Determining tax residency status is important for a wide range of life situations. Alexey Stanchin, Senior Tax Consultant at Tax Compliance, explained the importance of tax residency status, under what conditions it is possible to be recognized as a non-resident, and at what rate taxes should be paid.

Based on the tax residency of a particular state, the tax authorities determine the amount of income on which an individual must pay tax. In the Russian Federation, the tax resident status directly affects the personal income tax rate. Thus, the rate for residents is 13 (15)% and for non-residents - 30%.

Each state independently establishes criteria for determining tax residency. Thus, it is possible to distinguish several criteria generally accepted in the world practice, based on which it is possible to determine the status of a tax resident:

1. Location of permanent dwelling;
2. Life Interest Center;
3. Domicile (most common in the UK);
4. Country of permanent residence;
5. Citizenship, etc.

The Russian Federation applies a rather simple criterion for determining tax residency - the country of permanent residence. According to Article 207 of the Tax Code of the Russian Federation, the status of a tax resident of Russia is automatically granted to an individual who has been on the territory of the country for 183 days or more during 12 consecutive months. This applies not only to Russian citizens, but also to foreigners and stateless persons. It is not necessary for the year to coincide with the calendar year: you can become a resident, for example, by spending the required number of days on the territory of the country from June 2022 to June 2023.

Despite the fact that the above criterion for recognizing a person as a tax resident is quite clear and unambiguous, on 27.12.2023 the Federal Tax Service of Russia issued Letter No. SHU-4-17/16342@ (hereinafter - Letter dated 27.12.2023), which confirms the provisions of the Tax Code of the Russian Federation and draws attention to the fact that the Code currently does not contain any other criteria for the purposes of recognizing an individual as a tax resident of the Russian Federation, including the criteria of citizenship or the presence of a residence permit. Foreign citizenship, presence of a foreign residence permit, etc. does not in itself indicate the absence of the status of a tax resident of the Russian Federation.

However, despite these provisions, the legislation provides for a number of exceptions, namely cases where an individual has been absent from Russia for more than 183 days and still retains the status of a tax resident:

1. The individual was absent due to medical treatment;
2. The individual was absent due to study abroad for up to six months;
3. The individual is a member of the armed forces or an employee of the authorities and is on an overseas assignment;
4. Where an international treaty (double tax treaty) has been concluded between the Russian Federation and another state which establishes other criteria for recognizing a person as a tax resident.

An example of other criteria for recognizing a person as a tax resident can be seen in the Convention between the Government of the Russian Federation and the Government of the Republic of Kazakhstan of 18.10.1996 "On Elimination of Double Taxation and Prevention of Evasion of Taxes on Income and Capital".

Thus, the tax authorities pay primary attention to the presence of the individual's permanent home. If a person has a permanent home in both states, the tax authorities analyze where the center of vital interests of the individual is located. In the case when the center of vital interests is located in both Russia and Kazakhstan, the tax authorities proceed from the presence of citizenship of one or the other state of the individual. If a person is a citizen of both states or neither of them, the issue of tax residency of an individual is decided by the competent authorities by mutual agreement.

Situations where tax residency status plays an important role

The loss or acquisition of tax residency status has consequences that are important for every individual to be aware of. Thus, resident status may affect not only the personal income tax rate, but also deductions, notifications to the FTS about foreign bank accounts, etc.

What are the things that need to be looked at?

Individuals - tax residents who have foreign bank accounts should pay attention to the fact that the tax authorities must be notified of the movement of money on the foreign account no later than June 1 of the following year.

If a person loses the status of a tax resident, the obligation to notify the tax authorities of the existence of bank accounts abroad ceases.

It is important to note that a resident's failure to notify the tax authority of the opening (closing) of an account (deposit) or of a change in the details of an account (deposit) in a bank located outside the territory of the Russian Federation shall entail the imposition of an administrative fine on citizens in the amount of four thousand to five thousand rubles; on officials - from forty thousand to fifty thousand rubles.

For what period can I claim a tax deduction?

Consider a situation: in 2023 a physical person bought an apartment and at the end of the year he was considered a resident. In 2024 the individual became a non-resident and in 2025 he regained the status of tax resident.

Such person would then be able to take a deduction on 2023 and 2025 income.

Also, in practice, the question often arises whether a tax non-resident, when selling an apartment, can take into account the costs of its purchase?

Non-residents determining the tax base for personal income tax on the sale of housing are not entitled to take advantage of the property tax deduction and, consequently, are not entitled to reduce income from the sale of an apartment by expenses related to its acquisition.

Employee Relocation: Taxation in 2024

Last year, the issue of recognition as a tax resident became quite acute for relocants who went to work abroad but receive income from a source in the Russian Federation. Relocants are persons who have temporarily moved to a new place of residence and plan to return in the future. This is due to the fact that the income of relocants who stay abroad for more than 183 days and receive monetary remuneration from a source in the Russian Federation should be taxed at an increased personal income tax rate of 30%. At the same time, Article 208 of the Tax Code of the Russian Federation contains a list of income that can be attributed to income from a source in the Russian Federation.

Last summer, the President signed a law[1] amending tax legislation with regard to the peculiarities of taxation of income of citizens working remotely with Russian organizations under employment contracts and GPH contracts.

