ARTICLE 4 — U.S. Income Tax Treaty

Fiscal Residence

This Article defines those persons who are residents of the United States or Indonesia for purposes of the Convention. Paragraph 1 begins by Stating that a person who is liable to tax as a resident under the taxation laws of a Contracting State is a resident of that State. A U.S. partnership, estate, or trust is considered a U.S. resident only to the extent that the income it derives is subject to U.S. tax as the income of a U.S. resident, either in its hands or in the hands of its partners or beneficiaries. (A similar rule is not needed in the case of Indonesia, which generally taxes partnerships and trusts as corporations and estates as individuals.) The references to "liable to tax" and "subject to tax" in paragraph 1 do not cause a tax-exempt organization to lose its status as a resident.

A person who is a resident of only one of the Contracting States under their respective taxation laws need look no further. Paragraphs 2 and 4 address cases of dual residence.

If an individual is considered a resident of both States under their respective domestic laws, paragraph 2 provides a series of "tie breakers" to assign a single residence for purposes of the Convention. The first test is where the individual has a permanent home, i.e., where he resides with his family. If the individual has a permanent home in both countries or in neither of them, he is deemed to be a resident of the State with which his personal and economic relations are closer. If that test is inconclusive, the deciding factor is where he has a habitual abode. If the individual has a habitual abode in both States or in neither of them, he is deemed to be a resident of the State of which he is a citizen. If Citizenship fails to assign a single residence, the competent authorities are charged with settling the question.

Once an individual is determined to be a resident of a Contracting State under paragraph 1 or 2, that definition of residence prevails for all purposes of the Convention, including the "saving clause" of Article 28 (General Rules of Taxation).

Paragraph 4 provides that a company which under domestic tax laws is a resident of both Contracting States will be considered a resident only of the State in which it is organized or incorporated.