1.6 Tax residence: considerations and implications
To determine if a person should be subject to taxation, countries generally use the following criteria:
| Residence: | a country may tax the income of anyone who lives there, regardless of citizenship or whether the income was earned in that country or abroad; |
| Source: | a country may tax any income generated there, regardless of whether the earner is a citizen, resident, or non-resident; or |
| Citizenship: | a country may tax the worldwide income of their citizens, regardless of whether they reside in that country or not. |
Most countries use residence and/or source when determining if a person should be subject to taxation. The USA, and to a lesser extent some other countries,5 are notable exceptions.
The place of residence for tax purposes is therefore generally important in determining how you are taxed. If you have connections with, and spend long periods in, more than one country, there may be uncertainty about whether such connection or time spent in different jurisdictions does not make you tax resident in more than one place. The question of tax residence is very important for internationally active people, because getting it wrong can be expensive and time-consuming to resolve.
Other than the number of days spent in a country - which is generally the most important factor – a wide range of personal, business, property, economic and social connections must also be considered to determine “residence for tax purposes”.
In many countries, the laws and regulations are ambiguous, except for minimum thresholds (i.e. below a certain number of days of presence in the country - with anywhere between 10 and 90 days a year, you are generally safe and would normally not be deemed resident for tax purposes, depending on the country), and there is generally no clear guidance on the relevant weight of each factor.
Other factors that can play a role include
By choosing a country with a mild tax climate for a main residence, a taxpayer can considerably reduce his burden legally and effectively without the need for complex tax planning. Monaco, Belgium, Malta, Switzerland, St Kitts and Nevis, Hong Kong, Singapore, the United Kingdom or Croatia, to name a few, are attractive destinations in this respect. So a change of residence may well be worthwhile not only as a lifestyle choice but also from the standpoint of taxation.
The move will either have tax advantages and tax savings or it can create a greater tax burden, depending on the jurisdiction. It is therefore imperative to establish the tax implications prior to changing residence. Interesting scenarios could arise that one would not ordinarily be aware of. Most sensibly, one should consult a tax advisor who is versed in the tax laws of both countries.
A trend which we see with tax authorities around the world is that they look not only how long you are resident in a particular country, but also whether you may be spending more days in their country than in any other single country. In other words, even if you spread out your presence globally across several jurisdictions, and say you are spending your year in 6 different countries with 80 days, 70 days, 60 days, 75 days, 10 days and 65 days in each, then it could be that the tax authorities of the country you spend 80 days could still deem you tax resident (practically of course only if you have some other connection there), even if you are well below the normal threshold for that country but simply because you spent even less time elsewhere.
Day counting
If you spend more than 183 days in any country, you are normally tax resident in that country, unless the presence there is of a temporary nature. If you spend no time at all in a country, you cannot be deemed tax resident.
Between zero and 183 days lies a wide range of possibilities, although normally there are some minimum thresholds of number of days below which you are “safe”.6
You also need to be aware of what constitutes a day spent in any particular country. Is it a full 24 hours? Is it just being present in any given day, even if just for half an hour in transit? Furthermore, the year in which the days are counted may correspond to a different period than the calendar year, depending on the country’s “tax year”.
Some countries rely on a territorial (or sourced) based tax system7 which has no impact on whether one is resident or non-resident as all income derived in that country is subject to tax, while income derived outside the country remains tax free.8 Most countries, however, have or are introducing taxation on world-wide income.
Therefore (tax) residence status becomes highly relevant as most countries use residence as the key criterion for subjecting one to personal income taxes and other taxes such as capital gains or net wealth taxes. Normally, various tests are applied to determine one’s tax residence. In most countries, such as the United States of America and now also the United Kingdom, this is determined by the number of days of physical presence in the country, in combination with other factors.
The tax authorities will also establish whether the individual has accommodation readily available and family and business interests in the country. For former countries of residence, it is important for the individual to prove that he has left permanently to establish residence in another country as this confirms bona fide residence in the new jurisdiction so that the former country can no longer tax the emigrant’s worldwide income. In some countries, this change of residence is confirmed by way of exit taxes.
As mentioned previously, the emigration of U.S. citizens does not terminate their world-wide tax liability under Federal tax law, even if they are permanently resident in another jurisdiction. In such cases, the only way to legally relinquish