One of the most commonly misunderstood parts of the NZ US double tax treaty, is Article 4, which covers tax residency.

Whilst of course, most of the treaty can be interpreted in differing ways, none more so than tax residency.

What is Article 4 of the NZ US Double Tax Treaty?

As above, article 4 determines which country an individual is deemed to be tax resident of. When an individual meets the conditions to be treated as a tax resident of both New Zealand and the United States, then article 4 enables us to “tie-break” an individual to a specific country, and prevent them from being taxed as tax resident of both.

How does somebody become a tax resident of both countries?

For example, if somebody spends a relatively equal amount of time in both NZ and the US, or potentially meets other conditions to be treated as a tax resident of each country, then they can become a dual-tax resident.

What does the tie-breaker do then?

For someone who is a tax resident of both countries, this can mean that both taxing authorities (the IRD and IRS) will want to tax the individual’s worldwide income.

The tie-breaker enables us to determine which country retains first taxing right. This then applies to income types throughout the tax treaty, which in most cases determine in which country certain types of income will be taxed, and which one must allow a treaty benefit.

For example, Article 18 of the NZ US DTA states that the country where the taxpayer is resident, generally has the right to tax pension income (in most cases). For an individual whom is resident of both countries, the tie-breaker allows us to determine which country the individual is deemed to be resident of with regards to the pension income.

As you can likely see already, this is a complex area and specific tax advice should be sought.

What is measured under the tie breaker?

The specific wording regarding the tie breaker is contained in Article 4, paragraph 2 of the tax treaty:

Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows:

• (a)he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (hereinafter referred to as his centre of vital interests);

• (b)if the State in which he has his centre of vital interests cannot be determined, or if he does not have a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

• (c)if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a citizen;

• (d)if he is a citizen of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to settle the question by mutual agreement.

As you can see, the tie-breaker requires us to look at where the individual’s home is, where their habitual abode is, and where their centre of vital interest lays.

This can become a complex and time consuming determination to establish exactly what ties an individual has to a country, looking at all aspects of their life such as employment, housing, family and other ties.

Can a US citizen tie break to New Zealand to prevent US annual tax filings?

Unfortunately no, the US places the “savings clause” into all double tax treaties, which in essence says that when involving a US citizen, the IRS is allowed to tax its citizens as if the treaty did not exist.

So what is the benefit of the tie breaker?

The tie breaker is especially beneficial when a Kiwi travels to the US for a sufficient period of time to meet US tax residency rules, but is not yet prepared to become US tax resident (and thus taxed by the IRS on their worldwide income). The same applies for US citizens who travel to New Zealand temporarily.

It is important to note, that the tie-breaker test doesn’t affect all tax residency laws in either the US or NZ, and other local tax rules can still apply, despite being tie-broken to the other country in question.

Summary

The tie-breaker is just one of the many complexities of international taxation, and specifically NZ US Tax for migrants.

Getting correct US and NZ tax advice is essential to ensuring issues don’t arise later down the line, which can be costly to deal with.

If you’re looking for US tax advice with New Zealand's US tax specialist advisors contact us today – info@usatax.nz