The focus of today’s blog is the peculiarities of tax residency conflicts, in which several countries consider a person to be their tax resident, and, accordingly, double taxation and the role of bilateral agreements in the settlement of these issues. For clarity, let’s take as an example the provisions of the Cypriot legislation regarding tax residency. This is especially relevant for Ukrainians who were forced to go abroad due to the war and chose Cyprus as their country of residence.
When will I become a Cyprus resident?
Perhaps, for many, the concepts of “resident”, “domicile” and “non-domiciled residents” are already familiar. In this block, we offer to recall them and understand how these concepts affect taxation in practice.
To determine a natural person as a resident of Cyprus, two tests of length of stay are used – the 183-day test and the 60-day test.
First, a person is recognized as a resident of Cyprus if he is on the territory of Cyprus for more than 183 days during a calendar year. At the same time, other criteria, for example, the center of vital interests, are not taken into account.
Secondly, a person can become a resident of Cyprus if he stays in the territory for more than 60 days and at the same time (a) does not live in another country for more than 183 days; (b) is not considered a tax resident of any country and (c) has ties to Cyprus. The existence of a connection presupposes the presence of a place of residence, owned or rented, and economic activity – business, employment or the position of a director in a Cypriot company. All these criteria must be applied simultaneously in order for a person to be recognized as a resident under the 60-day test.
Is it possible to receive dividends and not be taxed on them??
Cypriot tax legislation distinguishes a separate category of so-called non-domiciliated residents. Non-residents and non-domiciliated residents are exempt from war tax on dividends (17%), interest (30%) and rental income, regardless of source of origin.
Who can become a non-domiciliated resident? If a person has not been a tax resident of Cyprus for the past twenty years, he is given the tax status of a non-dominated resident of Cyprus. To do this, it is necessary to annually submit a special form to the tax authorities, which must confirm this status to the taxpayer.
There are no questions for Ukrainians who have officially left for permanent residence
So, with Cyprus it is clear. Suppose a Ukrainian becomes a non-domiciliated tax resident of Cyprus. Now he must file a declaration with the Cypriot tax authorities, pay personal tax on his income and is exempt from taxation of received dividends and rental income.
What about Ukraine? Everything here depends very much on the basis on which the person left Ukraine and what assets he has left here.
If a person officially traveled abroad for a permanent place of residence, he had to submit the last declaration of property status and income to the tax office two months before departure. The tax office was supposed to determine tax liabilities, verify the payment of the due amount of personal income tax andissue a certificate of no tax liability. This certificate is submitted to the control authorities when crossing the border and is the basis for customs procedures. This whole lengthy procedure signals to the Ukrainian tax authorities that a person is going to change his place of permanent residence, respectively, there are no grounds to continue to consider him a tax resident of Ukraine.
Does Dual Residency Mean Double Taxation?
It is more difficult with those who left spontaneously and remained a tax resident of Ukraine, and now also received the status of a tax resident in another country, in our case, in Cyprus. Now, respectively, both Cyprus and Ukraine quite legally consider these persons taxable and expect them to pay taxes on all their income. So now pay twice?
How to avoid double taxation?
In such situations, the provisions of the residency clause of the bilateral double taxation treaty apply. This article contains the so-called rating criteria – places of permanent residence, center of vital interests, physical residence, citizenship, for which a person can be recognized as a resident of only one of the countries and avoid double taxation.
If it comes to this, it is necessary to analyze each criterion very carefully and responsibly approach the argumentation of your tax position. For example, the long-forgotten registration of FLP can refute the argument of the absence of vital interests in Ukraine, because for the Ukrainian tax authorities this is an obvious economic link to Ukraine and the economic component of the center of vital interests. In such cases, we advise you to contact lawyers, because the slightest nuance can play a fatal role.
In this blog, we have focused on Cyprus, but we are sure that it will be interesting for Ukrainians living in other countries to get acquainted with it. The principle of operation of tax residency, with the exception of the features inherent in each jurisdiction, is almost the same. If you have any questions about this topic, please contact us, we will analyze your situation in more detail..