Once you do your taxes internationally, you will soon face the concept of fiscal residency, or residence for purposes of taxation. Especially if you have no previous experience with living and working abroad, or if you aren’t a financial expert, you may need to think about this topic for the first time in your life.
Simply speaking, fiscal residence influences how you’ll be treated with regard to taxes in a specific country. It’s a significant issue concerning finance for expats, as it has a direct impact on how much money you owe to local tax authorities.
Definitions of Tax Residence
For laypersons, it seems rather non-intuitive that your fiscal residency does not necessarily equal your residence in terms of immigration law. For example, you may have a residence permit for a country, but you might still not be a fiscal resident of this jurisdiction in that tax year. Very rarely is tax residence directly connected to nationality, either.
So, how do you define fiscal residency? Mostly, it depends on the tax code of the country (or countries) where you have lived during the tax year in question. Either their tax code incorporates a legal definition, or their fiscal authorities apply various criteria to determine fiscal residency on a case-by-case basis.
The 183 Days Clause
A frequent criterion of fiscal residence is the so-called “183 days” rule. This means: if you are actually present in a specific country for at least 183 days in a year, you will be considered a tax resident.
While this seems to be an easy, commonsensical regulation at first glance, the devil’s in the details. In the world of tax lawyers, apparently straightforward words – such as “day” or “year” – may become rather tricky. If your current country of residence evokes the “183 days” rule (or a similar rule involving a period of physical presence), a legal or financial consultant will help you find out if this really applies to you.
Other Important Factors
In other cases, tax residence could be connected to your status as a property owner, or to your business interests. Even a clause as nebulous as “personal ties to a country” might be used to justify your fiscal residency status. For example, the latter may become relevant for expats who spend a lot of their time working abroad, but whose spouse and children still live back home in their country of origin.
International Tax Treaties
From the tax office’s point of view, it’s even possible to reside in two places at once! In the same tax period, you can actually be a fiscal resident of more than one country. In this situation, a DTA usually comes in handy.
DTA is short for “double taxation avoidance agreement”, also known as bilateral tax treaty. This kind of international agreement is supposed to make sure that you don’t have to pay taxes on the same income twice. For this reason, the DTA defines which of the countries takes precedence as regards your fiscal residency. The OECD’s model convention for tax agreements lists several factors that could serve as tiebreakers, e.g. the possession of a permanent home in one of the countries.
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- 11 Apr, 2016
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