The word “expatriate” is not defined under both the Rwandan Immigration Laws and the Tax Laws. Usually, it refers to an employee who comes to work in a country, in this case Rwanda, for a short period, say between six months and five years.
There are many reasons why people become expatriates. For most it is for work reasons. Usually, an expatriate does not intend to become a permanent resident of the country. Therefore from a Rwanda income tax perspective, an expatriate may be a non resident person, a short term resident person, or a full term resident person.
An expatriate would be deemed to be resident in Rwanda if he has a permanent home in Rwanda, or is present in Rwanda for periods aggregating to 183 days (six months) over a period of twelve months. This means if a person comes to Rwanda and stays for period which is less than 183 days, or six months in aggregate, in any one tax year, he will not be treated as a Rwanda resident person for tax purposes.
The biggest challenge with regards to determining the tax status of expatriates in Rwanda is establishing the effective date when an expatriate becomes a Rwandan resident person. Is it on the 184th day of his stay in Rwanda, or the day when he arrives in Rwanda, provided he will be staying for more than 183 days? The tax rules provide some guidance to this, although it is always not a very straight forward case.
The place where the expatriate employee exercises his employment, which is often the same place where he renders his services, is considered as the expatriate’s place of employment. If that place is in Rwanda, then the expatriate will be deemed to be sourcing income from Rwanda, and that income is therefore subject to tax in Rwanda.
The place where the expatriate’s salary is paid is usually not relevant for purposes of taxation. What is important is the purpose for which the payment was made. As long as the payment was made in respect of services rendered by the expatriate in Rwanda, then usually that payment is subject to tax in Rwanda. The rationale for this is that the payment is being made to the expatriate in respect to services rendered by the expert to his employer, while in Rwanda.
An expatriate may be resident in more than one country, especially in the year of arrival in Rwanda and the year of his departure from Rwanda. In such a case, the expatriate may be taxable in both countries on his worldwide income. If there is a Double Taxation Agreement (DTA) between the two countries, then usually such a DTA would have a tie breaking clause which would be used to determine which of the two countries have the first right of taxing the expatriate’s income.
In applying the tie breaker clause, there is a hierarchy of tests that have to be followed. The first test is where the individual has his permanent home. The country in which the individual has his permanent home is the country which has the first right to tax that individual’s income. The other tests that are applied in their order are, the individual’s centre of vital interests (that his personal and economic relations); then the country of habitual abode (where he normally resides), his nationality; and if all that fails, then the two countries would have to work out a mutual agreement on which one should tax the income.
I will discuss what we mean by “permanent home” in this column next week.
The author is a Tax Manager at PwC Rwanda