Instruction for determining the residency for tax purposes of a natural person

On the basis of subsection 15 (1) of the Taxation Act, the Estonian Tax and Customs Board issues the instruction for determining the residency for tax purposes of a natural person.
 

Contents


1. The definition of a resident
1.1. The definition of a place of residence
1.2. Counting of 183 days

2. Change in residency
2.1. Decision of the tax authority
2.2. The time of change in residency for tax purposes
2.3. Arrival in Estonia
2.4. Leaving Estonia

3. On declaration and obligation of payment of income tax
 

1. The definition of a resident


According to the subsection 6 (1) of the Income Tax Act, a natural person is an Estonian resident if at least one of the following requirements is met:

  • the person’s place of residence is in Estonia;
  • the person stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months;
  • the person is an Estonian state public servant who is in a foreign service.

A person shall be deemed to be a resident as of the date of his or her arrival in Estonia. A resident natural person shall pay income tax on all income derived by him or her in Estonia and outside Estonia, regardless of whether the income is listed in §§ 13 – 22 of the Income Tax Act or not.

The basis for determining the residency for tax purposes is three criteria wherefrom the realization of one requirement already gives the person the right to be considered him or her a resident in Estonia. For the Estonian citizens, a change of the place of residence is important for determining the residency, for persons arriving in Estonia from abroad temporarily, the number of days staying in Estonia is important.

According to subsection 6 (3) of the Income Tax Act, a non-resident is a natural or legal person not specified in subsections (1) and (2). A non-resident shall pay income tax pursuant to the provisions of § 29 of the Income Tax Act on income only derived from Estonian sources.

According to the subsection 6 (5) of the Income Tax Act, if the residency prescribed on the basis of an international agreement differs from the residency prescribed pursuant to law or if the international agreement prescribes more favourable conditions for taxation of income than those provided by law, the provisions of the international agreement shall apply.
 

1.1. The definition of a place of residence


On determining the place of residence we proceed from the definition of a place of residence in § 14 of the General Part of the Civil Code Act, according to which the place of residence of a person is the place where he or she permanently or primarily lives. Under this provision, the place of residence may be simultaneously in several places and the place of residence is deemed to be changed if the person settles elsewhere in a manner which expresses his or her intention to change the place of residence. If the place of residence of a person cannot be determined, the place where he or she stays for each time shall be deemed to be his or her place of residence.

The place of residence is deemed to be permanent if it is clear that the place of residence is established for permanent use, contrary to the conditions wherefrom it can be seen that the person intends to dwell at the said place for a short time only. The place of residence can be either a house or an apartment, as well as a room or a dwelling place of the same kind, owned by the person himself or herself, rented or otherwise possessed by a person for the permanent dwelling (e.g. also an apartment of the spouse or the room rented by the employer).

To determine person’s place of residence, it is important that the place of residence would be permanent and lasting, i.e. it must be apparent that the person has made preparations or efforts for changing the place of residence for himself or herself all the time and making permanently available, not acquired for the purpose of short-term dwelling (a holiday trip, a business trip, a study trip, training courses, etc.). Acquisition of property (as well as an immovable) in Estonia itself does not make a person a resident for the purposes of the Income Tax Act. If the apartment or house owned by a person is let out on rent to other persons, this shall not be deemed to be this person’s place of residence.
 

1.2. Counting of 183 days


For the determination of the residency for tax purposes, ‘the days when a person was physically present’ only will be taken into account for calculating 183 days. All the days when the person stayed in Estonia will be counted up, despite of the reasons staying here (except the cases, if the person who had to leave Estonia could not do it with good reason, for reasons independent of him or her (for example, a serious illness)).

In addition to the full days when a person stayed in the country, also parts of the days (including days of arrival and departure) shall be included in the 183 days.

The full days, when a person is out of Estonia whether on holiday, on a business trip or for some other reason, shall not be numbered in the 183 days. Whereas the time, nevertheless how short, when the person stayed in Estonia, shall be numbered as one day in the 183 days.

