Non-resident taxes

What are non-resident taxes? What is a non-resident? Do non-residents and residents pay the same taxes? What are the advantages and disadvantages of being a resident of a certain country?

The tax residence of an individual is a complex situation and has very important consequences from the tax point of view when submitting you’re your income tax. The change of residence, for natural or legal person, must be carefully planned and several aspects must be considered, such as where the economic activity is carried out, where it receives its compensation and the country from where it will be paid. When a non-resident decides to change its tax residence, he must necessarily inform a tax agency about its future place of living and get informed about what taxation he will be a subject to. Depending on the information provided by the tax agency the client decides if he should submit a resident or a non-resident tax. 

What is a non-resident taxpayer?

From the fiscal point of view a non-resident natural person is a person who does not carry out any commercial activity in the country where he habitually resides and has his residence abroad, that is, he does not have a physical presence of more than 183 days during a year in the country and its economic activities are not located in the country where he habitually resides. You will not be able to receive any kind of remuneration from self-employment or resident companies and if the natural person is not legally separated and has children under his care he could be considered a resident for the residence of his family. These are the only variants that your tax agency will contemplate when granting you the status of resident or non-resident in the country. 

When a person leaves the habitual residence heading to a tax haven, the tax agency will change his status for not resident only in 5 years, therefore he will be considered as a tax resident in the country he lived before for the first 5 years even though he already resides in tax haven and will have to pay taxes in the country where he lived. An individual residing in a tax haven will have to prove his effective residence by means of rental agreements, home purchase, electricity bills, water, landline, gas and corresponding charges of the invoices in the tax haven bank to verify that he is actually residing in country. Some countries of the European Union are adapting these models to prove the real residence of a citizen, other countries oblige the individual to pay all taxes of non-residents that may be taxed when leaving the country of residence. 

In reference to the nucleus of economic activities it is a very thorny and debatable issue because several interpretations can be made, some of them correct or not. As a general rule, any commercial activity is considered a core economic activity when the benefits of it are higher than those in a country where you want to reside, in this example tax haven. Other countries may consider it as an activity carried out in a country where the economic interests necessary for a person to live are located. 

Taxes of non-residents 

When a natural person is considered non-resident in a country, he will not have to pay local taxes. For this he must fulfill the following requirements:

  1. Live outside the country for more than 183 days.
  2. Prove that the economic activities are not located in the resident country and he does not depend on them for living.
  3. His wife and children do not reside in the country.

Fulfilling these 3 requirements a physical person will be considered non-resident and will not be a subject to taxes.

Residents and non-residents will logically pay different tax rates. Residents will pay all taxes from the income obtained in their country of residence, VAT, successions for the proper functioning of the country. Non-residents, once their tax agency gives them the status of non-resident will not have to pay taxes. Note that you will pay taxes where you reside physically; depending on the country, if it is a territory of low taxation or a high tax jurisdiction, you will pay more or less taxes. The status of resident or non-resident can be changed at any moment and it is totally legal to change a residence since no one can prohibit you from leaving the country. However, it is crucial to comply with the corresponding fiscal obligations of your previous country of residence and if you meet the 3 requirements described above you will not have problems with your tax agency. 

The obligations of non-residents who want to return to their native country is to inform their tax agency of their new resident status and comply with the tax obligations imposed by the country where they reside. If the person decides to continue with his non-resident status and his fiscal agency finds out about it without being informed previously, he could impose administrative sanctions for tax evasion and depending on the volume defrauded he can receive a prison sentence. 

The advantages and disadvantages of being residents of a country are very obvious: 

Advantages of being a resident

  • Live in the country where you really want to live, close to your family and children.
  • Generally, high tax countries are safe for living.
  • Free social security.
  • Insured pension.

Disadvantages of being a resident

  • You will pay income, VAT and inheritance taxes.
  • You will not protect the assets located in the country where you are a resident.
  • You are not safe from legal demands
  • High payments of self-employment fees and social security 

Regarding legal non-resident entities, they are not subject to local corporate tax if it can be easily proven that the company does not carry out any type of activity within the boarders of this country. The conditions are the following:

  • It does not carry out transactions with natural local persons.
  • Does not perform transactions with local freelancers.
  • It does not carry out transactions with local resident companies.
  • It does not have bank accounts in the name of the non-resident company in local banks.

To avoid a company paying taxes and being considered non-resident, it is advisable that the company does not have any kind of bank account in the country where it operates since it can become a subject to tax payment. Let´s take Gibraltar as an example. If a locally registered company does not have a business account in Gibraltar, the tax rate it will have to pay will be equal to 0%. Once the Gibraltarian company has a bank account, the company will pay the corresponding corporation tax that is of the 10%, and also keep accounting and auditing by regulated advisers.