- Can you lose the status of a tax resident of a certain country?
- Tax residency is required to make use of the DTA provisions
- Can it be beneficial to have no tax residence?
- How can you break up your fiscal ties with a specific country?
- Tax residency in an offshore country
- Tax havens
- Countries that do not tax foreign incomes
- Low-tax countries with special incentives for foreign investors
- Test for tax residence
Digital nomads are a relatively new group of people but it has been growing in size intensively in recent years. Companies all around the world have an increasing number of remote workers today. Now, if a person is not tied to an office, he or she may want to travel around the globe and experience living in different countries. However, since the person makes money by working from wherever they are, they have to pay taxes somewhere. Normally, you become a tax resident of a national state if you spend more than 183 days per year on the territory of the state.
Is it possible to be a tax resident of no country if you spend less than half a year in any particular place but move from one country to another on a regular basis? Let’s discuss this possibility and find out if lack of tax residency can bring any significant advantages.
Please apply for our professional assistance in obtaining long-term visas and residence permits in different countries. We will also gladly help you with opening an account with a foreign bank or an international payment system. Please do not hesitate to send us an email or use the messengers to contact us. The numbers are +372 5 489 53 37 and +381 6911 12327 .
Can you lose the status of a tax resident of a certain country?
If you are a freelancer and you work from home, you can travel from one country to another while still making a living. If you do not linger very long (more than 183 days) in any particular country, you can avoid becoming its tax resident in most cases. However, there are exceptions from the general rule.
Some countries such as the U.S.A. and Eretria, for example, consider their citizens tax residents wherever they live and work. Thus, you can cease to be a tax resident of the U.S.A. only if you cease to be a citizen of the country. Besides, some countries such as Australia and Canada, for example, will assign the tax resident status to you if you have a permanent residential address on their territories.
At the same time, most countries (including the EU countries) do not assign the tax resident status to the person on the basis of his/ her citizenship or place of residence. This theoretically means that you can be a tax resident of no particular country if you keep moving around Europe, for example.
We recommend that you inform the fiscal authorities of the country where you have stayed for a long time (more than 183) about your departure if you are moving to another country. They have to know that you are acquiring a new tax residency to stop considering you their tax resident and thus stop charging you taxes.
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On choosing a jurisdiction
and terms for changing
Your tax residency.
On choosing a jurisdiction and terms for changing Your tax residency.
Tax residency is required to make use of the DTA provisions
If a freelancer is a tax resident of no country, it does not mean that he/ she can pay nothing in taxes at all. The person can be taxed in the country of their residence or in the country where their pay comes from. If these countries are different, the provisions of Double Taxation Avoidance (DTA) agreements are applied. Such agreements ensure that the person does not have to pay taxes on their income in two countries at a time.
If you don’t have tax residency in any country, the DTA provisions cannot be applied and you will be charged a withholding tax in this case. Besides, some countries will tax you even if you work for money on their territories for one day only. Fiscal rules are different in different countries. Some other countries, however, will tax you only if you work for a local employer. If you derive income from foreign sources, you will not be taxed in the country of your residence. (Please note that this rule does not apply everywhere).
Can it be beneficial to have no tax residence?
You have to be a tax resident of a certain country if you would like to use banking services. Besides, the tax resident status allows using the DTA agreements thus lowering the amount of the withholding tax.
Citizens of the EU, EEA, and Switzerland will be well-advised to consider Malta for tax residency. It is easy to legalize your stay on the island by acquiring the status of a ‘self-sufficient resident’. The 183 days rule does not always apply in Malta. If, for example, you spend every winter on the warm and sunny island, you may be considered a ‘habitual resident’, which will make you qualified to tax residence of Malta.
Please request a personal consultation from our experts to find out about the countries whose tax residence looks attractive. You may be able to lessen your fiscal burden by changing your tax residence.
How can you break up your fiscal ties with a specific country?
When people are asked to supply proof of address, they will often submit utility bills. A bank statement, however, would serve as a more secure proof of address. Many banks allow clients to change their residential addresses, even to move to foreign countries without closing the account nor imposing any restrictions. Fiscal authorities, in their turn, will be happy with the bank statement that you supply as proof of address.
Speaking about foreign bank accounts, many jurisdictions use two concepts for reporting matters: the concept of ‘permanent resident’ and the concept of ‘tax resident’. The country of your permanent residence does not have to coincide with the country of your tax residence and bank administrators understand that.
By default, you are thought to permanently reside in the country of your citizenship. For this reason, the fiscal authorities of the foreign state where you have a bank account will report to the fiscal authorities of your home country if there is an agreement on exchange of fiscal information between the two countries.
