Tax residence

From Wikipedia, the free encyclopedia

Legal residence is the principle that each legal person (natural or corporate) has a single location of primary residence. This is of relevance with respect to taxation and other state-imposed obligations, but is also important with respect to the determination of citizenship or nationality.

Usually legal residence and tax residence are defined differently in law in that one can be an illegal alien and resident for tax purposes in the same country. Also, it is possible to be resident, for tax purposes, in more than one country at a time.

Domicile is, in many countries, a different legal concept to residence.

In the face of growth in the scope of governmental regulation, and an increasing burden of taxation, corporations and individuals not surprisingly have sought to avoid, or at least to minimise, the effects of state intervention.[1] This was particularly important with respect to taxation,[2] both from the perspective of governments – which would lose revenue – and that of corporations or individuals who sought to avoid payment of taxes.

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[edit] Tax residence by country

Different countries set different standards to determine tax residence, but broadly, one becomes resident in a country if one is in that country for more than a certain number of days. The following list specifies the number of days (or months) in a variety of countries:

  • France: 180 days
  • Germany: 6 months
  • South Africa: 91 days
  • United Kingdom: 91 days
  • United States: 122 days

[edit] Tax residence in Germany

All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salary, dividends etc that you earn from your limited company. Generally, individuals are deemed to be tax resident if they are physically present in Germany for more than six months in any one calendar year or for a consecutive period of six months over a calendar year-end. This ruling is applied retrospectively so presence in Germany from, say, 1 March to 30 November would make you German tax resident and therefore subject to German tax on your worldwide income for the entire period rather than just from the beginning of the seventh month.

An individual can also be deemed tax resident if they acquire an abode in Germany. This can include renting, as opposed to purchasing, a property but only if the duration of the lease is deemed to be more than temporary. For this reason, to avoid German tax residency, short-term (e.g., three months) should be taken out wherever possible.

Non-resident individuals are taxed on German-source income only. In the case of salary and benefits from your limited company, the source is German since the duties of the employment are being performed in Germany. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in Germany – see below) would be from a non-German source regardless of where the dividends are received. There is therefore scope for tax mitigation here in the event you do not become a German tax resident (although non-German taxes may also need to be considered).

[edit] Tax haven

Main article: Tax haven

One option that became available in this respect was the tax haven – a country that attracted overseas companies and individuals to register or otherwise obtain legal residence, in return for paying minimal tax. As states alone levied taxation, so states alone could offer taxation incentives to investors. There was a significant rise in the number of tax havens in the course of the 20th century. This has continued into the 21st century,[3] even though tax burdens have in many cases eased. Possibly half of all money in circulation throughout the world either resides in or passes through tax havens.[4] In very few of these cases do the investors actually physically reside in the tax havens. It is generally sufficient if their legal residence is within the haven. If companies or individuals were required to relocate completely from one jurisdiction to another to take advantage of a tax haven, interest in tax havens would perhaps have remained relatively insignificant. Use of a tax haven usually requires only a legal move, the management of most companies – and private investors – remaining physically located elsewhere.[5]

[edit] See also

[edit] Notes and references

  1. ^ Financial Stability Forum, Report of the Working Group on Offshore Centers, Financial Stability Forum, Basel, 2000. p 11; available at <http://www.fsforum.org/Reports/RepOFC.pdf> (as at 17 July 2002).
  2. ^ J Prebble, "Criminal Law, Tax Evasion, Shams, and Tax Avoidance: Part 1 – Tax Evasion and General Doctrines of Criminal Law" (1996) 2 NZJTLP 3; J Prebble, "Criminal Law, Tax Evasion, Shams, and Tax Avoidance: Part II – Criminal Law Consequences of Categories of Evasion and Avoidance" (1996) 2 NZJTLP 59; R McIntosh and J Veal, "Tax Evasion and New Zealanders’ Attitudes Towards It" (2001) 7 NZJTLP 80.
  3. ^ R Palan, "Tax Havens and the Commercialization of State Sovereignty" (2002) 56 Int Organization 151.
  4. ^ M Cassard, The Role of Offshore Centers in International Financial Intermediation, Washington, IMF, 1994, IMF Working Paper WP/94/107; N Kochen, "Cleaning up by Cleaning up" (April 1991) Euromoney 73.
  5. ^ R Palan, "Tax Havens and the Commercialization of State Sovereignty" (2002) 56 Int Organization 151, 163; W Diamond and D Diamond, Tax Havens of the World, New York, Matthew Bender Books, 1998.