On the 6th of June 2018, the Ministry of Finance of Russia (hereinafter "MoF") published a Guidance Letter No. 03-04-06/33393 as of 17th of May 2018 clarifying the tax residency status of an individual who appears to be a dual tax resident of Russia and Cyprus.
The MoF clarified that if a Russian resident individual provides the Russian tax agent with a certificate of tax residency issued by the tax authorities of Cyprus; such individual does not automatically lose the status of a Russian tax resident. Therefore, tax authorities in Russia may still consider this person as a Russian tax resident regardless of a fact that the individual possess a tax residency certificate issued by Cyprus.
A trend of obtaining Cyprus tax residency began when a new rule of 60 days (instead of a general rule of 183 days) was introduced in Cyprus in July 2017. The rule states that a person can qualify as a Cyprus tax resident if all the below conditions are met for each tax year:
- The individual stays in Cyprus for one or more periods of at least 60 days;
- He or she does not stay in another state for one or more periods exceeding a total of 183 days;
- He or she is not a tax resident in another state;
- He or she has a business in Cyprus or is employed in Cyprus or holds an office in a Cypriot tax resident company on 31 December of each tax year, that is, the business or employment or the holding of an office does not end before the end of the tax year;
- He or she maintains permanent residence in Cyprus, either owned or rented.
The introduction of such innovative tax residency definition rules for Cyprus was considered as a significant advantage for relocation of tax residency for wealthy individuals from around the world, seeing as only several jurisdictions have previously provided for 60 days tax residency requirement (e.g., Guernsey).
It is important to note that the tax residency certificate confirming the tax residency status of an individual may be issued provided the following documents are submitted:
- Passport copy with arrival and departure stamps from Cyprus, boarding passes, e-tickets etc.;
- Title deed of the permanent residence, or a rental agreement;
- Employment contract (if applicable) valid as of 31st December of the relevant tax year.
As a result of the fulfilment of the above-mentioned requirements, a tax residency certificate may be obtained by an individual both for general purposes (general tax residency certificate, or GTRC) as well as for purposes of a specific double tax treaty - for example with Russia – confirming a status applicable for the other jurisdiction as well (specific tax residency certificate, or CTRC).
According to the section 2 of article 207 of the Tax Code of the Russian Federation, an individual is considered a tax resident in Russia if the individual spends no less than 183 days in Russia during an uninterrupted period of 12 months (excluding a period not exceeding 6 months for education or health treatment purposes). No other criteria are prescribed by the Russian Tax Code.
According to the article 4, section 1 of the effective Double Tax Treaty concluded between Russia and Cyprus on avoidance of double taxation, "where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
- he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);
- if the State in which he has his centre of vital interests cannot be determined, or he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the State in which he has an habitual abode;
- if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;
- if each State considers him to be a national or if he is a national of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement."
Prior to the introduction of the so-called 60-days rule of tax residency in Cyprus, it had already become an important issue for Russian citizens whether or not to become non-resident taxpayers in Russia. Individuals who decided to become non-residents and obtained a TRC from the relevant jurisdiction could enjoy beneficial provisions of double-tax treaties (if such existed between the two countries). For instance, tax treaty rates for non-residents may be reduced to as low as 5% for passive income such as dividend and royalties, provided that that the necessary criteria are met.
As the result, with the introduction of the 60-days rule in Cyprus, Russian tax residents made sure to obtain it but continued living in Russia, without checking whether their Russian tax residency had been canceled.
In light of this situation, on 17th of May 2018, the Russian Ministry of Finance issued the clarification letter N 03-04-06/33393 (which does not have a binding legal power but is relevant for consideration of the practice of the Russian tax authorities), which states that a situation where an individual possesses a TRC issued by Cyprus does not automatically imply that this individual is no longer a tax resident in Russia. The Russian MoF refers to the Double Tax Treaty article and the provisions of the Russian Tax Code for determination of the individual's tax residency status, underlining the importance of the 183-days criteria.
Obtaining tax residency in Cyprus has been seen as an advantageous option for foreign individuals seeking a convenient tax harbor in the EU for investment and personal tax planning purposes. However, as demonstrated by the recent letter of the Russian MoF, an individual may be considered a dual tax resident in both Russia and Cyprus even though he has fulfilled the Cypriot tax residency requirements and has obtained a TRC in Cyprus. When deciding to relocate residence to Cyprus, it is vital to remember the requirement of losing the residency status in Russia, by residing outside the Federation for 183 days.
Our team can help you evaluate whether losing the residency status in Russia will result in a greater tax burden compared to being a resident. Furthermore, we can support you in the process of obtaining a TRC in Cyprus and justifying it in front of Russian tax authorities.
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.