Imagine that you are thinking of changing your lifestyle so as to live partly in the UK and partly somewhere else. Canada, say. What are the tax issues you (or your spouse) might need to consider?
Most countries use the same two broad criteria for levying taxes:
- They tax people who are resident within their borders on income and gains that arise to them anywhere in the world (the UK’s specially favourable treatment of foreign income and gains of “non-doms” is unusual); and
- They mostly tax income and gains that arise within their borders regardless of whose income and gains they are.
The result is that, if profits of a resident of country X arise in country Y, they are subject to the domestic tax regime in both countries: in layman’s terms they are at risk of being double-taxed.
In most cases there is a Double Taxation Agreement (“DTA”) between the two countries: this carves up the taxing right between them. The precise terms differ from agreement to agreement; the only safe course is to check the relevant agreement in every case: but broadly the country in which the income or gain arises gets first dibs, and the country of residence either exempts it from tax altogether or reduces its own claim pound for pound for tax paid in the source country (but without repaying any excess).
That, of course, means that you need to be clear about where a particular profit arises and where the recipient is resident.
The first is not usually problematic, though this is not to say that it never is: in particular the question whether a resident of country X is operating a business through a “permanent establishment” in country Y (and is therefore liable to tax there) can give rise to interesting and abstruse questions, especially as different countries may have marginally different interpretations of the term.
As to personal residence, every country has its own set of rules. In the UK, there is now a reasonably clear (though quite complicated) set of objective rules: work through them applying the facts and there should be no doubt about where you stand. The rules in some other countries are less precisely framed and take account of a wide range of factors, some of them subjective.
The result: it is perfectly possible to be tax-resident in two (or more) countries simultaneously under each country’s domestic law. Where there is a DTA there will usually be a “tiebreaker” clause awarding residence (for treaty purposes) to only one country, though applying the clause (which often comes down to identifying the “centre of vital interests”) may itself be problematic.
It is thus likely that if someone splits his time between the UK and Canada (for example) he will end up being treated for tax purposes as resident in one or other of the countries (though it may be difficult to decide which) – but not both. If income or gains arise in one or more “third countries”, the tax position can rapidly get quite interesting.
More ambitiously, it is also possible to be resident nowhere, by arranging a lifestyle in such a way that the criteria for tax residence are not met in any one country. Having homes in multiple jurisdictions (or none) helps; but do not underestimate the strains that the life of a tax nomad may create. And since
- Most income and gains will in any event be taxed in the country in which they arise and
- A tax nomad is (obviously) denied the benefit of any DTA (the clue is in the name)
the tax benefits of tax nomadism may be less compelling than you would suppose.
Overlaid upon this is the fact that there is one major country in the world that (in addition to taxing residents on worldwide profits and non-residents on domestic profits) also imposes taxes on its citizens regardless of where they are resident or where the profits arise. That country is the USA – which further complicates matters by imposing taxes at both Federal and State level. So, if you are planning on splitting your time between the UK and another country and you also happen to be a US citizen, your affairs take on yet another level of complexity.
And we haven’t even mentioned capital and wealth taxes…
For more information, please get in touch with your usual BKL contact or use our enquiry form.