Tax residence: the basics and 5 mistakes

Let’s first look at the basics

Tax residence can be a tricky part of international tax law. Especially when countries like the United Kingdom, the United States, or Australia are involved. Before we tell you more about the most common mistakes, and how to avoid them, first a few words on the basics.

Three statuses: none, resident, and non-resident

Roughly speaking, your tax relationship with a country falls within one of the following three categories:

1. You have no relationship at all with the country in question. Tax residence is not an issue.
2. You live in a certain country, either permanently or part of the time. You may be a tax resident of that country, which is the strongest tax relationship there is.
3. You don’t live in a certain country, but you still have a relationship with it. For example: you work there part of the year, you have assets there, or you get income from that country. You may be considered a non-resident for tax purposes. This is the “middle position”: there’s no full tax residence, but for certain sources of income you can still be tax liable.

The country of residence has the broadest rights

When a country considers you a tax resident, the default rule is that you’re taxed there on your entire income, worldwide. Why is that fair? If you live in a country, you’re (in)directly using its public services, like its infrastructure, its hospitals, its army, etc. So it’s basically the country with “the best right” to tax you. As a result, you’ll also get the primary tax bill from that country.

“Non-residence” means “no taxation”, unless…

On the other hand, if you don’t live in a certain country, you’ll only face a tax claim if there’s a special reason for that. That’s where non-residence comes into play. Think, for example, of a house you may own abroad – let’s say in Greece. You’re not a tax resident there, but this country still has the closest connection with the rental income you get from it. (Think of the Greek roads, or the Greek sewer system, that serve the property.) So for this item, you’ll be paying taxes to Greece as a non-resident.

Relevant for mobile people

For many people, the question of tax residence never arises. They were born in a certain country and they’ve lived there all their lives. So it makes sense that they’re tax residents there. But for people who travel, work or live between countries, this question is of great relevance. After all, it can make quite a difference if your worldwide income is taxed in Switzerland or Sweden, for example.

5 common mistakes

In an attempt to (over)simplify the concept of tax residence, many myths, beliefs and “rules of thumb” circulate. Below, we’ll discuss 5 oft-seen misconceptions.

“'183 days' is all you need to know”

A common belief is that all tax residence questions can be answered by counting your days of stay in a country. The “magic number” that you’ll often hear is 183 days, or 6 months. Once your presence goes beyond this threshold, you’d get the status of tax resident. And the other way around: less than 183 days means no tax residence. Unfortunately it’s not always that simple.

Staying somewhere 183 days can indeed serve as an indication that you (permanently) live in that country. In quite a few legislations, this number is therefore explicitly mentioned. But you have to carefully check national laws to know what the exact meaning is. Some countries see the days of stay as one of the most important criteria, while others consider it just one factor amongst many others (like having a home there, work, economic ties, or an intention to stay). And not to forget: many different duration thresholds can be found, some of which are much shorter than 183 days.

By the way, the threshold of 183 days does also appear in the context of cross-border workers. Often, cross-border workers will be taxed only in their country of residence, and not in their country of work, if their presence there is limited to 183 days or less. However, this rule is often combined with additional requirements, for instance that the employer should be based outside the country of work.

“You can’t be a tax resident in two countries”

In fact, that happens quite often and it’s called “dual residence”. Of course, this situation is far from ideal for the taxpayer as his worldwide income can then be taxed in two countries at the same time.

Therefore, so-called “tax treaties” exist between countries. In such treaties, you typically find some rules to solve dual residence problems: the so-called tie-breaker rules. By looking at certain facts (for example: where is someone’s permanent home located or where does their social and economic life take place) one of the two countries eventually ‘wins’, meaning that this country may consider the person in question as its tax resident for treaty purposes in case of a double tax claim. However, not all countries have concluded tax treaties with one another. As a result, dual residence (and therefore: double taxation) does occur in practice.

“It’s all about registration”

When you migrate, you’re required to let the authorities know: you deregister in the country you leave behind, and you do the opposite in the country of destination. Although this is often a good starting point to formally change your residence, it doesn’t automatically mean that your tax residence is then changed, too. Why not?

First of all, many countries look at a broad set of circumstances when determining tax residence. Registration can be one of those circumstances, but there are many others as well. We already talked about the number of days that you actually stayed in the country, regardless of registration. But don’t forget things like bank accounts, having a car, insurances, place where your direct family lives, work, or even mobile phone subscriptions.

Second, some countries approach tax residence in a binary way: you have it for the full tax year, or you don’t have it at all for that tax year. For instance, if you leave Italy around September, you’re already a tax resident for the full year, based on your presence so far. Deregistering in Italy, and registering in another country, will probably not change that outcome for the remaining months of the tax year in question.

“Permanent travelers have no tax residence”

It’s a popular belief that you can escape paying any taxes if you just keep moving from one country to another. In the (more distant) past this was indeed the case. Assuming, of course, that the “right” countries were chosen and that the permanent traveler planned their stays carefully. But times have changed quite a bit, and authorities around the world have made tax compliance one of their top priorities. This means that the country with the “best rights” (relatively speaking) to make you a tax resident, will most likely step in. This could be the country where you lived before starting the permanent travel or the country from which you hold a passport. Nowadays, the generally accepted policy goal is that “no taxation” should be avoided whenever possible.

Also note that having a residence address is often a requirement in all kinds of other processes, like setting up a bank account or getting health insurance. Here you can find a longer read on the woes and risks of the permanent traveler.

“A day is a day”

A day is simply a day, but unfortunately not in the world of international taxation. When you count the number of days for tax residence purposes, there’s more than meets the eye. First of all, the definition of ‘day’ itself can be a source of confusion. Does it mean 24 hours or does a part of a day count as an entire day as well? Also: do days of stay only count when they are consecutive (in a row) or do you count them cumulatively over the year? And what about days that you were in a country while traveling to another destination, so-called transit days?

Again, the truth is that every country has its own interpretation and that there are no guidelines with universal validity. And in recent years, the situation has become even more complicated. During the COVID-19 pandemic, people were sometimes unable to travel to or from a country because of restricted (air) travel and lockdowns. What to do with such days? Do they count as days spent in the country where you were supposed to be (if no restrictions had been in place)? Or do they count as days in the country where you got stranded?

Although some countries have adopted a flexible approach in this regard, some other countries indicated that days during a “forced stay” also count towards tax residence. Spain and France were notable examples of this second, more stringent approach.

Takeaways

First of all, the concept of tax residence can be fairly complicated. In any case, it’s often not as simple as counting days. And if it comes down to counting days, then you should carefully check what the exact threshold is (not always 183!), what the meaning of that threshold is, and what qualifies as a day.