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, subject to Article 22 (Limitation on Benefits), claim the benefits of the Convention. This definition of residence is to be used only for purposes of the Convention.

The determination of residence for purposes of the Convention looks first to a person's liability to tax as a resident under the respective taxation laws of the Contracting States. For this purpose, liability to tax is interpreted as subject to the taxation laws; thus, a tax-exempt entity may be a resident of a Contracting State. 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. Consistent with U.S. treaty policy, the Convention includes citizenship as one of the criteria of residence. Thus, a U.S. citizen resident in a third country is entitled to the benefits of this Convention on the same basis as an individual residing in the United States. If, however, a U.S. citizen or resident (e.q., a "green card" holder) is also a resident of Ukraine under its taxation law, the individual must look to the tie-breaker rules of paragraph 2, which attempt to assign one State of residence to such a person for purposes of the Convention. A U.S. citizen would continue to be subject to U.S. taxation under the saving clause of paragraph 3 of Article 1 (General Scope), but a green card holder's residence would be determined only under this Article for purposes of Convention benefits.

It is understood that the two Contracting States and their political subdivisions are to be treated as residents of those States for purposes of the Convention.

A person that is liable to tax in a Contracting State only in respect of income from sources within that State will not be treated as a resident of that State for purposes of the Convention. Thus, for example, a Ukrainian consular official in the United States who is subject to U.S. tax on U.S. source investment income, but not on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention. (In most cases such an individual also would not be a U.S. resident under the Code.)

Paragraph 1 of the Protocol provides that a partnership, estate or trust will be treated as a resident of a Contracting State in accordance with the residence of the person liable to tax with respect to the income derived by the partnership, estate, or trust, i.e., to the extent that the income is taxed as the income of a resident, whether in the hands of the person deriving the income or in the hands of its partners or beneficiaries. This rule is applied to determine the extent to which the partnership, estate or trust is entitled to benefits with respect to income derived from the other Contracting State. Under Ukrainian law a partnership is generally taxed as an entity, and trusts and estates are not used. Under U.S. law, a partnership is never (except for certain publicly traded limited partnerships and partnerships that are reclassified as associations under Treas. Reg. § 301.7701-2), and an estate or trust is often not, a taxable entity. Thus for purposes of the Convention, income received by a U.S. partnership need only be treated as received by a U.S. resident to the extent included in the distributive share of partners who are U.S. residents (looking through any partnerships that are themselves partners). Similarly, the treatment under the Convention of income received by a U.S. 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 particular circumstances. 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 is provided in paragraph 2 to determine a single State of residence for that individual. These rules come from the OECD Model. The first test applies if 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 competent authorities are instructed to resolve his residence by mutual agreement.

Paragraph 3 provides that if a person, other than an individual, is a resident of both Contracting States under their respective laws, the competent authorities will attempt to establish a single country of residence and agree on how the Convention is to apply to such a person.