Definition of the term "tax resident"
The reference point for recognizing a person as a tax resident of a particular country is the official definition in Art. 4 OECD MODEL CONVENTION (2017).
For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, registration, place of management, or any other criterion of a similar nature.
In the case of individuals, the definition is intended to capture the various forms of personal attachment to the State which, under national tax law, form the basis of comprehensive taxation.
Who is considered a tax resident of Ukraine in 2022
The definition of a tax resident of Ukraine is given in the Tax Code of Ukraine. What you should pay attention to:
- As a general rule, an individual is considered a resident of Ukraine if he has a place of residence in Ukraine;
- If an individual also has a place of residence in a foreign state, he is considered a resident if such a person has a place of permanent residence in Ukraine;
- If a person has a place of permanent residence also in a foreign state, he is considered a resident if he has closer personal or economic ties (center of vital interests) in Ukraine;
- If the state in which an individual has a center of vital interests cannot be determined, or if an individual does not have a place of permanent residence in any of the states, he is considered a resident if he stays in Ukraine for at least 183 days (including the day of arrival and departure ) during the period or periods of the tax year;
- A sufficient (but not exclusive) condition for determining the location of the center of vital interests of an individual is the place of permanent residence of his family members or his registration as a business entity;
- If it is impossible to determine the resident status of an individual using the previous provisions, an individual is considered a resident if he is a citizen of Ukraine.
Considering that one of the most ambiguous and subjective factors in the presence of tax residence is the center of vital interests, we will consider it in detail below.
A tax residence certificate can be obtained in a simplified format and even in a bilingual version (Ukrainian-English) using the DIA application.
Also, read about tax residency in Georgia
How to get rid of tax residency of Ukraine?
Unfortunately, Ukrainian legislation does not provide formal procedures for exiting tax residency in Ukraine.
In order to leave the tax residency of Ukraine and have an official document on such exit, an individual must be recognized as a non-resident. Recognition by a non-resident is recognition of a fact, which is carried out only in a separate court proceeding.
Ukrainian courts consider cases of establishment of facts in the order of separate proceedings only in those cases, if such facts give rise to legal consequences, that is, the emergence, change or termination of personal or property rights depends on them.
This means that there must be specific facts (circumstances) that force the court to request recognition of a natural person as a non-resident.
These facts (circumstances) must contain the following information: in order to restore which rights (violated, unrecognized or contested), freedoms or interests of an individual, the court must establish the fact of acquiring the status of a non-resident.
The practice of the Supreme Court indicates that such a circumstance, when an individual wishes to avoid double taxation situations in advance, will not be recognized as a relevant fact (circumstance). In other words, in order to file a lawsuit for recognition as a tax non-resident, a person's rights must already be violated (or there must be a real risk of violation of rights). For example, the tax office charged an individual with tax to be paid in Ukraine, and the fact of being recognized as a non-resident of Ukraine will help to avoid paying tax in Ukraine on legal grounds.
The fact (circumstance) for filing a claim for recognition as a tax non-resident may be:
- Existing debt of a natural person - a resident of Ukraine, to pay any tax;
- The requirement of another country, where an individual is a resident, to withdraw from Ukrainian residency (for example, a person cannot hold a public office in another country if he is a resident of Ukraine, or cannot purchase real estate).
What does tax residency affect?
According to generally accepted rules, an individual is obliged to pay taxes on his world income in the country of his tax residence. This means that it is easier to acquire the status of a tax resident than to get rid of it. A good example is a simplified procedure for obtaining electronic certificates of whether a person has the status of a tax resident of Ukraine, but the absence of a similar document on the status of a non-resident and the complete absence of formally defined procedures for terminating tax residency in Ukraine.
IT specialist Petr went to Poland, officially works there and pays a tax on his income in the amount of 17% (this rate is valid in Poland). However, if Petr is a tax resident of Ukraine, then he must pay taxes on his Polish income in Ukraine too. Thanks to the DTT (double tax treaty) between Poland and Ukraine, taxes paid in Poland on the income of an individual are credited in Ukraine. That is, instead of 18% of personal income tax in Ukraine, a person can pay only 1% (after all, he has already paid 17% in Poland) and let's not forget about 1.5% of the military tax so that the state has something to protect our mother from the feral invaders by erefiya.
However, if Peter went abroad (to Poland) in connection with the armed aggression of the terrorist state of the Russian Federation against Ukraine, stays there for more than six months, moved his family, mother-in-law, and cats there bought housing and receives income from all over the world, then pay taxes he obviously will not be in two countries (even if we are talking about a surcharge of 2.5% in Ukraine), since he will receive the status of a tax resident of Poland.
Therefore, it is very important to know your tax residence, understand what criteria it is determined by and how it can be changed.
Marichka who is an HR manager left Ukraine and move to Poland, but works remotely for a Ukrainian company and receives her salary in hryvnia to a Ukrainian bank account. Given that Ukraine and Poland have signed an agreement on the avoidance of double taxation, the Ukrainian salary of such a person is not taxed in Poland if the person stays there for no more than 183 days during a calendar year.
