When you live and work solely in one country, tax residency is straightforward. However, if you are living away from your home country or living between multiple countries, then determining tax residency is complicated.
One of the difficulties in determining tax residency is that the laws applied to residency differ in each country. This means you may simultaneously meet the residency requirements in multiple countries within a given tax period. Alternatively, if you live a particularly transitory life, it may be difficult to identify primary residency.
Note that tax residency is different to citizenship or visa residency. This article discusses what you need to know about tax residency.
Why Residency Matters
As each country has their own rules for taxation, it is important to know which country has taxation rights over you as an individual resident. This is why residency is such a foundational concept.
Being a tax resident of multiple countries has potential implications on how your worldwide income is taxed. Generally, your country of residence has primary taxing rights over your income. It also raises double taxation concerns, with competing tax jurisdictions aiming to potentially tax the same income. As countries sometimes tax the same income, a dual tax resident could face significant tax consequences. For this reason, tax treaties between countries exist to help resolve conflicting taxation rights, including determining tax residency.
As this can be a particularly complex issue it is important to ensure that you consult with qualified tax professionals who are familiar with the tax laws of each country. The following information provides a general overview of the potential tax consequences of being a tax resident in multiple countries.
Taxation Rights
Once residency is determined, your country of residence will have the primary taxing rights. Income that is taxable from other sources will be taxed as income earned by a non-resident.
Double Tax Agreements (DTAs) between countries cover a range of factors to help mitigate double taxation issues, including who has primary taxing rights of specific types of income and can include limitations on the taxing rights of the country where the taxpayer is a non-resident.
For countries that tax on a territorial basis, the country of residence might only legislate taxation over income derived from the country of residence, or foreign income that is remitted into the country.
However, countries that tax on a worldwide basis assess all income earned by the individual, regardless of the source of income.
In either case, DTAs, and other tax relief provisions help alleviate the impact of being taxed in multiple countries. This typically means that when you pay foreign tax on foreign sourced income, your country of residence will count this tax towards the tax they assess on this income.
Tax Residency
As each country has its own rules for determining residency, your first step is working out whether you are a resident in each country that you are connected to. To give an example of how this works we consider the tax residency rules of Australia, Singapore, the USA and the UK.
Tax Residency In Australia
How Residency Is Determined
There are a number of tests used to determine residency in Australia, which are essentially designed to determine whether Australia is your home. This means that you are an Australian tax resident if you reside in Australia, or intend to reside in Australia for a significant period of time, and you have a permanent home there.
If you are an Australian permanent resident who is living and working overseas on a temporary basis, you may still be considered a tax resident of Australia. If you have not established a permanent place of abode outside Australia, then your Australian tax residency will continue. A permanent place of abode is a place where you live and consider your home. This means you may still be considered an Australian tax resident even if you are not physically present in Australia for a given tax year. Individuals who are not Australian citizens may also remain Australian tax residents if they travel overseas for short periods of time, while maintaining their home in Australia.
In an income tax year where you become or cease being a resident you will be considered a part-year tax resident.
Income Taxes as a Resident
Australian tax residents are assessed on worldwide income. This includes all forms of income including capital gains.
Tax Residency In Singapore
How Residency Is Determined
In Singapore you are a tax resident when you are physically present in Singapore for at least 183 days in a calendar year.
Income Taxes as a Resident
Singapore tax residents are typically only required to pay tax on Singapore sourced income, or foreign income that is brought into Singapore. Singapore does not tax capital gains.
Tax Residency In The USA
How Residency Is Determined
In the USA, all US citizens and dual citizens are required to lodge a tax return to declare their worldwide income, regardless of their tax residency.
Non-citizens are tax residents if they hold a Green Card that legally allows permanent residency.
Tax residency is determined by a physical presence test. This test requires physical presence in the USA for at least 31 days in the relevant calendar year, after being present for a specific number of days totalling at least 183 days over the preceding two years.
Income Taxes as a Resident
Both citizens and tax residents of the USA are taxed on their worldwide income. Citizens are taxed on worldwide income even if they no longer reside in the US and do not meet the residency test. There are some foreign earning exclusions for individuals who meet specific requirements.
