Money Abroad
Tax residence is decided by rules you did not choose, and people discover it late
Whether a country treats you as tax resident is a legal test applied to the facts of your life, not a status you elect or a consequence of any single document.
By Varun Krishnan3 min read
It is not a matter of intention
A great many people living abroad believe that their tax position follows from what they intended, from where they consider home to be, or from which country issued their residence document. None of those is how the question is decided. Tax residence is established by each country applying its own statutory tests to the facts, and your view of the matter is not one of the inputs.
That is why the discovery is so often late and unwelcome. Nothing announces it. There is no letter on arrival, and the first indication frequently comes a year or more afterwards, at which point the position for a completed tax year may already be fixed.
This piece contains no rules, no tests, no figures and no advice, because every one of those is national and changes. It is written to make you ask a qualified tax professional in good time, which is the only sensible response to the subject.
The kinds of fact that tests tend to look at
Without describing any country’s rules, it is fair to say that residence tests commonly consider some combination of physical presence, where a permanent home is available to you, where your closest personal and economic ties are, and sometimes nationality or formal registration. Different countries weight these very differently.
Because the tests differ, two countries can each conclude that you are resident, which is not a contradiction but a conflict, and it is a normal one. Arrangements between pairs of countries exist precisely to resolve it, usually through a sequence of tie-breaking considerations, and applying them is technical work.
It is also possible to be resident nowhere in a way that sounds advantageous and generally is not, since it tends to attract scrutiny and can leave you without the protection of any treaty relief.
The obligations that come with it
Being tax resident somewhere typically brings more than a liability on local earnings. Many countries tax residents on worldwide income, require the reporting of foreign accounts and assets, and impose filing obligations that exist even where no tax is due. That last category catches people badly, because a person who owes nothing assumes there is nothing to file.
There are also information-sharing arrangements between many tax authorities under which financial institutions report account holders’ details to the country of residence they have recorded. This is one reason to keep the residence information your bank holds accurate, and one reason that silence is not a strategy.
Penalties in this area are frequently attached to failure to report rather than to failure to pay, which is worth understanding before deciding that a small amount of income is not worth mentioning.
What you leave behind may not have left you
Moving abroad does not automatically end tax residence in the country you came from, and the rules on ceasing residence are often stricter than the rules on acquiring it. Retaining a home, family connections, or certain kinds of income can be enough for the old country to continue to have a claim.
Some countries also apply exit charges or continuing obligations for a period after departure, and some tax their citizens on a different basis altogether. These are exactly the kinds of feature that no general description can safely summarise.
The practical consequence is that a move abroad usually needs advice on two sides, not one. An adviser in the destination country may know nothing about the obligations you have left running behind you.
Getting ahead of it rather than behind it
The pattern that works is to take advice before or shortly after the move, while the year in question is still open and choices are still available. Advice sought afterwards is limited to explaining what has already happened, and the difference in cost and stress between the two is large.
In the meantime, keep records that are dull and easy to keep: dates of travel, where you lived, what income arrived from where, which accounts existed. Every subsequent conversation with a professional or an authority is easier with that in hand.
And be sceptical of confident advice from other foreign residents, however experienced. Tax outcomes depend on individual facts to an unusual degree, and the person telling you what they do may have a materially different situation, may be wrong, or may simply not have been asked about it yet.
Common questions
Does my residence permit make me tax resident?
Not by itself in most systems, since immigration status and tax residence are determined under separate rules by separate authorities. They often correlate, and correlation is not the test. Ask a qualified tax adviser about your own position.
Do I have to file anything if I earn nothing locally?
Possibly, because many countries impose filing and reporting obligations on residents irrespective of where income arises or whether tax is due. Assuming otherwise is one of the more common and more expensive errors.
When is the right time to get tax advice?
Before the move if you can, and otherwise as early as possible in the first year, because most of the useful options exist in advance. Waiting until a filing deadline approaches usually means paying for a description of a position you can no longer change.
Editor, Globetrotter Talks
Varun has been reporting on arriving, visas & paperwork, money abroad since long before it was fashionable and is happiest when a piece answers the question completely.