According to this law, remuneration and other payments to remote workers received for the performance of labor duties should be subject to personal income tax at the standard rate of 13%, and when the threshold of 5,000,000 rubles is exceeded, an increased rate of 15% should be applied.

Starting from January 1, 2024, this procedure also applies to remote workers who have a contract with a Russian organization, regardless of their tax resident status.

What documents should be used to confirm the status of a tax resident?

Practice shows that one of the most frequent questions arising among taxpayers is: what documents can be used to confirm tax resident status? This misunderstanding is due to the fact that the Tax Code does not contain a list of documents required to confirm the status of a tax resident.

Nevertheless, the tax authorities took into account the appeals of citizens on this issue and in the Letter dated 27.12.2023 indicated that the documents confirming the stay in the Russian Federation for more than 183 days may include:

• copies of passport with border control authorities' stamps on border crossing;
• hotel receipts;
• migration card;
• timesheets;
• other documents on the basis of which it is possible to establish the actual presence of an individual in the Russian Federation and outside the Russian Federation.

How to obtain a document confirming the status of a tax resident of the Russian Federation, and in what situations it may be needed?

In order to obtain a document confirming tax resident status in the Russian Federation, a taxpayer must complete and send an application for the submission of a document confirming resident status. The application form is approved by Order No. MMV-7-17/837@ of the Federal Tax Service dated November 7, 2017 (hereinafter - the Order). In accordance with this document, an application must be submitted by a taxpayer to the Federal Tax Service or an authorized tax authority (MI FTS for the DTC).

The following ways of submitting such an application are distinguished:

1. Through the interactive service on the website of the Federal Tax Service;
2. By mail to the MI FNS DPC;
3. In person.

At the same time, the tax authority informs that the priority way of submission is the first way (through the interactive service). This is due to the fact that the tax authority for a long time develops electronic document flow in order to improve the quality of public services and optimize document formats.

A document confirming tax residency status may be required when an individual receives dividends from a foreign company and plans to apply preferential withholding tax rates (applicable if Russia and the foreign state have concluded a Double Taxation Avoidance Agreement). In this situation, in order to apply the preferential rate, an individual will need a document confirming his tax residence in the Russian Federation.

Is it possible to obtain a document confirming the absence of the status of a tax resident of the Russian Federation?

An equally frequent question arising among individuals is: "How can one confirm the absence of the status of a tax resident of the Russian Federation?". The Federal Tax Service gave an answer to this question in the Letter dated 27.12.2023. Thus, the tax authority indicated that tax legislation does not provide for the issuance of any special document certifying that an individual is not a tax resident of the Russian Federation.

Thus, when an individual needs to confirm his or her status as a non-resident, by analogy with the supporting documents, such an individual may provide copies of a passport with border control marks on border crossing, hotel receipts, migration card, timesheet and/or other documents on the basis of which it is possible to establish the actual presence of the individual outside the Russian Federation.

An important point is - in what situations may physical persons need confirmation of the absence of tax resident status?

Under Article 25.13 of the Russian Tax Code, only a tax resident of the Russian Federation may be a controlling person of a controlled foreign company (CFC). In order not to report under the CFC rules in the Russian Federation and not to pay tax on undistributed profits of a CFC in the Russian Federation, an individual must confirm that he was not a tax resident of the Russian Federation on the date of his alleged recognition as a controlling person of a CFC (December 31).

In addition, the tax authority draws attention to an important aspect: refusal to issue a document confirming the status of a tax resident of the Russian Federation does not constitute confirmation that the applicant does not have the status of a tax resident of the Russian Federation.

How do tax authorities identify non-residents?

As practice shows, at the end of 2023 physical persons began to receive requirements from the Federal Tax Service, according to which it is necessary to provide information on the basis of which it is possible to draw conclusions about the presence or absence of the status of tax resident.

Thus, the tax authorities requested the following data in their demands for the provision of documents (information):

• a copy of the taxpayer's Russian passport;
• copies of all pages of the passport, if available;
• information on the number of days spent outside the Russian Federation;
• copies of documents confirming citizenship or residence permit (residence permit) of foreign countries;
• foreign bank statements;
• documents confirming the performance of currency transactions on foreign accounts.

In the requirements, the tax authority indicated that the documents were requested as part of an audit of compliance by residents and non-residents with currency legislation.

At the same time, it should be noted that based on the information received, the tax authorities can potentially bring taxpayers to a number of possible offenses, for example, in connection with the failure to submit a tax return in the form of 3-NDFL reflecting the amounts of income received on foreign accounts or, as indicated earlier, in connection with the failure to submit notifications and reports on cash flows on foreign accounts.

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Based on the results of the above, it becomes apparent how many legal consequences are entailed by the presence or absence of tax residency status.

It is particularly important for individuals who frequently enter or leave the Russian Federation to keep track of the number of days spent in Russia, taking into account special rules for study or medical treatment abroad. Such control is necessary not only to be able to claim deductions or apply reduced rates, but also to avoid claims from the tax authority.

Thus, in case of clear and timely tracking of the status of a tax resident, the probability of additional tax assessments at a higher "non-resident" rate or imposition of a fine for failure of a resident to submit to the tax authority a notification on opening (closing) an account in a bank located outside the territory of the Russian Federation is significantly reduced.

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[1] Federal Law No. 389-FZ of July 31, 2023