What is Residency?
When we talk about residency for tax purposes and you only live and do business in one country the rules that apply are very simple.
If you are a resident of Canada (you live there) Canadian tax rules apply.
As you start to do business in multiple countries, have customers elsewhere, live abroad, form companies abroad, etc. It becomes more complex.
It’s always important to look at whose tax rules will apply to you.
Residency in short means “whose tax rules apply?” You might have one residency, multiple residencies, or no residency for tax purposes.
There are three different residencies we talk about:
- Personal residency
- Corporate residency
- Residency of income
Personal Tax Residency
Personal residency will affect which personal tax you’ll have to pay, but will also trigger the application of certain rules, such as CFC rules to your business.
Personal residency is not legal residency. You could be legally allowed to live somewhere and still not be tax resident there.
Also, you could be a tax resident somewhere while being an illegal immigrant.
Yes, that’s right! You could be illegally in the USA and they still expect you to pay tax! You are not allowed to legally be there, they will deport you when they find it out BUT you still have to pay their taxes.
Another thing to have in mind when talking about personal residency is this:
Just because you don’t qualify under certain residency rules doesn’t mean that you are non–resident
For example, spending 183 days per year will make you a resident in most places, but not spending 183 days doesn’t make you non–resident.
You could be in a situation where you are a double resident or double non–resident.
For example, people will set up a residency in Panama and Panama only requires them to spend a day out of a year there. That rule only applies to Panama but not to your home country. Your home country will not recognize you as a resident of Panama if you only spent that little time there and they might still tax you depending on their local rules and the other circumstances of your life. In eyes of your own country, you will still be viewed as a resident. This might not always be the case, but it’s very important to be careful.
Corporate Tax Residency
When it comes to corporate residency lots of people don’t understand the difference between corporate registration and corporate residency.
In other words, if you form a company in a certain country it doesn’t necessarily mean that your corporation is also a resident of that country.
Canada, for example, will consider a company to be tax resident if it’s formed there, however even if your company is not formed there, Canada will still tax exactly the same as a local Canadian registered company it if it’s managed and controlled from Canada.
So, when talking about company residency these are the three things that you have to have in mind:
- Where the company is registered
- Where is it managed and controlled
- Where is the main office
Any of these might trigger the tax residency of the company in that country and could potentially mean double tax residency (or double non-tax residency).
Residency of Income
Another residency that you will want to consider is the residency of income, but we will talk more about this in the future. (See our post on “what is source income?”)
We help clients legally reduce their tax through international tax planning, as well as help with company formations, bank account openings, residency, citizenship, and payment processing. Have a question you want answered? Book a consultation now!