Understanding Tax Residency: A Beginner’s Guide

Introduction

You may have heard of tax residency but don’t fully understand it. Let’s start with defining what tax residency is:

‘Tax residency refers to the status of an individual or company for tax purposes in a particular country or jurisdiction. This status determines which country has the right to tax an individual or a business on their income’.

So in simple terms, it’s the country (or countries) you pay your taxes on your worldwide income to, in that particular year. Understanding tax residency is essential for avoiding double taxation and staying compliant with local tax laws.

What determines if I am tax resident?

Each county has slightly different tax residency rules. These often include factors like the number of days you spend in the country, where your permanent home is, where your economic interests are located, or where your business is managed and controlled.

Many countries use a "physical presence" rule to determine tax residency. For example, if you spend more than 183 days in a country during a tax year, you are often considered a tax resident there.

Some countries consider where your permanent home or domicile is located when determining tax residency. This can be especially relevant if you have ties to more than one country.

Can I be tax resident in more than one country?

It is possible to be a tax resident in more than one country at the same time, which can lead to issues like double taxation (having to pay tax to two different countries).

However, many countries have double taxation treaties that help resolve these issues by determining which country has the primary right to tax you. Whoever said tax was simple? I have written a more detailed guide on double taxation treaties.

See the link here - https://www.blueedgeaccountants.co.uk/blog/double-taxation-treaties-digital-nomads

How to lose or avoid tax residency

If you are spending less than 183 days in a country and have never been tax resident there before, it’s quite easy to avoid tax residency. If you have had ties to a country in the past, it can be difficult to lose your residency unless you spend minimal amount of days there. Understanding tax residency rules is key here: tax residency is often hard to gain—but even harder to lose.

Why Tax Residency Matters for Digital Nomads

This can make tax compliance challenging for digital nomads who want to visit their home country regularly but also spend time in their favourite overseas destinations. Understanding how to determine tax residency is crucial for avoiding double taxation and staying compliant. Contact an expert to plan your time in each country and maximise your tax efficiency!