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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.


More pages

Page 1: Blevins Franks – May 2006
Page 2: Not Resident Anywhere?

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