20 February 2015

Definition of the Russian tax residency for individuals - potential changes?


The Russian Federal Tax Service (“FTS”) has prepared a letter clarifying criteria for determining the Russian tax residency for individuals (the “Letter”).

Currently the Russian Tax Code views an individual as a Russian tax resident if they are physically present in Russia for 183 days in any 12 month consecutive period. This definition is exhaustive and does not refer to any other sources, or allows for any substantial interpretation.

The letter of the FTS refers to the provisions of the international double tax treaties concluded by Russia, specifically stating that an individual can become a tax resident in Russia, if they have a permanent home in Russia, or if their centre of vital interests is in Russia. The letter further clarifies that the home is permanent if it is owned by an individual, or if it is a place of permanent official registration. The centre of vital interests is explained as the place where the individual’s family lives, his business is based or where they are employed.

Most surprisingly, the FTS concludes that the fact of a physical presence in the Russian Federation for less than 183 calendar days within 12 consecutive months does not lead to an automatic loss of a tax resident status in Russia.

We believe that the argument presented in the letter is incorrect. Reference to the provisions of the international treaties should only be made in cases where an individual acquires tax resident status in two contracting states: this is not possible in instances where the Russian domestic residency test is not met.

Letters of the FTS do not have status of law and are not binding. In practice, however, clarifications given by the FTS can be used as guidelines for interpretation of the law by both Russian courts and tax authorities.

We do not believe that the letter changes the definition of the Russian tax residency; however, it reminds us that the current simplicity of the residency definition is likely to be temporary and can be revisited by the Russian legislator shortly.

Amendments to the tax residency definition will have significant effect on individuals who spend substantial number of days in Russia and has various other ties with Russia, but who are not caught by the current 183 day rule.

Specifically, it can have severe effect on individuals, who in 2015 adopted the strategy of ceasing tax residency in Russia to avoid disclosure and taxation in accordance with the new Russian Controlled Foreign Companies regime.

We are monitoring further developments and will notify you of further changes. If you would like us to help you to successfully plan your tax strategies, please contact Olga Boltenko or any other member of the Withers Russia and CIS team.

Category: Article