Ukraine: Tax Residency Status: Issues To Consider When Moving Abroad

Last Updated: 12 December 2016
Article by Alexander V. Buryak and Kateryna O. Kolos

Most Read Contributor in Ukraine, October 2017

Recent social and economic developments have had a powerful impact on many Ukrainian citizens and businesses and have led them to look for a better life beyond the borders of Ukraine. Obviously, Ukrainians moving abroad is not something new. Periods of economic crisis in almost every state are usu­ally accompanied with outflow of hu­man and financial capital.

Moving to the new place of resi­dence or transfer of business activi­ties to another state is a serious chal­lenge. Apart from organizational is­sues, especially when individuals are moving, the issue of tax residency status usually takes one of the last places on the agenda. In this regard, it only becomes relevant when reg­istering at a new place, receipt of in­come by such person in Ukraine or abroad, as well as the acquisition or disposal of property or other assets.

It should be noted that the con­trolling authorities usually apply a fiscal approach when assessing the status of a tax resident in Ukraine without proper analysis of the facts and application of the principle "sub­stance over form".

The criteria for determining the status of a tax resident of Ukraine

The Tax Code of Ukraine of 2 De­cember 2010 with further amendments in subsection "в)" of paragraph 14.1.23 of Article 14 (TC) establishes list of cri­teria for determining the status of an individual as a tax resident of Ukraine, which are applied in consecutive order. These criteria are the following:

  • place of residence;
  • place of permanent residence;
  • centre of vital interests;
  • staying on the territory of Ukraine for at least 183 days during the year;
  • citizenship of Ukraine.

Also, according to TC sufficient basis for determining the tax resi­dency status of a person is a self-de­termination of the principal place of residence on the territory of Ukraine or registration as a self-employed person. In this article, we would like to analyse the peculiarities of prac­tical application of certain criteria when determining the status of a tax resident of Ukraine, which are crucial to the tax status of an individual.

Place of residence vs. place of permanent residence

The criteria for the tax residency status established by TC generally comply with the Model Tax Conven­tion on Income and on Capital of the Organization for Economic Cooperation and Development (OECD) and trea­ties on avoidance of double taxation, signed and ratified by Ukraine, ex­cept for the first criterion, the place of residence. Such separation of the mentioned criterion was established historically by the On Personal Income Tax Act of Ukraine of 22 May 2003 with further amendments.

Ukrainian legislation does not clearly distinguish the terms "place of residence" and "place of permanent residence", which leads to inconsist­ent interpretation and application.

The On Freedom of Movement and Free Choice of Place of Residence in Ukraine Act of 11 December 2003 with further amendments operates with the term "place of residence", defin­ing it as accommodation, located on the territory of the administrative-territorial unit in which the person resides. The mentioned Act also establishes the obligation to regis­ter information about temporary or permanent place of residence of the person within 30 calendar days after the arrival to a new place.

At the same time, Ukrainian leg­islation allows an individual to have several places of residence, not ex­cluding residence in other states.

The place of residence is con­firmed by a registration mark in his/her civil passport. However, Ukrain­ian legislation does not establish any options for confirmation of the place of permanent residence.

At the same time, Ukrainian leg­islation in the customs sphere and sphere of foreign economic activ­ity operates with the term "place of permanent residence". It is defined as a place of residence on the territory of a state for not less than one year of an individual who does not have permanent residence on the territory of other states, and intends to reside on the territory of the first state for an indefinite period, without limiting such residence by certain purpose, provided that such residence is not a consequence of the performance of that person's obligations under the contract.

Therefore, from the practical point of view, there are additional challenges in determining the tax residency status in accordance with the first two criteria stipulated by TC due to existing non-compliance of legislative provisions. Additionally, individuals moving abroad usually do not deregister from their place of residence, which formally can be interpreted as the existence of mul­tiple places of residence and used an argument in favour of the controlling authorities.

Determination of the permanent place of residence according to the OECD

The first criterion of the OECD Model Tax Convention on Income and on Capital with respect to the defi­nition of tax resident status is "per­manent home", which means a place where the individual owns or pos­sesses a home; this home must be permanent, that is to say, the individ­ual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short du­ration.

The permanence means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay, which, ow­ing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.).

Therefore, the OECD does not specify the legal form of the defini­tion of a permanent home and rec­ommends relying on the substance of such residence, not on its formali­zation by the right of ownership, lease, etc.

At the same time, given the fiscal approach of the controlling authori­ties in Ukraine while determining the tax residency status, the applica­tion of the OECD approach may not always have a positive result for the taxpayer.

Centre of vital interests

According to the clarifications of the State Fiscal Service of Ukraine centre of vital interests includes fam­ily, social relations, political, cultural or other activities, place of employ­ment or business activities.

In most cases, this criterion is of a subjective nature and may not be applied in a consistent manner.

For example, if a person resides abroad and owns certain corporate rights in Ukraine, and remains on the territory of Ukraine for a certain peri­od of time, Ukrainian controlling au­thorities will most likely not be able to determine the centre of vital inter­ests and will apply the next criteria to determine the tax residency status.

Stay on territory of Ukraine for at least 183 days during the year

The criterion of staying on the territory of Ukraine for at least 183 days during the year applies in cases when the previous criteria for deter­mining the status of a tax resident are equally applicable to both the states in which the person resides.

Therefore, the presence of a per­son on the territory of Ukraine for less than 183 days does not automat­ically mean that the person is not a tax resident of Ukraine.

The period of stay in Ukraine is calculated including the dates of de­parture and arrival for the calendar year. In case of doubt on the actual presence on the territory of Ukraine (for example, when there are no stamps in the passport on crossing the border), the person may apply for a certificate confirming days of depar­ture and arrival to Ukraine issued by the departments of the State Border Service of Ukraine.

Citizenship of Ukraine

When applying the criterion of citizenship of Ukraine, it should be noted that double citizenship is pro­hibited in Ukraine. If an individual violating the law has dual citizenship he/she is not allowed to offset taxes paid from income originating from foreign sources against taxes that should be paid from the same income in Ukraine.

Conclusions

Given the above analysis as well as the practice of interpretation and application by the controlling authori­ties, the provisions of TC and interna­tional agreements with regard to the definition of tax residency status, we would propose the following recom­mendations.

First of all, a person who intends to move to another state, should ana­lyse the issue registration of place of residence in Ukraine and options of de-registration and new registration in the consular register in the new state. In addition, the person should carefully calculate the number of days of stay on the territory of Ukraine.

In any case, it is recommended that the application of all mentioned criteria be accompanied with the rel­evant documents, which can strength­en the legal position of the taxpayer.

Moreover, despite the rule of consistent application of the criteria of tax residency status, in our opin­ion, a comprehensive analysis and confirmation of the tax residency status on the basis of the relevant documents according to the principle of "substance over form" is crucial to determining the state in which such individual is obliged to declare and pay taxes on income received (except for income taxed on receipt in the source state).

Previously published in The Ukrainian Journal of Business Law | November 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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