What is tax residency and why is it important?

It’s important to understand that tax residency and physical residency are two different things.

Simply being a permanent resident of a country doesn’t automatically make you a tax resident, and leaving a country doesn’t necessarily mean that you’re no longer a tax resident.

This can be particularly relevant when you move from your home country to a new one, as your old country may still consider you a tax resident and continue to tax your income.

Tax residency is usually determined by whether or not you actually live in a country, and isn’t necessarily related to your visa status or right to live there.

It’s essential to be aware of the rules regarding tax residency in both your home country and your new country to avoid any issues down the line.

What does it mean to be a tax resident?

Being a tax resident of a country means that the country has the legal right to tax you.

Depending on the country’s tax policies, you may be taxed on your worldwide income or only on locally sourced income. Additionally, some countries may or may not tax capital gains, or inheritance, and so on.

Tax planning becomes crucial in such cases. If you are looking for assistance with tax planning options, especially if you reside, invest, or conduct business in the Asian region, we can help.

How to obtain tax residency in a new country

To establish residency in a new country, the easiest way is to be present in that country for at least six months. However, every country has its own rules and sometimes there are multiple methods to determine tax residency.

Here are the most common methods for establishing residency in Southeast Asian countries:

Thailand – You are considered a tax resident if you stay for 180 days or more in a calendar year.

Malaysia – You need to stay for 182 days or more in a calendar year.

Cambodia – You need to stay for more than 182 days in a 12-month period.

Philippines – Generally, non-citizens are regarded as tax residents if they stay in the country for at least two years.

Vietnam – You need to stay for 183 days or more in a 12-month period.

Indonesia – You need to stay for more than 183 days in a 12-month period.

Laos – There is no defined residency test as tax is levied on all foreigners who are present in the country.

What are the pros of becoming a non-resident for tax purposes?

Exiting the tax system in your country of origin may be a good option for digital nomads, expats, and retirees. However, it is important to consider individual factors before making a decision.

High income earners who can take their income with them, like those who run a business that can be operated from a laptop in any location with an internet connection, may find it more attractive to become a non-resident in their country of origin.

Investors who earn money from capital gains in the stock market or from crypto investing may benefit from establishing residency in a country that doesn’t tax capital gains, as there are several such countries available.

Taxpayers can reduce their liability by moving from a high-taxing residency-based country to a low-tax or territorial-based tax country.

For instance, if you move your business from Australia to Hong Kong, you can significantly reduce your corporate tax rate. Similarly, if you move your stock portfolio from Australia to Singapore, you can cut your tax on dividends in half.

What are the cons of becoming a non-resident for tax purposes?

Exiting the tax system of a country can be a tricky process with potential pitfalls. There is the increased admin burden and mental load of having to switch everything over, lodge tax forms etc. And if done wrong, it could prove costly.

In addition to this, there might be an exit tax that needs to be paid on capital assets held in your old country. And immovable property such as real estate may lose any beneficial tax treatment that was previously available to you as a tax resident of that country.

The more assets you have, the higher the complexity of the process, but there are also greater opportunities for tax savings.

How to end tax residency in your home country

Every country has a different process for becoming a non-resident. Typically, you will need to spend most of the year outside the country to qualify.

You may be required to establish a permanent home or prove that your place of abode is overseas in order for your old country to recognize your new country as your new tax home.

Residency rules are often subjective and can be unclear. However, in general, you will need to move most of your life out of your home country and into your new country. This could include things like bank accounts, investments, business registrations, insurance policies, and property.

If you’re interested in establishing a new tax residency, we can help you ensure that you meet all the requirements and submit all the necessary forms to sever your tax residency in your old country and start anew.

Can you be tax resident of nowhere?

In the early days of digital nomadism, some people claimed to be “residents of nowhere” in order to avoid paying taxes. The idea was that if they didn’t stay long enough in any one country to become a tax resident there, they could avoid paying taxes altogether.

But to whatever degree that this may have been remotely possible in the past, despite its questionable legality, it is generally not possible anymore.

As remote work has become more common, countries have updated their residency rules to reflect this trend. Either through legislative changes, guidance on existing interpretations of rules or case law.

For example, in Australia, you can only become a non-resident if you establish residency elsewhere. If you don’t stay in another country long enough to become a tax resident there, you will still be considered a tax resident in Australia.

Can you be a tax resident in two different countries at the same time?

It is possible to be a tax resident in more than one country at the same time, and this is where things can get a bit tricky.

For instance, if you are an Australian citizen who has moved to Thailand on a retirement visa, you can quite easily establish residency in Thailand, but Australia may still regard you as a resident as well.

When two countries regard you as a tax resident, you should refer to the tax treaty between them, if there is one.

These tax treaties, also known as Double Taxation Agreements, usually include tie breaker rules which determine the country where you will ultimately be considered as a tax resident.

These rules depend on various factors such as where you have a permanent home, where your habitual abode is, where your personal and/or economic relations are closer, and in which country you are a citizen.

Next steps

Determining your tax residency can be a complex process as the rules were written in a pre-internet and pre-digital nomad era, making it challenging to apply to modern-day scenarios.

If you are planning to become an expat and move overseas, it’s important to ensure that your tax status is clear and you are managing your affairs in a tax-efficient way. This will help you avoid double taxation and paying more tax than you are required to.

We can assist you in making sure that everything is set up correctly and compliant with the tax authorities in the various countries where you have ties. Please feel free to get in touch with us.