Temporarily Resident Individuals
A person is considered a temporarily resident individual under Section 11 of the Income Tax Act , if the person otherwise satisfies the definition of a resident individual but is not a citizen of Sierra Leone or domiciled in Sierra Leone and does not intend to reside in Sierra Leone for more than four years. The subjective intention test is reinforced by an objective retrospective test that measures the four-year residency period back from the year of assessment, regardless of the taxpayer’s intention.
- Only individuals who are not citizens of Sierra Leone and who are not domiciled in Sierra Leone can qualify as a Temporary Resident.
- Domicile is a complicated legal concept partly based on the place of birth of the individual and of his parents. Legal advice must be obtained if an individual claims to be not domiciled in Sierra Leone.
Chargeable Income of Temporarily Resident Taxpayers
Section 15 of the Income Tax Act defines what chargeable income can be assessed on temporarily resident taxpayers. The taxation of worldwide income is modified so that only income remitted to Sierra Leone is taxed in addition to income arising in Sierra Leone.
The calculation of the chargeable income of a temporarily resident taxpayer is similar to that for a resident taxpayer.The deduction provisions are limited to expenses that are incurred to derive assessable income, so a deduction will not be available for expenses that are incurred by a temporarily resident taxpayer to derive income from a source not in Sierra Leone that is not remitted to Sierra Leone.
Residence in Sierra Leone – Individuals:
Residents are liable to tax on their income derived from any source (see Section 14 of the Income Tax Act, while non- residents are liable to tax only on their Sierra Leone-source income (see Section 16 of the Income Tax Act).
If a director is resident in Sierra Leone, then he is liable to Sierra Leone income tax on the whole of his worldwide income. A director who has companies in Liberia and Sierra Leone may have to pay tax here on his Liberian income depending on his residence position.
Subsection (1) of Section 10 of the Income Tax Act provides for three alternative tests of residence:
• A normal place of abode test
• A more–than–182 day test, and
• An official of the Sierra Leone Government test.
An individual who does not satisfy any of these tests is a non – resident for the purposes of this Act. The operation of each test is outlined below:
1) An individual with a normal place of abode in Sierra Leone who is present in Sierra Leone for part of the year of assessment is a resident individual under section 10 (1)(a). Place of abode is the place at which a person normally lives- his home.
- There is no minimum period of presence under this test. This means, for example, that a person posted overseas for, say, eighteen months who maintains a home in Sierra Leone and who returns to Sierra Leone during the year of assessment for a holiday will be a resident for the whole of the year of assessment. While the individual is a resident in these circumstances, he or she may be exempt from Sierra Leone income tax on overseas employment income under section 91.
2) An individual who is present in Sierra Leone for more than 182 days during a 12 months period that commences or ends in a year of assessment is a resident individual under section 10(1)(b) for the year in which the 12 month period began or ended. However, a person satisfying this test may be a temporary resident under section 11 and thus exempted from the consequences of ordinary residency.
- The more-than-182 day test is based on any 12-month period rather than a year of assessment. If the 182 days were measured only in terms of a year of assessment, an individual could stay in Sierra Leone for a continuous 364 days without establishing residency by dividing the stay between two years of assessment (for example, arrive on the 2nd of July and depart on the 29th of the following June).
- Without further measures, the more-than-182 day test could lead to anomalous results. For example, a taxpayer arriving in Sierra Leone on 2 June and departing on 2 January would be a resident of Sierra Leone during the year of arrival and the year of departure since the person was present in Sierra Leone for a period greater than 182 days that started in one year of assessment and ended in a following year of assessment.
- However, subsections 10(2) and 10(3) will protect this person by treating the person as a non-resident prior to 2 June and after 2 January. Thus, the person would be liable to taxation in Sierra Leone on income from all sources derived on or after on or after 2 June; only the person’s Sierra Leone-source income would be subject to taxation before that date. The ordinary derivation rules apply to determine when a taxpayer who changes residency status derives foreign or Sierra Leone-source or Sierra Leone-source income.
- The more-than-182 day test may be satisfied by a single period of presence in Sierra Leone, or by the aggregation of two or more periods within the period of twelve months. Presence in Sierra Leone for a part of a day will count as a whole day for the purpose of applying this test.
3) An individual who is an official of the Sierra Leone Government posted overseas during the year of assessment is a resident individual under 10(1)(c). It is the individual’s status as an official of the Sierra Leone Government which determines residence under this test. Consequently, this test is satisfied regardless of whether or not the person is present in Sierra Leone for any part of the year of assessment.
- Subsections (2) and (3) apply to persons who become or cease to be residents of Sierra Leone during a year of assessment will be assessed on Sierra Leone-source income only for the part of the year of assessment proceeding the date on which they became a resident and for that part after they ceased to be a resident.
- Subsection (4) contains a number of exceptions to the preceding subsections. Paragraph (a) applies to persons who may reside outside Sierra Leone but who are employed in Sierra Leone or employed elsewhere but who cross into Sierra Leone to carry out their employment. For example, a person resident in Liberia who crosses the border to work in Sierra Leone would be exempted from the application of the 182-day rule by this subsection. But he would have to cross back into Liberia at the end of the day. Paragraph (b) applies to persons who transit through Sierra Leone. This paragraph may apply to persons such as airline employees.
- Further exemptions to the ordinary residency rules are found in paragraphs (c) and (d). Paragraph (c) applies to persons present in Sierra Leone for the purpose of medical treatment or full-time study at, say, the college. Paragraph (d) applies to diplomats and members of their family. The effect of treating a diplomat as a non-resident for tax purposes is to exclude non-Sierra Leone income from taxation. Thus, investment income derived overseas by a diplomat will not be subject to Sierra Leone taxation. However, income from Sierra Leone-based investments derived by a diplomat will be subject to Sierra Leone taxation since non-residents are assessed on Sierra Leone-source income.
3. Resident Company:
Section 12 provides rules for determining whether a company is a resident of Sierra Leone. Subsection (1) provides three alternative tests of residence; place of incorporation; place of management and control; and place of majority of operations. Subject to subsection (2), a company that does not satisfy any these tests is a non-resident person for the year of assessment. The operation of each test is outlined below:
- First test: A company that is incorporated or formed under the laws of Sierra Leone is a resident company under section 12(1) (a). The reference to a company being ‘formed’ ensures that this test applies to entities within the expanded definition of ‘company’ in section 2 such as unincorporated associations.
- Second test: A company that is not incorporated in Sierra Leone but which has its management and control in Sierra Leone is a resident company under section 12(1)(b). The reference to the management and control of a company is intended to adopt the test of corporate residence in United Kingdom judicial decisions. According to these decisions, the management and control of a company is regarded as being in the hands of the directors rather than the shareholders; consequently, the management and control of a company is usually located at the place where the directors exercise their powers of management. In this regard, the focus is on the location of the superior and directing authority of the company and not the place of day-to-day operations.
- Third Test: A company that undertakes a majority of its operations in Sierra Leone is a resident company under section 12(1)(c). This test is intended to overcome tax avoidance practices whereby it is ensured that the place of incorporation, and management and control of a company is located outside Sierra Leone even though the majority of the company’s operations occur in Sierra Leone. Tax Auditors may find Sierra Leonean companies that are wholly owned by a foreign company. In some circumstances, the second and third tests mentioned above could lead to the foreign company being treated as resident in Sierra Leone.
- Foreign permanent establishment is a fixed place of business of a resident person situated in a foreign country where the business is conducted continuously for at least 183 days, but excludes any place at which only activities of a preparatory or auxiliary nature are conducted.