The idea of a “perpetual traveller” is popular among freelancers, investors and digital nomads. Such a traveller spends three to four months at a time in different countries, is a tax resident of no country and, as a result, has no tax obligations. How realistic is this concept, and does it offer any meaningful advantages? This article explores this issue.
- Many countries apply several residency tests at once, so failing one — such as the 183-day rule — may not free you from the others.
- Nations like Spain and Germany can keep taxing citizens for years after departure, particularly if they move somewhere with low or no tax.
- Without residency you cannot obtain a tax residency certificate, so double tax treaty relief vanishes and source countries withhold at full rates.
- Banks must record a residency, complicating account opening and triggering misdirected information exchange.
Who Is a Tax Resident?
Each country sets its own criteria for determining whether an individual is a tax resident. The main approaches to tax residency across the world include the following:
| Criterion | Examples of Countries |
|---|---|
|
Citizenship |
United States |
|
Place of residence or habitual abode |
In Germany, for example, a person is deemed to be resident if they:
|
|
Number of days actually spent in the country |
Specific time limits may differ. For example, Cyprus applies a 183-day rule and a 60-day rule, depending on the person’s circumstances. |
|
Centre of vital or economic interests, such as family, work, business, etc. |
Spain uses the centre of economic interests or main base of activities as one of its criteria. A person is also considered a resident of Spain if their spouse (where not legally separated) and dependent minor children permanently reside there, unless the person proves otherwise. |
Is It Easy to Lose Tax Residency?
Many countries set several criteria for tax residency. As a result, even if a person stops meeting one criterion, they may still be treated as a tax resident under another. Examples include the UAE, Serbia and Armenia, which apply at least two of the general residency criteria listed above.
Some countries provide for special conditions under which an individual who has left the country remains liable to pay tax there on their income.
For example, under Article 8.2 of Spanish Law No. 35/2006 on Personal Income Tax, Spanish nationals who acquire tax residency in a country or territory that is non-cooperative for tax purposes (the list is approved separately) remain liable to income tax in Spain in the year of the change of residence and for the following four tax periods.
Similar rules are found in Section 2 of the German Foreign Tax Act (AStG). The rule applies where all of the following conditions are met:
- the person is a German citizen and, during the 10 years before the termination of their unlimited tax liability in Germany, was subject to unlimited tax liability (i.e. resided in Germany) as a German citizen for a total of at least five years;
- the person moves to a country with a low rate of income tax (determined separately) or remains without official tax residency; and
- the person retains significant economic interests in Germany (for example, owns high-value real estate).
Where these criteria are met, the person will be liable to pay tax in Germany on a broader range of income than an ordinary non-resident, in the year of the move and for 10 years after it.
Finally, where citizenship is the criterion for tax residency, an individual is taxed on their worldwide income regardless of where they live or are physically present. In that case, tax residency can be lost only by renouncing citizenship of the country.
Technically, therefore, it is possible not to be a tax resident of any country, provided that the person meets none of the criteria and ends their tax relationship with their former country of residence. In practice, such a scenario requires careful planning and is the exception rather than a common strategy.
How Does the Absence of Tax Residency Affect Withholding Tax?
Income is taxed not only in the person’s country of tax residency but also in the country where the income arises. In the latter case, the tax levied is known as withholding tax.
Usually, where the country of tax residency differs from the country of the income source, double tax treaties (DTTs) apply. DTTs aim to reduce the taxpayer’s tax burden by preventing the taxation of the same income in more than one country. For example, with respect to withholding tax, lower rates apply than those provided for under the source country’s domestic tax legislation, or the right to levy tax is reserved solely to the country of residence.
However, to benefit from a DTT, an individual must be a tax resident of one of the treaty countries and confirm that status with a certificate of tax residency. A non-resident cannot obtain such a document, so the country where the income arises withholds tax at the full rate. For example, income from services provided as a freelancer may be taxed in the country where the freelancer is physically located.
How Is Automatic Exchange of Information Linked to Residency?
More than 110 jurisdictions have already begun the automatic exchange of financial account information. Under this system, banks and other financial institutions report information on the accounts of clients who are residents of other countries to their own country’s tax authorities. That data is then passed on to the country of which the account holder is a tax resident.
Therefore, a bank must establish the tax residency of its client. When opening an account, the client completes a self-certification form and states their country of residence. The bank is required to check this information and, if no residency is indicated, may request further explanations or refuse to open the account.
For accounts opened with the bank before automatic exchange was introduced, the bank looks for indicators of residency in its own records. The indicators the bank takes into account include:
- residential address,
- telephone number,
- a standing instruction to transfer funds to an account in another jurisdiction, and
- other indicators.
As a result, the information may be sent to a country the client has already left. If, under that country’s rules, such a person remains its tax resident, its tax authority may require them to declare income from foreign accounts and pay tax on it, or to comply with other legal requirements. In that case, the client will bear the burden of proving that they have ceased to be a tax resident. If the client has no tax residency in any country, this may be more difficult to establish.
What to Bear in Mind Before Changing Tax Residency
Although an individual may be a tax resident of no country, in practice this status is difficult to attain because of:
- a multi-criteria approach to determining residency, or
- continuing tax obligations to a country even after leaving it (in certain circumstances).
Having no tax residency does not mean having no obligation to pay tax. On the contrary, in some cases the tax burden will be higher, because the country where the income arises will apply withholding tax at the full rate.
Tax residency also matters when opening an account with a foreign bank, since a bank is required to establish the residency of each new client.
In light of this, a more practical approach is to deliberately choose a country of tax residency where the new status can be documented, while properly terminating their tax relationship with the previous country.
Tags: Tax Residency
