Concept of “Center of vital interests” in determining tax residency status

Concept of “center of vital interests” in determining person’s tax residency status becomes more and more relevant. In this article we will consider the essence of this concept and its application in various jurisdictions.

Concept of “Center of vital interests”

Center of life interests – person’s close personal and economic ties to a particular state.

The international definition of “center of vital interests” is contained in Article 4 of the United Nations (UN) Model Double Taxation Convention. A center of vital interests is a person’s close personal and economic ties to a particular state.

According to the commentary in paragraph 15 of the UN Model Double Taxation Convention, the center of vital interests is determined by taking into account:

• family and social ties;
• social activities;
• political activity;
• cultural activity;
• the place where income-generating activities are carried out;
• the place from which the real estate owned by the person is managed.

Approaches in different jurisdictions

Now we review the approaches to determining the center of vital interests in different jurisdictions.

Belarus

In Belarus, the concept of “center of vital interests” is not directly defined in the tax legislation or in special regulations. Therefore, this criterion is not subject to national legislation, but is determined privately by an international double tax treaty. The Belarusian tax authorities determine the center of vital interests on the basis of: length of stay in the country, business activity or residence of family members in Belarus.
 

Russia

There is no direct definition of the term “center of vital interests” in the Tax Code of the Russian Federation. However, the Letter of the Federal Tax Service dated June 25, 2020 No. BS-3-11/4763 “On Personal Income Tax” mentions the application of this criterion when considering cases of double tax residency of a person. Specific criteria for determining the “center of vital interests” as stated in this letter or another legislative act are not given. In determining tax residence on this basis, a combination of criteria listed in a separate international double tax treaty will be taken into account.

Cyprus

There is no direct definition and criteria for “center of vital interests” in the Cyprus tax legislation. Instead, it is derived from the UN Model Double Taxation Convention. It is important to note that each case is considered individually and the final decision is made by the tax authorities based on the circumstances of the particular case. In practice, this means that in order to be recognized as a tax resident of Cyprus, a person must prove that his/her center of vital interests is located in the territory of this state. This may include a long stay in the country for a year, having family and business here, and other factors showing that the person has close ties with this country.

Spain

The center of vital interests is primarily determined by the place of residence of family members such as spouses and children. The designation of Spain as the main place of economic activity is also an additional criterion. It is the presence of their residence in Spain that can have a significant impact on the determination of tax residency status. This approach is established in Articles 8 and 9 of Spanish Law 35/2006 on Income Tax.

Turkey

The Turkish Personal Income Tax Law does not explicitly define the term “center of vital interests”. The application of this criterion in the territory of the country is determined through a separate tax treaty on avoidance of double taxation. According to the rules for determining taxpayers, Turkish citizens permanently residing abroad and performing economic activities for the benefit of a company headquartered in Turkey are liable to pay taxes in Turkey.

General criteria for determining a life interest center

• Social ties: Ties to the local community, such as membership in clubs, participation in local social activities, or involvement in educational or charitable organizations;
   
• Financial ties: Having bank accounts, investments, property or businesses in the country may also indicate a center of life interest;
   
• Family ties: Having family, especially a spouse and children living in the country, may be considered an important factor;
   
• Source of income: The location of the main source of income may also be a key factor in determining tax residency;
   
• Place of residence: The actual place of residence, such as owning real estate or renting a home in the country, may be considered in determining residency;
   
• Intent to remain: A person’s plans or intentions to remain in the country permanently may be taken into account in determining residency.

Although there are general criteria for determining the center of vital interests, different countries apply the two most common grounds depending on their national legislation and international tax law practices:

• Place of residence or presence of real estate in the country;
• Source of income and family ties.

Migration and tax planning should take into account not only the primary criterion for determining tax residence (generally 183 days of stay), but also secondary criteria (e.g. center of vital interests).

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