(Please note that this is a simplification of the court case discussed below for purposes of our newsletter)
With personal and business interests outside South Africa, it is increasingly probable for taxpayers to trigger tax residency in two countries at the same time. Tax residency depends on countries’ domestic tax laws, e.g. you may trigger tax residency in a country:
• based on your intention being that the specific country is your centre of vital interest and where you will return to after traveling,
• based on a days-test over a 12-month or another period,
• based on the fact that you have a permanent home exclusively available to you in that country, or
• based on other jurisdictions’ domestic tax residency tests, as it may be applicable.
This is where tax treaties, or double tax agreements, find its application. Tax treaties assist in allocating taxing rights to a specific country by way of a tiebreaker test when a taxpayer is deemed to be tax resident in both countries. This is to ensure that the taxpayer is not double-taxed. Tie-breaker clauses may differ from treaty to treaty. Based on these submissions, it is clear that these matters are particularly complex and dependent on each taxpayer’s personal fact set.
Oppenheimer v HMRC:
Case law relating to treaty residence are extremely rare and therefore the recent Oppenheimer v HMRC [2022] UKFTT 122 (TC) will be an important point of reference, specifically relating to treaty residence and application of the tiebreaker test in a tax treaty.
Oppenheimer v HMRC was heard in the United Kingdom (“UK”) by the First-tier Tribunal (“the tribunal”). The tribunal was requested to consider if the said taxpayer’s (Oppenheimer’s) centre of vital interest is in SA or in the UK based on the UK/ SA tax treaty’s tiebreaker test. This specific tiebreaker test applies the following sequence:
• Does the taxpayer have a permanent home available to him in one or both countries? This was the case in Oppenheimer v HMRC.
• If the taxpayer has a permanent home available to him in both countries, then the taxpayer’s “centre of vital interest” should be considered.
• If undeterminable, or if the taxpayer has no permanent home in either country, then “habitual abode” needs to be considered. Habitual abode refers to the length of stay in a particular country, or where the taxpayer resides more frequently.
• Should this also be a tiebreaker, then nationality is considered.
The tribunal considered the following:
• As a permanent home was available to him in both countries, the taxpayer’s “centre of vital interest” was considered. This included his lifestyle and work broadly, and including family and social relations, occupations, political, cultural and / or other activities. Applying these factors objectively and also with an element of subjectivity, the tribunal held that the taxpayer’s “centre of vital interest” was in SA despite spending more time in the UK during the periods in question and more than half of his life overall.
• To ensure completeness and in the event that the application above was incorrect, the tribunal considered “habitual abode”, i.e. the “frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more that transient”. This proved to be challenging due to the mobility of the taxpayer’s lifestyle within a global context. The taxpayer were routinely residing in both SA and the UK, and this was part of his settled lifestyle. The tribunal held that this way of living was “of sufficient frequency, duration and regularity” to establish habitual abode in both SA and the UK, hence leading to a tie-breaker.
• The last factor of the sequence of the UK/SA tax treaty’s tiebreaker test was applied and the taxpayer was found to be treaty resident in SA, not only based on his “centre of vital interest”, but also based on the fact that he is a SA national.
Conclusion:
It is clear that these matters are particularly complex and dependent on each taxpayer’s personal fact set. Tax treaties are bilateral, and in some instances there are no treaty with SA in existence when specific jurisdictions are considered. It is therefore important to obtain prudent tax advice if you are a mobile taxpayer with connections in more than one country.
Please contact Suzanne Smit should you have specific questions relating to the Oppenheimer-case or if you require cross-border tax and exchange control advice: suzanne@fidelisvox.co.za.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)