What is tax residency?

Understanding tax residency is crucial for HR professionals to ensure compliance with tax laws and avoid potential penalties, especially when the IRS has estimated an average of $441 billion in taxes went unpaid annually in a recent three-year period. 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, which form a network of more than 3,000 agreements globally, may influence the applicable tax rates and provide relief from double taxation.

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What is tax residency?

Tax residency determines where you're legally required to pay taxes based on your connection to a specific country or jurisdiction. It's different from citizenship and establishes your tax obligations regardless of where you work.

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.

Tax residency for individuals vs. businesses

Tax residency works differently depending on who we're talking about:

• For individuals: Based on where you live, including physical presence, permanent home location, and where your family and financial ties are strongest

• For businesses: Determined by where the company is incorporated or where central management operates—even if the business has global operations

Tax residency vs. citizenship

Here's where it gets confusing—tax residency and citizenship aren't the same thing. Citizenship is your legal nationality, while tax residency determines where you actually pay taxes. So an Italian citizen living in Portugal for most of the year becomes a Portuguese tax resident but keeps their Italian citizenship.

How is tax residency determined?

So how do countries actually decide if you're a tax resident? Most use a combination of these common tests:

• Physical presence test: Many countries use a "183-day rule," though the specifics vary; for example, the U.S. Substantial Presence Test is calculated by counting all days in the current year, one-third of the days in the prior year, and one-sixth of the days in the second-prior year to reach the 183-day threshold.

• Permanent home: Having a permanent home available to you in a country can establish tax residency, even if you spend less than 183 days there.

• Center of vital interests: This test looks at where your personal and economic ties are strongest, such as family, social life, and income. In some cases, an individual can establish a 'tax home' and closer connection to another country to qualify as a non-resident, even if they meet the 183-day presence test.

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—a distinction that influences global tax strategies, as U.S. multinationals reported more than half of their foreign earnings in tax havens in 2019.

What is a tax residence certificate?

A tax residence certificate (TRC) is official proof of your tax residency status issued by local tax authorities. Its main purpose? Helping you claim treaty benefits and avoid double taxation when working across borders.

A typical TRC includes:

• Personal details: Your name and address

• Tax ID: Your tax identification number

• Validity period: How long your residency status is certified for

How to obtain a tax residency certificate

Getting a TRC usually involves submitting an application with supporting documents like proof of residency or income—but the exact process varies by country.

Why does this matter for HR teams? A valid TRC helps employees access reduced tax rates and treaty benefits, while keeping your company compliant and minimizing tax liabilities across your global workforce.

Managing tax residency for global teams

Understanding tax residency is essential, but managing it across a distributed team can feel overwhelming. Keeping track of different country rules, ensuring correct tax withholding, and staying compliant requires expertise and attention to detail.

A global employment platform simplifies this complexity. By handling local compliance, payroll, and tax obligations, it allows you to build your team with confidence, knowing that the administrative burdens are taken care of. Ready to see how it works? Start hiring globally and let a trusted partner manage the details.

FAQs

How do I tell if I am a tax resident?

You can generally determine your tax residency by reviewing your country's rules on physical presence (like the 183-day rule), where your permanent home is located, and where your primary economic and personal ties are. If you're unsure, it's always best to consult a local tax professional.

Can someone be a tax resident of multiple countries?

Yes, this is called dual residency. Tax treaties between countries, which are frequently updated through multilateral conventions signed by more than 100 jurisdictions, usually have tie-breaker rules to determine which country gets primary taxing rights.

What happens if an employee's tax residency changes during the year?

They'll face a "split-year" situation where different tax rules apply to each part of the year. Professional tax advice is essential to file correctly in both jurisdictions.