Income Tax Act
Ways Of Defining Residents & Non-Residents

By Rup Khadka

TAX treatment of residents and non-residents is different in different countries. However, there is a common practice to levy income tax on the domestic source income of non-residents while residents are generally taxed on their worldwide income.

Generally, income tax laws of various countries contain provision relating to the residents and non-residents. Similarly, article 4 of the UN (United Nations), OECD (Organization for Economic Co-operation and Development), and US (United States) model conventions for the avoidance of international double taxation also contains the provision relating to the residence of both individuals and legal persons.

Different tests of resident apply to individuals and companies. An individual can be defined as a resident on the basis of his domicile, normal place of abode, or length of stay. An individual is considered as a resident of a country in which he has a permanent home. If it is difficult to define a resident on this basis, then an individual is deemed to be resident of a country in which he has a habitual abode. Specified duration of stay in a country, for example more than 183 days in an income year, is also taken as criteria for defining a resident. The stay has to be continuos in some countries while it is not necessary in other countries.

In the United States, the concept of residence is defined in terms of nationality. Australia, Canada and the Philippines also follow this approach.

A Company is considered as a resident in a country where it is incorporated or where it has its head office or where its central management and control is located. Resident companies are known as domestic companies while nonresident companies are called foreign companies.

In the United States, a legal person is taxable in the place of its registration or incorporation. Germany focuses on the legal seat or place where central management is exercised. In the United Kingdom, a company is considered as a resident if it is incorporated in the country.

It is possible that an individual or a legal person may be resident in more than one country at one time. For example, an individual who has a permanent home in country A but stays more than 183 days in country B may be considered the resident of both countries. Similarly, sometimes, it is possible for a company also to be subject to tax as a resident in more than one country. For example, an XYZ company is registered in country A but its place of effective management is in country B. Country A defines resident company on the basis of registration while in country B, a resident company is defined on the basis of the place of effective management. In such a situation, the XYZ company may be the resident of both countries.

Thus it is possible that both individuals as well as companies might be residents in more than one country in one income year. UN, OECD, and US model conventions on avoidance of international double taxation have formulated rules for resolving such issues. According to OECD Model convention, if an individual is a resident of say two countries, his status shall be determined in the order of his center of vital interest, or habitual abode, or nationality or by mutual agreement of say two contracting states.

In Nepal, income tax laws did not contain any provision regarding residents or nonresidents prior to the first amendment in 1972 to the Income Tax Act 1962. This amendment instead of defining resident introduced the concept of non-resident and temporary resident. A non-resident was one who resided outside Nepal but obtained or derived income from sources in Nepal. A temporary resident was one (a) who resided in Nepal less than 180 days in a fiscal year, (b) a firm that was not registered under the current law of Nepal, or (c) a branch or sub-branch of a foreign firm or an organized body whether registered or not registered under the current Nepal law or a firm or organised body controlled by such a firm. However, agency dealers, stockiest, distributors, nominees or representatives were not considered temporary residents.

The Income Tax Act 1974 also instead of defining resident provides the definition of temporary resident. As per this act, a temporary resident is any individual who has resided in the Kingdom of Nepal for 183 days or less during any fiscal year or who resides outside the Kingdom of Nepal but earns or obtains income from the Kingdom of Nepal. Similarly, any firm or company operating as a branch or sub-branch of any foreign firm or company or under the control of such (foreign) firm or company, irrespective of whether or not it is registered under the current Nepal Law is a temporary resident.

This means that a person whose total length of stay in the country is more than 183 days during a fiscal year is considered to be a resident for that year, the stay in Nepal does not have to be continuous. Similarly, a company is a resident or a domestic company if its control is excised in Nepal.

The draft Income Tax Act 2000 makes detailed provision for the resident individuals and companies. As per this act, an individual is a resident (a) whose place of abode is in Nepal and who is present in Nepal at any time during the income year, or (b) who is peresent in Nepal for more than 182 days in any period of 365 consecutive days of which 183 days fall within the income year, or (c) who is an employee or an officials of His Majesty’s Government posted abroad at any time during the income-year.

In the case of legal person, a company that is incorporated or formed under the laws of Nepal, or has its iffective management in Nepal during the income-year, is a resident of Nepal. Similar definition exist in the case of local bodies. Similarly, any partnership is treated as a resident. Likewise, a trust that is established in Nepal or has a trustee that is a resident person for the income-year or is controlled directly or through one or more interposed entities by a person or persons one of whom is resident person for the income-year is a resident. A foreign permanent establish-ment of a non-resident person situated in Nepal is also considered as a resident.

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