Where to pay taxes if you live in two countries?

Tax residency criteria

As a general rule, a tax resident of a country has an obligation to declare income and pay taxes to the budget of his country. It is not possible to be a tax resident of two countries at the same time, however, certain types of tax can and will be withheld in the countries of assessment, and must be declared in the country of residence.

To determine the tax resident of which country you are, you should be guided by the country’s residency criteria and international conventions. Each country has its own criteria, but they are similar, and the following can be deduced:

• length of stay in the country (more than 183 days);
• center of vital interests (family, employment, business, real estate, bank accounts, etc.);
• place of residence;
• place of permanent residence;
• registration as an entrepreneur;
• other criteria.

At the request of the tax authorities, supporting documents are provided. For example, a certificate confirming the status of a tax resident or a certificate of tax residence, statements from a company or business entity, an employment contract or an employment order, a housing lease agreement, and confirmation of ownership of the real estate.

A person who considers himself a resident of Ukraine submits evidence in the country where he resides to confirm this. Thus, it shows that he has tax obligations in Ukraine. In foreign countries, tax services and departments deal with tax issues. They will make the final decision on tax status.

The opposite situation applies to those who moved abroad for permanent residence and changed their citizenship. And we are talking about the loss of communication with Ukraine. And obligations to declare incomes and pay taxes arise already in the new country.

What to do if, despite this, the tax office sends a demand for payment of taxes in Ukraine? Most likely, you will have to prove the tax status of a resident of another country in court. Because there is no order and procedure for losing the status of a tax resident of Ukraine in our country. When a person leaves Ukraine, he or she does not receive a document on the loss of status.

PE and double taxation

Most often, PEs are on the simplified system and pay a single tax. The activities of PEs are diverse – from the sale of goods to the provision of services in the IT sphere. We reviewed several conventions on the avoidance of double taxation between Ukraine and other countries. The following conclusions can be drawn:

🔹there is no single tax in the list of taxes covered by the convention;

🔹 there is no definition of private entrepreneur self-employed persons;

🔹types of activities or services according to the convention are limited (in general, these are the activities of teachers, artists, writers, artists, architects, scientists, doctors, and accountants), although there is a note “in particular”, which may mean that the list is not exhaustive and can be continued.

Although the convention applies to any identical or similar income taxes, and we can consider a single tax as such, the position of tax Ukraine is different. Namely, that the double taxation convention does not apply to the single tax.

Despite the fact that each country can interpret the rules of the convention at its own discretion and apply local tax codes, it is not possible to be a tax resident of another country and be subject to a single tax. This is a direct ban for non-residents under the Tax Code of Ukraine. Consequences – loss of status and risk of additional tax on income at the general rate of 18%.

A general recommendation for PEs who temporarily live abroad and plan to operate in Ukraine in the future is to collect evidence of connection with Ukraine. That is confirmation of the tax residence of Ukraine, the obligation to pay taxes in Ukraine. If the decision to move abroad is final, it is recommended to close the PE, which will also be one of the triggers for recognition as a tax resident of Ukraine.

Employee and double taxation

Conventions on the avoidance of double taxation apply to personal income tax. An employee has the right to offset the tax paid.

The first example is that an employee works remotely from abroad, receives a salary in Ukraine, and pays personal income tax. In order not to tax this income again in a foreign country, he submits proof of payment of taxes in Ukraine.

The second example is that a Ukrainian is an employee of a foreign company and pays taxes in another country. Accordingly, Ukraine must show that tax obligations have been fulfilled.

Confirmation can be a certificate of accrued and paid wages, tax amounts, or a statement of the established form. Documents are signed by the tax authorities, additionally – translation, notarization, and apostille (depending on the requirements of the specific country).

Dividends

If the calculation and payment of taxes are carried out in the country of establishment of the company, then in the future, these amounts are declared in the country of tax residence, guided by the rules of conventions in the form of application of marginal tax rates or additional payment of the difference.

Countries may have additional tax requirements for dividends. For example, in Ukraine – rules of CFC and additional tax on foreign dividends, in Portugal – special NHR regime allows to avoid additional payment on dividends, etc.

Conclusions

We recommend that you start by determining which country you are or can be considered a tax resident of. These issues are quite often conflicting, so you should carefully analyze the legislation of the countries, it is possible to involve local tax experts or invite explanations from the tax authorities.

In the future – to decide on the peculiarity of the declaration. In particular, what is the income, and how is it declared with the preparation of relevant evidence (tax certificates, primary documentation, types of income, etc.). The next step is to declare and pay taxes in the country of your tax residency. You should be ready for requests or clarifications from the tax office. Given the fact that sometimes the response time is limited, it is better to prepare evidence in advance.