Article 4 of MLI provides a tie-breaker rule for the dual resident entities for determining their tax residence.
A company is easily considered tax resident in two different states simultaneously when it registers under one state’s laws but has the place of effective management in another. It is generally understood that a place of effective management is where key management and commercial decisions necessary for the conduct of the enterprise’s business are made. However, of course, states are free to attach a different meaning to the concept. A conflict like this results in dual residence for the company.
Bilateral tax treaties include specific tie-breaker rules to decide where the company should be considered resident and which state can, therefore, tax the company’s worldwide income.
For a detailed analysis of Article 4 click here.