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Tax residence (also known as fiscal residency, residence for tax purposes, or other, similar terms) is an important concept for all tax payers living and working abroad. It determines how you are treated with regard to taxation in a particular country.
Whether you are considered a tax resident influences your liability, i.e. the total amount owed to the local authorities. This is due to several factors, for example:
- Different principles regarding the sources of your income may apply. For instance, residents have to pay tax on their worldwide income, while non-residents are taxed on local sources only.
- There are often different tax rates for residents vs. non-residents, e.g. progressive or fixed rates.
- A resident frequently profits from more deductions or benefits.
Defining Fiscal Residency
How exactly is tax residence defined? Most countries include a legal definition in their tax code, or their authorities use a variety of criteria for handling it on a case-by-case basis. Some places might not define it at all.
For obvious reasons, states that do not raise personal income tax, such as Qatar or the UAE, have no use for the concept. Others, like Hong Kong, routinely tax selected kinds of local sources, but ignore everything else, e.g. what you earn from a job abroad.
However, if there is a definition in a particular state, nationality tends to play a minor role or no role whatsoever. For instance, regulations like in Argentina, where Argentine nationality makes you a fiscal resident, are the exception rather than the rule. You could, for example, be a French national, but a tax resident of China.
Residence in More Than One Place
It is possible to be a tax resident in several countries in the same period. However, if their governments have entered into a DTA (double taxation avoidance agreement), this treaty usually serves to ensure that people are considered fiscal residents in only one of these countries. In this way, you will not be taxed on the same income twice. So don’t forget to ask your local tax office if your home country has agreed upon such a dual taxation treaty with your expat destination!
Where you ultimately reside, in fiscal terms, is decided by various factors. In the OCED model convention, on which many DTAs are based, such factors could be:
- the place where someone has a permanent home
- the country where their “center of vital interests” lies
- the place that is their “habitual abode”
- the state whose nationality they have
If these criteria are not enough to make a final decision, most DTA treaties have some “tiebreaker clause”, so the competing authorizes will quickly come to a mutual agreement.
As you can see from the phrases used above, like ”habitual abode” or “center of interests”, such guidelines are not very intuitive if you aren’t an expert. They vary among different states, too. However, in the different definitions of tax residence, some criteria are repeatedly evoked.
The “183 Days” Rule
Frequently, your residency status depends on the so-called “183 days” rule. If you are physically present for at least 183 days of a year in a particular country, you are counted as a resident for tax purposes. Sometimes, the number might be 184 or 182, but apart from that, the rule’s easy as pie, isn’t it?
Unfortunately not. The interpretation of the law relies on further definitions to explain the exact meaning of the original definition.
- Let’s start with the word “day”. Does it refer to a full period of 24 hours spent in a specific place, or does a partial day – like the date of arrival or departure – count as well?
- Does the period have to be consecutive, i.e. six months in a row? If it should be uninterrupted, what kind of absence actually counts as an interruption?
- And if you think defining “day” is hard, you haven’t yet thought about what a “year” could be. Does this mean a calendar year? The tax year? Simply a period of 365 days?
Questions like this are the reason why laypeople keep scratching their heads, and financial consultants keep busy!
Instead of, or in addition to, the “183 days” rule, the laws may use other periods of physical presence. To quote just one example, in Malaysia, your status may be considered “tax resident” if
- you are resident for 90 days or more in a year
- AND were also resident for at least 90 days each in three out of the four preceding years.