What is Tax Residency?
Tax residency, in its simplest form, refers to where an individual pays taxes based on where they reside and do their work, but not where the company they work for is based and is determined by how long they’ve lived in that area. In most cases, ‘residency’ occurs after someone has lived in a single location for 6 months.
When deciding how to levy taxes on citizens, every country’s government has developed specific laws about residency – what circumstances define someone as a ‘tax resident’ and what circumstances do not. These are referred to as ‘tax residency laws’.
Tax law can be difficult to untangle, but it’s important for an organisation to be very familiar with how tax residency works in every country where it employs workers as well as where their workers may be interested in living or where they spend extensive periods of time. This includes being aware of any existing tax treaties between countries, understanding how tax residency is determined, what taxes should be paid by a resident versus a non-resident, and so on. Getting these things wrong could be costly.
How is tax residency determined?
Every country has its own rules about when and how to determine tax residency. Typically, people are considered tax residents of where they live most continuously during a specific period. This period could be as short as two months, such as in Cyprus. Or, like most countries, it may be half a year – a continuous 183 days.
However a given country chooses to determine residency, being a ‘tax resident’ means an individual is generally subject to the country's tax laws on their global income, which includes income earned both within and outside that country.
What is a non-resident taxpayer?
In some cases, an individual who doesn't meet the criteria for tax residency in a particular country may be considered a non-resident taxpayer. The tax specifics for non-residents can vary widely depending on the country's tax laws and the nature of their income. Non-residency generally applies to people who do not have their main or permanent home in a given country, or have not lived in that particular place for the minimum amount of time the country deems necessary to claim ‘residency’.
Non-residents usually only pay taxes on income earned within that location, not on their worldwide income.
Does tax residency apply to businesses?
In some cases, tax residency can refer to the concept of a 'permanent establishment'. This is a concept used in international tax law to determine whether a business has a substantial presence in a foreign country that justifies the application of that country's tax laws to the business's income generated within its borders.
If your company wants to learn more about whether their work would trigger a permanent establishment, it’s imperative to seek local tax advice. EORs are not licensed to give such recommendations.
What is a tax residence certificate?
The term ‘tax residence certificate’ refers to an official document issued by a country's governing tax authorities. This document confirms an individual's or a business organisation’s tax residency status within that particular country, and serves as proof that the certificate holder is indeed considered a tax resident for a specific period.
Tax residence certificates may be required for employers or workers in situations involving international tax treaties and agreements between countries. Most often, they’re used to determine which country has the right to tax certain types of income. These certificates are most commonly used to claim benefits under ‘double taxation’ treaties, or agreements between two countries to prevent individuals and businesses from being taxed on the same income in both countries.
Do I need a tax residence certificate?
An individual may need a tax residence certificate to provide evidence of their tax residency status when dealing with cross-border financial matters, such as opening bank accounts, investing in foreign countries, or receiving income from another country.
The certificate confirms that the individual is a tax resident of a specific country, and this can affect how their income is taxed and whether they are eligible for certain tax benefits or exemptions.
Businesses, on the other hand, may require tax residence certificates to demonstrate their tax residency status in the context of international business operations. For example, a company operating in one country but generating income in another may need a tax residence certificate to prove its eligibility for reduced withholding tax rates under a ‘double taxation’ treaty.
What must I do to obtain a tax residency certificate?
Tax rules, regulations, and processes vary greatly between countries and no two processes for obtaining a tax residency certificate are the same.
As a general rule, workers or businesses complete and submit an application to the tax authorities of the given country. The application may also require additional documentation such as proof of income or even proof of residency. Tax authorities review the application and, assuming the individual or organisation meets the necessary criteria for tax residency, they issue the requested certificate.
Make sure your employees are employed the right way
Requirements and procedures surrounding tax residency vary significantly from one country to another. Boundless helps companies around the globe employ people properly where they live and ensures they’re enrolled in and pay their local taxes.
Speak to an expert at Boundless about what steps you must take to stay compliant and which avenues are best suited to your organisation’s needs.