Tax: A Question of Residence – Where should you pay your taxes?

Blevins Franks – May 2006

It can be surprisingly difficult to establish one’s tax residence in certain circumstances. The onus is on the taxpayer to get it right in order to avoid the charge of tax evasion, which can lead to financial penalties and/or criminal charges.

Example

Mrs Smith is a divorcee living nine months in Spain.

Her neighbour, Mr Davis, works in the oil industry travelling throughout the world. He spends only two months in Spain.

Now you might think that Mrs Smith, spending nine months in Spain is tax resident in Spain, whereas her neighbour Mr Davis, spending only two months there, is not Spanish resident.

In fact, it is quite possible for Mrs Smith NOT to be Spanish resident, whilst Mr Davis IS.

How can this be?

Mrs Smith

Well Mrs Smith owns a business based in Manchester, and her two children go to boarding school in the UK, where she has another home. She has decided to live in Spain for nine months to write a book, returning to the UK during her children’s holidays and to attend Board meetings.

As she remains UK resident under UK tax rules, whilst she is also a Spanish tax resident under the 183 day rule in Spain, the UK/Spain Double Tax Treaty (“DTT”) overrules the Spanish residence determination. She cannot be tax resident in both countries under the DTT, and the DTT tie breaker rules will find her to be UK resident despite her spending nine months in Spain.

Mr Davis

Mr Davis, on the other hand, is not tax resident anywhere else. His wife and children live in Spain, and he returns to be with them on all the major holidays, birthdays etc. Even through he only spends a mere sixty days or so a year in Spain, it is his centre of interests and the Spanish rules make his Spanish tax resident.

Similar rules apply to France, Portugal and other countries.

Worldwide Income

If you are tax resident in a country, you are usually liable to pay tax as your worldwide income, worldwide gains, and worldwide assets if there’s a wealth tax. There are some exceptions to these rules, in Europe, but not many.

Not Resident Anywhere?

There is no law which states you must be resident somewhere, but if you wish to fit into this category (called “permanent traveller” or “fiscal nomad”) you need to ensure you do not fulfil of any one country’s tax rules. There are many people who legally are NOT resident in any single country. There are even those people who claim not to be tax resident anywhere, but in fact they are an undisclosed resident of a country either through ignorance or by simply pretending that they are “non resident”. You need not only to understand very carefully the rules, but also to ensure you live by them.

Poor Pilot

An English national BA pilot thought he understood the UK tax rules well, as he had read the UK Inland Revenue’s book on residence, IR20, and was very careful to lead his life whereby he stayed less than ninety days a year in the UK.

Unfortunately, he didn’t pay too much attention to the inside cover of IR25 which states that the book is a guide and not the law. He was found to be a UK tax resident, despite his protestations to the contrary. Do It Yourself tax planning can be very expensive if you get it wrong. Experienced professional advice in this tricky area is worth every penny.

© Blevins Franks 2006

This article is reproduced with the kind permission of Blevins Franks.

For information and advice on tax issues, contact the Blevins Franks Tax Advisory Service on +44 (0) 207 015 2126 www.blevinsfranks.com