Whether you live in the United States, Canada, or Europe, personal taxes can be a challenging task. Yet, it can be even more difficult if you live or work in two different countries or reside in one country and gain income from another. You may not know which country is your tax residence, if you should pay taxes in each country, or if you can avoid paying high taxes in one country. This guide will help you navigate this complicated and often confusing situation. Follow along below to learn:
What Is Tax Residency?
Tax residency refers to any country where you are required, by law, to pay taxes to the government. As you may assume, residency refers to the country in which you reside or live. Yet, how countries determine if you qualify for tax residence varies. In the past, most countries stated that if you lived and worked more than six months on their soil, you were considered a tax resident and, therefore, needed to pay taxes on your income. Today, some countries still use this rule, making it easy to determine your tax residency. However, other countries have changed their practices to make it harder to avoid taxes.
What is Tax Residency in Canada?
In Canada, it is relatively easy to become a tax resident and challenging to remove yourself as a tax resident. If you are a Canadian citizen by birth and have many connections within the country, such as work or family, you are a tax resident. Likewise, you are a tax resident if you spend six months or more annually in Canada or if you have a Canadian employer. As a result, if you work abroad or incur income from another country, you must pay Canadian taxes.
Canadian taxes are considered very high. These taxes may be even higher depending on your province of residence, as you also owe provincial taxes. Since this is the case, many tax residents wish to become tax residents in other low-tax countries and remove their Canadian tax residency. In this way, they no longer need to pay Canadian taxes on their income.
What is Tax Residency in Europe?
Most European countries are similar to Canada in that you are a tax resident if it is your home country or if you spend more than six months annually in that country. However, each country has its own rules, and these may vary. Since some European countries have incredibly high taxes, citizens may be looking for a way to avoid those taxes and take on low tax rates on their income from a different country.
What is Tax Residency in the United States?
If you are a U.S. citizen, you are automatically a tax resident, even if you spent time in another country. You are also considered a tax resident if:
- You have a Permanent Resident Card or Green Card
- You stayed 31 days or more in the country this year and more than six months in the past three years
While you may wish to avoid American taxes by becoming a tax resident in another country, it is impossible to revoke tax residency without renouncing your citizenship.
How Do You Determine Your Tax Residency?
If you wish to determine if you are a tax resident of one or more countries, it is crucial to consult tax experts in specific counties. Since every country has different regulations, you may be surprised by your tax residency status.
In most cases, you will be considered a tax resident if:
- You have always lived in the country
- You have stayed in the country for more than six months per year
- You live in the country permanently
What Is Tax Residence Vs. Domicile?
Many people confuse tax residency and domicile, or their country of permanent residence. You are not necessarily a tax resident simply because you reside in a country, or are a citizen of that country (although this may be the case in some countries like the United States). Likewise, since tax residency is determined annually, it is possible to be a tax resident in many different counties throughout your life. However, permanent residency is more long-term and often takes many years even to obtain. That said since many people work in the same country as their permanent residence, they are usually tex residents of their domicile.
Can You Be a Tax Resident in More than One Country?
Living or working in more than one country, you may be subject to dual or multiple tax residency. This is considered double taxation if you need to pay taxes on the same income in both countries. You will need to pay taxes at the source, to the county where the income was earned, and taxes to your country of tax residence.
Paying two sets of taxes on the same income is a substantial burden. It is rare for individuals to deal with double taxation, but it may be more commonplace for business activities and investments.
How Can You Avoid Double Taxation?
Thankfully, most countries have agreements with each other to avoid double taxation. Double taxation agreements lay out rules to determine which country should receive income taxes. Typically, this country is where the person has the most ties or connections. As such, if a person is a tax resident of Canada and England yet has the most social and economic relations in Canada, they will pay Canadian income taxes.
If double taxation is unavoidable, many countries, such as the United States and Canada, offer tax credits. Credits can significantly reduce or eliminate the taxes owed to the residence country.
Can You Avoid Tax Residency?
Many who garner income through work or other means wish to avoid tax residency in a high-tax country. In these situations, people consider citizenship, residence, and work in a low-tax or zero-tax country. They may seek to either revoke a tax residency in their primary country to pay one or no tax.
Tax residency in your home country is difficult to renounce. If you have always lived and worked in a high-tax country, it is challenging to convince the government that you do not have strong connections to the country. However, it is certainly possible if you spend time building a life in another country and do not reside in the country for a good portion of each year. In some countries, such as the United States, you cannot remove tax residency without renouncing your US citizenship.
Can You Be a Tax Nomad?
In other situations, people may wish to avoid tax residency at all. Naturally, you will need to look up what would cause you to become a tax resident in any country you visit. Sometimes, it may be as little as leaving personal property behind for more than a few months. Generally, you can only stay less than six months in any given country. You will also need to give up your tax residency in your home country. This way, you can avoid being taxed on your income completely.
Conclusion
Whether you have one or more citizenship, there are plenty of solutions to optimize your taxation, but we can agree on the fact that if you are operating as a company, you will have more space and you will be able to align better with your chosen country’s tax policy. Deductible taxes of offered goods or services – and their extent – are also need to be considered, there could be various regulatory environments where you can’t do it and when you can, but everything depends on how you operate and what type of service/value you provide to your customers.