Tax residency, or can a person be recognized as a tax resident of another state through the courts?

Case No. 1. Reversal of the decision on the loss of Ukrainian resident status and acquisition of Ukrainian non-resident status

The Pecherskyi District Court of Kyiv granted the application and established the fact that, as of 1 January 2023, a Ukrainian citizen had lost their status as a Ukrainian resident and acquired the status of a Ukrainian non-resident.

In granting the application, the court of first instance relied on the following grounds:

• Neither the Tax Code of Ukraine nor any other regulatory legal act provides for a specific procedure for confirming that a person has the status of a Ukrainian citizen who is a non-resident;
• The applicant and their family permanently reside in the United Kingdom, hold residence permits, are officially employed, receive a salary, own real estate, and exercise their constitutional rights in the United Kingdom;
• The applicant’s rights and interests should not be adversely affected by double taxation.

The Kyiv Court of Appeal overturned the decision and closed the proceedings.

The Civil Cassation Court upheld the ruling of the Kyiv Court of Appeal and emphasized the following:

• The issue of establishing the fact that a person has lost their status as a resident and acquired non-resident status cannot be considered by a court independently of the actions of interested parties concerning the applicant’s specific rights, freedoms, and interests;
• Such facts may be established by a court, in particular, in the course of proceedings concerning the taxation of the applicant’s income or violations of customs regulations, rather than in separate or adversarial proceedings under the rules of civil procedure.

Case No. 2. Refusal to initiate proceedings on an application to establish the fact of loss of Ukrainian tax residency and acquisition of tax residency in the Kingdom of Spain

The applicant filed an application with the court under special proceedings seeking to establish the fact that she had lost her status as a tax resident of Ukraine and acquired the status of a tax resident of the Kingdom of Spain as of 24 November 2022. In support of her application, she stated that she had been фактично residing outside Ukraine since 2021, had obtained a residence permit in Spain, paid taxes in that country, and believed that establishing the relevant fact was necessary to avoid double taxation and ensure the proper application of international treaties.

The Darnytskyi District Court of Kyiv refused to initiate proceedings, in particular, on the following grounds:

• The absence of an actual dispute over a right or a specific decision by a tax authority that violates or challenges the applicant’s rights precludes the consideration of such an application under special proceedings;
• The applicant did not provide any circumstances demonstrating that, at the time of filing the application with the court, there was any decision or action by a Ukrainian tax authority that violated or challenged her rights. She also failed to demonstrate that it would be impossible to protect such rights, if violated, through administrative or adversarial court proceedings.

The analysis of the court cases discussed above allows us to draw several key conclusions regarding the establishment of non-resident tax status through the courts:

1. The impossibility of establishing an “abstract” fact: Courts clearly state that the issue of changing or losing one’s tax status cannot be considered in isolation from a specific dispute. A court is not a body that can replace the tax authorities or issue confirmations of non-resident status for future purposes.
2. Special proceedings (establishing legal facts) cannot be used to determine an individual’s tax status where there is no actual and ongoing dispute with the competent authorities. The desire to “avoid double taxation in the future” is regarded by the courts as a hypothetical concern rather than an actual violation of rights.
3. A specific dispute must arise in order to initiate court proceedings. In such cases, the protection of rights takes place through administrative proceedings by challenging specific actions or decisions of the tax authorities, rather than through special proceedings aimed at establishing a fact.
4. The existence of a residence permit, foreign real estate, and official employment in other jurisdictions may constitute strong arguments in support of establishing that an individual’s centre of vital interests is located abroad. However, these facts must be substantiated either through pre-trial procedures or within the framework of an administrative dispute, for example, where the tax authorities issue tax assessment notices or take specific actions.

It is worth recalling that the criteria for determining tax residency include: place of residence, permanent place of residence, close personal or economic ties (the centre of vital interests), presence in a country for more than 183 days during a calendar year, and citizenship.

These criteria may be applied using different approaches — either cumulatively or according to the cascade principle.

The cascade principle for determining tax residency is a defined hierarchical algorithm used to establish in which country an individual is considered a tax resident.

The main purpose of this “cascade” is to prevent situations in which two countries simultaneously claim the right to tax an individual’s income.

The essence of the “cascade” is that the criteria are assessed step by step, one after another. If the first criterion provides a clear answer, the process stops. However, if an individual meets the relevant criterion in both countries, the analysis moves to the next level of the cascade.

We would also like to emphasize that each case should be considered individually, as it is not advisable to rely solely on the fact that a person has spent more than 183 days outside their country of residence.

Published on AIN