16 March 2021

Obtaining Tax Residency

Tax residency or otherwise known as fiscal residency is simply the jurisdiction in which one is legally required to pay taxes. Citizens of countries who utilize the territorial tax system can greatly benefit from creating an offshore strategy and optimize their tax planning.

When it comes to tax residency, there are many misconceptions and it is always advisable to contact a tax accountant or attorney to ensure you or your business are always in compliance in both your home country and the country in which you plan to obtain it.

Misconception #1: with tax residency, you will no longer be liable to pay taxes in your home country

Obtaining tax residency will only benefit you if your home country and the jurisdiction in which you obtain the tax residency hold a double taxation treaty and you comply with tax laws in both countries.

For example:

  • The US utilizes the worldwide tax system and under the Foreign Account Tax Compliance Act (FATCA), financial institutions around the world are legally bound to report back to the IRS on foreign assets held abroad for US citizens. Simply put, the only way to become a non-tax resident for a US citizen is to obtain citizenship elsewhere and to renounce their US citizenship.
  • Canadian citizens may hold tax residency in an offshore jurisdiction, however, if the Canada Revenue Agency believes the person still holds strong ties to Canada, they may still impose their tax obligations within Canada as well.

Holding tax residency will determine how you are taxed in a particular country thus choosing the right jurisdiction according to your personal and business needs and goals is a crucial step in the process.

Misconception #2: the “183-Day Rule” will automatically grant tax residency

Many countries adhere to the “183-day rule” where if you reside in a country for a minimum of 183 days within the fiscal year, you qualify for a tax residency certificate. Though, it is important to keep in mind that each country is different and have established their own set of requirements. Case in point, in Panama elsewhere, one can easily obtain a tax residency certificate if they have remained in Panama for at least 183 days. However, if they do not meet this requirement, they can still obtain a tax resident certificate if the applicant can prove strong- enough economic ties to the country.

Misconception #3: obtaining a second (permanent or temporal) residency will automatically grant tax residency in said country

Many countries, especially in the Americas, offer appealing residency by investment programs which include tax incentives amongst many others. This, however, does not grant an applicant of the visa program automatic tax residency status. To become a tax resident, many countries will comply with the “183-day rule” or have their own set criteria to obtain it.

Obtaining tax residency in an offshore jurisdiction can be a great legal tool to reduce your personal and corporate tax liability and retain your wealth. With the increasingly complex laws, it is important to structure your finances not only with the right foreign entities but within the right jurisdiction as well.

Written by Magdalena Wczesna

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