The Russian Federal Tax Service (“FTS”) has published a new interpretation of the Russian laws of residency for individuals. Such guidance is not new law, but it would be taken into account by the Russian courts.
The Russian Tax Code defines an individual as being Russian tax resident if they are physically present in Russia for 183 days in any 12 month consecutive period. However, taking inspiration from the OECD model double tax treaty, the FTS have said that an individual can still remain Russian tax resident if they have a “permanent home” in Russia, or if their “centre of vital interests” is in Russia.
They have a wide definition of “permanent home”. A home is permanent if it is merely owned by an individual, or if it is a place of permanent official registration.
The centre of vital interests is defined as the place where the individual’s family lives, his business is based or where they are employed.
This interpretation of the law seems questionable. The standard approach is to apply the local tests of tax residency to an individual and only in the circumstance that the individual is resident in two jurisdictions are the “tie-breaker” provisions of the applicable double tax treaties applied. In those circumstances the questions of permanent home, centre of vital interests, nationality and so on are applied.
These changes will have an impact on persons who intend to break Russian tax residency, for example because they intend to avoid the new controlled foreign company rules, but intend to still spend time in Russia and have close ties to Russia.
What this means in practice is that people leaving Russia must take urgent steps to sever any unnecessary ties to Russia to avoid a future dispute about whether they are resident there or not, and also take the necessary steps to become tax resident somewhere else, such as the United Kingdom, with an appropriate double tax treaty with Russia.