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Thoughts on Tax Residence

Outlander

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Aug 24, 2019
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The way I see it, high tax countries (HT) treat tax residence like a metal scanner. They make you pass through the scanner, and flag you if they find evidence of connection to the country. They are divided in several tiers of increasing sensitivity.

Tier 1: The presence test, usually 183 days within one year
Tier 2: Tier 1 OR being a citizen/visa holder with social/economic ties to the country
Tier 3: Tier 2 OR being a citizen/visa holder unable to demonstrate tax residence in another country
Tier 4: The scanner is defective and you're always flagged

Examples:
Tier 1: Brazil, Argentina, most non-EU countries
Tier 2: United Kingdom
Tier 3: ?
Tier 4: United States

Conversely, most low/zero tax countries (LT) treat tax residence like an exclusive club. You must be invited to the club or pay dearly to get in, but once inside, the foods and drinks are complimentary. Usually, LT countries will sell "memberships" (a residence visa or even a citizenship) by various means (e.g. start a company, buy real estate, etc.) and then apply the presence test. If your result is positive to the presence test, they will treat you as a VIP member - not only a resident but also a tax resident.

Some HT countries (Tiers 2 and 3) don't like the LT clubs and will put officers holding metal detectors near the the clubs. Thus club members could be flagged, in certain cases, as tax residents of both a LT and a HT country, or worse, of two HT countries! In the later case, the conflicting countries sometimes have a gentlemen's agreement (a tax treaty) in which they decide to what country the person belongs for tax purposes.

A question that often arises is whether one can be a tax resident of nowhere. This is a kind of a grey area, but my guess is that the answer would be yes for citizens of Tier 1 HT countries that live like digital nomads, since their countries don't send officers near the clubs. But since it's a grey area, other institutions such as banks won't take "nowhere" for an answer. They want to know a specific country where your tax matters belong, or they won't deal with you. And the answer can't be Liberland.

Thus people that go for schemes such as permanent residence visa in Panama (LT country with a 0% income tax), generally don't want to stay in Panama for long enough to pass the presence test. They want a shinny Panamanian ID card they can use for opening bank accounts and escaping the gray area, even if technically they aren't tax resident there. Or worse, they could be simply living in their home HT countries but using their IDs to claim to the banks that they live and pay taxes in Panama (a criminal offense).

There are some cases which I'm not sure of. Suppose you were granted the right to live in the UAE, a LT country, and you effectively live there for most of the year, thus passing the presence test. However, your residence visa was issued as an extension to that of your husband or wife, who work in the UAE or have a business there - and the extension explicitly rules out the right to tax residence, which means that, if asked, UAE won't issue a tax residence certificate for you. Does it prevent, however, that you declare UAE as your tax residence to your bank, and effectively live tax free?

Do you agree with the above or have anything to add?
 
The way I see it, high tax countries (HT) treat tax residence like a metal scanner. They make you pass through the scanner, and flag you if they find evidence of connection to the country. They are divided in several tiers of increasing sensitivity.

Tier 1: The presence test, usually 183 days within one year
Tier 2: Tier 1 OR being a citizen/visa holder with social/economic ties to the country
Tier 3: Tier 2 OR being a citizen/visa holder unable to demonstrate tax residence in another country
Tier 4: The scanner is defective and you're always flagged

Examples:
Tier 1: Brazil, Argentina, most non-EU countries
Tier 2: United Kingdom
Tier 3: ?
Tier 4: United States

Conversely, most low/zero tax countries (LT) treat tax residence like an exclusive club. You must be invited to the club or pay dearly to get in, but once inside, the foods and drinks are complimentary. Usually, LT countries will sell "memberships" (a residence visa or even a citizenship) by various means (e.g. start a company, buy real estate, etc.) and then apply the presence test. If your result is positive to the presence test, they will treat you as a VIP member - not only a resident but also a tax resident.

Some HT countries (Tiers 2 and 3) don't like the LT clubs and will put officers holding metal detectors near the the clubs. Thus club members could be flagged, in certain cases, as tax residents of both a LT and a HT country, or worse, of two HT countries! In the later case, the conflicting countries sometimes have a gentlemen's agreement (a tax treaty) in which they decide to what country the person belongs for tax purposes.

