In the era of globalised business networks, digital nomads and remote working, more of us are likely to work abroad at some point in our careers. With that comes the need to consider the various tax implications that come from residing for tax purposes in a different country to where you might normally call home. The tax residency rules for each country vary so it's important to understand the rules that apply in your destination, as well as the tax regime for your country of origin. Both employees and employers sending staff overseas are affected. There's only so much you can learn on your own, which is why you should always seek the guidance of a professional tax adviser before making any decisions.
Find out the tax implications of working abroad, how to avoid double taxation, and at what point you may need to decide where to plant your residential roots in terms of tax liability.
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Working abroad: tax implications
Whether you are taking a working holiday, accepting a short posting overseas with a global corporation, or relocating abroad without a definitive end date, there is a cut-off point at which your tax liability will transfer from your home to your destination country. Knowing that date can significantly reduce your tax burden. Escaping the reach of the tax authorities in your home country (or domicile) is by no means as straightforward as leaving the country. Some countries in particular, such as the United States and Australia, require citizens to jump through a series of fiscal hoops to avoid taxation.
Unless you find yourself in Bermuda, the Bahamas, Monaco or the United Arab Emirates, you are likely to be taxed at source on any income earned in an overseas country. Employment income is normally taxed in the country where you are working. What some expats do not realise, however, is that their home country may also have designs on a portion of that overseas income for tax purposes. Worldwide income is taxed in your country of residence. Unless you are “resident for tax purposes” in your destination country, you could potentially find yourself paying tax twice on your income, or paying income tax in the country with the higher income tax rate of the two.
What does “resident for tax purposes” mean?
Your tax residency status defines where your income tax is due, and it is not automatically related to your legal status as a resident in the country in question. In other words, you could still be liable for local income tax while you're waiting for your work permit or residency papers to be processed. The key shift in liability applies when your overseas stay exceeds a designated time period. Let's look at some possible scenarios:
Lauren, a US citizen, who spends five weeks in the Philippines combining travel with online work as a digital nomad.
Tax status: Lauren's stay in the Philippines is too short to qualify as a tax resident, but she is liable for US income tax on her worldwide income.
Geoff, a UK consultant, who is posted to Toronto for three months to set up a new Canadian subsidiary to the UK business operation.
Tax status: Not only will Geoff be taxed at source by his UK employer, but his stay in Canada is also too short to make him resident for tax purposes. However, Geoff's employer may incur unexpected liabilities which we'll discuss later.
Ben, an Irish superyacht skipper, who leaves the Emerald Isle to skipper a Panamanian-flagged vessel for several years.
Tax status: Providing Ben keeps to the open seas and does not return to Ireland for an extended period, he will transfer to the tax regime of his flagged vessel, in this case Panama.
Once you are not resident in your home country, you are no longer liable for income tax on overseas earnings. However, you may still be liable for tax on investment or rental income in your country of domicile. Tax authorities make the distinction between your domicile country, which is the one where you have your official home, permanent connection, and possibly family ties, and your country of residence. Although your tax residency may change, it's highly unlikely that your domicile will change just because you're working abroad.
The threshold that most countries impose to establish tax residency is six months in any given fiscal year (not calendar year). For that reason, 183 is the magic number - for most. 183 is the magic number for many countries but not all, and it's for that reason that it is imperative that you seek the advice of a professional tax adviser before making any tax-related decisions.
Everything you need to know about the 183 day rule
On your 183th day overseas, you will have spent more time within the country than at home. That is the cue for tax collectors to pounce. It should also be the point at which tax authorities in your home country acknowledge that you will not be subject to income tax for that fiscal year.
Certain conditions apply according to the home country:
Tax around the world
UK HM Revenue and Customs (HMRC)
In the UK, you will not be subject to income tax on overseas earnings provided you spend more than 183 days outside the UK and fewer than 91 days in the UK. You may also have to take a Statutory Resident Test to confirm your exemption from self assessment.
If an employee is out of the country for more than 183 days, they will be tax resident in the overseas country. But before those 183 days have elapsed, there is a period during which the employer is liable for withholding tax (if they're working for a UK company), meaning that the employee could be subject to double taxation.
US Internal Revenue Service (IRS)
US citizens have to report their earnings to the IRS wherever they are in the world. As a US citizen, you could still be liable for Social Security and Medicare Taxes if you're working for a US employer or resident or are working in one of the countries with which the US has a Totalization Agreement.
In the other direction, the Substantial Presence Test (SPT) is used to define whether someone working in the US is a resident for tax purposes. Normally, you will have to be physically present in the US for at least 31 days in the fiscal year to qualify.
Switzerland Federal Tax Administration
Expats working in Switzerland assume residency for tax purposes after just 90 days. That means that Swiss income tax applies after just three months. Because of Switzerland's federal structure, employees pay income tax in whichever of the 26 cantons they are resident.
Hong Kong Inland Revenue Department
Hong Kong operates a similar system, although in this case income tax is levied according to the 60-day rule. Any income earned in the territory beyond 60 days is taxable, although rates are notably low compared to many other expat destinations.
Canada Revenue Agency
Although Canada applies the 183-day rule for foreign workers, tax authorities take a robust approach to Canadian nationals working overseas. Unless you leave definitively and cut your residential (and family) ties, you could be liable for Canadian income tax on your overseas earnings.
Australia Tax Office
Australia also makes it relatively hard to escape the long arm of the Australian Tax Office. In order to successfully fail the domicile test as an Australian emigrant, you must prove that you are making a new, permanent home outside the country. It can be a challenge to know if you are an Australian resident for tax purposes, with no fewer than four key tests to take in order to meet the criteria. Bear in mind that foreign residents in Australia are not entitled to the tax free portion of their income, whereas Australians have a tax-free threshold of AU$18,200.
Business owners should pay particular caution when sending employees overseas. If an employee is performing certain functions for a business in an overseas country, such as negotiating contracts or sales, that may be considered as a “permanent establishment” which may expose the employer to having a taxable presence. As a consequence, the business could be liable to additional business taxes and licensing requirements. If in doubt, you should always contact a professional tax adviser to give you the appropriate guidance.
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Photo by Olya Kobruseva from Pexels. This information is correct as of 8 February 2022. This information is not to be relied on in making a decision with regard to an investment. We strongly recommend that you obtain independent financial advice before making any form of investment or significant financial transaction. This article is purely for general information purposes