Tax Residency: What It Is and Why It Matters
Tax residency is a status that determines in which country you are required to pay taxes. Sometimes, it is obtained intentionally, while other times, it results from frequent travel or owning property in another country.
In this article, we will discuss how tax residency is determined, what factors influence it, and why this status is crucial for your financial planning.
How Is Tax Residency Determined?
The main criteria that a country may use to recognize you as a tax resident include:
- 183-day rule – If you spend more than half the year in a country, you are likely to be considered a tax resident.
- Center of vital interests – Tax authorities consider where your family, job, and property are located.
- Sources of income – If you earn income in a country, it may claim the right to tax you.
- International agreements – If two countries claim your taxes, the issue is resolved based on double taxation agreements.
Why Is Tax Residency Important?
Your tax residency status affects not only tax payments but also other aspects of your life:
- Determines the tax rate and potential benefits.
- Impacts the extension of a residence permit and the possibility of obtaining citizenship.
- Can influence your investments and foreign bank account transactions.
- Defines your obligations for declaring foreign income.
How to Avoid Double Taxation?
If two countries consider you a tax resident, it is essential to use international double taxation agreements, which allow you to:
- Credit taxes paid in one country against those owed in another.
- Reduce the tax burden through deductions and exemptions.
- Clearly define which country has the primary right to tax your income.
Tax residency is a complex but crucial aspect of financial planning. If you frequently travel, work abroad, or own property in another country, it is essential to understand your tax obligations in advance. This will help you avoid fines, double taxation, and other unpleasant consequences.
