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:
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.
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:
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.
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.
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