What is tax residency?

In simple terms, tax residency refers to an individual's or entity's legal tax status within a jurisdiction, such as a country. Determining tax residency is essential for Human Resources (HR) professionals, as it establishes the extent of tax obligations for employees and companies operating across international borders.

The criteria for tax residency vary by country. The most common factors include the duration of one's physical presence, the location of their primary home or headquarters, and the nature of their financial ties within a jurisdiction.

Understanding tax residency is crucial for HR professionals to ensure compliance with tax laws and avoid potential penalties. Tax residents are typically subject to taxation on their worldwide income, while non-residents are taxed only on income earned within that jurisdiction. 

Also, tax treaties between countries may influence the applicable tax rates and provide relief from double taxation.

HR professionals and employee tax residency

HR professionals play a vital role in managing tax residency for employees, as they are responsible for accurate tax withholding and reporting. They must also stay informed about changes in tax laws and regulations, particularly when managing a globally mobile workforce. 

With the right knowledge regarding tax residency, HR professionals can effectively navigate complex international taxation scenarios and regulations while supporting employees in fulfilling their tax obligations.

What is a tax residence certificate?

A tax residence certificate (TRC) is an official document issued by the tax authorities of a jurisdiction. It is designed to certify an individual's or entity's tax residency status within that specific state or country. 

The main purpose of a TRC is to help taxpayers claim benefits under tax treaties and avoid double taxation when operating across borders.

The certificate generally includes information such as the taxpayer's name, address, tax identification number, and the period for which the tax residency status is valid. 

How to obtain a tax residency certificate

The process for obtaining a TRC varies by country, often requiring an application accompanied by supporting documentation, such as proof of residency or income.

For HR professionals, understanding the significance of tax residence certificates is crucial when managing employees with international tax exposure. 

A TRC enables employees to benefit from reduced tax rates, tax exemptions, or other provisions outlined in tax treaties between their country of residence and the country where they earn income.

Ensuring that applicable employees obtain a valid TRC also helps companies maintain compliance with international tax laws and regulations, minimize tax liabilities, and foster a supportive environment for a global workforce.

How do you determine state residency for tax purposes?

Each state in the United States has its own criteria for establishing tax residency, but there are common factors that contribute to this determination:

• Domicile: Your domicile is your primary, permanent residence where you have the intention to return after temporary absences. 
• Physical presence: Many states apply a day-count test, considering the number of days spent in the state during the tax year. You may be deemed a tax resident if you exceed a specified threshold, typically 183 days or more.
• Significant connections: States may assess your economic and social ties to determine residency. These connections can include but are not always limited to employment, property ownership, voter registration, and driver's license.
• Declaration and documentation: Filing a state tax return as a resident or obtaining a state-specific document, like a driver's license, can serve as an indication of your state residency.

What is non-resident tax?

Even if you don’t permanently reside in the United States, you’re still required to file a tax return if you earn income in the country. Non-residents do so by filing IRS form 1040-NR.

The primary distinction between non-resident tax and resident tax is the amount of income subject to taxation. While tax residents are usually liable for taxes on their worldwide income, non-residents are taxed only on income earned within the taxing jurisdiction.