HOW TO REMAIN A TAX RESIDENT OF UKRAINE

How can forced migrants from Ukraine avoid double taxation in the countries where they temporarily reside?

Shortly after the start of the war, the information space began to discuss the issue of declaring and taxing the income of Ukrainian immigrants abroad.

A year has passed, and this question is more relevant than ever, because with the beginning of the new year, the campaign to declare and tax income for the previous year has begun in most countries.

At the same time, it can be stated that, unfortunately, the situation has not become clearer over the past year and, as before, raises many questions.

The most key and most controversial issue remains the issue of determining the tax residency of Ukrainian immigrants, since depending on such status, the country in which their incomes must be declared and taxed is determined.

The rules for determining tax residency are not the same in different countries, however, three criteria are usually decisive:

• place of residence
• period of staying in the country (at least 183 days during the year)
• the center of vital interests

As a result, situations may arise when several countries, according to the rules of their national legislation, will consider the same person as their tax resident.

In effect, this would oblige such a person to declare and tax his income in both such countries.

To eliminate such an unfair situation, the system of interstate agreements on the avoidance of double taxation, which decide in which country a person’s income should be taxed, is intended.

Given the international status of such agreements, the rules defined by them prevail over the rules of national legislation.

Thus, if two countries recognize a person as their tax resident, then the resolution of this conflict should be carried out on the basis of the provisions of the agreement on the avoidance of double taxation between such countries.

Although the texts of agreements on the avoidance of double taxation are not completely identical, they are nevertheless quite similar, as they are based on the UN Modal Convention on the Avoidance of Double Taxation.

In the matter of determining tax residency, double taxation agreements usually define the following rules:

A person is considered a resident of the country where he has a permanent home. It is understood that a person owns (based on the right of ownership) or has at his disposal (based on a lease or other similar right) housing (house, apartment, room, etc.), available for use at any time on a permanent basis.

That is, not from time to time for the purpose of a short-term stay (travel, business trip, etc.).

Therefore, for example, an apartment or a house that a person rented to other unrelated persons during his stay in another country and, accordingly, does not have the opportunity to live there during the period of such a lease, will not be considered a permanent residence.

Therefore, if, after leaving the country, the Ukrainian emigrant transferred his home for use by third parties, then such home during such a rental period cannot be considered as his permanent place of residence and, accordingly, his permanent place of residence will most likely be considered a home abroad.

At the same time, it should be recognized that the area of housing rent in Ukraine is in the “gray zone”, that is, the state does not control the conclusion of lease agreements, and landlords usually do not declare and tax such income, especially if they are received in cash.

Therefore, the regulatory bodies of Ukraine, and even more so the regulatory bodies of foreign countries, have very little chance to learn about such circumstances.

Thus, if a person, having moved abroad, kept his home in Ukraine, and abroad also has a suitable home at his disposal, then there are reasons to believe that such a person has a permanent home in both countries.

If a person has a permanent home in both countries, he is considered a resident of the country where his center of vital interests is located.

In other words, it is determined with which country a person has tighten personal and economic relations. In this aspect, family and social ties, place of work, place of education of children, political / social / cultural / entrepreneurial activities, etc. should be taken into account.

For example, the comments to the Modal Convention of the United Nations indicate that if a person, having a home in one country, arranges a home in another country while keeping the first home, then the fact that such first home is kept in the same position as it was when the person has always lived there, where her family is located, then this, together with other factors, may indicate that the person has kept her center of vital interests in the first country.         

 In general, the definition of the center of vital interests is a rather subjective issue and there is no unambiguous and specific criterion that would prevail over others and indicate the specific place of the center of vital interests.          

Therefore, all circumstances are analyzed as a whole, and therefore there are no small things here, since any detail can play a role, up to the presence in Ukraine of a gym membership frozen during the war (not suspended), active membership in clubs or organizations, other remote activities in Ukraine or even a post on a social network about the desire to return to Ukraine as soon as possible.

Thus, it is necessary to analyze all existing circumstances in each specific case. For example, a woman with a child went abroad, rents an apartment there, the child goes to school or kindergarten there, but at the same time, her husband, parents and pet remained in Ukraine, the woman works remotely for a Ukrainian employer, has certain property in Ukraine (a car, real estate, etc.), has and uses accounts in Ukrainian banks, there are certain other individual factors that indicate maintaining a connection with Ukraine.

On the one hand, it can be considered that the number of factors prevails in Ukraine. However, on the other hand, a major role in determining the center of life interests will be played by the place of residence of minor children, although it is also necessary to take into account that such a place of residence abroad is forced due to war.

As we can see, in such a case it is quite difficult to clearly determine where exactly the center of vital interests is located, and rather one can come to the conclusion that the center of vital interests will be equal in both countries.

If a person has a permanent home in both countries, and the country in which he has a center of life interests cannot be determined, it is considered that the person is a resident of the country where his usual place of residence is located, i.e. the place where the person usually lives.

In the context of double taxation agreements, habitual residence cannot be determined by a simple calculation of the country in which a person spent more days.

