In this article we describe the factors that determine the tax residence of natural and legal persons or the existence of permanent establishments in the main Latin American countries as well as in Spain and Portugal, as well as the methods of interpretation that in some cases the tax authorities of these countries have issued, to account for (or not) biases caused by the health crisis.
The restrictions on movement caused by the health crisis have led to new ways of working and the organization of company activities. Homework has become a staple for many organizations, diminishing the importance of people's geographic location.
For example, we find cases where the pandemic has forced people to stay in a particular country longer than originally planned. In other cases, video calling has replaced face-to-face board meetings for companies, and more than some construction or installation projects in other countries have had to be extended because the staff required to complete them could not be brought to the site.
Although an individual's physical location, the place where a company's decisions are made, or the length of certain projects in other countries remain the main factors in determining the applicable tax on individual and corporate income, those described above could be Types of scenarios are important for these purposes.
Colombia
For both natural and legal persons, resident for tax purposes in Colombia means that they are taxable on their worldwide income, once they receive it, along with their assets in and outside the country, while non-residents are only taxable on their Colombian income and Assets in the country.
To the Individuals, The place of residence is determined as follows:
Foreign citizens: The only test that applies to this group is that they must have been in the country for more than 183 calendar days in a 365-day period, continuously or with breaks.
Colombian citizens: A Colombian not only spends the above-mentioned time in the country for foreign citizens, but also lives in Colombia:
- If your spouse or dependent child are Colombian tax residents.
- When 50% or more of the income they generate comes from Colombian sources, or when 50% or more of their assets are managed in Colombia, or when 50% of their assets are held in Colombia.
- If you do not provide proof of your residence in another country at the request of the tax authorities or if your residence is in a tax haven.
To the Legal entitiesThe factors that are taken into account in determining their residence status (in other words, a “national company”, and a “foreign company” if not resident) make up the main tax domicile, the laws under which the company was incorporated with the more effective place of administration. There is also the concept of a "permanent establishment" for foreign companies and corporations, according to which they must be taxable on the income of their branches or PEs.
Colombia has not put in place a special rule for calculating the length of time after which an individual can become tax resident due to COVID-19. However, the tax authorities have indicated in responses to motions for a resolution that in the event of force majeure events that have forced a person to reside in Colombia, evidence can be provided that they will not be treated as a tax resident.
The same principle should apply to cases where a company in Colombia could qualify as PE.
Peru
In Peru, residence or domicile is one of the contextual factors set out in the applicable legislation to determine who is taxable. Resident taxpayers have tax on their worldwide income, that is, on all taxed income they receive regardless of the nationality of the individual, the place where legal persons are incorporated or where the source of income is located. Non-resident taxpayers, along with their branches, agencies or permanent establishments, are only liable to tax on their income taxed from Peruvian source.
Individuals are deemed to be resident if: (i) they are Peruvian citizens and are resident in the country according to the rules of general law; or (ii) for foreigners, they have spent more than 183 calendar days in the country in a 12 month period. Residency status is lost if the person becomes resident in another country (with a visa or employment contract) and has left Peru. if they spend more than 183 calendar days outside the country in a period of 12 months.
Legal entities Completing the following tests is deemed to be a Peruvian resident, among others: (i) corporations or other legal entities incorporated in the country; and (ii) branches, agencies and other permanent establishments established in Peru by individual shareholders, companies and corporations of any kind incorporated in other countries.
Peru has not issued any special residence regulations due to COVID-19.
Mexico
Under the Income Tax Act, Mexico residents (individuals or legal entities) are subject to income tax on all income, regardless of where the source of that income is. Any person or entity that is resident for tax in other countries and has no permanent establishment in Mexico is only subject to tax on income from source in Mexico.
In relation to IndividualsUnder Mexican law, they are a resident if (i) they are settled in Mexico or (ii) they are Mexican citizens who are civil servants or government employees, even if their center of vital interest is in another country.
When a person is at home in Mexico and in another country, he or she will be resident in Mexico if their center for vital interests is there. A person's center of vital interests is in Mexico if, among other things, more than 50% of their total income for the calendar year comes from a source in Mexico or where their primary professional center is in Mexico. Another point to note is that if you are a Mexican citizen, you will not lose your tax resident status in Mexico if you prove your new tax residence in a country or territory where their income is subject to a tax break system, unless that country has one Comprehensive tax information exchange agreement concluded with Mexico.