If Marichka stays more than 183 days in the country, then Polish tax will be applied to the Ukrainian salary in the corresponding tax (calendar) year. Therefore, Marichka will report worldwide income (including salary from Ukraine) to the Polish tax office and pay tax according to local procedures and rules.
Since the Ukrainian company will continue to pay Ukrainian taxes (18% personal income tax + 1.5% military tax), double taxation will arise. To avoid it, a tax resident of Ukraine must file in Ukraine before May 1 of the next year an annual declaration of their income with the requirement of the Ukrainian tax authorities to return the overpaid personal income tax, adding to it a certificate of tax payment in Poland.
Tax residency of Ukraine and CFC
Recognition of a person as a tax resident of a particular country is of great importance not only in terms of taxation of personal income but also considering the obligations arising from the ownership or control of foreign legal entities.
Controlled foreign company (CFC) - any legal entity registered in a foreign state or territory, which is recognized as being under the control of an individual - a resident of Ukraine or a legal entity - a resident of Ukraine in accordance with the rules determined by the CCU.
The controlling person is an individual or legal entity - residents of Ukraine, who are direct or indirect owners (controllers) of a controlled foreign company (Article 39-2.1.2 of the TCU).
That is, if a person is a tax resident of Ukraine, then he/she has:
1) there is an obligation to report on the acquisition or termination of control over a CFC;
2) submit a report on controlled foreign companies;
3) pay tax on CFC
Read more in our article about CFC in Ukraine.
So, we come to the conclusion that not being a tax resident of Ukraine, a person is exempt from the above obligations to Ukraine.
Tax resident under international law: basic principles
The 2017 edition of the OECD Model Convention contains general concepts for defining the concept of a person as a tax resident of a particular country. More detailed signs of tax residence are prescribed in the domestic legislation of the country or the double taxation treaty between countries.
According to Art. 4 OECD MODEL CONVENTION, "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, place of incorporation, place of management, or any other criterion of a similar nature.
However, this term does not include a person who is liable to tax in that State only in respect of income from sources in that State or capital situated therein.
Where, by the above provisions, an individual is a resident of both Contracting States, his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has his permanent home; if she has a permanent home in both States, she shall be deemed to be a resident only of the State with which she has of vital closer personal and economic relations (center interests);
b) if the State in which the person has his center of vital interests cannot be determined, or if he has no habitual residence in any State, the person shall be deemed to be a resident only of the State in which he has his habitual residence;
c) if a person has a habitual residence in both States, or does not reside in either State, he shall be deemed to be a resident only of the State of which he is a citizen;
d) if the person is a citizen of both States or is not a citizen of either of them, the competent authorities of the Contracting States shall settle the matter by mutual agreement.
If you take a closer look at the COMMENTS TO ARTICLE 4 OF THE MODEL TAX CONVENTION in more detail, it is clear that the analysis of residency in the following paragraph is of the most important nature:
The Article prefers the Contracting State in which the person has his permanent residence. This criterion will often be sufficient to resolve the issue of residency.
Thus, subparagraph a) means that in the application of the Convention (i.e. if there is a conflict between the laws of two states), the place where the person owns the dwelling is considered to be the place of residence; this accommodation must be permanent, that is, the person must organize and store it for his permanent use, as opposed to staying in a certain place under conditions where it is obvious that the stay should be of short duration (hotel, hostel, and so on).
About the concept of housing, it should be noted that any form of housing can be taken into account (a house or apartment owned or rented by a person, a rented furnished room). But the permanence of the home is important; this means that the person has agreed that the accommodation is available to him at any time continuously, and not from time to time for the purpose of a short stay (travel, business trip, study, attending a course at school, etc.).
Where an individual has a permanent home in both Contracting States, paragraph 2 shall prefer the State with which the individual has closer personal and economic ties, which is understood to be the center of vital interests. In cases where domicile cannot be determined by means of this rule, paragraph 2 provides, as subsidiary criteria, first habitual residence and then nationality. If a person is a citizen of both States or is not a citizen of either of them, the matter shall be decided by mutual agreement between the States concerned in accordance with the procedure laid down in Article 25.
Close economic relations (center of vital interests)
If an individual has a permanent home in both Contracting States, the facts must be examined to ascertain which of the two States his personal and economic relations are closer. Thus, family and social relations, occupations, political, cultural, or other activities, place of work, a place from where a person disposes of his property, etc. will be taken into account.
If a person who has a home in one country creates a second home in another country while leaving the first one, the fact that the person retains the first home in the environment where she has always lived, where she has worked, and where she has her family and property, may, together with other elements to demonstrate that the center of their vital interests is located precisely in the first state.
Where an individual is habitually resident in both Contracting States or is resident in neither of them, preference shall be given to the State of which he is a national. If in these cases, the person is a national of both Contracting States or is not a national of either of them, the duty to resolve these difficulties lies with the competent authorities.
