Which Country Is Your Tax Residence Under a Tax Treaty? The 5 pillars of OECD Tie-Breaker Rules Explained

If you maintain a residence in Germany and another country, you may be considered a tax resident in both countries under domestic law. However, Article 4 of most double taxation agreements allows only one treaty residence. The treaty’s tie-breaker rules determine which country is treated as your residence state for treaty purposes. In practice, the most important factor is often where your spouse and children live, because this frequently determines your center of vital interests. 

Many expats keep a home in their home country while living and working in Germany (dual residency). For example, an American moving to Germany may continue to own a house or condo in the United States as a secondary residence. Likewise, a British, Canadian, or Australian expat may decide to keep a property available for future visits, retirement, or family reasons. 

From a domestic tax law perspective, this often creates a surprising result: the individual may be considered a tax resident in both countries at the same time (dual tax residency). 

Germany generally treats individuals as tax residents if they maintain a residence (Wohnsitz) or have their habitual abode (gewöhnlicher Aufenthalt) in Germany. Similar rules exist in many other countries. 

As a result, an expat may have a tax residence in Germany while simultaneously retaining a tax residence in their home country. 

This raises an important question: 

If both countries consider me a tax resident, where am I actually resident for purposes of the applicable tax treaty? 

Many expats search for terms such as “primary residence”, “secondary residence”, “dual tax residency”, or “tax resident in two countries”. However, a precise answer is found in Article 4 of most double taxation agreements (“DTAs” or “tax treaties”), which are largely based on the OECD Model Tax Convention. 

Tax Treaty Residence Under the OECD Model Convention 

While domestic tax law may allow an individual to be tax resident in more than one country, tax treaties generally operate on a different principle. From a tax treaty perspective, an individual can have only one treaty residence at a time. 

Article 4(1) of the OECD Model Tax Convention defines who is considered a resident of a Contracting State for treaty purposes. Where a person qualifies as a resident of both countries under their respective domestic laws, Article 4(2) provides a mechanism for determining a single treaty tax residence. 

This mechanism is commonly referred to as the OECD tie-breaker rule. 

The purpose of the tie-breaker rule is not to eliminate domestic tax residence under either country’s national law. Rather, it determines which country is treated as the individual’s tax residence state for purposes of applying the tax treaty. 

OECD Tie-Breaker Rules for Dual Tax Residence

Article 4(2) of the OECD Model Tax Convention establishes a series of tests that must be applied in a specific order. 

1. Permanent Home 

The first question is whether the individual has a permanent home available in only one country. 

If a permanent home exists in only one state, that state becomes the treaty tax residence. 

However, many expats maintain homes in both countries. In such cases, the analysis moves to the next test. 

2. Center of Vital Interests 

Where a permanent home is available in both countries, the decisive factor is usually the individual’s center of vital interests (OECD term: centre of vital interests). This refers to the country with which the person’s personal and economic relations are closer. 

Relevant factors include: 

In practice, this is often the most important tie-breaker criterion. 

Prinz.tax Experience: For many expats, the location of the immediate family becomes the strongest indicator of where their center of vital interests is located. 

3. Habitual Abode 

If the center of vital interests cannot be determined, the next question is where the individual habitually resides. This primarily involves examining where the person spends the greater portion of their time. 

4. Nationality 

If the habitual abode test is also inconclusive, nationality becomes relevant. A U.S. citizen who is not also a German citizen would be allocated to the United States at this stage. 

5. Mutual Agreement Procedure 

In the rare event that none of the preceding tests resolve the issue, the competent authorities of the two countries must determine treaty tax residence through a mutual agreement procedure. 

Prinz.tax Expat Tax Experience: In practice, the location of an individual’s spouse and children is often the most important factor in determining treaty tax residence. To give you a better understanding of the practical application of the tie-breaker rule, we have summarized a few examples. 

Prinz.tax Practical Examples for Tax Treaty Residence 

The following section contains four practical examples from our tax consulting experience that are meant to explain the concept. Please note that these examples are for illustrative purposes only and your individual situation should be carefully reviewed to determine the appropriate tax treatment. Please also be aware that the United States applies special rules because U.S. citizens remain subject to U.S. taxation regardless of residence. However, Article 4 of the applicable tax treaty still determines treaty residence for purposes of applying treaty provisions. 

Example 1: U.S. Family Relocating to Germany 

Assume a U.S. citizen moves to Germany together with their spouse and children. The family rents a home in Germany, the children attend school in Germany, and the individual works in Germany. At the same time, the family keeps a house in the United States. 

From a domestic tax law perspective, both countries will likely regard the individual as a tax resident. 

From a tax treaty perspective, however, Germany will generally be the tax residence state because the family’s personal and economic relations are primarily located there. The center of vital interests has likely shifted to Germany. 

Example 2: Family Remains in the United States 

Now assume the individual accepts a position in Germany, but their spouse and children remain in the United States, and the children continue attending school there. The taxpayer rents an apartment in Germany while maintaining the family home in the United States. 

Although the expat spends significant time in Germany, the continued presence of the spouse and children in the United States indicates that the center of vital interests remains in the United States. Absent other significant facts and circumstances, the treaty tax residence in this example likely remains in the United States. 

Potentially you might be eligible for double household deductions. Learn more here.

Example 3: Single Individual Living Primarily in Germany 

Assume a single U.S. citizen moves to Germany, rents an apartment there, and spends most of the year in Germany. The individual keeps a condo and sometimes works remotely from the United States but has no spouse or dependent children. 

In this case, the center of vital interests may be less clear because family considerations are absent. The analysis would focus more heavily on economic relations and habitual presence. If the expat spends most of their time and conducts their daily life in Germany, Germany is likely treated as the treaty residence state. 

Example 4: Digital Nomad With Homes in Both Countries 

Assume a single U.S. citizen maintains an apartment in Germany and another in the United States. The individual works remotely, travels extensively throughout the year, has friends and family spread across multiple countries, and does not have a clear personal or economic center of life. 

In such cases, determining the center of vital interests may be difficult. The analysis would then proceed to the habitual abode test. In our example, it is also not clear where the expat’s habitual abode is because of extensive travelling. 

If no center of vital interests and no habitual abode can be determined, nationality may become decisive. Because the individual is a U.S. citizen and not a German citizen, treaty tax residence is likely to be allocated to the United States under Article 4(2)(d) of the OECD Model Tax Convention. 

Legal References 

• Article 4 OECD Model Tax Convention (OECD country guides)

• OECD Commentary on Article 4 

• Article 4 of the applicable Double Taxation Agreement 

• § 1 German Income Tax Act (Einkommensteuergesetz, EStG) 

• § 8 German Fiscal Code (Abgabenordnung, AO) 

• § 9 German Fiscal Code (Abgabenordnung, AO) 

Key Takeaway for Tax Residence

Many expats assume that they have a “primary residence” in one country and a “secondary residence” in another. While this terminology is commonly used, international tax treaties generally focus on treaty tax residence rather than concepts such as primary or secondary residence. 

Even if an individual maintains residences in two countries and is considered tax resident in both under domestic law, the applicable tax treaty generally recognizes only one treaty tax residence. 

The tie-breaker rules contained in Article 4(2) of the applicable double taxation agreement determine which country is treated as the individual’s residence state for treaty purposes. 

The most important factor is often the individual’s center of vital interests, which frequently depends on where the spouse and children live. 

Once treaty residence has been determined, the treaty’s allocation rules govern how different categories of income are taxed between the two countries. 

Frequently Asked Questions