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3 Tax Questions to Ask Before Changing Your Residency or Citizenship
July 26, 2019 - Guide
Lowering one’s tax liability is one reason why some individuals decide to acquire a second citizenship or invest in a residency program.
However, even if managing your taxes isn’t your primary motivation, acquiring a second citizenship or changing your residency can have unexpected financial consequences.
Here are 3 questions to ask before you make any crucial decisions:
Will I pay tax on my global income as a citizen of a new country?
Some countries such as the US infamously use a citizenship-based taxation system under which all US citizens – irrespective of when you last lived or visited the US – are designated taxable in some capacity.
Becoming a citizen of a country that applies a citizenship-based taxation system could require you to pay tax on your global income and can have significant consequences on your finances.
Most countries thankfully apply a residence-based taxation system, under which you pay tax on your global income only when you are resident in a country.
Others impose policies whereby you are only taxed on your domestically-sourced income if you are a citizen but not a resident of a country (e.g. Cyprus).
None of the Caribbean countries currently offering second citizenship such as St Kitts and Nevis, Dominica, Antigua and Barbuda, St Lucia and Grenada tax non-resident citizens on their global income.
What factors would deem you tax resident in a country?
Countries use very different domestic definitions to determine whether or not you are deemed tax resident.
In the EU for instance, you will usually be considered tax-resident in the country where you spend more than 6 months a year.
Importantly, for those who regularly spend time outside their home country, you will normally remain tax-resident in your home country if you spend less than 6 months a year in another EU country.
However, countries with more aggressive tax policies (such as the UK) often have complex tests to determine whether or not you are deemed tax resident.
Whether or not you are considered tax resident depends on more than just the time you spend in a country in any given tax year – it can depend on factors as wide-reaching as whether or not you recently got married, if you sold or acquired a new home, whether you have close relatives in a country, how much time you spent in a country in previous tax years and what activities you carried out during your visits.
It can even be affected by your transit times and flight departure times – countries such as the UK determine whether you were in the country at the end of a day (at midnight) but then have other “deeming rules” that apply.
Can I be deemed tax resident in two countries simultaneously?
The short answer is yes. The reason is that different countries apply different local rules to determine whether you are tax resident. You may unluckily meet the criteria for tax residency under both sets of rules.
For individuals applying for Residency through Investment programs in any EU state, with the ultimate goal of acquiring permanent residency and then becoming a naturalized citizen, the fact that you will spend time living in the country could make you tax resident and therefore tax liable on your global income.
Thankfully double taxation treaties exist to prevent you from paying tax twice on the same income. If a country decides to challenge your tax residency status ‘tie-breaker rules’ will usually determine an individual’s tax residency status in favour of just one country, forcing the other to drop their tax residency claim.
- The first tie breaker rule is that if you are resident in two countries according to each country’s domestic rules, you are deemed to be resident in the country in which you have a permanent home available to you. A permanent home is any form of accommodation continuously available to you for your personal use and does not have to be owned by you.
- Where you have a permanent home available in both countries, the second tie breaker rule determines which country is considered your centre of vital interests – for example, if you have a home in Lebanon where many of your personal possessions are kept, and your family and majority of friends live in Lebanon, and you have Lebanese bank accounts, it would be difficult to prove that Lebanon is not your centre of vital interests.
- If the second tie-breaker test isn’t conclusive, the third tie breaker determines in which country you have a habitual abode – which refers to the country you stay more frequently, determined over a significant period of time.
- If you spend time in two countries equally and all other tie-breaker rules are inconclusive, then you are deemed resident in the country you are a national.
Your domicile [usually the country your father considered his permanent home when you were born] can also have a bearing on whether or not you pay tax on your global income. Many countries have special tax considerations for non-domiciled residents.
Other countries such as Portugal have very favourable programs such as Non-Habitual Resident Tax Regime that allow you to be tax resident in Portugal but not pay tax on foreign-sourced income for 10 years.
Even if traveling the world visa-free is your primary motivation to apply for a Residency by Investment or Citizenship by Investment in another country, visiting your tax advisor to determine the financial consequences of your decision should be an important first step.
You can find the answers to the Top 10 Questions most of our clients ask us about second citizenship here
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