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.
Tax residency 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:
- a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
- b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
- c) if he has a habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
- d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
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.
The Base Erosion and Profit Shifting (BEPS) 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.
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 in December 31, 2016.
Tax residence in the United Kingdom
Tax residence 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.
Tax residence 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:
- The words "resident in the United Kingdom", "... guide the subject remarkably little as to the limits within which he must pay and beyond which he is free. .. The Legislature has, however, left the language of the Acts substantially as it was in , nor can I confidently say that the decided cases have always illuminated matters. In substance persons are chargeable or exempt, as the case may be, according as they are deemed by this body of Commissioners or that to be resident or the reverse, whatever resident may mean in the particular circumstances of each case. The tribunal thus provided is neither bound by the findings of other similar tribunals in other cases nor is it open to review, so long as it commits no palpable error of law, and the Legislature practically transfers to it the function of imposing taxes on individuals, since it empowers them in terms so general that no one can be certainly advised in advance whether he must pay or can escape payment.
Similarly, the Codification Committee concluded:
- an enquirer can only be told that the question whether he is resident or not is a question of fact for the Commissioners but that by the study of the effect of a large body of case law he may [emphasis added] be able to make an intelligent forecast of their decision.
More recently, the Chartered Institute of Taxation concluded:
The number of days present in the UK is not a decisive factor (unless the number of days exceeds 183 in a tax year). 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.
Tax residence 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 (such as three months) 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 (assuming this is not deemed to have a permanent establishment in Germany: see below) 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 (although non-German taxes may also need to be considered).
Tax residence 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 (e.g. foreign-source trading or rental income). Under Article 4B of the French Tax Code (Code Général des Impôts), an individual is resident in France for tax purposes if:
- they have a home (foyer) 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.
French courts have ruled that the principal place of physical presence test is only applicable where the "home" test cannot be applied. A "home" is to be construed as the place where the taxpayer normally lives, without any regard being given to the taxpayer's temporary stays in another country. As the "home" test is concerned with where the taxpayer's family ties are (i.e. where the spouse and children live), this test is highly unlikely to apply to single individuals. Consequently, the principal place of physical presence test should be viewed as primarily applicable to single individuals only.
"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.
Tax residence in the Russian Federation
In Russian Federation all tax resident individuals are taxed on their worldwide income, regardless of the source. Individuals are deemed to be tax residents if they are physically present in Russia for more than 183 days during consecutive period of 12 months. The period of presence in Russia is not interrupted in case individual is out of the country for less than six months for educational purposes or for medical treatment. Foreign servants and civil servants that were sent abroad for work purposes are deemed tax residents no matter how long they really are present in Russia.
- Physical presence test
- Permanent establishment
- Tax exile
- Tax haven
- International taxation
- Tax treaty
- Permanent tourist
- OECD Model Tax Convention (2014 version)
- UN Model Convention (2011 version)
- US Model Convention (2016 version)
- "About Base Erosion and Profit Shifting (BEPS) - OECD". www.oecd.org. Retrieved 2016-03-12.
- Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report
- For HMRC views see SP 1/90 and the International Tax Handbook chapters 3 and 4. For a statement of judicial views, see “Control of Special Purpose Vehicles” (John Chadwick)  Jersey & Guernsey Law Review 153. For general studies, see Corporate Residence and International Taxation (Robert Couzin, IBFD 2002); Stephen Brandon QC’s Taxation of Non-UK Companies and their Shareholders (Key Haven Publications, 2002).
- Section 831(1) Income Tax Act 2007
- Gaines-Cooper v HMRC  STC (SCD) 23 at .
- Levene v IRC 13 TC 486 at p.502.
- Income Tax Codification Committee Report 1936 Cmd.5131 pp.34–39.
- “Residence for tax purposes” 14 November 2007 accessible www.kessler.co.uk.
- IRC v Zorab 11 TC 289.
- HMRC 6 para 1.2, 1.5.13, 1.5.22, 2.2
- Gaines-Cooper v HMRC
- HMRC6 section 1
- IRC of Russian Federation, part 2, section 8, chapter 23, clause 207
- Site explaining what makes a person as tax resident, for different jurisdictions.
- Grant Thornton tax ebook for expats
- Deloitte Tax Guides
- Taxation of Foreign Domiciliaries in UK law