Tax residence

Definitions of residence for tax purposes vary considerably from state to state. For individuals, physical presence in a state is an important factor. Some states also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability of accommodation, family, and financial interests. For companies, some states determine the residence of a corporation based on its place of incorporation. Other states determine the residence of a corporation by reference to its place of management. Some states use both a place-of-incorporation test and a place-of-management test.

Domicile is, in common law jurisdictions, a different legal concept to residence.

Residence as defined in double taxation treaties is different from residence as defined for domestic tax purposes. Tax treaties generally follow the OECD Model Convention which provides:

1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.
2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his personal and economic relations are closer (centre of vital interests);
b) if the 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 State, he shall be deemed to be a resident only of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.
3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident only of the State in which its place of effective management is situated.[1]

Contents

Tax residence in the United Kingdom

Tax residence in the United Kingdom for companies

A company is generally treated as resident in the United Kingdom for tax purposes if it is incorporated in the United Kingdom or, if the company is not incorporated in the United Kingdom, if its central management and control are exercised in the United Kingdom. "Central management and control" refers to the highest level of oversight, usually as exercised by the board, rather than day-to-day management.[2]

Tax residence in the United Kingdom for individuals

An individual who spends more than 183 days in the UK in a tax year is UK resident.[3] Apart from that, there are no clear statutory guidelines. The question of whether someone is UK resident is a question of fact and degree, to be determined "on all the circumstances of the case."[4] The vagueness of this test has often been criticised. Viscount Sumner said in Levine v IRC:

The words "resident in the United Kingdom", "... guide the subject remarkably little as to the limits within which he must pay and beyond which he is free. .. The Legislature has, however, left the language of the Acts substantially as it was in [1801], nor can I confidently say that the decided cases have always illuminated matters. In substance persons are chargeable or exempt, as the case may be, according as they are deemed by this body of Commissioners or that to be resident or the reverse, whatever resident may mean in the particular circumstances of each case. The tribunal thus provided is neither bound by the findings of other similar tribunals in other cases nor is it open to review, so long as it commits no palpable error of law, and the Legislature practically transfers to it the function of imposing taxes on individuals, since it empowers them in terms so general that no one can be certainly advised in advance whether he must pay or can escape payment.[5]

Similarly, the Codification Committee concluded:

an enquirer can only be told that the question whether he is resident or not is a question of fact for the Commissioners but that by the study of the effect of a large body of case law he may [emphasis added] be able to make an intelligent forecast of their decision.[6]

More recently, the Chartered Institute of Taxation concluded:

the law determining whether an individual is resident in the UK is a mess.[7]

It is not possible in the scope of a wikipedia article to provide a useful and accurate statement of the substantial case law relating to residence of individuals for tax purposes in the UK and any short summary would be inaccurate and misleading. The number of days present in the UK is not a decisive factor (unless the number of days exceeds 183 in a tax year). In one case a foreigner who spent 5 months in the UK was held not UK resident.[8] In the view of HMRC someone who exceeds 90 days on a four year average is UK resident, but considerable emphasis is given to the fact that someone who averages less than 90 days may also be UK resident.[9]

Before 2009/10, the vagueness of the law did not seem to matter because HMRC published relatively clear guidelines in document IR20. That document has been withdrawn from 2009/10 and replaced with the much vaguer guidance in HMRC 6.[10]

HMRC currently argue that they are not bound by the terms of IR20 for years prior to 2009/10. Whether that is correct is currently the subject of litigation.[11] It is clear that HMRC are not in any way bound by the terms of HMRC 6, which contains a very full disclaimer.[12]

Tax residence in Germany

All tax resident individuals are taxed on their worldwide income, regardless of the source. This would include salary, dividends, etc. earned from one's 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 1 March to 30 November, for example, would make one a German tax resident and therefore subject to German tax on the 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 (such as 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 if one does not become a German tax resident (although non-German taxes may also need to be considered).

See also

References

  1. ^ http://www.oecd.org/dataoecd/50/49/35363840.pdf
  2. ^ For HMRC views see SP 1/90 and the International Tax Handbook chapters 3 and 4. For a statement of judicial views, see “Control of Special Purpose Vehicles” (John Chadwick) [2007] Jersey & Guernsey Law Review 153.[1] For general studies, see Corporate Residence and International Taxation (Robert Couzin, IBFD 2002); Stephen Brandon QC’s Taxation of Non-UK Companies and their Shareholders (Key Haven Publications, 2002).
  3. ^ Section 831(1) Income Tax Act 2007
  4. ^ Gaines-Cooper v HMRC [2007] STC (SCD) 23 at [165].
  5. ^ Levine v IRC 13 TC 486 at p.502.
  6. ^ Income Tax Codification Committee Report 1936 Cmd.5131 pp.34–39.
  7. ^ “Residence for tax purposes” 14 November 2007 accessible www.kessler.co.uk.
  8. ^ IRC v Zorab 11 TC 289.
  9. ^ HMRC 6 para 1.2, 1.5.13, 1.5.22, 2.2
  10. ^ http://www.hmrc.gov.uk/cnr/hmrc6.pdf
  11. ^ Gaines-Cooper v HMRC
  12. ^ HMRC6 section 1

External links