The concept of tax residency is highly important, as this is the basis of whether a type of tax and set of rules and regulations will be applied to you or your company. Tax residency is truly highly important, as tax residency will be the cornerstone to determine if you will be subject to all these rules and taxation. For example, the U.K. will not tax you on your worldwide income if you are not a tax resident there, hence the U.K.’s C.F.C. Rules, transfer pricing rules, etc., will not be applied to you at the individual level.
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Being a Tax Resident or Non-Tax Resident will determine if a country has a right to tax you, if certain taxes will be applied to you, or if withholding tax is to be applied to income sourced from that jurisdiction as a non-resident.
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Being a tax resident of a certain country means you will be treated as such pursuant to that jurisdiction’s tax code. Being a tax resident does not mean you are a resident for immigration purposes as you can be tax resident but not legally a resident of that jurisdiction.
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​Additionally, you can also be a tax resident in a jurisdiction, and not pay taxes. This is accomplished by your company or you personally being a tax resident in a tax haven.
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An individual or company being a tax resident or a non-tax resident in a jurisdiction does not mean that you will be taxed or not taxed in that jurisdiction for that income. Depending on each income type, an income will be subject to taxes or not to tax residents or non-tax residents.
Difference between being a tax or non-tax resident
Tax Resident
Being taxed as a tax resident, in case your income is subject to taxes as a resident, will in theory allow you to deduct costs and expenses, this is the only benefit from being a tax either.
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Being a tax resident in a jurisdiction might sometimes mean you will pay taxes in that jurisdiction on your worldwide income (we will discuss this further in the worldwide vs territorial tax system subchapter)
In the offshore world, sometimes forming a company or being a tax resident in a jurisdiction that has very low-income tax will allow you to reduce your overall tax bill.
Non Tax Resident
Being a non-tax resident in a jurisdiction does not mean you will not be taxed if you receive income sourced from that jurisdiction. It all would depend on the payment concept and on the jurisdiction tax code, as always.
In general, when you are a non-tax resident, if you receive income for providing professional services while physically outside of that jurisdiction, the payor would not withhold income tax, but if the payment concept is Royalty or Interests (from loans or bank deposits) it might be subject to taxes, and the problem with this is that your taxable base will be your gross income, without allowing you to deduct expenses on that income.
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When an income is subject to tax to a non-tax resident because such income is sourced from that jurisdiction, the latter will levy a withholding tax.
If the income is subject to withholding tax, you can reduce this by either creating a tax resident company there and doing tax planning which will allow you to deduct costs and expenses, or by claiming tax treaty benefits by creating a company in a jurisdiction that has a double taxation avoidance treaty with this second jurisdiction.
Corporate Multi Tax Residency
A company can be a tax resident in, for example, the following scenario:
It is formed in a jurisdiction where tax residency is based on the country of incorporation/formation, and itt also has its Place of Management and Control in another jurisdiction, where one of the factors that determine a company’s tax residency is based on place of Management and Control.
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A way to avoid this, is to of course understand the tax residency rules of each jurisdiction involved in your tax and offshore affairs to avoid being a tax resident in one, two, or more jurisdictions.
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In cases where there is a multiple tax residency status, a tax treaty between two jurisdictions will allow you to only be taxed in a jurisdiction. These jurisdictions will surely not have the same tax rate, which is why sometimes it is better to create the tax residency status in the jurisdiction that gives you a much lower tax rate.
Company and individual tax residency
Company Tax Residency
In general, for companies, tax residency is determined by the Country of incorporation, and/or country of management (where annual meetings are held and where decisions are taken).
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Sometimes, depending on the jurisdictions’ tax code, your company could be a tax resident in two or more jurisdictions at the same time, that is the case if country A considers tax resident a company by country of incorporation, and country B considers a company tax resident by way of place of management.
Residency by Company Permanent Establishment
Your company can also be a tax resident in another jurisdiction if you have a permanent establishment (PE) there, or it has representatives who sign contracts on the company behalf there.
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For example, if you have a company formed in the Cayman Islands, and this company opens a restaurant, factory, shop, warehouse, etc., in London (for example), the London Tax Authority (HMRC) will treat the portion of income earned through this permanent establishment as sourced from the U.K. (logically), and will only tax the portion of this income earned through this Permanent Establishment, but not the overall Cayman Islands company income.
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Another way you can have a Permanent Establishment is by having a dependent agent with authority to conclude contracts, such as an employee or representative, who has the authority to conclude contracts on behalf of the company can create a PE. The agent must regularly exercise this authority in the jurisdiction.
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Companies may seek to avoid creating a PE to minimize their tax liability. Strategies for this include fragmenting activities into smaller, preparatory, or auxiliary functions that do not constitute a PE. Another common strategy is engaging agents who operate independently and do not have the authority to conclude contracts on behalf of the company. The exact details, and the ways to circumvent being a tax resident, will be found in that jurisdiction’s tax code.
Residency by Place of Incorporation
Some jurisdictions deem a company as a tax resident if incorporated or formed there as one of the factors to determine tax residency.
