Tax residence: double taxation and its avoidance

With the beginning of russia’s full-scale invasion of Ukraine and a large flow of Ukrainians leaving abroad, the issue of tax residency becomes not only relevant but also much more complicated in the context of international relations and tax legislation. Crossing borders and changing the place of residence creates confusion in determining tax obligations, which highlights the need to study both local regulations of the host country and international agreements. A particularly pressing issue is the identification of measures to avoid double taxation that will help Ukrainian citizens minimize tax risks and obligations in conditions of change and uncertainty.

Criteria for determining tax residence

On the way to understanding what the term “tax residence” is, it becomes clear that it is not just an abstract definition, but a key to understanding financial obligations in a particular jurisdiction. Generally, tax residency is a unique status that determines which individuals are required to bear the tax burden in a particular country based on the income received and/or the property registered.

Determination of tax resident status in each country is fixed at two levels:

• at the level of local tax legislation of a particular country;
• at the level of international legislation (Double Taxation Convention).

Thus, by clause 14.1.213 of the Tax Code of Ukraine (hereinafter – TCU), the criteria for determining residence are (by priority):

1. determination of permanent residence;
2. center of vital interests;
3. 183 days rule;
4. citizenship.

We would like to note that each person is responsible for determining the tax resident status following the above criteria – independently.

Further details on each of the criteria.

Permanent residence

According to clause 14.1.213 of the Tax Code, a resident is an individual with a place of residence in Ukraine. If an individual also has a place of residence in a foreign country, he is considered a resident if such a person has a place of permanent residence in Ukraine.

The Civil Code of Ukraine defines an individual’s place of residence as the housing in which they live permanently or temporarily. For this criterion to be met, the housing must be available for an extended period, such as long-term rental housing in the host country (more than 6 months). It may also be important to have a residence permit or own real estate.

The status of temporary protection is debatable for many Ukrainians who moved abroad due to the full-scale invasion. This status allows them to stay in the host country temporarily, for a period determined by local legislation. As there cannot be a permanent place of residence in the country of temporary stay, a person cannot be considered a tax resident of that country. This situation can also be interpreted as a person’s compelled stay in another country due to forced circumstances, similar to how forced circumstances were interpreted in connection with COVID-19.

In order to consider this criterion, it is also worth paying attention to the OECD Model Convention, which is designed to regulate disputes between countries when local norms are not enough.

Ordinary place of stay

If we cannot determine a permanent residence, we must find the person’s “habitual residence” for that person.

So, according to paragraph 19 of the commentary to Art. 4 of the OECD Model Convention, a person’s habitual residence is the place where the person habitually resided; the test will not be performed by simply determining in which of the two countries the person spent more days during that period.

“Habitual residence” means the frequency, duration and regularity of stays that are part of the person’s established routine and are therefore more than temporary. Days spent by a person in the previous country of residence due to restrictions should not lead to a change in place of permanent residence.

The determination of permanent residence must cover a sufficient period of time to enable the frequency, duration and regularity of stay to be established as part of the individual’s established routine. Relocation because a person is unable to return to his or her jurisdiction due to compelling circumstances should not affect the person’s residence status for purposes of determining the person’s tax residence status.

Thus, a person must determine his place of residence and the tax resident of which country he is listed as. If there are doubts about determining your status according to this criterion or your place of residence cannot be accurately determined, you must use the next most important criterion, namely:

Center for Vital Interests

There are two aspects to this criterion:

1. Social – determining the location of the family, the child’s place of education, hobbies, cultural or other activities.
2. Economic – the place of registration and conduction business activities.

Where the center of a person’s vital interests is determined, in accordance with the specified aspects, he will be recognized as a tax resident of that country.

Also please note if a person has a sole proprietorship registered on the territory of Ukraine, he will definitely be determined as a tax resident of Ukraine.

If determining the center of vital interests is also difficult, it is necessary to move on to the next most important criterion, namely:

183 days rule

In accordance with this criterion, if a person cannot determine his place of residence or center of vital interests in one country, then it is necessary to pay attention to the number of days spent in the country, namely if the person has stayed in one of the countries for 183 days over the past 12 months , he will be considered a tax resident of that country.

If this criterion cannot be used and it is impossible to determine 183 days of stay for any of the countries, then the last most important criterion will be used, namely:

Citizenship

Thus, if none of the above criteria can be considered in a particular situation, then the person will be a tax resident of the country of his citizenship, in this case Ukraine.

Settlement of disputes regarding tax residency

Unfortunately, as of this moment there is no official position OECD regarding the mass emigration of Ukrainians.

However, we would like to note the presence of an explanation from the Ministry of Finance of Ukraine dated November 18, 2022 No. 44010–13/2284 “On recognition as a tax resident and avoidance of double taxation,” which states that disputes regarding the determination of tax residency are resolved within the framework of existing international treaties on the avoidance of double taxation concluded by Ukraine with the relevant countries.

Tax Convention has a special section (article) called “Residence” and “Mutual Agreement Procedure”.

In accordance with the section “Mutual Agreement Procedure”, any person who considers that he is subject to double taxation or taxation that is applied to him not in accordance with the Convention, that person may submit an application for review of his case to the competent authority of Ukraine or to the authority of his country of residence.

In accordance with the “Residence” section, if countries cannot determine which country a particular person is tax resident in, the test established by the Convention will be applied. Based on this decision, countries will determine which country the person is tax resident in.

In Ukraine, the specified procedure for resolving a dispute is established by Article 108-1 of the Tax Code.

Treaties for the avoidance of double taxation contain a special article “Residence”. If a conflict arises under the residency criterion (when both countries consider a person to be their tax resident in accordance with local legislation), the appropriate test established by the international treaty will be applied. Based on this test, the competent authorities of the two countries must decide which tax resident of the two countries the specified person will be. In this situation, each case will be considered by the competent authorities on the basis of the provided documents and confirmations, taking into account all the circumstances and grounds.

Filing a tax return in Ukraine

It is worth noting that if a person defines himself as a tax resident of Ukraine, but at the same time he receives income in another country, for example a salary, he will still be required to file a tax return in Ukraine, where it will be necessary to indicate the income he received abroad.

Taxes will need to be paid in Ukraine only if the tax rate on income in the country is less than in Ukraine (Income Tax – 18%), but the income received will still have to be shown in the declaration. However, we note that military tax in Ukraine must be paid in any case.

A tax return in Ukraine is submitted before April 30 of the current year for the previous reporting period (until April 30, 2024 for income received in 2023).

Thus, it is extremely important to study the norms of the local legislation of the country where you are located, the norms of the tax legislation of Ukraine and the provisions set out in international conventions to correctly determine your tax status. Please note that each situation is unique and depends on many factors, so if in doubt, it is important to contact the tax authorities consultation to correctly resolve your issue.