The Ultimate Guide to Tax Residencies & The 183-Day Rule

Your personal tax residency is one of the most fundamental pillars in the flag theory. The ideal choice is highly individual, and you have to consider many different factors. In this article, I will answer the most important questions regarding the concept of residence and domicile, explain the notorious 183-day rule, and give some concrete examples of how to change your residence for tax purposes.

This article is for you if:

• You're open to the idea of one day leaving your home country (even for a few years)
• You're running a location-independent business or are in the process of starting one
• You just want to be better informed about your options for the future

After you have read this article, you will know how to:

• Legally and ethically start saving significantly on personal income tax
• Avoid the critical (and costly) mistakes many people make
• Drastically reduce bureaucracy

What Does the Word "Tax Residence" Mean?

Your tax residence is the country in which you are legally obligated to pay personal income tax. For the vast majority of the global population, their tax residency is identical to their home country. The country in which they were born, where they live, and where they work (their so-called "domicile"). And as long as the last two factors do not change, the tax residence will not change.

"...but in this world nothing can be said to be certain, except death and taxes." — Benjamin Franklin

Benjamin Franklin was a smart man, but I guess he didn't anticipate the internet, and the possibility of perpetual traveling when he made that statement.

Once you start to spend time in different countries, things become much more interesting. Because it is quite possible (and very feasible), to change your tax residency.

Personal income tax rates in Western countries, like Germany, Canada, Australia, New Zealand, the Nordic countries and the UK, regularly exceed 50%. Since tax residence and personal income tax are intimately connected, where you are a tax resident and pay income tax is obviously a major factor and will to a large degree determine your overall tax load.

And while being a tax resident of those countries, the local CFC rules will also prevent you from using low-tax (and low-bureaucracy) companies in offshore or overseas jurisdictions.

Changing your tax residence away from those high-tax jurisdictions, to a jurisdiction with either lower tax rates or a territorial-based taxation system, is therefore a critical first step if you want to enjoy a tax-optimized, global lifestyle.

What Is the 183-Day Rule?

The time that someone spends in a country is one of the most important factors to determine tax residency. The so-called 183-day rule serves as a ruler and is the most simple guideline for determining tax residency.

It basically states that if a person spends more than half of the year (183 days) in a single country, then this person will become a tax resident of that country.

While there are many factors that can make you a tax resident quicker, spending more than six months in a country is usually the definite cut-off point to achieving tax resident status.

Some countries apply modified versions of this residency test.

USA: Substantial Presence Test

While US citizens have to declare their taxes whether or not they live in the country, the United States' Internal Revenue Service (IRS) applies the so-called "Substantial Presence Test" (SPT) to determine whether an individual who is not a citizen or lawful permanent resident qualifies as a "resident for tax purposes."

The criteria of the SPT are:

• The individual must have been physically present in the United States for at least 31 days in the year in question
• The total of (number of days present in the tax year) + (1/3)(number of days in the year before the tax year) + (1/6)(number of days in the year two years before the tax year) must be at least 183

Switzerland: Tax Resident After 90 Days

Switzerland knows about its outstanding reputation and high quality of living. If given the opportunity, many wealthy individuals would choose to spend a significant amount of time in that country.

So Switzerland significantly reduced the amount of time it takes to become a tax resident. If you are spending more than 90 days in the country, irrespective of short interruptions, Switzerland will consider you a resident for tax purposes.

How to Stop Being a Tax Resident in Your Home Country

As a resident of a Western, high-tax country, moving abroad and becoming an expat or perpetual traveler can have significant tax benefits. But before you can reap the benefits of a lower-tax country, you must first convince your own government to no longer regard you as a tax resident.

1. It is more difficult to stop being a tax resident of your home country than a country you only resided in short-term.
2. It is much easier to again become a tax resident of your home country than a country you only resided in short-term.

Following are specific guidelines for a few key countries.

How to Stop Being a Tax Resident of the UK (for UK Citizens)

The HMRC (Her Majesty's Revenue and Customs) determines your tax status through the so-called "UK Statutory Residence Test (SRT)."

Three sub-tests will determine your tax status. We need to work through them in the exact order.

1. The Automatic Overseas Test
2. The Automatic Residence Test
3. The Sufficient Ties Test

Automatic Overseas Test

If you meet any of these conditions, you will be treated as not tax-resident in the UK:

1. You were a tax resident during at least one of the last three years but spent no more than 15 days in the UK in the current year.
2. You were not a UK resident in any of the previous three years, and spent no more than 45 days in the UK in the current year.
3. You work overseas full-time (at least 35h/week), spent no more than 30 days working in the UK (a "work day" is defined here as three or more hours) and spent no more than 90 days in the UK in the current year.

Automatic Residence Test

If you meet any of these conditions, you are deemed (tax) resident in the UK:

1. Present in the UK for 183 days or more in the year.
2. Your only or "main" home is in the UK. It needs to be accessible for 91 consecutive days or more and actually be used for at least 30 days in the year.
3. Work full-time in the UK for any period of 365 days with no significant break of 31 days or more (this is subject to some conditions).

Sufficient Ties Test

If your residence status has not been determined through the first two tests, the HMRC now moves on to consider your connections to the UK.

1. Family — spouse and/or minor children resident in the UK.
2. Accommodation — available to you for 91 or more continuous days (even if you spend just one night there).
3. Work — working in the UK for at least 40 days in the year.
4. Substantial visits — spending 90 days or more in the UK in either or both of the two previous years.
5. Favored country — spending more days in the UK than any other single country.

The key takeaways for entrepreneurs leaving the UK:

• Get rid of any apartments or houses in your possession that could be interpreted as "available accommodation." Permanently rent out any rental properties you own.
• Be prepared to spend nearly the complete first year after your exit outside of the UK.

