Who has to pay taxes and where

In the first article of the series on income declaration amid quarantine, we talked about the basic rules for preparing and submitting annual declaration on assets and income to the tax authorities.

In this article, we will focus on the determination of an individual's tax residence status, which is the initial stage required to determine what income should be stated in the declaration.

As was noted in the previous article, the Ukrainian tax residents are subject to personal income tax on their worldwide income, whereas non-residents are subject to taxation on the Ukrainian-sourced portion of their income only.

Under the Tax Code of Ukraine (hereinafter, the “TCU”), the following criteria are considered for the determination of tax residence status:

1. Place of permanent residence in Ukraine
2. Center of vital and economic interests in Ukraine (where the personal and economic relations are closer)
3. Number of days spent in Ukraine during the reporting year (more or less than 183 days)
4. Citizenship

If the first criterion does not allow to determine the individual's status, then the remaining criteria are considered one by one until the status is determined.

A sufficient (but not exclusive) ground for considering a person a tax resident is the registration as an entrepreneur or self-employed and self-determination by a person of Ukraine as the principal place of residence.

If there are reasons to consider an individual a tax resident both in Ukraine and another state, the final status should be determined based on the provisions of double tax treaty signed between Ukraine and the respective state (provided that such a treaty exists and is valid).

Most of the treaties signed by Ukraine are based on the standards of the Organization for Economic Cooperation and Development (hereinafter, the OECD). The criteria used in the OECD treaties are very similar to those provided by the TCU:

1. Place of permanent residence
2. Center of vital interests (the place where the taxpayer's personal and/or economic relations are closer)
3. Habitual abode
4. Citizenship

Just as the TCU, the OECD conventions provide for a consistent assessment of each criterion (if the first criterion is not a determinative factor, the remaining criteria are considered one by one).

It should be noted that, apart from the text of the convention itself, it is important to ensure that the provisions of the model convention are interpreted correctly and recognized by each country. To address these complicated issues, there are the OECD Commentary and the UN Commentary to the Model Convention for the Avoidance of Double Taxation. Technically, these documents are not of legislative nature, but they are generally recognized and widely used in global practice.

Ukraine is not the OECD member country. Probably this may be the reason why the interpretation of double tax treaties in Ukraine (at least in terms of personal income tax) is not always consistent with the global approach and practice. As a result, this leads to tax disputes and the need to prove the country of tax residence.

The documents confirming the fulfillment of the above criteria and/or the actual tax residence status can help with proving the person's tax residence status.

It is not difficult to prove that an individual is a tax resident of Ukraine. The permanent residence in Ukraine is confirmed by a certificate of residence registration in Ukraine and other documents providing proof of residence in Ukraine (for example, an extract from the household register on family composition).

The center of vital and economic interests is the country where the taxpayer's family lives and where the taxpayer works. Accordingly, the documents supporting this information may include the proof of employment, proof of registration as an entrepreneur, a copy of marriage certificate, residence registration certificate of a spouse, etc.

To confirm the number of days spent in Ukraine, the taxpayer can provide a copy of all passport pages with the border crossing stamps. If the passport does not contain all the stamps, the State Border Guard Service of Ukraine can provide all the information on crossing the state border.

Citizenship is the fourth criterion used to determine the tax residence status. If a person is a citizen of Ukraine and none of the previous criteria makes it possible to clearly determine the residence status, such a person will be recognized as a tax resident of Ukraine “by default”.

However, the situation becomes more complicated when it comes to proving that a citizen of Ukraine is a tax non-resident. It is not always possible to provide documentary evidence of an actual permanent place of residence or center of vital and economic interests abroad. Moreover, the available documents do not always meet the requirements of tax authorities on the format and certification.

A person can provide a copy of work permit or residence permit abroad. To confirm the number of days spent in Ukraine during the reporting year, a taxpayer can provide a copy of all passport pages or information on crossing the state border obtained from the State Border Guard Service of Ukraine.

Another official document that may be useful in this situation is the certificate of residence issued by the tax authorities of the country of residence. It should be noted that the document has to be properly legalized (either consular legalization or apostille), except for countries with which Ukraine has signed the legal assistance treaties. In addition, it has to be translated into Ukrainian and notarized.

If the documents submitted to the tax authorities are insufficient to confirm the tax residence status, disputes concerning the tax residence status of an individual may be referred to a competent court. However, even the court will need documentary evidence of your position. Therefore, if your tax residence status has changed during the year, make sure to keep all the documents that will help you to confirm your status.

Once your tax residence status is determined, you can move on to the next step – state your taxable income and calculate tax liability without incurring double taxation. In our next article we will explain how to do it right.

This article was prepared jointly with Victoria Chornovol, Tax & Legal Partner at Deloitte Ukraine