Tax residence of individuals
The number of days that we spend in one country during a tax year is one of the most important factors taken into account when determining the place of residence of a natural person for tax purposes, i.e. tax residence. Due to movement restrictions, for example, closing of borders and suspension or limitation of air traffic, many people are currently in a country where they do not have – or did not plan to have in 2020 – tax residence. Inability or reluctance to move can cause at least two types of complications. First of all, it may turn out that during a tax year a person stays too long in a country, for example, Poland, where they did not plan to be resident under normal circumstances. The second, potentially problematic situation is the inability to demonstrate a sufficient relationship or a sufficient number of days of stay in the country in which, before the COVID lockdown, a person was trying to obtain tax residence.
The situation is extraordinary, but…
Tax residence is more a matter of fact than of law. National law and international tax avoidance agreements only set out certain norms to be assessed, mainly based on establishing a person’s relationship with the country where he lives. To put it simply, tax residence is determined by all the circumstances that make up the so-called centre of vital interests, for example, the family home, place of residence of the partner or children, economic relationships, place of regular use of medical care, health insurance or belonging to organizations and clubs.
Due to global reports about the rapid spread of the COVID-19 pandemic, some decided to return to countries where they did not declare tax residence before the crisis, but with which they still remained closely associated due to family, their own home or the right to use public health care. Others stayed where they were when the borders closed, but they did not necessarily plan to stay there permanently.
As a result, after the first weeks of the restrictions, the probability that persons who oscillate between two jurisdictions on a regular basis will necessarily exceed the time limits imposed in this respect by national law and we cannot be certain that such restrictions will end anytime soon.
OECD residency conflict settlement rules
Most of the double taxation agreements concluded by Poland are based on the OECD Model Convention on income and wealth tax. Article 4 of the Convention indicates that a natural person domiciled in a Contracting State is a person who, under the law of that State, is taxed there because of his place of residence, permanent residence or other criterion of a similar nature. However, this term does not include persons who are liable to tax in that country only in respect of income from sources in that country or from property situated in that country.
What does it mean?
The provision sets out the criteria for liability for tax in a given jurisdiction as certain facts. The definition aims to take into account various forms of personal ties with the state, which in its own legislation sets the basis for unlimited tax liability.
The key to resolving disputes arising in the course of determining the appropriate tax residence are the so-called tie break rules. These are conclusive norms determining how to consider the tax residence of a natural person, who may potentially be domiciled in two contracting countries. More on individual tie break rules https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-income-and-on-capital-condensed-version-2017_mtc_cond-2017-en#page32
No emergency solutions in the event of “force majeure”
It should be emphasized that neither the provisions of the OECD Model Convention applied in Polish tax avoidance agreements, nor the so-called The MLI Convention of 2016 provide for emergency solutions in the event of events caused by “force majeure” that could hold taxpayers in a given country regardless of their plans or intentions.
The breath of optimism is the OECD’s position on the interpretation of the aforementioned tie break rules, in a situation where a given individual through an unplanned, extended stay would admit the conditions of being a tax resident of a given country, however, it would need to be caused by restrictions on free movement.
First of all, if the stay in a given country was for short-term purposes , such as holidays or business trips, and then extended due to the crisis caused by the COVID-19 pandemic, one should not attribute to such a place of stay the attribute of a “permanent home” of a given person. However, if a given natural person has close relationships to both countries and their tax residence is determined on the basis of an assessment of the premise for staying in these countries, then the OECD recommends that the competent authorities take into account the extraordinary circumstances and appropriately extend the period which usually compares the length of stay of a person in individual countries.
The OECD recommendations are only guidelines without binding force on the authorities of individual countries. Moreover, they only concern situations in which an agreement on the avoidance of double taxation has been signed between states, and preferably in a form similar to that proposed under the OECD Model Convention.
Some countries, for example, Great Britain, Ireland and Australia have already decided to issue guidelines for natural persons according to which a certain length of stay in a given country, caused by known extraordinary circumstances, will not be taken into account when determining that person’s tax residence. As the lockdown is extended, evidence must be gathered by all available means that directly or indirectly confirms the intention to maintain permanent residence in a particular place. For example, the appointment of a representative who will deal with matters relating to property in the country of residence and through him maintain constant contact with tax authorities, persons, institutions in that country.
Aldona Leszczyńska-Mikulska, attorney-at-law, partner managing the Private Client team at GWW
Jan Wnorowski trainee attorney-at-law, member of the Private Client team at GWW