Resident status: who and how has to pay taxes according to the Russian laws

Actuality October, 23, 2007

The changes in the tax residence determination order of individual persons dated January, 1, 2007 aroused a great number of questions among taxpayers.

It is necessary to explain tax residence determination peculiarities for the calculation of tax on individual persons’ income after generalization of the Russian Ministry of Finance letter.

Let’s remind, that tax residents are individual persons who actually stay in the Russian Federation not less than 183 days within 12 months without a break. The period of individual person stay in Russian Federation (RF) is not broken for the period of his leaving the territory of the country for short-term (less than six months) medical treatment or study (paragraph 2).

The status of the taxpayer (resident or non-resident) is not based on the citizenship of the individual person or any other conditions, such as birthplace, place of permanent living etc. A foreign citizen or a person without any citizenship can have RF tax resident status. And, on the contrary, RF citizen can’t have tax resident status of RF or lose it during the tax period.

So, RF citizen loses the tax resident status, if he spends most time abroad within the last 12 months (more than 183 calendar days). It can be foreign business trips or simply job transfers either constant or temporary to the offices abroad etc.

Individual person has actually to stay on the RF territory not less than 183 days within 12 months without a break in order to receive the tax resident status. Days reckoning does not stop with the end of the next tax period (calendar year).

For example, the organization has concluded a labor contract with the foreign citizen, who is on RF territory since September, 1, 2006. 183 calendar days run out on March, 2, 2007 if the taxpayer does not leave RF territory since September, 1, 2006. Hence, he receives the tax resident status of RF since March, 2, 2007.

The period of stay in RF is estimated by summing up all calendar days when the individual person has been in RF within 12 months without a break. Total amount and duration of every trip abroad don’t matter for the tax determination status of the individual person in RF. At the same time, the periods of individual person stay abroad don’t influence upon the taxpayer status, regardless of the aim, as they are not directly specified in the section 207 of RF tax code, excluding the cases of leaving abroad for short-term (less than six months) medical treatment or study (the letters of the Russian Ministry of Finance № 03-04-06-01/268 dated July, 26, 2007, 2007 № 03-04-06-01/258 dated July, 23, № 03-04-06-01/210 dated July, 4, 2007, № 03-04-06-01/189 dated June, 15, 2007). For example, the days of business trips abroad, trips abroad on family circumstances are excluded from the period of stay on RF territory.

Since January, 1, 2007 it is forbidden to give a taxpayer the tax resident status of RF ahead of time (before the ending of 183 calendar days of an actual stay on the RF territory), even including the cases of having long-term labor contract with the Russian organization, providing the work duration not less than 183 days in the current tax period (the letters of the Russian Ministry of Finance № 03-04-06-01/207 dated July, 3, 2007, № 03-04-06-01/200 dated June, 25, 2007, № 03-04-06-01/185 dated June, 13, 2007).

The organization, the tax agent, should determine the tax status of the individual person based on actual, documentary fixed time of his stay in RF. Determination of the tax status is made by the tax agent monthly based on the 12-months period previous to the date of the income reception of the individual person (including the one begun in one tax period (calendar year) and lasting in another tax period (calendar year). At the same time, the final decision about the individual person tax status during the tax period can be made only on December, 31. If the individual person pays the taxes on his own according to the section 228 of RF tax code than his tax status is determined one time according to the results of the tax period (the letters of the Russian Ministry of Finance № 03-04-06-01/179 dated June, 8, 2007, № 03-04-06-01/177 dated June, 7, 2007, № 03-04-06-01/132 dated April, 27, 2007, № 03-04-06-01/119 dated April, 16, 2007, № 03-04-06-01/75 dated March, 19, 2007, № 03-04-07-01/30 dated March, 16, 2007).

The period of a foreigner stay on RF territory can be proved by a mark in the passport about the border crossing, visa, migration card (it is filled at the entry into RF and is given back at the exit), marks in the passport about a temporary registration in a place of residence. When the appropriate marks are absent any documents, showing the actual stay of the foreigners on RF territory and the exact number of days, are accepted as a proof. Such documents are time sheets (or references based on them), sheets of salary accounting and payment with an actual time of work, hotel stay references and any other documents that a taxpayer and a tax agent have (the letter of the Russian Ministry of Finance № 03-04-06-01/170 dated May, 31, 2007).

There is an opinion that the individual persons’ tax status is determined either according to RF tax code or according to the intergovernmental agreements in order to avoid the double taxation that is in priority to the national legislation. According to these agreements, the individual person’s tax status is determined not only by his stay on the territory of a foreign state, but also by citizenship, presence of constant habitation, registration place, etc.

So, the Russian organizations representative office employees abroad remain the tax residents of RF, regardless of time of their actual stay out the state. This conclusion is wrong. Applying the standards of the agreements to avoid double taxation it is worth taking into consideration the following aspects. RF regulations of the international contracts (agreements) with foreign states about double taxation avoidance, establishing reference criteria of individual persons to the resident status of one of the agreed states, are applied only in cases when any individual person is determined as tax resident accordingly to the internal legislation of each agreed state simultaneously in these both states; in other words, in cases of double residence. As the individual person stay on RF territory less than 183 days during 12 months without a break, according to the paragraph 2, section 207 of RF tax code are not determined as RF tax residents, so, the double residence problem of the individual person doesn’t occur. Clearly, there is no need to apply these agreements to avoid double taxation (the letter of the Russian Ministry of Finance № 03-05-01-04/254 dated August, 31, 2006).