What it means
Each country sets its own tests for residency. For individuals, a common test is the number of days spent in the country during a tax year, with a threshold such as roughly half the year being widely used, though the exact rules and thresholds vary.
Other tests look at where your permanent home is, where your family lives, and where your economic ties are strongest. For companies, residency often depends on where the business is incorporated, or where its management and control are actually exercised.
A company registered in one country but run from the boardroom of another may be treated as resident in the second. This is why directors' travel and meeting locations can create tax questions.
The consequences are large. Residents are normally taxed on worldwide income, which may include salary, business profits, interest, dividends and capital gains from anywhere.
Non-residents are generally taxed only on local income, such as rent from property in that country, and may have to file a return for it. A person can be resident in two countries at once under their domestic rules.
To prevent double taxation, countries sign tax treaties containing tie-breaker tests, which decide which country takes priority by looking at factors such as permanent home and centre of vital interests. Relief for foreign tax paid is another common tool.
For business leaders, residency affects remote working, international assignments and company structures. An employee who works abroad for long periods may become resident there, and a company can create a taxable presence overseas if its senior people make key decisions there.
Because the rules are detailed and differ widely, anyone moving between countries should keep careful records of days spent in each place and seek local advice before assuming a particular status. Residency can also change part-way through a year, so the dates of arrival and departure should be noted carefully.
In practice
Real-world examples
Example 1
An engineer takes a two-year assignment in another country and spends more than half of each tax year there. Under that country's day-count test she becomes tax resident, and her employer must adjust payroll and her tax filings. She also asks the tax adviser whether her home country will give credit for the foreign tax she now pays.
Example 2
A company incorporated in one country holds all its board meetings in another, where its two directors live. The tax authority there argues the company's management and control sit locally, and treats it as resident for corporate tax purposes. The company must now file local returns and may face tax on its worldwide profits.
Example 3
A freelance designer works from various countries as a digital nomad. He tracks the days he spends in each place and checks the residency tests before choosing where to base himself, because a long stay in one place could bring a tax filing duty. He sets a personal limit on days in each country and reviews it at the start of every quarter.
Think of it
Tax residency is like having a gym membership. You pay a monthly fee to the gym closest to your home where you work out most often, rather than paying every gym in the city just because you walked past their front door once.
Case study
Seen in the real world
Bramwell Analytics is an illustrative, fictional consultancy registered in a small country but run mostly by its founder, who lives abroad. The founder signed contracts, approved budgets and held strategy meetings from her home in another country.
When the company's accountant reviewed the position, he warned that the foreign tax authority could claim that the company was resident there because decisions were made from that location. If so, profits of around $600,000 a year might be taxed in the second country instead.
After advice, Bramwell moved board meetings to its country of registration and appointed a local director with real authority. In this illustrative story, the change was designed to match the company's legal home with the place where decisions were genuinely made. The founder also kept a log of her travel and the location of every major decision, so that the company could show its position clearly if the tax authority ever asked, and the accountant reviewed the log each quarter.
Watch out
Common mistakes
- Assuming citizenship decides tax residency, when most countries look at presence, home and ties instead.
- Counting only days of work abroad, when days on holiday or in transit may also count towards a residency test.
- Believing a company is resident wherever it is registered, when the place of management and control can override that.
Questions
People also ask
Can someone be tax resident in two countries?
Yes, under each country's own rules, but a tax treaty usually contains tie-breaker tests that settle the position.
Does a non-resident pay no tax at all?
No, a non-resident is normally taxed on income arising in the country, such as local rent or employment performed there.
How can I prove my residency status?
Keep records such as travel dates, rental or ownership documents and employer letters, and ask the relevant tax authority about a residency certificate.