule regarding the residence of partnerships, estates or trusts is applied to determine the extent to which that person is entitled to treaty benefits with respect to income which it receives from the other Contracting State and the extent to which a resident of the other Contracting State is entitled to treaty benefits with respect to income paid by such person.

If, under the laws of the two Contracting States, and, thus, under paragraph 1, an individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are provided in paragraph 2 to determine a single State of residence for that individual. The first test is where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal and economic relations are closest, i.e., the location of his "center of vital interests". If that test is also inconclusive, or if he does not have a permanent home available to him in either State, he will be treated as a resident of the Contracting State where he maintains an habitual abode. If he has an habitual abode in both States or in neither of them, he will be treated as a resident of his Contracting State of citizenship. If he is a citizen of both States or of neither, the matter will be considered by the competent authorities, who will attempt by mutual agreement to assign a single State of residence.

Paragraph 3 seeks to settle dual-residence issues for companies. A company is treated as resident in the United States if it is created or organized under the laws of the United States or a political subdivision. If India used the same rule, dual-corporate residence between the United States and India could never arise. Under its law, however, a corporation is treated as a resident of India if it is managed and controlled there. Dual residence, therefore, can arise if a U.S. corporation is managed in India. Since neither party was prepared to give up its test of corporate residence under a tie-breaker, the paragraph provides that if a company is resident in both the United States and India under paragraph 1, that company shall be considered to be outside the scope of the Convention for most purposes. There are several exceptions. Paragraph 2 of Article 10 (Dividends) applies, such that if a dual resident corporation pays a dividend to a non-dual resident of India, the U.S. paying agent would withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the non-dual resident of India not by the dual resident. Similarly, Articles 26 (Nondiscrimination), 27 (Mutual Agreement procedure), 28 (Exchange of Information and Administrative Assistance), and 30 (Entry into Force) apply to dual resident corporations. Thus, a Contracting State cannot discriminate against a dual resident corporation; such corporations can bring issues to the competent authorities; and information can be exchanged with respect to them.

Paragraph 4 deals with the possibility of dual residents other than individuals or

corporations, such as estates or trusts. In the event of dual residence of such persons, the competent authorities are instructed to settle the matter and determine the mode of application of the Convention to such persons.