Tax residence: what it is and how it is determined

What is tax residency in essence

What is tax residency? To be precise, it is a legal status that determines whether a country has the right to tax an individual on his or her income, and to what extent. Most tax systems around the world determine obligations based on tax residence, which means where an individual actually lives and has major economic connections, not based on nationality or passport.

This is a core distinction that many people overlook. A person can hold the citizenship of one country but be a tax resident of another country, and their main tax liability is tied to their tax residence. Correctly understanding what tax residency is helps avoid two false expectations: that changing one's passport will change one's tax liability, or that tax is paid only wherever one happens to live.

Criteria for determining tax residency

Determining tax residency is usually based on the number of days of presence in the year, combined with factors such as permanent residence, centre of economic interests and family relationships. Many countries use a threshold number of days as a benchmark, but the number of days is not the only factor; housing, work, and family connections are also considered together.

Specific criteria vary from country to country, so the same situation can lead to different conclusions depending on the system. This is the reason why it is not possible to apply a general formula to all cases, and why determining one's tax residency needs to be based on the criteria of each relevant country instead of guessing.

Risk of double tax residence

A complicated situation is when a person can be considered tax resident in more than one country at the same time — for example, having enough days of presence in one country, while also having a home and family in the other country. In that case, the same income is at risk of being taxed in many places, creating a double burden.

To deal with this, double taxation agreements between countries often provide a series of delimitation criteria to determine the main place of residence. However, the application of these criteria is not automatic and can be complicated, so people in dual residency situations should consult an expert rather than draw their own conclusions.

Tax residency and relocation decision

For those considering moving or obtaining residency in another country, the question of what tax residency is needs to be answered from the beginning. The actual change in tax liability usually comes from changing tax residence, not from having an additional passport or residence permit while still living in the same place.

The moment of becoming a tax resident of a country is an important boundary: many asset arrangements, ownership structures or the timing of recording a transfer can only be considered before crossing that boundary. This is why a tax advisor should be consulted before moving, not after.

Declaration obligations come with tax residency

Tax residency not only determines the tax payable but also entails the obligation to declare. Many countries require their tax residents to declare their overseas accounts and assets, and in the context of increasingly strict automatic exchanges of financial information, these obligations are difficult to avoid.

Omitting a filing obligation, even if it does not result in additional taxes, can still lead to undesirable consequences. Therefore, once tax residence in a country has been established, the declaration obligations that such status entails need to be reviewed at the same time, not just the tax portion.

Verification and professional consultation

Because the answer to what tax residency is differs depending on the legal system, people with income or assets spread across many countries should review their tax residency status according to each country's criteria, and find out whether there is a double tax avoidance agreement between the countries and to what extent.

This is a group of issues that should be assessed by a tax advisor with expertise in the relevant countries, rather than speculating from the experience of others. This article provides background information to ask the right questions and is not a substitute for personalized tax advice for each case.