Tax residency if a company meets one of the following:
There are jurisdictions that have a mix of features that determine if a company is a tax resident there. For example, some jurisdictions state that a company will be taxed in a certain jurisdiction there if the company:
- Is formed in that jurisdiction.
- Has its Management and Control in that jurisdiction (even though the company is not formed there).
- Has a Permanent Establishment there.
Not all jurisdictions of course have that full provision. Some may implement it partially, or fully, depending on the specific tax code.
For example, in Singapore companies formed in Singapore are not considered tax residents, but companies managed and having its place of management in Singapore are considered tax residents, so before the eyes of Singapore’s tax code, a company formed in the BVI that has place of control and management in Singapore, will be considered a tax resident in Singapore, but a company formed in Singapore but having its place of Management and Control in the BVI will not be considered a tax resident.
Some tax havens determine their tax residency by place of management and control, and not of incorporation.
It is a common practice in a lot of tax havens to not consider companies formed in their jurisdictions as tax resident, they consider tax residency of a company based on where the company is managed and exercised its control, meaning if the company is controlled and managed from its jurisdiction, they will deem that company as a tax resident.
This concept is beneficial as it allows you to have an offshore company with no tax residency on its place of formation (i.e. Cayman Islands, BVI, Belize, etc.) This way, for example, you could form a company in the British Virgin Islands, and report this company as not having its place of Management and Control in the BVI, making this company a non-tax resident in the BVI, and hence not being subject to the Economic Substance Requirements (we will discuss about the Economic Substance Requirements below)
Company Tax Residency by Place of Management and Control
Tax residency based on the place of management and control is a principle that determines where a company is considered a resident for tax purposes by focusing on the location of its key decision-making activities. This typically involves the location where the board of directors meets and makes strategic decisions, where the company’s executive directors and senior management operate, and where major corporate policies and directions are set. Jurisdictions like the United Kingdom and Australia apply this concept by considering a company tax resident if its central management and control occurs within their borders.
Similarly, India uses the place of effective management (POEM) to ascertain residency for companies whose significant management decisions are made within the country. The implications of this principle are profound, affecting a company's tax liability and potentially leading to dual residency issues where a company is considered resident in multiple countries, thus subjecting it to double taxation.
To mitigate such risks, Double Taxation Avoidance Agreements (DTAAs) often include tiebreaker rules favoring the country of effective management. Adherence to these rules is crucial for companies with cross-border operations to ensure compliance and optimize their tax position.
How to avoid being a tax resident based on the jurisdiction of control and management
Avoiding tax residency based on the center of management and control involves strategic planning and executing management activities across multiple locations.
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One effective approach is to decentralize decision-making by distributing key strategic decisions across various countries. This can be achieved by holding board meetings and executive sessions in different jurisdictions and ensuring that senior executives and decision-makers spend significant time working outside the target jurisdiction.
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Establishing the company’s main operational headquarters and key administrative functions in another jurisdiction can further support the claim that the center of management and control is not concentrated in the undesired location.
Individual Tax Residency
From the individual point of view, you can be a tax resident in a country by virtue of your nationality (in general, for those citizens in countries with a worldwide tax system), or by virtue of the time you have spent in certain territory.
Tax Residency by Physical Presence
In general, you are a tax resident in a jurisdiction if you spend 180 days in a calendar year therein.
Tax Residency by Center of Vital Interests:
Some jurisdictions even consider you a tax resident there if your personal center of vital interest is there, which includes where your personal and economic ties are strongest. This could involve the location of family, employment, business activities, and social connections.
Tax residency by Citizenship
Some jurisdictions determine your tax residency based on your citizenship. For example, if you are a U.S. Person, you will always be a tax resident in the U.S. even if you have never lived there, or have been out of the U.S. for decades.
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Only thing is that if you live outside of the U.S. they give you a Foreign Earned Income tax exclusion, meaning if you reside outside of the U.S. and your income does not exceed a certain threshold, which is below US$120,000 per year for year 2023, you will not be taxed in the U.S., but if your income exceeds that threshold you will be taxed, even if you don’t have any type of link to the U.S. besides your nationality.
How to stop being an individual tax resident.
To stop being a tax resident in a jurisdiction it will depend on that jurisdiction’s tax code and what factor specifically makes you a tax resident there.
If you are a tax resident in a jurisdiction because of your nationality, you will have to give up your nationality/passport, and acquire a second citizenship; if you are a tax resident because you have your center of vital interest there, you will have to close all your companies, bank accounts, sell your house, etc., to avoid this; if you are a tax resident because of the physical presence test, you would just have to not be physically in that jurisdiction for a period of time above the threshold.
In most cases, especially those with a worldwide tax system, you will have to perform an exit tax procedure, where to cease being a tax resident you need to pay any Capital Gains tax accrued.
Individual multiple tax residency.
It will depend on your jurisdictions’ specific tax codes, but for example, if you are a U.S. Citizen or Green Card holder (“U.S. Person” for tax purposes), or a Canadian or U.K. tax resident who has not performed an exit tax procedure, you will also be a tax resident in the jurisdiction where you physically reside.