Judicial practice of Ukraine on tax residency issues
Center of vital interests
On January 25, 2021, the Supreme Court in case No. 751/10863/16-a issued a rather interesting and solid decision on a resident of the Russian Federation. Briefly about the essence of the matter, a Russian citizen came to his sick mother and sister in the territory of Ukraine to help. Having a permanent residence permit in Ukraine, the authorized bodies perceived him as a resident of our country and accused him of committing illegal actions aimed at evading customs payments in the amount of UAH 213,719.90 when importing into the customs territory of Ukraine "Temporary import for up to one of the year".
Let's find out if there are any grounds to consider this person as a tax resident of Ukraine.
A man has a permanent place of residence and ownership of housing in Russia, a personalized code, and receives a pension there, has an insurance certificate of state pension insurance, a Russian taxpayer identification number, and a compulsory medical insurance policy in Russia. The crossing of the border of Ukraine by a man was due to the fact that his mother was ill and a sick sister lives, who cannot walk, so he was forced to periodically come to assist.
The husband considers his permanent place of residence the city of Orel (RF), of which he is a citizen, which also plays a certain role.
We agree with the conclusion reached by the Court: since a person is a citizen of Russia, has a place of registration, permanent residence, real estate, family ties, and a center of vital interests on the territory of Russia, then the presence of a view to the right of permanent residence on the territory of Ukraine cannot testify to that he is a resident of Ukraine in the understanding of the legislation of Ukraine.
The Court agrees with such conclusions since the fact of having a right to permanent residence on the territory of Ukraine does not yet indicate the realization of this right. To determine the status of a resident, a set of events should be taken into account.
With this decision, the Court actually changed the legal position that had previously been established on the issue of determining residency in the presence of a permanent residence permit. For example, on November 19, 2020, the Supreme Court in case No. 638/5172/17 motivated its decision in determining a person as a tax resident of Ukraine, based on the fact that at the time of signing the disputed loan agreements and receipts, the person had a temporary permit for permanent residence in Ukraine valid indefinitely
Thus, we concluded that the following attributes should be present in the foreign country of tax residence:
- Permanent place of residence, which, for example, is confirmed by utility bills or a lease agreement;
- Permanent work (as an option - acquisition of the status of a private entrepreneur);
- Identification tax code;
- Staying in this country for more than 183 days a year.
The last point is especially important. For example, in one of the cases, the Supreme Court recognized a person as a tax resident of Ukraine, despite the citizenship of the Republic of Poland, registration and permanent residence in this country, regular contributions to pension insurance, and health insurance. Against such arguments, the court made the following clarification: spending more than 183 days in the territory of Ukraine in a calendar year is necessary for recognizing an individual as a resident (of Ukraine).
At the same time, the presence of a residence permit in Ukraine, as well as a registered address in Ukraine, is not an obstacle in recognizing such a person as a tax non-resident of Ukraine.
What should not be done?
We will also give an unsuccessful example of a person who tried to use his status as a tax non-resident of Ukraine, passing the customs border in his own car (Decree of the Supreme Court of 06/13/2022 in case of number case No. 720/198/16-a).
Crossing the customs border, the man presented his passport of a citizen of Romania and a certificate of foreign registration of his vehicle.
First, we want to note that the citizenship of another state (in principle, contrary to the legislation of Ukraine) in itself is not the primary basis for recognizing a person as a tax non-resident of Ukraine. Paragraph 1 of Article 2 of the Law of Ukraine "On Citizenship of Ukraine" establishes that if a citizen of Ukraine has acquired citizenship (citizenship) of another state or states, then in legal relations with Ukraine he is recognized only as a citizen of Ukraine.
Secondly, in order to prove your permanent residence in another country and closer ties with it (and not Ukraine), it will be enough to show a passport with marks about leaving Ukraine and the number of days spent on the territory, for example, Romania. . Also, in accordance with the Law of Ukraine "On the Procedure for Departure from Ukraine and Entry into Ukraine of Citizens of Ukraine", as well as paragraph 5.3 of the Procedure for Consideration in Diplomatic Missions or Consular Offices of Ukraine Abroad of Applications of Ukrainian Citizens who Temporarily Left Ukraine for Permanent Residence abroad, it is provided that the document confirming the permanent residence of a citizen of Ukraine abroad is the passport of a citizen of Ukraine for traveling abroad with the stamp "Permanent residence" or such an inscription (with a note on the date of entry and indicating the position and surname of the person (who made it ), which is certified by the signature of an official and the seal of the relevant territorial unit of the Ministry of Foreign Affairs of Ukraine or a diplomatic mission or consular office of Ukraine abroad.
In this case, a person was recognized as a tax resident of Ukraine and fined 300 percent of the unpaid customs duties (which the person did not pay, because he considered himself a non-resident of Ukraine) for violating customs legislation. A very vivid example is why it is necessary to know how to determine your tax residency.