Tax Residency: A Complicated Enigma

Following our newsletter on corporate tax residency “Sonnet 18 by SARS all things POEM” today we discuss tax residency for individuals.

So as we know by now, seemingly simple questions are often not at all simple to answer from a tax perspective, and this is certainly true for the question as to where a person is tax resident. And in today’s global village, more than ever, individuals are trans versing the globe, moving to different countries, and often working from more than one country, making it harder to ascertain exactly where such people actually live and thus which country has primary taxing rights over them. As a reminder, tax residence is critical as generally, whatever country an individual is regarded as tax resident in, can subject the person to tax on her global income, whereas other countries can only seek to tax the individual on income sourced there.

Generally, in order to understand where you are tax resident, the following terms need to be understood and differentiated:

Citizen – Of course every country has their own particular definition of what it means to be a citizen of that particular country, but basically your “citizenship” status means what passport you can hold and where you can vote. Just because you are a citizen somewhere does not mean you are tax resident there.

Domicile -You’ve probably heard someone saying they are resetting their “non-dom clock” by spending time away from a particular country. Domicile is a very important concept in certain countries, for example the United Kingdom and Ireland. Although the term is broad and involves many different elements, it boils down to the country which you regard as your “true home”. Your domicile status can (and usually does) influence your tax residency status. Therefore, it is critical to assess the domicile requirements for the country which you may find yourself “home” in.

Each country has it’s own particular definition/explanation for what it means to be a tax resident in that country, often linked to how much time you spend there and thus frequent travelers, expatriate workers or digital nomads may find themselves tax resident in more than one country. For instance in SA there are two domestic legislation tests for being tax resident, should you meet either one of them you will be regarded as a SA tax resident. The first is the “ordinarily resident” test which is an intention test and very similar to the domicile test. This test is subjective and based on case law. A whole list of criteria is considered holistically to determine where you are ordinarily resident. The second test is the “physical presence test” which considers the number of days you have spent in the country, irrespective of what your intention may be.

So what happens if you meet the domestic legislation requirements for being a tax resident in more than one country? The relevant Double Tax Agreement (“DTA”) will then be considered and normally contains a series of tie-breaker clauses to determine which country has taxing rights over you.

Naturally, not all DTA’s contain the exact same tie-breaker clauses, although, the following factors usually play a role: the location of your permanent home (there are very particular guidelines and exceptions for what a permanent home constitutes), your center of vital economic interests (this involves your personal and economic relations and takes into consideration a whole list of items), your habitual abode (where you spend majority of your time) and where you are a national.

If it sounds easy – it is not. Often unforeseen circumstances (such as the Covid pandemic) play a role, and even then, some of the above-mentioned factors may not have clear cut answers.

Unfortunately, there are no quick and easy simple answers when determining your residency status. The terms mentioned above are often revised by tax revenue authorities as economic and social circumstances change across the globe.

If you have any questions about emigration or tax residency in general, contact us today.

Today’s newsletter was written by Liané Bouwer, an International Tax Consultant based in Johannesburg. Contact Liané at lbouwer@reganvanrooy.com