What is the difference between residency and tax residency?

A person might, technically, reside in many countries (have property, spend time and even live there), however, a person is liable to pay taxes on their worldwide income in one country only, the country of their tax residency. Tax resident status means that the person is not required to pay taxes in any other country, including the country of their citizenship (if different; except for the citizens of the US).

Being a resident means that the person is registered with the migration office or a municipality in a particular country. In the UAE, for example, every Emirates resident visa and Emirates ID holder is considered to be a local resident, however, only those who have significant ties to the UAE and spend certain period of time there might be eligible for becoming tax residents. Official document which confirms tax residency status is a tax residency certificate (TRC).

Many countries whose tax regimes are favorable, including the forementioned UAE, will never challenge individual’s tax residency, i.e., UAE will never ask a resident to obtain the UAE TRC in order to prove that he/she is paying taxes there. Tax residency certificate is most likely to be asked (and tax residency is most likely to be challenged) only by another - oftentimes a high-tax - country which has a reason to believe that a person is its tax resident and should pay taxes there and not somewhere else. This could be one of person’s previous tax residency countries, or the country of their citizenship.

The OECD model treaties for avoidance of double taxation provide that the individual is a tax resident in the country of his permanent home (these provisions have some exemptions). There is no difference if the person rents or owns a place, it is important that such place would be available for them to live. However, if a person has permanent home in two or more countries or does not have permanent accommodation at all, this person will be considered a tax resident in the country of their highest social and economic interest. If the center of social/economic interest cannot be determined, the person will be regarded as a tax resident in the country in which they spent most of their time.

If the lifestyle of a person allows them to believe that no country will challenge their tax residency, it would be a good idea to choose a tax-friendly jurisdiction with as little administrative requirements as possible and set up the tax residency there, just to be safe. On the other hand, if chances that the tax residency might be challenged are realistic, tax residency change should be taken more seriously as it will require much more substance.

The process of changing the tax residency is a fairly complex, therefore, it is important to choose the best option based on individual circumstances. A lot of attention must be paid to details, such as taxation rules of the country the person is leaving, potential application of exit tax, treaties for avoidance of double taxation (if any) between the “old” and the “new” tax residency countries and much more. If you would like to find out which country would be best for tax residency purposes in your case, do not hesitate to contact us; we will evaluate all short-term and long-term factors and suggest the best individual solution.

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