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The Difference Between Citizenship and Tax Residence

In an increasingly globalised world, more and more individuals are leading mobile lifestyles. Many no longer want to embed their entire identity in one country. Just this past year, the concept of digital nomads increased severely. With many of us working remotely from abroad for long durations, it is important to brush up on our rights and responsibilities as citizens and tax residents 

 

What is Citizenship?

Citizenship is often viewed as the closest connection between a person and a country. In its strictest sense, citizenship is a legal status that means a person has a right to be in a state and that state cannot refuse their entry or deport them in most circumstances. This legal status may be conferred at birth, by descent, or, in some places, through naturalisation. Naturalisation is a process through which states grant citizenship to people who, generally, have legally entered the country (or have been granted political asylum), have been permitted to stay, and have lived there for a specified period. 

A nation’s citizenship comes with the right, but not the obligation, to live and work in that nation. It allows one to possess property there, access social services such as education and healthcare, and apply for a passport. One’s citizenship is usually held for life and is difficult to lose. 

Moreover, as well as a legal status, citizenship can also indicate a feeling of identity and social relations of mutuality and responsibility. These can be described with terms like loyalty, values, belonging, or shared cultural heritage. Subjective notions like these can also point to the complex and often assumed relation between citizenship and belonging to a nation. 

What is Residence?

Residence, on the other hand, indicates where an individual lives and often works. Hence, residence rights are usually dependent upon one’s physical presence in a countryOne may lose their residence rights in a particular country if they fail to spend a certain amount of time in that country. 

While many individuals reside in their country of citizenship, citizenship is not a determinant of residence. For example, someone can be a Spanish citizen but live and work in Germany. Again, unlike citizenship, residence generally requires some degree of physical presence. 

What is Tax Residence?

An individual’s country of tax residence, also known as ‘fiscal residence’, is the country to which an individual is responsible for paying taxes (generally on their worldwide income and gains).  

What constitutes tax residence in a particular country is determined by that country’s domestic laws, with each country implementing its own definition of tax residence. Broadly speaking, individuals are considered tax resident in: 

  • countries in which they spend six months or more in a year; or 
  • countries where they have their ‘centre of vital interests’ or habitual abode, provided they spend less than six months in a year in other countries. 

In the Commonwealth of Dominica, for example, any individual (whether a citizen of Dominica or not) can become a tax resident in Dominica if they:  

  1. are physically present in Dominica for at least 183 days in the tax year; or 
  2. set up a permanent abode in Dominica and reside there for a period of time in the tax year; or 
  3. were tax resident in the preceding or following tax year. 

Only in the United States, Hungary, and Eritrea are individuals taxed based on their citizenship. 

How Do You Know if  You Are a US Tax Resident?

As a general matter, under the US Internal Revenue Code (Code), all US citizens, US permanent residents (green card holders), and US residents who meet the substantial presence test for the calendar year (and are not exempt, such as foreign students) are treated as US tax residents. This means that the US imposes taxes on its citizens for income earned anywhere in the world, and irrespective of where they live. If you are a US citizen and live in in a country that is not the US, you may owe taxes both to the US government and to the country where the income was earned or where you are a tax resident. 

However, income tax treaties between the US and other countries serve to effectively reduce or eliminate an individuals tax liability in order to avoid double taxation. For example, a treaty between the US and New Zealand overrides each country’s income tax laws to avoid double taxation. Even so, dual citizens may be required to file US tax returns even if they live and earn income in New Zealand. Because tax laws are complicated and can change from year to year, its important for individuals facing this situation to consult with a qualified tax expert or accountant. 

Read also: Americans Are Renouncing Their US Citizenship. Here is Why 

Can you be a tax resident of two countries?

It is possible to be a tax resident in more than one country at the same time. For example, you could be a US citizen who resides for more than six months in the UK, which would make you liable to pay tax on your worldwide income in both. You have to look at the double taxation agreement between the two countries to determine where you should pay tax. 

If you have dual tax residence in the UK and another country, then a double taxation agreement should prevent you from being taxed twice on the same income. We recommend that you seek some professional advice if you find yourself in a dual tax residence situation. 

What is the Difference Between Citizenship and Tax Residence

Except for the United States, Hungary, and Eritrea, possessing a country’s citizenship is not sufficient to make an individual a tax resident in that country. Therefore, citizenship is distinguished from tax residence. 

Dmitry Zapol, a dual-qualified international tax advisor, says that passports and citizenships alone do not give any tax benefits. “However, [citizenship] allows you to spend a longer period of time in a particular country than had you not had such a passport,” he added. 

“It is not sufficient to move to a low tax country that happens to have the Citizenship by Investment [programme]. To give an example, it’s not enough just to move to Spain, Portugal or Switzerland or Malta or Cyprus and payload taxes there. You must also become a non-resident in the country whose taxes you are looking to avoid.” 

For example, in Russia, “you would have to spend fewer than 183 days (6 months) in any year in Russia to really benefit from such cross-border planning,” he said.   

In 2019, Ernst & Young produced a report replying to the Organisation for Economic Co-operation and Development (OECD)’s concerns that citizenship by investment (CBI) programmes could be used to facilitate tax evasion by circumvention of the Common Reporting Standard (CRS), Ernst & Young concluded that “concerns over the scope for Citizenship by Investment to facilitate tax avoidance and evasion […] seem to be based on weaknesses in the tax implementation rather than a feature of Citizenship by Investment programmes themselves.” The report further concluded that concerns over failure to report under the CRS should be resolved in a process independent of citizenship by investment programmes themselves. 

For further inquiries on investment immigration opportunities, contact  CS Global Partners.  

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