The Tie-Breaker

Where an individual is a resident of both States, the treaty determines status as follows: he shall be deemed a resident of the State in which he has A PERMANENT HOME AVAILABLE TO HIM; if he has a permanent home available in both, of the State with which HIS PERSONAL AND ECONOMIC RELATIONS ARE CLOSER (CENTRE OF VITAL INTERESTS); if that cannot be determined, or he has no permanent home available in either, of the State in which he has AN HABITUAL ABODE; if he has an habitual abode in both or in neither, of the State OF WHICH HE IS A NATIONAL; and if he is a national of both or of neither, THE COMPETENT AUTHORITIES SHALL SETTLE THE QUESTION BY MUTUAL AGREEMENT. Each step is reached only if the one before it fails to answer.

The first test asks whether a permanent home is AVAILABLE TO HIM. Availability is the test, not use and not ownership. A flat kept empty and ready in one country is capable of being a permanent home available there even if nobody has slept in it for a year; a home is not disqualified by being rented rather than owned. This is why the first step resolves fewer cases than people expect — for this corridor, a family property kept in India and an apartment held in America will often both be available, which pushes the question straight to the second test.

Article 4(2) applies only where, by reason of paragraph 1, an individual is A RESIDENT OF BOTH CONTRACTING STATES. Paragraph 1 makes somebody a resident of a State where they are liable to tax there BY REASON OF DOMICILE, RESIDENCE, CITIZENSHIP, PLACE OF MANAGEMENT, PLACE OF INCORPORATION, OR ANY OTHER CRITERION OF A SIMILAR NATURE — and expressly not where they are liable only on income from sources in that State. Somebody resident in one country and merely taxed on local-source income in the other has no tie to break, and the whole Article is beside the point for them.

The treaty provides that notwithstanding any provision except a listed few, a Contracting State MAY TAX ITS RESIDENTS (AS DETERMINED UNDER ARTICLE 4 (RESIDENCE)), AND BY REASON OF CITIZENSHIP MAY TAX ITS CITIZENS, AS IF THE CONVENTION HAD NOT COME INTO EFFECT. The parenthesis matters more than anything else in the sentence. For a non-citizen the saving clause reaches only people who are that State's residents AS ARTICLE 4 DETERMINES — so a tie-breaker that lands on India means America is not saving anything about them under this limb. For a US citizen it is different: citizenship-based taxation is preserved whatever the tie-breaker says.

Federal law provides that AN INDIVIDUAL SHALL CEASE TO BE TREATED AS A LAWFUL PERMANENT RESIDENT if they COMMENCE TO BE TREATED AS A RESIDENT OF A FOREIGN COUNTRY UNDER A TREATY, DO NOT WAIVE THE BENEFITS of that treaty, and NOTIFY THE SECRETARY of the commencement. For somebody who has held a green card in eight of the last fifteen taxable years, ceasing to be a lawful permanent resident is precisely the event the expatriation tax attaches to. The tie-breaker is therefore not a free option for a long-term resident: it can trigger the exit regime without anybody handing back a card.