cross-posted from citizenshipsolutions.ca

Part D – Different definitions of “tax residence” – Not all countries define “tax residence” in the same way

Q. What is the criteria that different countries use to define who is a “tax resident” of the country?

A. The circumstances that constitute “tax residence” will differ from country to country. Generally speaking “tax residence” is based on definitions of (1) “residency” (deemed and actual), (2) “domicile” and (3) (in the case of the United States and Eritrea) “citizenship”. Note that different countries may define “tax residency” differently.

Q. How can I learn the definition of “tax resident” for the OECD countries?

A. In an earlier post about “OECD tax residency” I referenced the following chart which summarizes the definitions of “tax residency” in OECD countries. (I suggest that you use these definitions as a “start” to your research and not as the “last word”.)

Q. What is the significance of the “OECD” and why does “OECD tax residency” matter?

A. About the “CRS”: “OECD” tax residency matters because the “OECD” has implemented what is called the “Common Reporting Standard” (“CRS”). The purpose of the “CRS” is to require members to exchange information about the existence of financial accounts, owned by individuals in countries where they do NOT have “tax residence”. For example, if a “tax resident” of Germany had a bank account in Canada, then the German Government would want to know about it! Ultimately this is to ensure that all “individuals” pay their “fair share” of taxes. (By the way, the salaries of OECD employees are generally tax exempt. See an interesting post by Dan Mitchell on the OECD. Seems pretty clear that if OECD employees do not pay tax, that they are not paying their “fair share”.)

Q. About FATCA: Tell me more about the requirements to be a “tax resident of the United States”.

A. The United States has a system of “deemed tax residency”. In other words, the rules are very clear. At a minimum both U.S. citizens and “permanent residents” of the United States (“Green Card Holders”) are U.S. “tax residents” (Note that unless you are a U.S. citizen or “permanent resident” – a physical presence in the United States is necessary make one a U.S. “tax resident”. Here is a post I wrote describing what it means to be a “tax resident of the United States“.

Q. Tell me more about the requirements to be a “tax resident” of Canada.

A. The definition of “tax resident” in Canada includes both “deemed tax residency” and “tax residency based on facts and circumstances”. Here is a post I wrote describing what it means to be a “tax resident of Canada“.

Q. What about South Africa? The way that South Africa imposes taxation on its expats has been in the news lately. Can you tell me about the definitions of “tax residency” for South Africa? Is it true that South Africa is considering “citizenship-based taxation” just like the United States has?

A. No, South Africa has NOT considered “citizenship-based taxation”. But, it doesn’t require much to meet the test of “residence” for tax purposes in South Africa. To understand the “South Africa issue”, see:

Part 1: South Africa is NOT attempting to compete with the USA by enacting “citizenship-based taxation”; and

Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries

Part E – Oh My God! I think I might be a “tax resident” of two countries – What is a “tax treaty tie breaker”? How does a “tax treaty” tie breaker work?

Q. I am a U.S. citizen and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?

A. Absolutely, positively NOT. U.S. citizens CANNOT use a tax treaty to break “tax residence” with the United States. The reason is that almost all U.S. tax treaties includes what is called a “savings clause“. The purpose of the “savings clause” is two-fold:

First, to ensure that U.S. citizens can never (without relinquishment or renunciation) cease to be U.S. tax residents; and

Second, to force other countries to agree that the U.S. can impose U.S. taxation (according to U.S. tax rules) on people who are actual residents of those other countries (because those residents are deemed to be U.S. citizens). To understand how this impacts the lives of U.S. citizens living outside the United States see: “How to live outside the United Staes in an FBAR and FATCA world“.

Q. I am a U.S. “permanent resident” (Green Card Holder) and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?

A. Yes, the “savings clause” does NOT apply to Green Card holders. A “Green Card holder” is a “tax resident” of the United States. Therefore, a “Green Card” holder who actually lives in Canada and is a “tax resident” of Canada, may use a “tax treaty tie breaker” to cease to be a U.S. tax resident. But, this decision must be made VERY CAREFULLY because the use of the “tax treaty tie breaker” by a Green Card Holder “may” have the following NEGATIVE implications:

• it may (depending on whether the individual is a “long term resident”) subject the person to the Sec. 877A Expatriation Tax rules (this can be a significant asset confiscation)
• it may “jeopardize” your status as a “lawful permanent resident” of the United States
• it may interfere with your eligibility for U.S. citizenship

On the other hand, there are many reasons why a Green Card Holder might want to use a “tax treaty tie breaker” to cease to be a “tax resident” of the United States. These reasons include (but are not limited to):

• you may be relieved from the requirement to file Form 8938
• you may be relieved from the requirement to file Form 8621
• you may be relieved from PFIC and Subpart F income in general
• you may be relieved from the new Sec. 965 U.S. transition tax and S. 951 GILTI
• you will be required to declare ONLY your U.S. source income on your 1040NR

Note: If you are a Green Card holder, the decision to use a “tax treaty tie breaker” should be made only after consultation with an appropriate advisor! I am not kidding! The fallout from making this election can be enormous!

Q. I am a “tax resident” of Canada. I am not a U.S. citizen. I am a pure Canadian! Can I use a “tax treaty tie breaker” to break “tax residence” with another country!

A. Thankfully (as long as you are a “Tax resident” of both Canada and that other country), the answer is YES! Canada (apparently) has more than 90 tax treaties that include a “tax treaty” tie breaker provision. Here is a post that describes how the “tax treaty tax tie breaker” can be used to break “tax residence” with another country.

John Richardson