A question that often arises is whether one can be a tax resident of nowhere. This is a kind of a grey area, but my guess is that the answer would be yes for citizens of Tier 1 HT countries that live like digital nomads, since their countries don't send officers near the clubs. But since it's a grey area, other institutions such as banks won't take "nowhere" for an answer. They want to know a specific country where your tax matters belong, or they won't deal with you. And the answer can't be Liberland.

Thus people that go for schemes such as permanent residence visa in Panama (LT country with a 0% income tax), generally don't want to stay in Panama for long enough to pass the presence test. They want a shinny Panamanian ID card they can use for opening bank accounts and escaping the gray area, even if technically they aren't tax resident there. Or worse, they could be simply living in their home HT countries but using their IDs to claim to the banks that they live and pay taxes in Panama (a criminal offense).

There are some cases which I'm not sure of. Suppose you were granted the right to live in the UAE, a LT country, and you effectively live there for most of the year, thus passing the presence test. However, your residence visa was issued as an extension to that of your husband or wife, who work in the UAE or have a business there - and the extension explicitly rules out the right to tax residence, which means that, if asked, UAE won't issue a tax residence certificate for you. Does it prevent, however, that you declare UAE as your tax residence to your bank, and effectively live tax free?

Do you agree with the above or have anything to add?
Doesn't the visa in question also prevent you from working? If you're in the UAE without the right to work, and you're there > 183 days a year, it is unlikely that another country can claim you as tax resident as you won't pass your Tier1 and Tier2 tests.

In my 20+ years career I've never heard of Tier 3 except on this forum -- e.g. a country where you're a citizen that claims your taxes because you don't have a tax residence elsewhere, regardless of whether you passed the residency and economical / social interest tests except USA / Eritrea / North Korea (your Tier 4, which happens regardless of whether you're already paying taxes elsewhere or not).

Your post nails it really well -- the problem is usually the banking institutions that won't accept your business unless they have a Tax ID somewhere.
 
Doesn't the visa in question also prevent you from working?

It does but how about remote work? Managing your own business abroad?

Yes it's unlikely another country could make a claim in this case, but since technically UAE won't hand you a piece of paper saying you're tax resident there, you could still be in jeopardy if your citizenship is a Tier 2 country and you have some ties there.

What would you inform your bank re. your tax residence in this case if you wanted to be fully compliant?
 
Doesn't the visa in question also prevent you from working? If you're in the UAE without the right to work, and you're there > 183 days a year, it is unlikely that another country can claim you as tax resident as you won't pass your Tier1 and Tier2 tests.

In my 20+ years career I've never heard of Tier 3 except on this forum -- e.g. a country where you're a citizen that claims your taxes because you don't have a tax residence elsewhere, regardless of whether you passed the residency and economical / social interest tests except USA / Eritrea / North Korea (your Tier 4, which happens regardless of whether you're already paying taxes elsewhere or not).

Your post nails it really well -- the problem is usually the banking institutions that won't accept your business unless they have a Tax ID somewhere.

About tier 3.
I have moved from my citizenship EU country A to other EU country B. The tax inspectors in my home country has started investigation of my residency status. They have requested tons of proof: flight tickets, proof of rent etc etc. I have provided them home address certification, bank account statements with payments in country B. Later they requested to provide tax residency certificate of country B. If I could not provide these evidences my citizenship country would have claimed me tax resident.

My friend has tax advisor company in EU. And they have similar examples when citizenship country challange the residencies..
 
I have moved from my citizenship EU country A to other EU country B. The tax inspectors in my home country has started investigation of my residency status.
That's exactlt what they will do if you move between the EU or if you don't sign off in your home country accordingly. For less then 3 years it was possible to leave some European countries without to have to tell anyone where you are going, you could possible just disappear without anyone knowing. Not sure how it can work today.
 
That's exactlt what they will do if you move between the EU or if you don't sign off in your home country accordingly. For less then 3 years it was possible to leave some European countries without to have to tell anyone where you are going, you could possible just disappear without anyone knowing. Not sure how it can work today.

I have declared and signed off everything properly. It's just because they see that I earned income. And they try to collect taxes even if I don't live there anymore ;)
 
And they try to collect taxes even if I don't live there anymore
All countries need taxes badly to pay off their depts these days.
 