Legal entities will be considered resident for tax purposes in Mexico if the main administrative activities for their business or their effective place of administration are in Mexico. From the point of view of federal tax legislation, it is assumed that a legal person fulfills this requirement if the place or person is where the person or persons are who take the decisions on the control, administration, operation or management of the legal person and their activities meet or implement Mexico.
Mexico has not issued any special residence regulations due to COVID-19.
Chile
Overall, the Chilean Income Tax Act (LIR) stipulates that everyone who is resident or domiciled in Chile must pay taxes on their worldwide income. In relation to individuals who are not domiciled or resident in Chile, the law provides that they are only taxable on their income from Chilean sources. It is important to note that the Chilean Income Tax Act itself allows an exception to this principle: foreigners who acquire a residence or residence in Chile are only taxable within the first three years after entering the country, which are extended in certain cases can. After this period, they will be taxed in the same way as Chileans residing or residing in the country.
For tax reasons, a Individually acquires residence in Chile where they have been in the country continuously or otherwise for one or more periods of more than 183 days within a period of 12 months. With regard to residence, since there is no tax definition, the concept established in the Civil Code that requires residence (i.e. physical presence) with an actual or perceived intention to stay in the place without requiring a specific length of time applies.
The law takes this into account Legal entities are resident in the place where they were incorporated, although companies incorporated or resident in other countries could in any case be considered to have an operating establishment in Chile if they have a place in Chile where they are permanently or habitually doing any business part of their business, operation or activity, such as offices, agencies, installations, construction projects and branches.
Finally, in relation to loss of residence status, Chilean Income Tax Law states that an absence or lack of residence in the country is not a causal factor in the tax loss of residence in Chile if the person continues, directly or indirectly, to have their business headquartered in Chile . Therefore, the mere fact that a person is granted a tax residence visa in another country is not in itself a sufficient element to conclude that the person has lost their tax residence in Chile.
Chile has not issued any special residence regulations due to COVID-19.
Uruguay*
* (Garrigues has no office in Uruguay)
The function of the concept of tax residence, fully introduced in the 2007 tax reform, was to determine what type of income tax should be levied on individuals or legal entities. On IndividualsIncome tax (IRPF) is levied as a double tax with progressive aliquot parts of up to 36% on salary income and proportional aliquot parts of up to 12% on other income from capital and capital gains or non-resident income tax (IRNR). with a proportional aliquot of 12%.
On legal Entitiesbusiness income tax (IRAE) is levied, a corporation tax with an aliquot of 25% on adjusted income per book, or the same non-resident income tax (IRNR) as for natural persons if the company is not resident and has none Establishment in Uruguay.
Since 2011, Uruguay, in connection with its full integration into the OECD Budget Committee, has abandoned the source principle for individuals and levied taxes on various types of income generated in other countries. This does not apply to persons who acquire tax residence and who take advantage of the tax vacation option, where their income from foreign sources does not have to be taxed for up to 11 fiscal years due to a change in the legislation introduced in 2020.
Individuals acquire tax residence if they pass one of the following exams:
- You spend more than 183 days in Uruguay in a calendar year, including sporadic absences.
- The main center or base of their activities or their economic or vital interests is in Uruguay. For this purpose, it is assumed that vital interests exist if your spouse or dependent minor descendants reside in Uruguay. Under Uruguayan law, Uruguay has a base of economic activity in which certain investments have been made in the land, with the following approximate current values: at least USD 375,000 invested in real estate; Over $ 1,600,000 has been invested in companies that will create at least 15 new jobs.
Legal entities are resident if they were founded under the laws of Uruguay or if they relocate to the country (redomiciliation).
Uruguay has not issued any special residence regulations due to COVID-19.
Brazil
* (This section was created by the independent Brazilian law firm NBF | A.)
In Brazil, the worldwide income principle applies to natural and legal persons. Individuals Brazil residents are subject to Income Tax (IRPF) and Legal entities are subject to corporation tax (IRPJ and CSLL).