Instead, it is necessary to consider the frequency, duration and regularity of such residence, which are part of the established routine of such a person’s life. Moreover, to establish the frequency, duration and regularity of residence in a particular country, a wider period of time should be considered, during which, moreover, there were no significant changes in a person’s personal life that could affect the determination of the usual place of residence (for example, divorce or, as in our case, war).

Thus, if, in the context of Ukrainian immigrants, their place of habitual residence is determined, it is necessary to take into account the time before the start of the war and the forced migration from Ukraine.

Therefore, if a person has been permanently living in Ukraine for the last few years and moved abroad due to the war and intends to return to Ukraine after its end, then it is obvious that the person’s usual place of residence should still be Ukraine itself.

But, if suddenly and on the basis of the usual place of residence it is impossible to establish the resident status of a person (for example, if a person usually lives in both countries), then in this case there is the last and decisive criterion – citizenship.

That is, a person will be considered a resident of the country of which he is a citizen. Given that the legislation of Ukraine does not allow the possibility of dual citizenship, this last criterion allows to finally resolve the issue of a person’s residency.          

As you can see, the period of stay in one or another country (that is, at least 183 days) in the context of agreements on the avoidance of double taxation does not matter.          

If a person lived permanently in Ukraine before the start of the war, and after moving abroad kept his home, family / social / work and other ties in Ukraine, intends to return to Ukraine, then in this case there are grounds to claim that the person remains a tax resident of Ukraine.

However, if a person considers himself a tax resident of Ukraine and seeks to maintain this status, he will have to convince the tax authorities of the relevant foreign country of this.

Otherwise, the latter, not having sufficient information about the person, will not be able to properly take into account all the criteria defined by the agreement on the avoidance of double taxation with Ukraine, and most likely will simply proceed only from the fact that the person, according to the requirements of local legislation, is a resident of such foreign country.

Therefore, a person must provide in writing to the tax authorities of a foreign state information and explanations that will generally confirm that such a person:

• lived in Ukraine on a permanent basis
• was forced to leave Ukraine due to the start of the war
• intends to return to Ukraine after the end of the war
• keeps his permanent residence, property, work and other ties (economic, domestic, family, social, cultural, etc.) in Ukraine
• does not have tighten economic, family, social, cultural and other ties with the foreign country of residence
• according to the provisions of the relevant agreement on the avoidance of double taxation, will be considered a resident of Ukraine      

To such explanations, it is necessary to add a confirmation certificate from the Ukrainian tax authorities regarding the status of a tax resident of Ukraine.        

Such a certificate is provided on the basis of an application, the form of which is approved by order of the Ministry of Finance of Ukraine № 248 dated 19.08.2022. The same order also approved the procedure for confirming the status of a tax resident of Ukraine and issuing such a certificate.         

The application for obtaining a certificate can be filled out in electronic form and submitted through the taxpayer’s electronic office, signing with the help of EDS. You can also get a certificate in the electronic cabinet.

However, in our case, we will have to go through a somewhat more difficult path. The fact is that for use in a foreign country, such a certificate must first be “legalized” – legalized (apostilled).

The procedure of legalization (apostillation) involves confirmation by the state of the validity of the document for the possibility of its use abroad.

In this case, such a procedure must be carried out by the Ministry of Foreign Affairs of Ukraine and is possible only with respect to the original document or its duly certified copy.

That is, the certificate received in the electronic office cannot be legalized, as it is simply a copy of the document. In other words, such a certificate must be obtained in the original in paper form and then contact the Ministry of Foreign Affairs of Ukraine for its legalization (apostillation).

It is obvious that in order to carry out such a complex of actions, a person who is abroad cannot do without the help of a representative in Ukraine. In addition, in the host country, it is necessary to provide a notarized translation of such a certificate into the language of the relevant foreign country.

In addition to a reference to the tax authority of a foreign country, other documents must be added that confirm the circumstances stated in the explanations. Similarly, as with the certificate, it will be necessary to ensure the translation of such documents, and if necessary, their legalization (apostillation).

However, even after taking such steps, there is no guarantee that foreign tax authorities will not insist that the person is a tax resident of the host country.

Obviously, Ukraine will also not voluntarily release its citizens from tax residency. And therefore, a conflict will arise regarding the place of declaration and taxation of the income of such a person.

Its solution is possible, in fact, in two ways.

The first – with the application of the already mentioned agreements on the avoidance of double taxation and the mutual agreement procedure provided for by them. In fact, within the framework of such a procedure, representatives of the competent authorities of the states must conduct negotiations on the disputed issue and resolve it.

The disadvantage of this procedure is that it can last for months, if not years, and therefore it can hardly be considered effective.

The second way is to appeal against the actions and decisions of the tax authority of a foreign country, directed to the declaration or taxation of an individual’s income.

And here it is worth considering that some incomes of Ukrainian immigrants will still be taxed in the foreign host country (for example, wages received in the host country from a local employer). Details about this and how to submit a declaration – I am already preparing the material.