15 years ago I sold my business in the UK and paid 7 figures in tax to the inland revenue. I then established residence in a new country that taxes territorially (i.e. only on income earned locally or brought into the country) and notified the UK authorities of my new (foreign) address and asked them to confirm that I was now non-resident for tax purpose, which they did in writing. I still have some business interests and a substantial income but I have ordered my affairs so that I have no taxable income in either the UK OR my current country of residence and I have paid no tax for 14 years. To me the tax I paid 15 years ago though painful (still the largest personal cheque I have ever written!) was an investment in tax legitimacy and one of the best investments I have ever made.
 
15 years ago I sold my business in the UK and paid 7 figures in tax to the inland revenue. I then established residence in a new country that taxes territorially (i.e. only on income earned locally or brought into the country) and notified the UK authorities of my new (foreign) address and asked them to confirm that I was now non-resident for tax purpose, which they did in writing. I still have some business interests and a substantial income but I have ordered my affairs so that I have no taxable income in either the UK OR my current country of residence and I have paid no tax for 14 years. To me the tax I paid 15 years ago though painful (still the largest personal cheque I have ever written!) was an investment in tax legitimacy and one of the best investments I have ever made.
You may be a resident of a country which turns blind eye in your business. If you own the business outside of your residence country, then considering the effective place of management is in your residence country, shouldn't your foreign business be subject to tax in this country?
 
You may be a resident of a country which turns blind eye in your business. If you own the business outside of your residence country, then considering the effective place of management is in your residence country, shouldn't your foreign business be subject to tax in this country?

It depends if your residence country applies CFC rules (most do), and even then, CFC rules don't generally apply to businesses incorporated in any countries. They were designed specifically to grab companies incorporated in extremely favorable tax regimes.
 
It depends if your residence country applies CFC rules (most do), and even then, CFC rules don't generally apply to businesses incorporated in any countries. They were designed specifically to grab companies incorporated in extremely favorable tax regimes.
I understand but CFC rules are one thing, DTAs is another and country taxation rules also something else. For example Singapore has no CFC rules as far as I am concerned, however IRAS clearly states that "A company is a tax resident in Singapore when the control and management of the company is exercised in Singapore.". So although no CFC rules are applied, Singapore may still treat your whole foreign owned business subject to tax.
 
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Tier 4 - citizenship based taxation. Renouncing citizenship is the only way to escape the milk cow status. USA and Eriteria are the well known examples, but the latest addition to this category is Hungary.

Tier 3 - citizens, wheter residents or not, are taxed until another residency is proven. For example: France, Denmark, Greece. You can cut all ties and spend 0 days in country, but you pay taxes until you satisfy the tax office with Tier 2 criteria AND prove that you have at least one residency somewhere else in the world. Until then, you're a resident even if you're not.

Tier 2 - well-defined residency (and non-residency) criteria which are honored by the tax office. Usually, a series of stringent tests make it easy to get in the net by meeting just one criteria of many, but hard to get out as all conditions, often 4 or more, must be satisfied.

Typical tests include "center of life", "economic ties", "location of assets", "availability of permanent home", "days-spent" but with numbers at 30-90 and not 183 as with tier 1.

Lastly, even tier 1 which is based off of days-spent test alone, is now more commonly 183 days in ANY 12-month period rather than in a specific calendar year.
 
Thanks @xzars for the additional info. I have updated and summarized the idea below:

Tax Residency tiers for HT countries:
Tier 1: The presence test, usually 183 days within a calendar year (or even within any 12 month period)
Tier 2: Tier 1 OR being a citizen/visa holder with social/economic ties to the country
Tier 3: Tier 2 OR being a citizen/visa holder unable to demonstrate tax residence in another country
Tier 4: The scanner is defective and you're always flagged

Examples of countries per tier:
Tier 1: Brazil, Argentina, most non-EU countries
Tier 2: United Kingdom
Tier 3: Denmark, France (*), Greece
Tier 4: United States, Eritrea, Hungary

Examples of (rather subjective and ever expanding) "social/economic" ties criteria for Tier 2:
- Analysis of where is your "center of life" (family, businesses, etc.)
- Analysis of where are most of your assets
- Whether you have "availability of a permanent home" in the country (regardless of living there)
- Analysis of time spent in the country but with more stringent criteria than Tier 1

(*) France and possibly other countries will impose taxation for 3-5 years if your new country of residence is considered a tax haven.
 

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