As many as three in five employees plan to work abroad in the year ahead. Yet while the opportunities are evolving rapidly, the tax obligations are unyielding. If you're working abroad - even without moving overseas long-term - there are some important tax implications to know about. 

While it might be an attractive idea to stop being a tax resident in your home country and benefit from a lower regime overseas, it pays to be 100% sure of your status. Ignore the requirements for your home and host country and you could find yourself facing substantial demands for retroactive contributions, or even fines. 

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The importance of the 183-day rule

Most countries use the 183-day rule, (i.e. half a year) as the threshold for tax residency. If you're living and working in a country for 183 days or more, you will become a tax resident of that country. With that comes the obligation to pay social security contributions locally, as well as pay income tax on global earnings at the local rate. 

Providing your host country has a double taxation agreement with your home country, you won't be taxed twice since you will no longer be a tax resident at home. That can be advantageous if you're working in a low- or no-tax destination, of which the United Arab Emirates is the most notable example. 

However, there are some often-overlooked points to address about the 183-day threshold:

• • • It applies only to full-time employees contracted from overseas. Freelancers and contractors, by contrast, could be liable for local taxes immediately. 

    • It counts all days you are physically present in the country, not just the working days. 

    • The 183-day rule refers to tax liability only and does not affect your legal status to work abroad. In other words, you may still need work permits or residency permits from day one, even if you are not a tax resident. 

Not all countries apply the 183-day rule. Switzerland, for example, confers tax residency after just 90 days, while the United States is the only remaining country in the world to apply a citizenship-based tax model. As a result, the Internal Revenue Service (IRS) applies the same regime to all American citizens, wherever they are.  

Tax implications by country

If you're reading a blog on global tax policy, the likelihood is that you're either looking to clarify your position before:

• • • Moving abroad long-term,‌ as a retiree, digital nomad, or student

    • Taking up an overseas posting with a domestic company

What taxes you may have to pay on your overseas earnings will partly depend on where you're normally resident. 

Overseas tax for United Kingdom citizens

As long as you're a tax resident in the UK, your foreign income will be taxable. Accordingly, you'll have to report and pay taxes on your:

• • • Global salary

    • Investment income

    • Rental income on overseas property

    • Overseas pensions income

Spend more than 183 days abroad and you will normally switch to non-resident tax status in the UK, but not always. You could still be badgered by HMRC for UK taxes based on ‘sufficient ties' if:

• • • Your main home is in the UK and you use it for at least 30 days per year

    • You maintain a UK property that is available to you for 91 or more continuous days a year (even if you barely use it). 

Before you head overseas, consider registering for self assessment to cover payments for any overseas income not covered by double taxation agreements, and file form P85 if you're leaving indefinitely as you may be eligible for a rebate on your annual tax allowance. 

If you are sent to work abroad by a UK employer, you will continue to make National Insurance contributions, but you won't have to pay social security in your country overseas if there is a reciprocal agreement in place. 

Tax for Irish citizens

Irish citizens can be classed as a resident, ordinarily resident, or domiciled for tax purposes. As a resident, your worldwide income is taxable in Ireland, although double taxation relief applies. 

As a non-resident but still domiciled, which applies if you're spending less than 30 days a year in Ireland, you'll pay tax on any foreign investment income over €3,810 but not on overseas earnings. 

Ireland also applies the 183-day rule, but the tax year corresponds to the calendar year, unlike in the UK where it begins in April. 

Tax for Australian citizens

Australians abroad need to satisfy no fewer than four tests to qualify as a non-resident in the eyes of the Australian Tax Office. A major obstacle is the domicile test, for which you'll need to prove that your permanent abode is overseas. That's harder if you're a digital nomad moving between countries, and even more difficult if you keep a home in Australia. 

Nevertheless, foreign tax treaties typically ensure that even if you are taxed on your global income by the ATO, you won't be paying tax twice on overseas income. 

Tax for US citizens

As an American citizen, you report your income to the Internal Revenue Service (IRS) whether it's earned inside or outside the United States. Foreign income is taxed at the same rate as in the US, but the Foreign Earned Income Exclusion (FEIE) covers the first USD $112,000 of overseas income and Foreign Tax Credits also apply for any taxes already paid overseas. 

Foreigners can work for a US employer remotely, but must complete and submit the W8-BEN form to confirm that they are exempt from US federal taxes. Non-citizens working in the United States are subject to the substantial presence test, with US taxes payable for anyone physically present in the country for 31 days or more. 

Taxes for EU citizens

Definitions of tax residence differ across the 27 member states, so you'll need to check the rules for your particular country. 

However, one particular quirk of life in the EU is fictitious tax residence. This is granted to workers who earn all or most of their income in a country where they don't live, and applies mainly to the large number (as many as 2 million) of cross-border commuters. Even if you're working in another country just one day a week, you will be entitled under EU law to allowances available to regular residents. 

Note too, that if you're working in the EU but living outside the euro zone (e.g. UK, Switzerland), your employer will usually require you to open a local bank account in the EU country. 

Can I be a tax resident nowhere?

Is it possible to move continually between countries without ever becoming a tax resident? That's one of the pillars of ‘Flag Theory' but in practice even the most-wandered digital nomad will struggle to escape their tax domicile. 

In the absence of prolonged stays in any single country, the most likely scenario is that your country of citizenship will make a claim to tax your global income, unless there is ‌another country to which you have strong ties. 

Realistically, you will need residency to open a bank account overseas, which would put you on that country's revenue radar. Likewise, if you are using your bank account in your home country for all payments and transactions, that would be further proof that you are still a resident for tax purposes. 

Implications for businesses

Any business that is judged to have a permanent establishment overseas could be liable for corporation tax, even if it's just a single office. The principle of Permanent Establishment (PE) applies where a company carries out revenue-generating (as opposed to support) activities overseas. 

To avoid the prospect of retroactive taxes and fines, it's important to be fully aware of the compliance, tax and legal implications of employing staff overseas. One solution is to set up a nearshoring or offshoring partnership with a local agency so that there is a legal entity in the overseas country handling the formalities. 

Need to pay overseas tax?

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This information is correct as of May 2023. 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.