The exercise of fiscal sovereignty or jurisdiction to tax is, across the world, based on residence or source, and only the United States claims taxing rights over its citizens irrespective of their country of residence.
Rwanda also applies residence and source as connecting factors when exercising its jurisdiction to tax. Under these connecting factors, residents are liable to pay tax in Rwanda on their worldwide income (i.e., income derived from or sourced in Rwanda) whereas non-residents are only liable to pay tax on income derived from/sourced in Rwanda. But when does one become or cease to be a tax resident in Rwanda?
Law nº 027/2022 of 20/10/2022 establishing taxes on income as amended (the Income Tax Law) provides for different tests for individuals and corporate bodies, but the focus of this article will be on tax residence of individuals.
In terms of article 4 of the Income Tax Law, an individual is considered a Rwandan resident for tax purposes if he/she (1) has a permanent residence in Rwanda, (2) has a habitual abode in Rwanda (3) is a Rwandan representing Rwanda abroad, (4) is present in Rwanda during the tax period for a period or periods amounting in aggregate to 183 days or more, or (5) is present in Rwanda during the tax period of assessment and has been present for periods averaging more than 122 days in each of the two preceding tax periods.
The last three conditions are objective, and one can easily ascertain whether they have become and/or continue to be a Rwandan tax resident based on the same. For instance, if a person who does not have a permanent home or habitual abode in Rwanda spends 183 days or more in Rwanda during the period between January and December (whether consecutively or intermittently), they should know that they have become a Rwanda tax resident with the attendant tax implications. This would also be the case if one spends even a single day in Rwanda in a given tax year so long as they have spent more than 122 days (whether consecutively or intermittently) in each of the two previous tax years.
On the other hand, the last two conditions (i.e., having a permanent residence/home or habitual abode) can be subjective and need to be considered on case-by-case basis. Attempt has however been made to provide guidance as to what constitutes permanent residence/home in Rwanda under the ministerial order nº003/19/10/TC of 29/04/2019 determining a taxpayer’s permanent residence and the location of effective place of management. This ministerial order defines permanent residence as a taxpayer’s home, his or her house, an apartment, a hotel or any other residential quarters in Rwanda where the taxpayer usually stays.
The critical element here is not whether the individual owns the place or not, but the permanence of it, hence the use of the words ‘usually stays’. In this vein, for any of the above-mentioned places to be considered a permanent residence/home, the individual must have arranged to have the dwelling available to him or her at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration such as travel for pleasure, business travel, educational travel and attending a course at a school.
For instance, a house owned by an individual cannot be considered to be available to that individual during a period when the house has been rented out and effectively handed over to an unrelated person so that the individual no longer has the possession of the house and the possibility to stay there. The conclusion would however be different if the house is available for the said individual to stay there.
The applicable laws do not provide any guidance on what should be understood as habitual abode, but according to the OECD Commentary on 4 of the OECD Model Tax Convention, it is more about determining whether the individual lived habitually, in the sense of being customarily or usually present in a given country. It refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient.
In consideration of the above different applicable tests in determining individual tax residence, it is not strange that some individuals may find themselves in a dual-residence situation i.e., being a tax resident of two different countries. For instance, one may have permanent homes in more than one country or have a permanent home in a foreign country, but spend 183 days or more in Rwanda in a given tax year, etc.
Unfortunately, Rwandan tax laws do not provide for any solution in case of dual tax residence, something that may lead to unrelievable double taxation. However, where the situation of dual residence arises in relation to a person who is also a resident of a country that has concluded a double taxation avoidance agreement (DTAA) with Rwanda, all DTAAs concluded by Rwanda include the so-called tie-break rules.
The said rules give prevalence to the country where the person has a permanent home, and where the person has a permanent home in both countries, the country with which his personal or economic relations are closer (centre of vital interest), where the centre of vital interest cannot be determined, the country in which he/she has a habitual abode, and if he/she has a habitual abode in both countries or neither of them, the country of which he/she is a national.
The above analysis clearly indicates that tax residence is a quite delicate one, and individuals spending substantial time and/or having homes and other vital interests both in Rwanda and other countries should carefully consider their tax affairs to ascertain whether they have become or continue to be Rwandan tax resident, given what it means to be a tax resident i.e. subject to the applicable rules on foreign tax credit, the liability to pay tax on their income irrespective of the country where it is derived from.
The views contained herein are those of the author.
The writer is a tax and corporate commercial lawyer and International Tax Affiliate at the Chartered Institute of Taxation, UK.