Tax Talk Thursday: Tax Treaty “Tie-Breaker” Rules for Dual-Residents

When a taxpayer is considered a resident under the domestic law of two countries for the same tax year, both jurisdictions may claim the right to tax worldwide income. This creates a risk of double taxation unless resolved by a tax treaty. Most U.S. income tax treaties follow the OECD Model Tax Convention, Article 4(2), which provides a hierarchical “tie-breaker” test to assign treaty residency to only one country.

Hierarchical Tie-Breaker Tests

Under Article 4(2) of most U.S. treaties, the following criteria are applied sequentially until a single country of residence is determined:

1. Permanent Home Available – The country where the taxpayer has a permanent home available (owned or rented) is treated as the country of residence.

   
   

2. Center of Vital Interests (CVI) – If a permanent home is available in both or neither country, residency is assigned to the country where the taxpayer’s personal and economic relations are closer (employment, business, family, bank accounts, investments, memberships, etc.).

   
   

3. Habitual Abode – If CVI cannot be determined, residence is assigned to the country where the taxpayer spends the greater number of days during the tax year.

   
   

4. Nationality Test – If residency still cannot be determined, residency is assigned to the country of which the taxpayer is a national/citizen.

   
   

5. Mutual Agreement Procedure (MAP) – If none of the above tests are conclusive, the competent authorities of both countries will determine residency by mutual agreement under the treaty’s Competent Authority Article.

   
   

U.S. Tax Implications

• IRC §7701(b) and Form 1040NR: Taxpayers treated as residents under domestic law (Substantial Presence Test or Green Card Test) but residents of the treaty partner country under the tie-breaker rules may file as nonresident aliens under IRC §7701(b)(6).

  
  

• Form 8833 Disclosure Required: Per Treas. Reg. §301.6114-1(b)(1), taxpayers must file Form 8833 to disclose a treaty-based return position that overrides U.S. residency. Failure to disclose may result in a $1,000 penalty for individuals ($10,000 for corporations).

  
  

• Dual-Status Returns: In some cases, a taxpayer may file a dual-status return if they are resident for part of the year under §7701(b) but claim treaty nonresidency for the remainder.

  
  

• State Tax Residency: U.S. income tax treaties do not bind individual states. California, New York, and other states generally do not recognize treaty tie-breaker positions. Additional state filings or residency arguments may be required.

  
  

Best Practices for Practitioners

• Track Physical Presence: Maintain a day-count log (travel calendars, boarding passes) to substantiate Substantial Presence Test and Habitual Abode days.

  
  

• Document CVI Factors: Keep evidence of where family resides, location of employment contracts, bank accounts, and other economic ties.

  
  

• Consider Treaty Timing: Strategic planning around travel dates or residency start/termination can shift the tie-breaker result.

  
  

• Coordinate with Foreign Advisors: Ensure both countries report the same treaty outcome to avoid mismatches and unnecessary Competent Authority requests.

Navigating dual-residency rules, Form 8833 disclosures, and state tax implications can get complicated quickly. At MKHS Tax Group, we specialize in international tax compliance and treaty-based positions. If you think you might qualify for treaty nonresidency or want to avoid double taxation, reach out today — email us at info@mkhstaxxgroup.com. We’ll help you understand more, stress less, and file your tax returns with confidence.