Example
A person stays in Estonia from 1 January to 2 July (i.e. 182 days) and then on 31 December one more day. The said person is deemed to be a resident from 1 January to 31 December (also in the period from 3 July to 30 December).


2. Change in residency


2.1. Decision of the tax authority


The decision about the change in a natural person’s status (from a resident to a non-resident or vice versa) shall be made by the tax authority. If a person arrives or leaves Estonia due to circumstances that may affect his or her residency, the person shall turn to the tax authority for the determination of his or her status of residency for tax purposes. According to subsection 6 (6) of the Income Tax Act, as of 1 January 2011 a taxpayer who is a natural person is obliged to notify the tax authority about the creation of or change in the residency for tax purposes. This may be done on Form R approved by the Minister of Finance for determining natural person’s residency for tax purposes whereby the review of the circumstances of essential importance affecting person’s residency for tax purposes is given. By the said form you may solve the problem of double residency that can arise due to different rules for the determination of residency for tax purposes in different countries. The tax authority may also decide about person’s residency on the basis of the data collected on its own initiative only, if data cannot be obtained from taxpayers or if the data received are not reliable. A person shall submit data and proof about the circumstances affecting the residency. The Tax and Customs Board shall have the right to request that the person submit additional proof and documents.

On determination of the place of residency for the Estonian citizens, the existence or the change of the place of residence and the vital interests to be carried abroad in connection with the change of the place of residence shall be important. For persons arriving in Estonia from abroad temporarily the number of days staying in Estonia is important. Resulting from different laws of various states, a person may be deemed to be a resident in several states at the same time, thus, the double residency may be created for the person. If for the purposes to avoid double taxation by income tax and prevent tax evasion, tax treaties have been concluded between Estonia and other countries, then it is possible to avoid the double residency. In order to avoid the double residency resulting from the tax treaty, a person shall submit the certificate of residency for tax purposes confirmed by the foreign tax administrator.

If the tax authority has reason to doubt about the person's residency for the purposes of the tax treaty, despite of the certificate of residency for tax purposes issued by the other state, then the tax authorities of the two states shall determine the person’s residency in the course of the mutual agreement process in accordance with the criteria provided for in the taxtreaty.

A person himself or herself as well has the right to initiate a mutual agreement process for eliminating the double residency, applying for the tax authority by a corresponding request. The mutual agreement process is governed, as a rule, by item 25 of the tax treaty.

The tax authority shall make a decision on registration of a person as a resident or non-resident after having analysed the circumstances and certificates. The tax authority shall make a notation on person’s residency for tax purposes in the register of taxable persons and, at a person’s request, shall issue a certificate about his or her status as a resident or non-resident. The information concerning the residency of a person is available to the public.

If the circumstances that are known shall not enable to determine the change in person’s residency in the future, then the status of the person as a resident or non-resident shall be considered unchanged until the circumstances be clear (for example, the person has stayed in Estonia for at least 183 days). A natural person shall apply to the tax authority informing of the circumstances changed and submitting Form R and necessary documentary evidence. The change shall be made in the residency afterwards as of the date of arrival or departure. It is possible to recalculate taxes on the basis of an income tax return of a resident natural person or in a notice of assessment (for example, a non-resident from whose income there have been made deductions meant for a resident which were not allowed for a non-resident, shall pay an additional amount of income tax due according to the notice of assessment). Overpaid amounts of taxes shall be refunded on the basis of the income tax return of a resident natural person or pursuant to § 106 of the Taxation Act.

A paying authority may operate as a representative of a taxpayer on determination of the status of residency by the tax authority. A paying authority shall not decide on the change in the residency of the payment recipient alone but shall get the confirmation on the residency of the payee on the basis of the decision of the tax authority.
 

2.2. The time of change in residency for tax purposes


On application of the Income Tax Act it is considered that the status of a natural person as a resident or non-resident changes during a period of taxation (one calendar year) on the date when the person’s status is changed. If a person arrives in Estonia from a tax treaty state or leaves for a treaty state, the possible double residency shall be eliminated at the first opportunity, thus, on arrival or leave-taking.

