Changing tax residency is the aspect of international taxation with the greatest impact on an individual’s taxes.
The difference depending on where you are considered a tax resident is such that some people may live tax-free while others will see how 50% of their earnings are taken away.
For this reason, in recent years, there has been a surge in searching for advantageous tax residencies and how to change tax residency.
In this article, you will learn everything you need to know to make the change completely legally and without unexpected events!
Requirements for changing tax residency
Surely you have heard about the 183-day rule and how it determines your tax residency:
“If I spend less than 183 days in X country, I will not be considered a tax resident.”
While it is true that this rule and the counting of total days per year are relevant to determine your tax residency…
They are not the only criteria to consider!
The first thing we must understand is that if we are going to leave country X, it is because we will spend those days in another country or group of countries.
Therefore, we must consider NOT ONLY our tax resident status or non-resident status in the country of origin, but also our tax status in the destination country or countries.
It is at this point where a more thorough study of the situation is needed, as each jurisdiction applies different criteria to determine your tax residency.
This can lead to conflicts regarding your tax residency, being considered a tax resident in multiple countries or even in none.
Fortunately, many countries apply similar criteria or have numerous double taxation treaties, thus avoiding these kinds of situations.
Let’s look at the most common criteria for tax residency:
183-day rule: Spending an accumulated 183 days or more in the territory will deem you a tax resident.
Center of economic interests: Depending on where the main sources of income are located, where the headquarters and management of your business are situated, or where the majority of your assets are compared to other countries.
Center of vital interests: Factors such as the residence of your spouse or dependent children in the territory.
Other factors that may come into play in the subjective determination of “center of interests” include the location of one or more residences available to you, phone lines, memberships, insurance…
Risk factors when changing tax residency
Tax nomadism makes the tax authorities of various countries very nervous.
More and more people can conduct their economic activities with geographical freedom and temporal flexibility, having great capacity to “play with their tax residency” without violating regulations.
But I want to warn you about the unfair SUBJECTIVITY that the tax authorities will want to apply to you and from which you should protect yourself.
While the days criterion is mathematical, the center of interests criterion can be stretched like chewing gum in favor of the tax hell that wants to pursue you.
Some risk factors you should avoid are:
- Having a residence available to you in your original tax hell. If you have any property, it’s better to have it rented out to a third party.
- Unbalanced assets. Don’t leave most of your money and properties in that country.
- Lack of evidence. Keeping utility bills, gym subscriptions, purchase records, rental contracts, etc., abroad are your best protection against parasites.
- Don’t play on the edge of the days limit. It will never be the same to have spent 100 days a year as 182.
- Not having a tax residency certificate abroad. This certificate will be of great use to you to break ties with your tax hell, and I’ll explain why below.
Tax residency deregistration
In many countries, there is a taxpayer register or census from which you must deregister to avoid continuing to be considered a tax resident due to a lack of notification.
Other countries do not require this step, but it is precisely those jurisdictions with more aggressive tax authorities that demand to be notified of the relocation for deregistration.
Some countries do NOT allow you to deregister your tax residency unless you are acquiring ANOTHER tax residency and it is not what they consider a “tax haven” (jurisdiction on their blacklist).
It is also common that you are not allowed to lose the obligation to pay taxes simply by leaving or no longer meeting the requirements in the country of origin. You may be required to “plant your flag” in the new tax residency or you will continue to be considered a tax resident in that country of origin.
Tax residency certificate: What is it?
On some occasions, the tax authorities demand proof of relocation for deregistration. Here, the tax residency certificate from the destination country becomes crucial:
The tax residency certificate is the document issued by the authorities of a territory that recognizes your status as a taxpayer there.
This document becomes highly valuable under a double taxation treaty that mediates the conflict between two countries regarding your tax residency.
We can affirm that by following the previous advice, meeting the deregistration requirements of the country of origin, and fulfilling the requirements of the destination country to obtain the certificate, you won’t have any problems!
When to change tax residency
To get the timing right for your tax residency change, we need to consider three main issues:
First, tax residencies work on a calendar year basis. Purely mathematically, in a given year, you’ll have problems with the change by May-June (due to the accumulation of days).
Therefore, it is important to plan in advance for which year you want to relocate your residency.
Second, tax authorities are nervous, and we don’t know when they will try to change the rules of the game.
Countries are increasingly being pressured to reduce tax opportunities and advantages, more methods of taxpayer persecution are being developed, and it will become more complicated to escape their web.
Finally, we must consider that the longer you wait to make the change, the more assets you develop in your tax hell, the more your business scales, and the wealthier your profile becomes… THE MORE OBSTACLES THEY WILL PLACE IN YOUR WAY TO LEAVE!
For instance, the exit tax has been designed to make companies pay up if they wish to leave, and it now also applies to wealthy individuals in countries like Spain!
Tips for your tax residency change
To conclude this article, I wanted to share some reflections and tips from my experience as a Tax Nomad:
- Don’t think only about taxes. Some tax residencies offer near-zero taxes, but other factors like cost of living, safety, or living conditions might not compensate for this. In some cases, paying LITTLE is better than paying NOTHING.
- Take compliance seriously. The best way to avoid problems with various tax authorities is not to play with fire and follow the rules to the letter.
- Your first move should be to a reputable country. If you are new to being a Tax Nomad, it’s always better to choose a tax residency with a double taxation agreement and one that can issue you a tax residency certificate.
- Learn about or visit your new residency. If you are going to spend several months a year in your new residency, learn about it—or you can even visit it as a tourist!
- Plan the relocation of your business or economic activity. How will you invoice? What business structure will be most favorable? How can you make your business pay fewer taxes according to your new tax residency?
Are you interested in changing your tax residency or setting up an offshore company?
Or would you prefer a complete analysis of your situation to discover the best option for you?
In either case, we can help!
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The right time to change tax residency depends on several factors:
Tax planning: Consider changing at the beginning of the fiscal year to optimize benefits and avoid complications with accumulating days in your home country.
Asset development: The less developed your assets are in your home country, the easier the relocation will be. Avoid accumulating significant wealth before changing, as it could incur additional taxes.
Changes in tax rules: Tax regulations can change, so stay alert to potential modifications that may affect your plans.
A tax certificate is a document issued by the tax authorities of a country that confirms the tax status of an individual or entity within that territory.
This certificate may be required when changing tax residency or when conducting international transactions to avoid double taxation.
It is particularly useful in situations involving double taxation agreements between two countries, as it can help prevent taxes from being levied on the same income twice.
Obtaining a tax certificate is an integral part of international tax planning.