Tax Residency In The UK
How Residency Is Determined
In the UK you are a tax resident under the Statutory Residence Test. This test considers a range of factors including the number of days you are present in the UK, your connections to the country, and other relevant criteria.
The UK has an automatic overseas test. This means if you spend less than 16 days in the UK (or less than 46 days if you have not been a UK resident for the previous 3 tax years), or you are working abroad full-time and spend less than 91 days in the UK, then you are a non-resident.
There are three automatic resident tests:
- You are present in the UK for at least 183 days.
- Your only home is in the UK for at least 91 days in a row, and you visited or stayed for at least 30 days in the tax year.
- You worked full time in the UK for any period of 365 days and at least one of those days falls in the tax year you’re checking.
Where you do not meet either automatic test the “sufficient ties test” will determine if you are a resident. This test considers your UK connections, including family, accommodation, work, and physical presence, over a number of years.
Income Taxes as a Resident
UK tax residents are taxed on their worldwide income. However, non-UK sourced income may be exempt from UK taxation in certain circumstances.
Dual Residency
As can be seen from the various residency tests of just these four countries, there is variety in how residency is determined and the tax implications this could lead to. Given the variation in tests, you could easily be considered a resident of multiple countries over a single tax year.
When an individual is a tax resident in multiple countries the next step is to determine if there are tie breaker rules contained in a DTA. These rules provide guidance on determining an individual’s primary place of residence.
Residency Tie Breaker Rules
Most countries adopt the Mutual Agreement Procedure, specifically Article 4 of the OECD Model Tax Convention, to resolve dual residence situations. Accordingly, there is a fairly standard set of tie breaker rules across various DTAs. These tiebreaker rules are outlined as follows:
- Permanent Home – Where you have a permanent home in one country but not the other, you will be a resident of the country where your home is located.
- Centre of Vital Interests – The country in which you have closer personal and economic connections will be your country of residence. This may include family and personal ties, social and economic activities such as work and club memberships, and where you keep your main assets.
- Habitual Above – Where neither of the previous tests assist, the country where you regularly abide or reside in will be your country of residence.
- Nationality – Where none of the previous tests assist you will be a resident of the country in which you are a national.
In most cases an individual will be able to determine their residence using one of these tie breaker rules.
When it comes to Australia, Singapore, the USA and the UK, most of these countries adopt comprehensive DTAs between one another, in which Article 4 of the OECD Model Tax Convention is essentially utilised. This includes the DTAs between the following countries:
- Australia and Singapore
- Australia and the USA
- Australia and the UK
- Singapore and the UK
- The UK and the USA
Notably, there is no DTA between Singapore and the USA. This means that dual residents of Singapore and the USA will need to rely on the taxation rules and access to tax relief options in each country in order to avoid double taxation.
Dual Tax Residents
In very rare cases an individual may have sufficient ties to multiple countries in which they are either not a citizen, or in which they hold dual citizenship, leading to a situation whereby they may not be able to effectively use tie breaker residency rules to accurately determine their country of residence. This creates a complex situation wherein no country has clear priority for determining tax residency and a decision regarding residency is subjective.
This situation could theoretically lead to an individual being subject to taxes being assessed on their worldwide income in multiple tax jurisdictions. The Mutual Agreement Procedure contained in some DTAs enables a taxpayer to request the competent authority in one country to engage with their counterparts in another country to resolve double taxation.
Managing Dual Tax Residency
In summary, determining residency is an important factor because it determines which tax jurisdiction has primary taxation rights.
DTAs exist to help mitigate the risk of double taxation by providing tie breaker rules in determining residency and placing restrictions or limitations on taxation rights over certain types of income, as well as providing tax relief through the recognition of foreign tax credits.
Where no DTA exists, or where an individual’s residency cannot be determined, other provisions are required to mitigate the impact of double taxation.
Tax residency can be a very complex area and it is recommended you seek specialist international tax advice for your particular situation.