1. Understand Physical Residency vs. Tax Residency
The first key concept to understand when it comes to tax laws is the idea that physical residency is often separate from tax residency.
In many cases, you may have to pay tax where you live, but it is crucial to understand that both physical residency and tax residency are separate from one another.
Physical residency refers to where you live, regardless of whether you possess a temporary visa status, permanent residency, or citizenship in a country.
Tax residency refers to the country (or countries) where an individual is liable to pay tax. Tax residency is often conflated with temporary residency, permanent residency, or citizenship but the fact is, a person’s tax residency may not always be tied to their physical residency.
It is common for some countries around the world to have the following tax law in general:
If you physically reside in a country for at least 183 days out of the year, you might be deemed a tax resident and liable to pay tax there regardless of whether you are a temporary resident, a permanent resident, or a citizen. In some cases, even if you do not have an actual residency status in the country, you might still be liable to pay taxes there if you spend at least 183 days out of the year in the country.
- If you do not physically reside in a country for at least 183 days out of the year, you might not be deemed a tax resident who is liable to pay tax there regardless of whether you are a temporary resident, a permanent resident, or a citizen. Depending on the country, if you have some form of a residency status in the country but you are not liable to pay taxes for the year, you might still have to file a tax report to remain compliant.
Of course, not all countries possess the tax law described above, and it should be in your interest to consult other official sources or a cross-border tax professional to determine the tax law practiced in your country of interest.
For instance, there are some countries that deems you a tax resident as long as you hold a citizenship or permanent residency there regardless of where your actual physical residency is for the year, such as the United States. In this case, regardless of how much time you spend in or out of the country, you might be liable to pay tax to the IRS (Internal Revenue Services) in the United States, as well as the country you are living in.
2. Know Your Residency Status
First of all, you should know your residency status in the country you are moving away from: Are you a temporary resident, permanent resident, or a citizen?
Now, ask the same question to the country you are moving into: Are you a temporary resident, permanent resident, or a citizen?
Even though many countries impose the same income taxes to its physical residents regardless of whether you are a temporary resident, permanent resident, or a citizen, there are countries that may treat these three classes of residents differently.
Knowing the differences or similarities between the status you hold in relevant countries you are affiliated with will help you consult the appropriate official sources and it will help you obtain a better picture of your cross-border tax situation.
3. Where Is Your Source Country of Income?
The next consideration that determine whether you need to pay taxes while living abroad is the source country your income, meaning where you receive income from.
If you are working in Country A but receive your income from Country B, there are several possible scenarios:
- You have to pay income taxes in Country A only
- You have to pay income taxes in Country B only
- You have to pay income taxes in both Country A and Country B
4. Any Relevant Tax Treaties?
Typically, a tax treaty eliminates double taxation—so even if you have to pay taxes to more than one country, they are often reduced proportionately so everyone gets a share of the pie.
Extending on the previous point, a tax treaty between two countries will often outline which of the three scenario above will apply.
Some tax treaties define that income would be taxed at source country only, whereas some tax treaties may determine that a portion of the income taxes would have to be paid to the source country, and the remaining portion would have to paid to the country where the individual is residing.
Tax treaties are often available publicly online, although they are not necessarily in English.
5. Income Taxes vs. Sales Taxes
Finally, do not conflate income taxes and sales taxes.
- If you are employed by a company and you receive only a regular salary as your income, you may be liable for income taxes only.
If you are self-employed, you may be liable for both income taxes and sales taxes. A self-employment in this context means that you personally receive all sales you make to your customers and you do not draw a regular salary as your income. The rules for sales taxes is on another playing field and all of the concepts outlined above may not apply to it.
- However, if you are self-incorporated, meaning that you have a separate company that you own, and all sales go to the company while you draw a regular salary from it, then you as an individual may be liable for income taxes only, but your company as a business entity may be liable for both income taxes and sales taxes.
Over and Out
Admittedly, cross-border taxes can be complicated, but the 5 concepts outlined above should provide you a headstart in terms of the essentials you need to know when it comes to income taxes abroad. Ultimately, if you need an assessment of your specific tax situation, it is always best to consult a cross-border tax professional, as well as official sources from the relevant countries you are affiliated with.