Tax residence
Encyclopedia
Definitions of residence for tax purposes vary considerably from state to state. For individuals, physical presence in a state is an important factor. Some states also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some states determine the residence of a corporation based on its place of incorporation. Other states determine the residence of a corporation by reference to its place of management. Some states use both a place-of-incorporation test and a place-of-management test.
Domicile
is, in common law jurisdictions, a different legal concept to residence.
Residence as defined in double taxation treaties is different from residence as defined for domestic tax purposes. Tax treaties generally follow the OECD Model Convention which provides:
Similarly, the Codification Committee concluded:
More recently, the Chartered Institute of Taxation concluded:
It is not possible in the scope of a wikipedia article to provide a useful and accurate statement of the substantial case law relating to residence of individuals for tax purposes in the UK and any short summary would be inaccurate and misleading. The number of days present in the UK is not a decisive factor (unless the number of days exceeds 183 in a tax year). In one case a foreigner who spent 5 months in the UK was held not UK resident. In the view of HMRC someone who exceeds 90 days on a four year average is UK resident, but considerable emphasis is given to the fact that someone who averages less than 90 days may also be UK resident.
Before 2009/10, the vagueness of the law did not seem to matter because HMRC published relatively clear guidelines in document IR20. That document has been withdrawn from 2009/10 and replaced with the much vaguer guidance in HMRC 6.
HMRC currently argue that they are not bound by the terms of IR20 for years prior to 2009/10. Whether that is correct is currently the subject of litigation. It is clear that HMRC are not in any way bound by the terms of HMRC 6, which contains a very full disclaimer.
, dividend
s, etc. earned from one's limited company
. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year
or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from 1 March to 30 November, for example, would make one a German tax resident and therefore subject to German tax on the worldwide income for the entire period rather than just from the beginning of the seventh month.
An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term (such as three months) should be taken out wherever possible.
Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in Germany: see below) would be from a non-German source regardless of where the dividends are received. There is, therefore, scope for tax mitigation here if one does not become a German tax resident (although non-German taxes may also need to be considered).
Domicile
Domicile (law)
In law, domicile is the status or attribution of being a permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave...
is, in common law jurisdictions, a different legal concept to residence.
Residence as defined in double taxation treaties is different from residence as defined for domestic tax purposes. Tax treaties generally follow the OECD Model Convention which provides:
- 1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
- 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
- a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
- b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
- c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
- d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
- 3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Tax residence in the United Kingdom
Tax residence in the United Kingdom for companies
A company is generally treated as resident in the United Kingdom for tax purposes if it is incorporated in the United Kingdom or, if the company is not incorporated in the United Kingdom, if its central management and control are exercised in the United Kingdom. "Central management and control" refers to the highest level of oversight, usually as exercised by the board, rather than day-to-day management.Tax residence in the United Kingdom for individuals
An individual who spends more than 183 days in the UK in a tax year is UK resident. Apart from that, there are no clear statutory guidelines. The question of whether someone is UK resident is a question of fact and degree, to be determined "on all the circumstances of the case." The vagueness of this test has often been criticised. Viscount Sumner said in Levine v IRC:- The words "resident in the United Kingdom", "... guide the subject remarkably little as to the limits within which he must pay and beyond which he is free. .. The Legislature has, however, left the language of the Acts substantially as it was in [1801], nor can I confidently say that the decided cases have always illuminated matters. In substance persons are chargeable or exempt, as the case may be, according as they are deemed by this body of Commissioners or that to be resident or the reverse, whatever resident may mean in the particular circumstances of each case. The tribunal thus provided is neither bound by the findings of other similar tribunals in other cases nor is it open to review, so long as it commits no palpable error of law, and the Legislature practically transfers to it the function of imposing taxes on individuals, since it empowers them in terms so general that no one can be certainly advised in advance whether he must pay or can escape payment.
Similarly, the Codification Committee concluded:
- an enquirer can only be told that the question whether he is resident or not is a question of fact for the Commissioners but that by the study of the effect of a large body of case law he may [emphasis added] be able to make an intelligent forecast of their decision.
More recently, the Chartered Institute of Taxation concluded:
- the law determining whether an individual is resident in the UK is a mess.
It is not possible in the scope of a wikipedia article to provide a useful and accurate statement of the substantial case law relating to residence of individuals for tax purposes in the UK and any short summary would be inaccurate and misleading. The number of days present in the UK is not a decisive factor (unless the number of days exceeds 183 in a tax year). In one case a foreigner who spent 5 months in the UK was held not UK resident. In the view of HMRC someone who exceeds 90 days on a four year average is UK resident, but considerable emphasis is given to the fact that someone who averages less than 90 days may also be UK resident.
Before 2009/10, the vagueness of the law did not seem to matter because HMRC published relatively clear guidelines in document IR20. That document has been withdrawn from 2009/10 and replaced with the much vaguer guidance in HMRC 6.
HMRC currently argue that they are not bound by the terms of IR20 for years prior to 2009/10. Whether that is correct is currently the subject of litigation. It is clear that HMRC are not in any way bound by the terms of HMRC 6, which contains a very full disclaimer.
Tax residence in Germany
All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salarySalary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
, dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
s, etc. earned from one's limited company
Limited company
A limited company is a company in which the liability of the members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. And the former of these, a limited company limited by shares, may be...
. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year
Calendar year
Generally speaking, a calendar year begins on the New Year's Day of the given calendar system and ends on the day before the following New Year's Day. By convention, a calendar year consists of a natural number of days. To reconcile the calendar year with an astronomical cycle , certain years...
or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from 1 March to 30 November, for example, would make one a German tax resident and therefore subject to German tax on the worldwide income for the entire period rather than just from the beginning of the seventh month.
An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term (such as three months) should be taken out wherever possible.
Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in Germany: see below) would be from a non-German source regardless of where the dividends are received. There is, therefore, scope for tax mitigation here if one does not become a German tax resident (although non-German taxes may also need to be considered).
See also
- Tax exileTax exileA tax exile is one who chooses to leave a country with a high tax burden and instead to reside in a foreign nation or jurisdiction which takes a lower portion of earnings. Going into tax exile is a means of tax mitigation or avoidance.-Legal status:...
- Tax havenTax havenA tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
- International taxationInternational taxationInternational taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country's tax laws. Governments usually limit the scope of their income taxation in some manner territorially or provide...
- Tax treatyTax treatyMany countries have agreed with other countries in treaties to mitigate the effects of double taxation . Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes...
- Permanent tourist