How to Stop Being a Tax Resident of Canada (for Canadians)

In order to become an emigrant of Canada for tax purposes, you need to meet all of the following conditions:

1. You need to leave Canada, to live in another country
2. You need to cut your residential ties with Canada

Significant residential ties include:

1. A home in Canada
2. A spouse or common-law partner in Canada
3. Dependents in Canada

Relevant secondary residential ties may include:

1. Personal property, such as furniture or a car
2. Social ties, such as memberships in recreational or religious organizations
3. Economic ties, such as bank accounts or credit cards
4. Health insurance with a Canadian provider

There are very few absolute rules here. If you need precise actionable advice, get in touch with us, and we can refer you to a tax expert familiar with the specific limits of these rules.

How to Stop Being a Tax Resident of Ireland

Ireland considers three criteria to determine an individual's tax residence status: their residence, their "ordinary residence," and their domicile status.

Residence Is Determined by Physical Presence

An individual is considered a resident in Ireland if they are present for more than 183 days in a calendar year, or if they spend 280 days or more in Ireland in both the current and preceding tax year combined. Spending less than 30 days in Ireland in the current year automatically makes you a non-resident for that year.

Ordinary Residence

If you were considered a resident for three consecutive years, you become an ordinary resident. This status does not expire until three years after you've stopped being a tax resident in Ireland.

As an ordinary resident, you will have to keep paying taxes on your domestic and foreign income, outside a few exceptions:

• Income from a trade or profession exercised outside of Ireland
• Income from employment or self-employment that takes place outside of Ireland
• Foreign income, if the total amount is less than €3,810

How to Stop Being a Tax Resident of Australia

Australia uses four different residency tests to determine if an individual is a resident for tax purposes.

• The "resides test"
• The "domicile test"
• The 183-day test (relevant for arrivers)
• The Commonwealth superannuation test

You need to fail all of them in order to no longer be considered a resident for tax purposes of Australia.

Resides Test

The primary test of tax residency is called the "resides test." It takes into account your:

• Physical presence
• Intention and purpose
• Family
• Business and employment ties
• Social and living arrangements
• Maintenance and location of assets

Domicile Test

This is the one test that Australian expats most commonly struggle with.

Even if you don't reside in Australia, you will still be considered a tax resident, unless you can prove that you have a new permanent place of abode outside Australia. You must show the intent of making a new home outside the country.

Unfortunately the relevant tax ruling is quite vague about what determines a permanent place of abode. So how can you demonstrate to the Australian Taxation Office that you have really left the country permanently?

• Sell your Australian home, or lease it out long-term
• Give up any business or job in Australia
• Leave all Australian memberships
• Advise Australian government agencies, such as Centrelink and Medicare, that you have left the country permanently
• Advise the Australian Electoral Commission that you want your name taken off the electoral role because you are leaving Australia
• Stop making Medicare claims, cancel your private Australian health insurance policies, and sign up for local services in your adopted country

Note: Australia does have an exit tax.

How to Stop Being a Tax Resident of Spain

The income that you earned in Spain is taxed even if you live there for less than 183 days and are not considered a tax resident. However, you'll be paying your worldwide income in Spain if you live there for a period that exceeds 183 days. Income tax rates range from 19% to 45%.

What You Should Do Next

After you have left your country, you have several options:

1. Start living as a perpetual traveler, and avoid becoming a tax resident in any other country by constantly moving around.
2. Become a resident in a country with a territorial-based taxation system, and earn your money tax-free online.
3. Become a resident of a country with a much lower tax rate (Bulgaria or Romania for example).

In some cases like Australia, you will be almost required to choose option 2 or 3 if you actually want to stop paying income tax there. Just becoming a perpetual traveler is not an option.

What you need is a bridge country. Panama with the Friendly Nations Visa, Paraguay, or Georgia are potentially viable options. If you need specific advice, contact us for a consultation.

Frequently Asked Questions

Do I have to consider calendar years or fiscal years?

Since the rule affects your fiscal status, the fiscal year is the one we need to consider.

In most countries the fiscal year and the calendar year are identical. So in general the rule is applied over the calendar year.

But some countries have a fiscal year that is different from the calendar year. In the UK for example, the fiscal year runs from the 6th of April to the 5th of April the following year. This is also the period of time that is being considered for the 183-day rule.

How do you count the days for the 183-day rule?

There are some irregularities in how arrival and departure days are counted, and how much time you need to spend in the country for a day to count as a full day.

In many countries, arrival days count as a full day, and departure days don't count at all.

Sweden however counts both the departure and the arrival days as a full day spent in the country.

How many days can I spend in a country consecutively without triggering the rule?

If you spend more than 183 days consecutively in a country, you will generally trigger the rule.

If you want to maximize your time in the country over a period that involves the beginning of a new year, you will need to leave the country.

For example, you could spend July to November in a country, leave for (part of) December, then come back from January to May without triggering the 183-day rule for either year.

If you stayed all the way through to January, you would trigger the rule, and possibly even for both years.

Is the 183-day rule universal?

The 183-day rule is not universal and does not apply to immigration and social security law. It is important to take into consideration that both immigration and social security law are locally and internationally governed by separate laws.

Take the case of immigration legislation as an example. There might be time limits specified in immigration legislation that allow for an exceptional approach. This means that it is a reflection of what the favored strategies of each country are regarding free trade, attracting overseas workers, and security. Therefore, the 183-day rule may not be relevant to immigration compliance considerations. It is always a requirement to review the destination country's immigration rules on a case-by-case basis.

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This guide is for educational purposes only and does not constitute tax advice. Consult a qualified tax professional for advice specific to your situation.