In the case of the change in person’s permanent or primary place of residence, the residency for tax purposes shall change as of the date when the change in the place of residence takes place. For persons who stay in Estonia temporarily, the residency shall commence and terminate according to the calculation of the days when the person has stayed in Estonia. In order to eliminate the double residency according to tax treaties, in every particular case the dates of commencement and termination of the residency in another state shall be taken into account as well on the basis of the certificate of residency for tax purposes confirmed by the tax authority of that state.
 

2.3. Arrival in Estonia


A non-resident natural person shall be deemed to be a resident in Estonia as of the certified date of his or her arrival in Estonia over the course of a period of 12 consecutive calendar months and the person meets the conditions provided for in subsections 6 (1) and (5) of the Income Tax Act.

A natural person who arrives in Estonia shall apply to the tax authority with his or her application on Form R for determining his or her residency for tax purposes. The tax authority may make a decision immediately, at a person’s request, on the determination of the person’s status as a resident on his or her arrival in Estonia, if there is reason to presume, on the basis of the data submitted by the person, that he or she is staying in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months or he or she has come to Estonia with the intention to settle in Estonia. If a person comes from a state with whom Estonia has concluded the tax treaty, the possible double residency shall be determined and eliminated in each case in particular circumstances provided for in the tax treaty.

A natural person possessing a place of (permanent or primary) residence in Estonia is deemed to be a resident during a full period of taxation pursuant to the Income Tax Act. If person’s place of residence is changed, the status of residency for tax purposes shall be considered changed as of the date when the change of the place of residence takes place.

A natural person arrived in Estonia is a resident if he or she stays in Estonia for at least 183 days over the said course of a period of 12 consecutive calendar months. A natural person shall be deemed to be a resident as of the first day of his or her arrival over the said course of a period of 12 consecutive calendar month. A natural person arrived in Estonia shall be deemed to be a resident until the day of leaving (included), save in the case if the said person has got a permanent, lasting or primary place of residence in Estonia.

If a natural person is a resident in Estonia under the Income Tax Act, but according to the tax treaty shall be deemed to be a resident in another country, the person shall be registered as a non-resident in Estonia as of the date of the creation of treaty residency for tax purposes in that country. For registration as a non-resident, a person shall notify the Estonian tax authority about the circumstances concerning a change in his or her residency for tax purposes and shall submit the certificate of residence for tax purposes received from the other country.

On the basis of the information obtained from a natural person, the tax authority shall register the person as a resident or non-resident as of the date of arrival in Estonia. In the case if the circumstances related to changing person’s residency for tax purposes become apparent considerably later, the person shall be registered as a resident afterwards, when all circumstances be evident, as of the first day of arrival in Estonia. If the circumstances affecting the residency change, the person shall be obliged to notify the Estonian tax authority about the changes on the first opportunity in writing.
 

2.4. Leaving Estonia


A resident natural person shall be deemed to be a non-resident as of the calendar day following the date of his or her leaving Estonia, if the person meets the conditions provided for in subsections 6 (3) and (5) of the Income Tax Act.

If a resident natural person settles elsewhere in a manner whereof one can draw the conclusion that the person intends to change his or her place of residence (subsection 14 (3) of the General Part of the Civil Code Act) and there is left no place of residence for him or her in Estonia, and the person does not stay in Estonia for more than 183 days over the course of a period of 12 consecutive calendar months, and he or she is not an Estonian state public servant either, he or she shall be deemed to be a non-resident in Estonia as of the day following the date of leaving Estonia.

A resident natural person who has reason to presume that his or her status as an Estonian resident will change as he or she leaves Estonia, shall apply to the tax authority with his or her application on Form R for changing his or her residency for tax purposes in the register of taxable persons. A natural person shall be registered as a non-resident in Estonia, if the person no longer meets or, there is reason to presume that he or she will not meet (in the future) the conditions provided for in § 6 of the Income Tax Act.

