Author: Maryna Pokotylo, Partner at F&P
Double taxation is the simultaneous imposition of tax obligations on the same income or property of an individual or legal entity in different states. That is, if a person is a tax resident of both Ukraine and Canada, they are obliged to pay taxes to the budgets of both countries. It is clear that such a situation creates a significant financial burden, so entrepreneurs wish to avoid double taxation. It is possible that the absence of double taxation reduces the number of tax disputes related to the determination of residency, double interpretation of tax objects, and so on.
The key element in this matter is the determination of tax residency. It is residency that defines where and how an individual should declare their income. In this publication, we will examine, through an example, how tax residency is determined, what documents are needed to confirm it, and how to use international agreements to protect your financial interests.
A Canadian citizen, who emigrated from Ukraine back in 2020, approached the law firm Fedoryshyn and Partners. The main request of the client was to avoid double taxation.
To resolve this issue, it is necessary to determine tax residency.
Tax residency is the status of an individual that determines in which country they must pay taxes on their entire income. According to Canadian tax legislation, the presence of Canadian tax residency status must be comprehensively confirmed with documentary evidence of the following facts:
- registered permanent residence in Canada;
- permanent residence of family members in Canada;
- employment relations with a Canadian employer;
- rental (purchase) of real estate in Canada;
- teaching children in school or in preschool;
- opening accounts in Canadian banks, etc.
In addition, it is necessary to understand international legislation, as a number of countries have entered into international agreements to avoid double taxation. Currently, there are 71 international bilateral conventions (agreements) on the avoidance of double taxation in effect between Ukraine and other states (the current list is available on the website of the Ministry of Finance of Ukraine).
In particular, according to paragraph 2 of Article 4 of the Convention on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital between Ukraine and Canada, if an individual is a resident of both Contracting States, their status is determined as follows:
- (a) she is considered a resident only of the State where she has a permanent home. If she has a permanent home in both States, she is considered a resident only of the State with which she has the closest personal and economic ties (center of vital interests);
- (b) if the State in which she has her center of vital interests cannot be determined or when she does not have a permanent home available to her in any of the States, she shall be considered a resident only of the State in which she has a habitual abode;
- (c) if she usually resides in both States or when she usually does not reside in either of them, she is considered a resident only of the State of which she is a citizen;
- (d) if she is a citizen of both States or if she is not a citizen of either of them, the competent authorities of the Contracting States shall resolve the issue by mutual agreement.
It should be noted that the application of Ukraine’s international treaty regarding tax exemption or the application of a reduced tax rate is allowed only on the condition that the non-resident provides the person (tax agent) with a document confirming their tax resident status – a certificate. From this, it follows that the client needs to obtain a certificate from the Canadian employer and the Canada Revenue Agency, which, in turn, must be legalized and translated at the Embassy of Ukraine in Canada.
Additionally, it is possible to obtain documentary confirmation of the absence of primary activities in Ukraine:
- Certificate form OK-5 “Individual Information about the Insured Person.” It contains data on the amount of earnings for the appointment and calculation (recalculation) of pension amounts, as well as for the accrual of sick leave, social benefits (including the minimum wage supplement), and insurance experience. It can be obtained through “Diia” or the website of the Pension Fund of Ukraine.
- Certificate form OK-7 “Individual Information about the Insured Person.” Contains information about the actual amounts of wages from which the unified social contribution is paid (within the maximum limit) and the insurance period. It can be obtained through “Diya” or the website of the Pension Fund of Ukraine.
- Certificate from the State Register of Individuals – Taxpayers about the sources/amounts of accrued income, withheld and paid tax, and military levy. It can be obtained through “Diia” or the taxpayer’s electronic cabinet.
Separate attention should be paid to financial transactions.
Since Ukraine joined the Multilateral Agreement on Automatic Exchange of Financial Account Information (hereinafter referred to as the Multilateral Agreement) in the summer of 2022, a regular exchange of various financial information regarding individuals and legal entities between countries should be expected (personal data, information about foreign bank accounts, account balances and amounts, account inflows, etc.). The first exchange of tax information took place in the 4th quarter of 2024, which extended to 50 foreign jurisdictions.
Considering that at the time of contacting our law firm, the client was a resident of both Canada and Ukraine, we recommended that she engage in consultations with the bank to agree on the possibility of submitting information about her tax residency status, for which she should provide her Canadian passport and tax returns. However, this does not necessarily exempt her from the obligation to provide information about her tax residency status in Ukraine, as the mentioned Multilateral Agreement requires banks to obtain information about all countries where an individual is a tax resident.
It is important to understand that failing to provide the bank with information about assets and income may lead to the blocking of transactions at the bank or other sanctions. Meanwhile, providing such information will allow tax authorities to obtain the necessary data in accordance with the Multilateral Agreement.
In addition, in legal practice, banking institutions may take into account the legal conclusions of a Ukrainian lawyer, which will outline the position regarding the absence of signs of tax residency in Ukraine under the given circumstances. The same applies to the involvement of a Canadian lawyer, who can prepare a report explaining the specifics of Canadian tax legislation.
Therefore, to avoid double taxation, it is necessary to thoroughly familiarize yourself with the relevant convention, national legislation and analyze the documents available to the individual. The law firm Fedoryshyn and Partners can assist you with this, as it has a large number of successful cases in avoiding double taxation and is an expert in providing consultations on tax residency.
