What Is Tax Residency? Your Questions Answered

Tax residency may sound straightforward — you’re a tax resident of the country that you spend the most time in, right?

Well, not necessarily. Like most things tax-related, working out where you have tax residency can actually get pretty complicated.

Various factors such as your place of work, location of family, and where you maintain a home can all play significant roles. This means that even if you don’t spend the majority of your time in one country, you could still be considered a tax resident there based on your other ties to it.

In this post, we’ll break down what tax residency is, how you can establish it, and how you can use various countries’ tax residency rules to your advantage.

Understanding Tax Residency

So, let’s start with the basics: what is tax residency?

Tax residency determines where you are liable to pay taxes, and it’s not necessarily tied to the country of your citizenship. In fact, your tax residency can even change from year to year based on various factors.

Unlike a residence permit, which simply grants you the legal right to live in a country, tax residency doesn’t necessarily match up with your legal residency status. That’s because it’s based on other factors such as the amount of days you spend in the country, your economic ties (like owning property or running a business there), and sometimes even your intent to reside there permanently.

This means even temporary or short stays could influence your tax residency.

Tax Residency Examples

For example, let’s say you have a residence permit for Mexico. This permit allows you to live in Mexico, but unless you’re there for more than 183 days in the tax year, or meet other specific criteria, you might not be considered a tax resident.

You, therefore, wouldn’t need to pay Mexican taxes on your worldwide income, even though you live there for months at a time.

On the other hand, suppose you’re a UK citizen but have spent more than 183 days outside the UK in a tax year. This might suggest non-residency at first glance. However, if you maintain significant ties to the UK, such as owning a house there, keeping most of your belongings there, and having your family live there, you could still be considered a tax resident.

This means you would still be liable to pay UK taxes on your worldwide income, despite spending the majority of the year abroad.

Why Tax Residency is Important

Understanding tax residency, even if only on a basic level, is essential if you’re living abroad, travelling frequently, or simply looking to optimise your tax situation. Getting your tax residency right can mean the difference between having to pay hefty taxes in one country and barely having to pay any tax in another.

It’s also important to understand because if you don’t manage your tax residency properly you could risk double taxation, which is when you have to pay tax on the same income to multiple countries.

You could also risk falling foul of local taxation rules if, for example, you didn’t realise that you had established tax residency in a country and then proceeded to miss the tax payments you now owed.

How to Determine Your Tax Residency

General Criteria to Follow

The good news is, that most countries follow a similar set of criteria when it comes to determining tax residency, focusing on where you’re physically present and where your life is set up.

If you spend more than half of the tax year in a certain country (so, more than 183 days), you’ll become a tax resident there. Unfortunately, though, in many countries it’s not quite as simple as counting days. Many local tax authorities will also look at where your family lives, where you work, and where you have social and economic ties, which altogether point to where your “centre of life” is.

That’s why the 183-day rule, while a good benchmark, still has its limitations.

Country-Specific Tax Residency Criteria

Whilst there are general criteria that apply to most countries, it’s also true that each country has its nuances when it comes to determining tax residency.

◾ United States: Tax residency is determined by the “Substantial Presence Test”, which counts the days of presence over three years, requiring a significant amount of time spent in the U.S. within this timeframe to qualify as a tax resident.

◾ United Kingdom: The UK uses a “Statutory Residence Test” that considers days spent in the country and connections like family and work. Spending 183 days or more in the UK within a tax year typically qualifies someone as a tax resident.

◾ France: France makes you a tax resident if your main home or economic interests are located in France, or if you perform your main professional activities in France.

◾ Australia: Australia recently tightened its criteria, focusing more on an individual’s economic and social ties to the country rather than merely counting days spent there.

Tracking Your 183 Days

Keeping a careful log of your time spent in each country is non-negotiable if you’re looking to make use of tax residency rules to lighten your tax bill. This is where the Flamingo Travel Tracker App shines.

Unlike other travel planner apps that require manual input, Flamingo automatically tracks your location, letting you move from one destination to another whilst it keeps a log of your days spent in each country or state.

Later, you can export your travel history from the travel app into a CSV format to provide to your CPA or tax attorney, ensuring that your travel days for your tax residency status are well-documented and clear.

Changing Your Tax Residency

Exiting Your Home Country

Deciding to no longer be a tax resident of your home country isn’t just about packing up and leaving. It can get pretty complicated, and the situation for taxation in the United States is the most complicated of them all!

Although the 183-day rule is a good starting point, you’ll want to do more to be on the safe side. This means rethinking where you keep personal belongings, possibly selling property, closing local bank accounts, or even ensuring your family moves with you if possible.

A common pitfall is leaving behind too many connections, like a car or a storage unit of personal items, which can be enough for the tax authority at home to still claim you as a tax resident.

Establishing New Tax Residency

Once you’ve cut tax residency ties with your home country, the next step is to establish a new tax residency. Many people opt for countries with low or no tax on worldwide income, like the UAE, Panama, the Bahamas, or Costa Rica, which can save a fortune on tax bills.

However, each country has its own set of rules for what constitutes a tax resident. For instance, some countries require you to spend a certain number of days there, while others might require you to invest in property or business within the country.

Some jurisdictions might offer a special tax residency program tailored to attract foreign investors or retirees, which often comes with specific conditions like a minimum stay or financial investment.

These programs are designed to be attractive, but, when it comes to establishing your new tax residency, the best method is always to consult with a professional tax advisor to fully understand your options and avoid making any costly mistakes.

Practical Tax Residency Tips

The bare minimum when it comes to tracking your tax residency is ensuring that you have an accurate log of how many days you spent where.

With the Flamingo Travel Tracker App managing complex tax situations across different jurisdictions becomes far easier. Using GPS, the travel planner app will automatically log how many days you spent where, pulling all of the info into a spreadsheet for you to use at the end of the year with your CPA or tax attorney.

While tools and apps can streamline the logistical side of managing your tax residency, nothing replaces the expertise of a seasoned tax advisor or lawyer specialising in international tax law.