Tax residence
The criteria for residence for tax purposes vary considerably from jurisdiction to jurisdiction, and "residence" can be different for other, non-tax purposes. For individuals, physical presence in a jurisdiction is the main test. Some jurisdictions also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some jurisdictions determine the residence of a corporation based on its place of incorporation. Other jurisdictions determine the residence of a corporation by reference to its place of management. Some jurisdictions use both a place-of-incorporation test and a place-of-management test.
Domicile is, in common law jurisdictions, a different legal concept to residence, though the two may lead to the same result.
The criteria for residence in double taxation treaties may be different from those of domestic law. Residency in domestic law allows a country to create a tax claim based on the residence over a person, whereas in a double taxation treaty it has the effect of restricting such tax claim in order to avoid double taxation. Residency or citizenship taxation systems are typically linked with worldwide taxation, as opposed to territorial taxation. Therefore, it is particularly relevant when two countries simultaneously claim a person to be resident within their jurisdiction.
In international tax law
Double taxation treaties generally follow the OECD Model Convention. Other relevant models are the UN Model Convention, in the case of treaties with developing countries and the US Model Convention, in the case of treaties negotiated by the United States.OECD and UN Model Convention
The OECD Model Convention and the UN Model Convention are identical. They first provide for a definition of "resident of a Contracting State":1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
The definition is followed by "tie-breaker" rules for individuals and non-individuals, which result in the person being considered resident in only one of the countries:
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
US Model Convention
The US Model Convention is similar to the OECD and UN Model Convention with respect to residency of individuals. However, if non-individuals are considered to be residents of two countries, the default result is that they shall be considered resident of none for the purposes of claiming the benefits of the tax treaty. The countries will engage in mutual agreement procedures to reach a decision. Therefore, domestic taxation will continue as normal until an agreement is reached.BEPS
Action 6
The Base Erosion and Profit Shifting project developed by the OECD and endorsed by the G-20 reached a critical milestone in October 2015, where final deliverables for 15 Actions were presented. Paragraph 48 of Action 6's final deliverable indicated a new wording for the "tie-breaker" relating to non-individuals, whereas it will no longer be automatically determined in the forthcoming revision of the model. According to the new wording, the "tie-breaker" will depend entirely on mutual agreement between both countries:3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting State, the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption form tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.
Action 15
Pending work on BEPS Action 15, concerning the development of a 'Multilateral Instrument to Modify Bilateral Tax Treaties' may result on the amendment of a large number of existing treaties to reflect, particularly, the new wording in Action 6. There are currently a considerable number of counties involved in this instrument's negotiation but it is still unclear what changes and what countries will agree to the changes. The work on the multilateral instrument will be concluded and open of signature on December 31, 2016.In the United Kingdom
In the United Kingdom for companies
A company is generally treated as resident in the United Kingdom for tax purposes if it is incorporated in the United Kingdom or, if the company is not incorporated in the United Kingdom, if its central management and control are exercised in the United Kingdom. "Central management and control" refers to the highest level of oversight, usually as exercised by the board, rather than day-to-day management.In the United Kingdom for individuals
An individual who spends more than 183 days in the UK in a tax year is UK resident. Apart from that, there are no clear statutory guidelines. The question of whether someone is UK resident is a question of fact and degree, to be determined "on all the circumstances of the case." The vagueness of this test has often been criticised. Viscount Sumner said in Levene v IRC:Similarly, the Codification Committee concluded:
The number of days present in the UK is not a decisive factor. In one case a foreigner who spent 5 months in the UK was held not UK resident. In the view of HMRC someone who exceeds 90 days on a four-year average is UK resident, but considerable emphasis is given to the fact that someone who averages less than 90 days may also be UK resident.
Before 2009/10, the vagueness of the law did not seem to matter because HMRC published relatively clear guidelines in document IR20. That document has been withdrawn from 2009/10 and replaced with the much vaguer guidance in HMRC 6.
HMRC currently argue that they are not bound by the terms of IR20 for years prior to 2009/10. Whether that is correct is currently the subject of litigation. It is clear that HMRC are not in any way bound by the terms of HMRC 6, which contains a very full disclaimer.
In Germany
All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salary, dividends, etc. earned from one's limited company. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from 1 March to 30 November, for example, would make one a German tax resident and therefore subject to German tax on the worldwide income for the entire period rather than just from the beginning of the seventh month.An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term should be taken out wherever possible.
Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company would be from a non-German source regardless of where the dividends are received. There is, therefore, scope for tax mitigation here if one does not become a German tax resident.
In France
In France, taxpayers are either "domiciled" in France or are "non-resident". Domiciled individuals are subject to French tax on worldwide income, but non-residents are not taxed on foreign-source income. Many treaty exemptions may apply, however. Under Article 4B of the French Tax Code, an individual is resident in France for tax purposes if:- they have a home or their principal place of physical presence in France,
- they have their professional activity in France, unless such activity is only ancillary, or
- they have the centre of their economic interests in France.
"Principal place of physical presence" covers a wider range of situations that a basic 183-day rule would have. This is because the taxpayer's physical presence in France in a given calendar year will be tested against his presence in another country. Perpetual travelers must therefore be able to demonstrate that they have resided in a foreign country for a longer period in the relevant calendar year.
In Liechtenstein
In Liechtenstein, generally speaking all registered residents are also deemed to be tax resident in Liechtenstein and are thus taxed there on their entire worldwide income and wealth.In Switzerland
In Switzerland, generally speaking all registered residents are also deemed to be tax resident tax resident in Switzerland and are thus taxed there on their entire worldwide income and wealth, except on the income and wealth from foreign business or real estate or where tax treaties limit double taxation. For tax purposes, residence may also arise if a person stays in Switzerland for 30 days, or for 90 days if he or she does not work.Either a progressive or proportional income tax is levied by the Confederation and by the cantons on the income of natural persons. The income tax is imposed as a payroll tax on foreign workers without a residence permit, and in the form of a withholding tax on certain transient persons, such as foreign musicians performing in Switzerland.
Taxable income includes all funds accruing to a person from all sources, in principle without deduction of losses or expenses, and usually including the rental value of a house lived in by its owner.
Non-working foreigners resident in Switzerland may choose to pay a lump-sum tax instead of the normal income tax. The tax, which is generally much lower than the normal income tax, is nominally levied on the taxpayer's living expenses, but in practice, it is common to use the quintuple of the rent paid by the taxpayer as a basis for the lump-sum taxation. This option contributes to Switzerland's status as a tax haven, and has induced many wealthy foreigners to live in Switzerland.