Russian Tax Residence Rules

Private Wealth

"Waiting for Better Days..."

Russia, under its domestic laws, applies the 183-days criterion for determining an individual’s tax residence. However, in 2019 the Russian Ministry of Finance (MinFin) presented a proposal to (i) shorten the qualifying stay to 90 days and (ii) look at the "centre of vital interests", an OECD concept, where determining tax residence.

It is true that after consultations with stakeholders, the 90-days rule was quickly abandoned. However, as MinFin’s initiative is aimed at (i) increasing Russia’s tax base ("improve the administration of the budget’s revenues") by bringing home “runaway” Russian businesspeople and (ii) align Russia’s tax policies with international standards, we believe that Mr. Siluanov’s jack in the box is here to stay.

Center of Vital Interests

By taking into account the closeness of an individual’s "personal and economic relations", MinFin wants to complement an objective residence criterion (183 days) with a more subjective concept (“centre of vital interest") creating a host of new attachment points and giving Russian authorities more discretion to tax:

• Family and social relations

• Occupations

• Political and cultural activities

• Place of business and possessions

• Place of property administration

If adopted and interpreted restrictively, this new residence rule may "bring home" a large number of "non-residents" currently flying under the radar of the tax authorities such as (i) frequent travellers and, most importantly (ii) individuals claiming residence under CBI/RBI programs yet maintaining family, business, or real estate interests in Russia.

Such individuals face the risk of double taxation and, as a remedy, need to invoke "tie-breaker" rules contained in double tax treaties (DTTs) applicable to them.

OECD Tie-Breaker Rules

Since its first draft in 1958, the OECD Model Convention serves as the blueprint for the negotiation of bilateral tax treaties. It contains legal definitions ("residence", "vital interests") widely adopted in DTTs by OECD member and partner states.

Art. 4 of the Model Convention (see below) provides rules for resolving cases of double taxation ("tie-breaker rules"). Conflicts often arise because, under their domestic laws, two states may claim that a person is resident in their territory.

OECD Model Convention Art. 4 – "Resident"

"The term resident means any person who, under the laws of [a] State, is liable to tax therein, by reason of domicile, residence, place of management or any other criterion of a similar nature".

"Where an individual is resident in [two] States, then his status shall be determined as follows:

• He shall be deemed to be a resident only of the State in which he has a permanent home available to him [arranged and retained for permanent use]; if he has a permanent home available in both states, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (center of vital interests);

• If the State in which he has his center of vital interests cannot be determined, or if he has not a permanent home available to him in either State [as for example, a person going from one hotel to another], he shall be deemed to be a resident only of the State in which he has an habitual abode [where he stays more frequently];

• If he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State in which he is a national;

• If he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement".