GFD on determining tax residence of individuals

This is not a revolution in the Income Tax Act but rather a fairly detailed guidance of considerable practical importance, particularly for determining the scope of taxation of income of mobile employees and individuals staying abroad on a long-term basis.

The guidance is based on the Income Tax Act and builds on previous interpretations (e.g. Instruction D-59). At the same time, it expressly confirms certain rules that had so far remained largely unwritten and clarifies some controversial situations. It also includes a number of illustrative examples.

The conclusion of the guidance confirms that, when determining tax residence, it is always necessary first to analyse the tax residence criteria under national law. Only where, under national rules, an individual is regarded as a tax resident of two (or more) states can the relevant double tax treaty be applied. Under no circumstances is it possible to determine tax residence solely on the basis of the rules in a double tax treaty.

The guidance also emphasises that each case must be assessed in the context of all relevant circumstances and in all related respects. It is therefore necessary to evaluate the taxpayer’s overall situation.

The guidance therefore provides an important insight into how both the financial administration and taxpayers should assess the tax residence of individuals in practice.