by Howard Bilton, Chairman of Sovereign Group
Many different countries are seeking to attract highly-paid individuals to relocate within their borders. Given that almost all countries have run up massive budget deficits to try to offset the financial damage caused by the Covid-19 pandemic, it is not surprising that they are now super keen to attract economic catalysts – entrepreneurs, top employees and high net worth individuals.
At the same time, the Internet has made individuals and businesses a lot more mobile. Now that coronavirus restrictions mean we cannot meet in person, there is no particular reason why people cannot work from anywhere. Places of work were previously governed by the location of the office and colleagues, and to a lesser extent by the location of clients. Now these factors do not apply to the same extent, if at all.
An increasing number of right-minded folks are thinking that if they are going to be locked down, they may as well be locked down somewhere with space, sun, sea, sand and cheap living costs. In many cases those same places also have low or zero tax regimes. Even if such people are not going to pay much direct tax while staying in their new temporary home, they still will contribute to the economy by paying for accommodation, spending their money at local shops, bars and restaurants (if, of course, thebars and restaurants are allowed to open), by using the services of local professionals and staff, by paying VAT or sales taxes and, generally, pumping money into the system.
That’s all great but there are tax traps for the unwary. First of all, it will rarely be the case that leaving the place where you are currently tax resident for a temporary period will automatically end your liability to pay taxes there. Nobody should assume that their tax liability ceases as soon as they get on the plane.
To illustrate, let us look at the statutory residence test as it applies in the UK. Basically, anyone who can fall within one of the three automatic ‘overseas’ tests will be non-UK resident for the year in question. If they cannot manage that, they need to avoid being caught by the automatic ‘residence’ and ‘sufficient ties’ tests.
1. ‘Automatic Overseas’ test
You will be non-UK resident for the tax year if you meet any of the following conditions (a day spent in the UK means being present in the UK at midnight):
- If you were resident in the UK for one or more of the three tax years before the current tax year, and you spend fewer than 16 days in the UK in the tax year;
- If you were resident in the UK for none of the three tax years before the current tax year, and spend fewer than 46 days in the UK in the tax year; or
- If you work full-time (at least 35 hours per week) overseas over the tax year and spend fewer than 91 days in the UK in the tax year and the number of days on which you work for more than three hours in the UK is less than 31 and there is no significant break from your overseas work.
2. ‘Automatic Residence’ test
You are will be UK resident for the tax year if you meet any of the following conditions / tests:
- If you spend 183 days or more in the UK in the tax year;
- If there is (or was) at least one period of 91 consecutive days when you had a home in the UK and at least 30 of these 91 days fall in the tax year and you were present in that home for at least 30 days at any time during the year (but, importantly, if you had an overseas home and were present in it for more than 30 days in the tax year you will not trigger this test);
- Work full-time in the UK for any period of 365 days, which falls in the tax year, with no significant break of 31 days or more (subject to certain conditions).
3. ‘Sufficient Ties’ test
If your residence position has not been determined under the first two tests, the third step is to apply the ‘sufficient ties’ test. In this case, you will need to consider your connections to the UK, known as ‘ties’, to work out if taken together with the number of days you spend in the UK they will make you resident in the UK for that particular tax year. These are as follows:
- Family tie – spouse or civil partner, and/or minor children resident in the UK;
- Accommodation tie – this tie will obviously include any property that you own and use when in the UK, but it can extend to a family member or even a friends’ property that you stay in when you return to the UK;
- Work tie – working in the UK for at least 40 days in the year (it does not matter whether the days are continuous or intermittent);
- 90 day tie – if you have spent more than 90 days in the UK in either or both of the previous two tax years immediately before the year under consideration;
- Country tie – spending more days in the UK than any other single country (this only applies to ‘leavers’).
The number of days that you can spend in the UK without becoming resident depends, firstly, on whether you were UK resident in one of the three previous tax years and, secondly, the number of ties you have with the UK in the tax year in question. For example, if you were UK resident in one of the three previous tax years and have two ties, you can spend up to 90 days in the UK and not be UK resident for that tax year. But if you were non-UK resident for all of the three previous tax years and have two ties you can spend up to 120 days in the UK and not be UK resident for that tax year.
On arrival in your new place of abode you may or may not become immediately tax resident there. That will depend upon the rules of the place you are visiting. If you intend to stay there permanently the chances are that you will become tax resident there from the day you arrive. But the fact that you are tax resident in this new place does not mean that you are not still regarded as tax resident in the country you have left as well. Many people are tax resident in more than one place at the same. For example, a person who spends 90 days a year in Hong Kong, 90 days a year in the UK, 90 days a year in Portugal and has a property available there, 90 days a year in Spain and also has a property available there, would theoretically be tax resident in all four places at the same time.
Tax residency in Hong Kong has little effect because Hong Kong charges tax only on Hong Kong-source income. However all the other places in our example charge tax on worldwide income, so in theory income earned in Hong Kong would be taxable in all four places at the same time. Tax treaties between the various countries may help to decide who has the taxing right. If there are no tax treaties it could be that credit is given for tax paid in one country against tax due on the same income in another, but this would be by concession rather than right.
Theoretically (but in practice unlikely) therefor it is possible to be liable to tax on the same income in several different places at the same time and have a tax bill in excess of the income earned. But generally on first moving a person will become tax resident in both the new place of abode and the one just departed. Of assistance in these cases is Article 4 of tax treaties which frequently contain a ‘tie-breaker clause’ that decides which of the two countries has the taxing right.
Consider the example of Joe Bloggs, a UK national who has lived in the UK for the last 35 years but decides that, for as long as he is no longer able to visit his clients in the UK or go to the office, he may as well go to Portugal and work from there. The Portugal/UK double tax agreement will decide who has the taxing right by reference to which place he has the closest connection, as follows:
2) Where an individual is a resident of both Contracting States, his status shall be determined in accordance with the following rules:
- He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closest (centre of vital interests);
- If the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode;
- If he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national;
- If he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
From the above it can be seen that a temporary absence from the UK is unlikely to result in any reduction in UK tax liability for as long as the taxpayer has a permanent home in the UK. However, if Joe has a home, permanent or otherwise, in Portugal he could well be taxable there as well.
Portugal offers a special tax status, known as the ‘Non Habitual Residency’ (NHR) regime, which may (with care) allow Joe to organise his affairs such that most of his worldwide income is exempt from Portuguese tax. But that doesn’t really help him if he is still subject to tax in the UK.
In other words, Joe needs to arrange his affairs in such a way that he cuts his ties with the UK sufficiently to lose his UK tax residency there. If he can also do what is necessary to establish himself in Portugal, he may shed his UK liability altogether and not be subject to much tax in Portugal. Bingo.
In many other countries that are trying to attract foreign workers to relocate, either temporarily or permanently – the Cayman Islands, Malta or Dubai to name but a few – there would be little or no tax payable there. So it is essential to do what is necessary to lose your tax residency in the place from which you have come.
The point is clear. If moving country is motivated in part or whole by a desire to save tax, then great care must be taken. Not only because losing your current tax residency is rarely simple but also because there is substantive danger that your tax burden may actually increase if tax is payable both in the place you are residing and the place from which you have come. Assumptions about tax can be dangerous – or, as someone once put it, “Never assume, because when you assume, you make an ‘ass’ out of ‘u’ and ‘me’”. Tee hee.