In certain cases, it can be challenging to prove that you are not a tax resident of the country where you live. For instance, the U.S.A. and some Western European countries monitor all their residents very closely to make sure that all the due taxes are paid.
Some other countries, on the contrary, are rather relaxed about their legal residents being their tax residents as well. It may be enough to supply evidence that you have spent more than half a year outside the country not to be considered its resident for tax purposes. Please request our experts’ advice to find out what fiscal rules are in effect in your country of residence.
Tax residency in an offshore country
If you perform certain business operations that bring you profits, you have to report the profits in accordance with universally applicable principles. This means that a person of wealth cannot afford to have no tax residence in any country. How could you optimize your fiscal burden and reduce the overall amount of taxes that you pay? One possible option is to acquire tax residence in an offshore jurisdiction.
There are three types of offshore jurisdictions as far as taxes are concerned:
- Tax havens;
- Countries that charge no taxes on incomes made abroad; and
- Low-tax jurisdictions offering special incentives to investors and equity traders.
Tax havens are countries that do not charge the following taxes:
- Profit tax;
- Capital gains tax;
- Inheritance tax.
Traditionally, the following countries and territories are referred to as tax havens:
- Cayman Islands;
- St. Kitts and Nevis;
- Turks and Caicos Islands;
Countries that do not tax foreign incomes
Some countries will levy no taxes on the income made in foreign states. They are said to have a ‘territorial’ taxation system: only the income made on their territories is taxed. Some examples of such countries include the following ones:
- Costa Rica;
- Hong Kong;
Low-tax countries with special incentives for foreign investors
We can provide two examples of such countries:
- Malta; and
Those who live in Malta on regular legal residence permits have to pay the income tax at a progressive rate of up to 35%. The tax is payable wherever the income has been made on the condition that the money has been transferred to a Maltese bank. On the other hand, the capital gains tax is not payable in Malta even if the capital has been transferred to Malta from some other country.
As far as Uruguay is concerned, it used to have a territorial taxation system by around ten years ago some changes to the fiscal legislation were introduced. As of today, income from some types of foreign sources is taxed in Uruguay. This said, however, all newcomers are tax-exempt for the first five years that they live in the country. The authorities of Uruguay are interested in attracting people from other countries as they bring their capitals with them.
Test for tax residence
Many wealthy individuals like to spend several months in foreign countries each year. In certain cases, a prolonged stay in a foreign country may entail some fiscal obligations there. For instance, if you have a summer cottage in Canada and you spend a lot of time there, you might be considered a resident of the country for tax purposes. On the other hand, many countries will have signed bilateral DTA agreements that allow paying taxes in only one country instead of being taxed twice. In accordance with such agreements, if a person is a tax resident of one country and he or she lives in another country, the fiscal authorities of the second country will not tax the person.
Let’s take Spain as an example. The country applies two criteria to decide if a person should be considered a tax resident of Spain. You will become a tax resident of Spain if:
- You live on the territory of the country for more than 183 days within a calendar year; and
- The center of your personal and economic interests is located in Spain.
Spain as well as a number of other European countries use the following test to determine if a person is to be considered a local resident for tax purposes:
- If you live in two different countries during the fiscal year, you are considered a tax resident of the country where you have a permanent residential address even if the house/ apartment is not your property.
- If you have permanent residential accommodations in both countries, the second criterion applies. The authorities have to determine in which country the ‘center of your vital interests’ is located. The term covers the full spectrum of family, financial, political, and cultural ties that you have with the country. If your family lives in a detached house in Great Britain, the best part of your possessions is located there, you have a UK-registered company, and many of your friends and business partners also live in the country, you are going to have a hard time proving that Spain is the center of your vital interests even if you spend a lot of time there over the year.
- If you do not satisfy any of the two above mentioned criteria, the authorities will have to understand in what country you spend the best part of your time. They have to find out about the total period of time that you have spent on the territory of each country over the year.
- If you go ‘country hopping’ and regularly change your place of residence, you will be automatically considered a tax resident of the country of your citizenship.
If you like traveling from one country to another, you would certainly benefit from having bank accounts in all the countries that you visit often. Please request a free consultation on opening a foreign bank account with our experts!
Theoretically, you can be a tax resident of no country if you keep moving around the globe. However, this would not be very comfortable and you would not be able to engage in serious business operations if you do not have any tax residency. A better idea would be to find a country that offers the most attractive fiscal conditions. We will be happy to help you with that!
We provide professional consultations on international tax planning and immigration issues. Please do not hesitate to contact us by writing to firstname.lastname@example.org if you have ‘centers of vital interests’ in more than one country.