The tax authority, having analysed the circumstances concerning a person’s residency for tax purposes (also the future, if known) shall make a decision on the person’s residency. A person shall be registered as a non-resident as of the day following the day when the person leaves Estonia. If it is not possible to determine on the basis of the data submitted by the person or collected by the tax authority whether the person's status as a resident is to be changed when leaving Estonia, the relevant decision shall be made, if necessary, afterwards when all circumstances be evident.

Moreover, if a person leaving Estonia is an Estonian resident on the basis of the criteria provided for in subsection 6 (1) of the Income Tax Act but he or she leaves for a state with whom Estonia has concluded the tax treaty and he or she is deemed to be a resident in that state pursuant to the valid taxtreaty, the person shall be registered as a non-resident as of the day when the person is deemed to be a resident in that other state pursuant to the tax treaty. In order to avoid the double residency on the basis of the tax treaty, a person shall submit the certificate of residence for tax purposes confirmed by the tax authority of the other state. If the circumstances affecting the residency change, the person shall be obliged to notify the Estonian tax authority about the changes on the first opportunity in writing.

If the tax authority has reason to doubt about the person's residency for the purposes of the tax treaty, despite of the certificate of residence for tax purposes issued by the other state, then the tax authorities of the two states shall determine the person’s residency in the course of mutual agreement process in accordance with the criteria provided for in the tax treaty.
 

3. On declaration and obligation of payment of income tax


Resident natural persons shall declare their entire income in Estonia or a person shall be charged on the principle of ‘world-based income’ (income derived throughout the world). If income tax has been withheld from taxable income of a non-resident at the rates provided for in § 43 of the Income Tax Act pursuant to § 41 of this Act, the non-resident shall not have an obligation to declare the said income. Non-residents shall declare the taxable business income received in Estonia pursuant to § 29 of the Income Tax Act and the gains derived from a transfer of property, as well as the taxable income on the basis of subsections 29 (1), (2), (6), (7), (9) or (10) of this Act wherefrom the income tax was not withheld.

A natural person who has not been a resident during the whole period of taxation shall submit an income tax return concerning the income received during the period only when the person has been a resident, and he or she may make deductions allowed under Chapter 4 of this Act for the same period of time; deductions provided for in §§ 23, 231, 232 and 233 of this Act may be made and the limit of deductions specified in § 282 shall be taken into account in proportion to the number of months during which the person has been resident (subsection 44 (12) of the Income Tax act). A proportionate calculation means that, for example, the status of residency for tax purposes during the period of time from 16 January 2016 to 3 March 2016 allows to deduct basic exemption of 510 euros from the income during a period of taxation (one calendar year) (3/12 x 2040). The income received as a non-resident during the same period of taxation shall not be indicated on resident’s tax return, for the said income the obligation for declaration of income provided for a non-resident shall be applied.

If a person is deemed to be a resident in several states pursuant to the laws of different states, the double residency can be eliminated on the basis of tax treaties. If a person is deemed to be pursuant to the tax treaty

  • a resident in Estonia, then the said person shall declare the entire income received throughout the world;
  • a resident in another tax treaty state, then the benefits and exemptions under the tax treaty shall apply to the said person, taking into account the obligations of a non-resident on declaration of the taxable income received in Estonia. In order to apply the benefit or exemption to the income of a non-resident under the tax treaty, a person shall submit the certificate of residence for tax purposes confirmed by the tax authority of the other state.

If a resident or non-resident natural person has received income taxable in Estonia pursuant to the Income Tax Act, then the said income shall be declared according to the prescribed procedure provided for in the Income Tax Act, taking into account the benefits or exemptions under the taxtreaty. Thus, for example, if a non-resident received the taxable income in Estonia pursuant to § 29 of the Income Tax Act, that is exempt from income tax on the basis of the taxtreaty, then the non-resident’s taxable income shall be declared, indicating the rate of income tax and the amount as “0”.
 

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18.04.2017