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Double Taxation Avoidance Agreement – Article 1 Persons Covered.

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June 13, 2022 |

6 mins read

Double Taxation Avoidance Agreement – Article 1 – Persons Covered

ARTICLE 1 - Persons Covered

Further, Article 1(2) deals with cases of taxation of fiscally transparent entities. Article 1(3) provides that except in certain cases, the Treaty shall not restrict right of a Contracting State to tax its resident under its domestic laws. 

Introduction and Basic Concepts of Tax Treaty

Article/Para No. OECD Model Tax Convention on Income and on Capital 2017 UN Model Convention 2017
Persons Covered Persons Covered
1 This Convention shall apply to persons who are residents of one or both of the Contracting States This Convention shall apply to persons who are residents of one or both of the Contracting States.
While Article 1 of the OECD and UN Model are identical and apply to person who are resident of of one or both of the Contracting States, US Model is subject to any exceptions that may exist
2. For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State. For the purposes of this Convention, income derived by or through an entity or arrangement that is treated as wholly or partly fiscally transparent under the tax law of either Contracting State shall be considered to be income of a resident of a Contracting State but only to the extent that the income is treated, for purposes of taxation by that State, as the income of a resident of that State.
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Comments: –

Article 1(2) of OECD and UN Model Conventions are identical, and deal with entities like partnership firms, Trust etc, which are treated as wholly, or partly as fiscally transparent for tax purposes. Fiscally transparent entities are entities, who are not taxable on income derived by them, but the tax on their income is paid by owners/persons having interest in such entities.

This clause provides that if the income is earned by an entity (Say UK entity), which is   treated  wholly or partly, fiscally transparent under the tax law of UK, it shall be considered as  income of a resident of UK, but only  to the extent that such income is treated by UK as an income derived by a resident of that State.

For example: –

Say there is a UK based partnership firm (which is treated as a fiscally transparent entity for UK purpose), which derives professional income from India to the extent of USD 100,000. Out of two equal partners, one of the partners is a US resident. Income derived by US partner is not considered by UK as income derived by a resident of UK.

In such a case, income derived by a UK based partnership firm from India, shall be considered as income derived by a UK resident, and eligible for the India UK Treaty benefit to the extent of USD 50,000, since UK does not consider remaining 50% earned by US partner as  an income derived by a resident of UK.

Learn More about  “Double Taxation Avoidance Agreement  (DTAA)”  

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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