In focus - How to avoid unwelcome tax surprises if you are “fiscally nomadic”

In previous articles, Michael Parets has alluded to the tax risks and complications faced by geographically mobile taxpayers and their families.

Certain categories of high-net-worth individuals have a particularly nomadic lifestyle, from a footballer signed to a league club in a city outside his or her country of birth, a tennis player or golfer who regularly travels from the location of one international competition to the next, or even a pop or classical musician undertaking a residency in foreign city. It is easy to clock up a significant number of days in a country where you might not consider yourself tax resident.

In recent times, we have also observed a marked increase in temporary and semi-permanent relocations of business owners and their families. Alongside the need to travel to keep abreast of their increasingly global commercial interests, we are also seeing mobility driven by a desire to access better infrastructure, education, medical facilities and to benefit from increased political stability and personal safety, sometimes even despite unfavorable tax and commercial consequences. The sustainability impacts of frequent flying aside, it is easy, rewarding and often essential to spend a significant amount of your year in countries other than that of your main residency.

Paying tax in more than one jurisdiction is often both necessary and fair. But ideally you will know that the tax bill is coming before it arrives, so that you can manage your finances accordingly.

It is surprisingly easy to inadvertently become liable for taxes in the countries you visit. Of course, the rules vary from one jurisdiction to another. For example, in the UK, Spain and Germany the rules are broadly that you're considered tax resident if you spend more than 183 days per year in the country. (There are, of course, additional complexities, for example in Spain you also become resident if the center of economic interest is in Spain, and in Germany you also trigger residency when you have a place of residency available which you use, regardless of how long you spend in the country.) In the US, if you are present on at least 31 days during the current year, a formula test is applied that also counts one-third of the days present in the prior year and one-sixth of those of the year before that to calculate whether an individual meets the 183-day count test for the current year. In South Africa, it is 91 days in the current year and more than 91 days in each of the preceding five years and 915 days in total. The EY Worldwide Personal Tax and Immigration Guide 2022-23 gives a comprehensive overview of the rules in 159 jurisdictions and can be used for reference prior to seeking professional advice.

To make things more complicated, care needs to be taken about what constitutes a tax year in each jurisdiction - for some it is a calendar year or any 12-month period, but others look specifically at a tax year - which in the UK, for example, runs not from 1 January but from 6 April each year. Assuming that the rules in one country will be the same in another could easily lead to overstaying your welcome.

And statutory residence tests don’t just look at duration of residence, other ties to the country are also considered including having family members in the country, having accessible accommodation and having work ties.

If you do become tax resident in more than one country, you will need to look closely at double taxation treaties between the relevant countries. There are complex rules to govern which country has the primary right to tax. Having advisors in each country is good, but they won’t necessarily work with each other, so it is often advisable to appoint one person to facilitate that cross-border discussion.

Residency is not the only tax trigger. It's widely understood that US citizens and “green card” holders are subject to US income tax on their worldwide income, no matter where they live. Additionally, many jurisdictions levy source taxation on services performed in their country, regardless of residency. This might include, for example, taxing an athlete on income received for promotional work while attending a tournament in a certain country, even if she or he was only present for a handful of days.

Unfortunately, in many cases, the first indication that you have triggered a tax liability in another country might be the day you receive an unexpected tax bill. Aside from the reputational risk, penalties can include not just the tax bill itself, but potentially also fines, interest payments and in extreme cases imprisonment.

So how to avoid being caught by surprise?

Four simple steps may avoid a lot of pain:

1. Take professional advice in order to understand the residency and source tax rules of the countries you frequently visit.
2. Keep a diary of where you are each day, and a running total of days in each country. By keeping a tally you might be able to adjust your schedules to avoid hitting a residency threshold.
3. Retain evidence to support your movements. Passport stamps, flight itineraries and hotel receipts can all help to demonstrate actual time spend in each country. (In some countries, border control does not keep accessible records or does not share these with tax authorities).
4. If there is any likelihood of incurring overseas tax liabilities, seek professional advice in good time, and not just in one country. An organization like EY with a global footprint can equip your advisors in each country to take a joined-up view of your affairs.

Finally, if you do trigger unintentional tax liabilities and find yourself the subject of a tax enquiry from the authorities, it is essential to seek professional advice and, with that advice, respond promptly. Dialog with the relevant authorities can avoid miscalculations, avoid additional penalties and can sometimes result in a negotiated resolution.

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The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.

Authors:

Michael Parets with Antoni Murt Prats and Daniel Schüttpelz