Have you faced the question: "I am from country A, but now I live in country B. Where are the tax laws better and how to choose where to pay taxes?"
This is a mistaken approach because the choice of the country for paying taxes is not always up to you. It's like saying: "I live in the UAE, where alcoholic beverages are strictly regulated, but I am from France, where wine is freely sold, so can I drink a glass of wine on the street?" Such behavior will clearly lead to problems, and the same applies to taxes.
In Which Country Should You Pay Taxes?
You need to file a tax return and pay taxes in the country (or countries) where you are a tax resident. Tax residency is not something you can choose at your own discretion. It is determined by local legislation and international tax treaties. If you or your family have connections with several countries, or if such a situation may arise in the future, be sure to study this issue before starting to invest.
Every country in the world is interested in receiving your tax payments. If you spend time or establish connections in a country, you should think about whether this country will try to tax you. Consider the stories of celebrities like Shakira or Cristiano Ronaldo, who faced tax problems due to time spent in different countries. This happens not only to them but to ordinary people as well.
Special Considerations for US Citizens
This information does not apply to US citizens and green card holders. Even if you are a US citizen who has lived in Europe your entire life and has never been to America, US tax law will still apply. US tax laws are very different from most other countries, so if you are a US citizen or green card holder living abroad, you should consult a tax advisor.
What is Tax Residency?
So, what is tax residency? It is the country where you are considered a tax resident for tax purposes. In fact, tax residency is any country where you are required to file a return and pay taxes. And yes, you can be recognized as a tax resident of more than one country at the same time. However, it is important to understand that tax residency and residency for immigration purposes are different things. You can be a tax resident of a country without having the right to temporary or permanent residence in that country or even a work permit.
Consider a simple example: if you are a citizen of one country, have lived there all your life, and have no close ties to other countries, your tax residency will be fairly obvious. For example, Maria and Peter, a married couple from Switzerland, who have lived their entire lives in their cozy home in Zurich, love spending time with their grandchildren and enjoying their retirement. They both have property only in Switzerland, and all their close relatives also live there. Therefore, Maria and Peter will be tax residents of Switzerland because they are fully connected to this country and their life interests are there.
However, if you spend time in different countries or have property or family there, the situation becomes more complicated. Suppose Alek, a genius in software development, who works in Hong Kong in a promising position at a tech company but spends his free time and vacations in his hometown of Munich. Alek needs to carefully determine where he should file a tax return and pay taxes since his life and work cover different jurisdictions.
How is Tax Residency Determined?
Typically, tax residency is determined on an annual basis, as taxes are filed annually. Some countries have the concept of a "split year", which means the possibility of being considered a tax resident for only part of the year upon entry or exit.
Two Steps to Determine Tax Residency
The process of determining tax residency involves two steps:
- Check local laws in the countries where you live or have connections to understand if you are recognized as a tax resident.
- Check tax treaties between these countries if you may be considered a tax resident in multiple countries. The goal of such treaties is to avoid double taxation.
Criteria for Determining Tax Residency
1. Physical Presence Test
One of the most common criteria is the physical presence test. In most countries, if you spend 183 days a year in the country, you are likely to be recognized as its tax resident. It is important to understand that different countries may count these days differently. For example, in some countries, days of entry and exit are also counted, while in others they are not.
2. Permanent Housing
If you have a house or long-term rental agreement in the country, this increases the likelihood of being recognized as a tax resident.
3. Center of Vital Interests
An important factor is also the center of vital interests — where your family, your main social, and economic ties are located. For example, if your family lives in Germany, and your children attend school and use social services there, Germany may require you to pay taxes, even if you are physically in another country, such as Spain or Italy.
4. Habitual Places of Stay
If there is no permanent housing or clear center of vital interests, countries may consider your habitual places of stay, such as short-term rentals.
5. Citizenship and Immigration Status
In some cases, if it is not possible to establish tax residency by other means, citizenship can also be used as a criterion.
Some countries may assign tax residency based on your immigration status. For example, once you obtain a residence permit in the country, you may become its tax resident.
6. Mutual Agreement
Finally, if it is not possible to establish tax residency by any of the above methods, it can be determined by mutual agreement of the tax authorities of the interested countries.
This provides a general understanding of how tax residency is determined. In most cases, if you and your family live and work in one country for most of the year, you are likely to be a tax resident of that country. However, if your situation is more complex or you are planning to move to another country, you should carefully study this issue and consult a tax expert if necessary.