For tax reasons, a Individually is taxable in Brazil if you are a permanent resident of Brazil, entered Brazil on a permanent visa, or entered Brazil on a temporary visa and the following circumstances occur:
- The temporary visa holder has a local employment contract (Brazilian tax residence starts on the day of entry into Brazil).
- The temporary visa holder spends more than 183 days in Brazil in a 12 month period. or
- The holder of the temporary visa will receive a permanent visa (even before the above 183 days have expired).
To the Legal entities, Their place of residence is based on their main tax residence, and their effective place of administration determines their residence status. There is currently no clear definition of “permanent establishment” in Brazilian tax law.
Finally, Brazil has a Golden Visa mechanism based on the foreign investor attraction program adopted by Portugal. In short, a foreign investor can get permanent residence in the country if he buys a Brazilian property worth at least R $ 1 million.
Brazil has not issued any special residence requirements due to COVID-19.
Spain
Individuals and legal entities resident in Spain are taxed in Spain on their entire worldwide income, including income from foreign sources. A Individually will be resident for tax purposes if: (i) they spend more than 183 days in a calendar year in the country (including sporadic absences); (ii) the main center of their economic activities or interests is in Spain; or (iii) her legally separated spouse and minors reside in Spain.
A legal entity is resident for tax purposes in Spain if it was incorporated under Spanish law or if its seat or place of effective administration is in Spain.
Taxholder status will be lost if these requirements are no longer met. Any person who loses resident status must include in their taxable income any unreported income and unrealized capital gains arising from owning substantial interests. Companies moving from Spain must include the difference between the market value and the taxable value of their assets in their tax base. In both cases, if you move to another EU or EEA country, you have the option of deferring the exit tax or you may not have to pay it at all.
Tax residence in Spain does not depend on legal residence or vice versa. Therefore, citizens who obtain a Golden Visa Investor Residence Visa must meet the requirements set out in tax legislation. However, individuals who meet the established requirements are allowed to choose the special scheme for fixed-term workers in Spain (commonly known as the Beckham Law) and only be taxable on their income from Spanish sources at very reduced tax rates.
Regarding the assessment of the tests to determine tax residence under COVID-19, the DGT concluded that the days spent in Spain during the State of Emergency (lockdown) are for the purposes of the 183-day test counting.
Portugal
Standard taxpayers resident in Portugal are usually taxed at progressive rates of up to 48 percent (with flat rates of 28 percent for certain types of passive income) on their worldwide income, and there is a foreign tax credit to eliminate any double taxation of foreign – Withholding income. On the other hand, non-habitual tax residents (NHR) are entitled to a favorable flat tax rate of 20 percent on income from self-employment and self-employment from "activities with high added value" combined with the right to use the exemption method for certain categories of for 10 years To apply income from foreign sources. There is essentially no wealth tax and / or inheritance tax in Portugal.
A Individually will be considered taxable in Portugal if they pass one of the following exams: (i) they have spent more than 183 consecutive days or otherwise in Portugal in a 12-month period beginning or ending in the relevant financial year; or (ii) they have a home and there are circumstances that suggest they would like to keep it and habitually reside on any day during the above period.
In order to apply for the NHR regime, Portugal took a rather light-weight approach with two conditions: (i) The first requirement is that the applicant has not been considered a Portugal resident taxpayer for the five years prior to residing in Portugal. (ii) The second requirement is that the applicant qualify as a resident taxpayer in Portugal for a given tax year under the general residence exams.
The NHR Exemption Method for Income from Foreign Sources is an evolving exemption. If the taxpayer derives other taxable income in Portugal (which is not a flat-rate), a portion of the income exempted under the NHR rules is taken into account to determine the progressive rates that apply to the remaining taxable income. If the exemption method is not applied (or the NHR applies the credit method), a tax credit for the elimination of international double taxation will be granted for foreign withholding taxes up to the tax amount due in Portugal.
Finally a legal person is resident in Portugal for corporation tax purposes if it has its legal place of business or effective management there indicated in its articles of association (namely the place where the key management and business decisions necessary for the management of the company as a whole are essentially made in Made in Portugal.
Although Portugal has not issued any specific rules of residence due to COVID-19, other measures have been taken regarding social security contributions and tax payments without affecting tax residency in Portugal.