Has it ever happened to you that talking about taxes may seem irrelevant, a bit of a headache or simply something that is not interesting? Many people, even the most adult ones, live without knowing what tax obligations they pay, many in some cases (for example unemployment or if they have no possessions) do not even pay direct taxes, but surely they have paid an indirect one without knowing it - does VAT ring a bell?
Well, the topic is more important than it seems and you can certainly take advantage of it, whether you are an individual or a company. The taxes that, for the most part, you have to pay to a specific jurisdiction (country) will depend on your tax residence. And what exactly does that mean? Please pay attention as we explore the concept and significance of tax residency. It goes beyond fulfilling tax obligations; it encompasses accessing services, like the ones provided by Blackcatcard, as well as enjoying tax benefits.
Defining Tax Residency
To put it in very simple terms, tax residency is the link between a person (physical or juridical, such as a company) and a jurisdiction (a country) to which that person must pay taxes based on his income earned over a period of time (regularly 365 calendar days) and the assets he owns (e.g. real estate).
Factors determining tax residency
Tax residency is determined by different criteria that depend on each country's regulations. However, some of these criteria are usually found in different jurisdictions. Regarding individuals, many countries establish that a person has tax residence in their territory in any of the following cases:
- stay in the country, continuously or discontinuously, for more than 183 days in a calendar year (365 consecutive days). This criterion applies in countries such as Germany and the United Kingdom. It may happen that, in some jurisdictions, if the person is a citizen of another country and arrives in a new country where he/she fulfills this condition, he/she will acquire tax residency from the second year of stay.
- the individual's only home is in that territory and that person visited it for at least 30 days, as in the United Kingdom; or if the domicile or principal residence is in that country, as in the case of France.
- being a resident of that country.
- carrying out a professional work activity.
In theory the factors that determine the tax residence of a company are more elementary. As a general rule, companies are tax resident in the country where they are incorporated. However, some jurisdictions may establish the tax residence of a company if its principal headquarters and management representatives (e.g. the board of directors) are located in their territory, despite the fact that the company has been incorporated in another country. This tax aspect is really important for companies that have to consider the taxes they have to pay both in the country where they are incorporated and the taxes in the country where they are tax resident. This means a higher tax burden that can negatively impact the growth of a company if this issue is not taken into account.
Implications of Tax Residency for Individuals
As a tax resident of a country, an individual must normally pay taxes on all income received, including income from foreign countries. This is particularly important for individuals who provide professional services to clients in other countries or have investments abroad. It is also necessary to declare all assets held both in the country where the individual is a tax resident and in the rest of the world.
It should be noted that government officials, diplomats or other types of persons who perform a service for a state in a foreign country are regularly exempted from the taxes of that foreign territory even if they meet the conditions described above. In other words, these persons preserve the tax residency of the state for which they perform a service abroad.
As mentioned above, many, especially salaried workers, do not notice the taxes they pay on their income, since it is usually the employer who withholds a percentage of their salary, determined by law, to transfer it to the respective tax authority. Possibly for this same reason, if their salary does not reach the minimum threshold established by law, they do not have to file an income tax return. Therefore, they do not give much importance to the place where they are tax residents.
However, tax residency is fundamental in different spheres, and one of them is access to financial services. If you wish to open an account with us at Blackcatcard, as well as with any other financial institution, you must provide us with information about the country where you are a tax resident. Knowing this information is not only relevant for us, as a neobank that must comply with tax, KYC and Anti-Money Laundering regulations, but also for you, as a taxpayer in one jurisdiction or another. Thanks to the information we report to tax authorities in different countries, your information will be true to reality, therefore you will be able to file your income tax return and avoid tax evasion, which is a serious crime and severely punished by government authorities.
Keep this in mind if, for example, you are a professional offering services in different EU countries through digital platforms, but you manage all your business activity from a single country, e.g. Germany, Spain, France, etc. This happens very often with professionals in the technology sector or freelancers specialized in different areas. Thanks to your IBAN account in Blackcatcard, you will be able to receive payments for your services from other countries and fulfill your tax obligations accordingly.
As mentioned before, receiving income from different countries means paying income taxes on it both in the country where we are tax residents and in the country where the income originates. Not doing so implies committing the crime of tax evasion. To avoid both the commission of this crime and the negative impact of double payment of taxes, it is possible to access tax benefits to reduce the tax burden depending on the place where you are a tax resident, both as an individual and as a legal entity.
How to take advantage of your tax residence?
One of the best options to reduce the tax burden is to incorporate (in the case of companies) and be tax resident in countries that have double taxation treaties with other countries. These are treaties, usually bilateral, between governments of different countries to avoid taxing twice (or more) the same income, or even assets, by each of the signatory jurisdictions. A great alternative is, for example, France, which has more than 100 treaties in force with many other countries in Europe, America, Asia and Oceania. Other countries with a similar number of agreements in force are the United Kingdom (well over 100, being one of the countries with the largest number of such agreements in the world), Spain, Germany and Italy. Being a tax resident in these countries means having a very significant reduction of the tax burden if any activity is developed worldwide.
In other cases, some jurisdictions, unilaterally, offer their tax residents (individuals and different types of corporations and entities), who receive income from foreign sources, which are subject to income tax in the country of origin, a discount on the income and supplementary taxes that they must pay where they are tax residents, for the amount of the respective tax paid abroad. This discount may be partial or total, without exceeding the amount that they should pay in the country where they are tax residents. In this way, without the need of a bilateral treaty, a person can actually avoid this double taxation.
It is also possible to receive a tax refund, particularly VAT, as an individual and as a company, both from the tax authority to which a tax resident corresponds and from foreign authorities. For example, companies can receive a VAT refund if during a certain period of time they paid more VAT to their respective tax office than they actually invoiced. On the other hand, individuals who, as non-tax resident tourists, purchase goods in a foreign country, may apply for a VAT refund from the Tax Office of that country for the VAT they paid on the goods they purchased.
In addition, governments often offer subsidies or grants to their tax residents. For example, individuals are allowed to access housing subsidies, depending on their income, for which it is necessary to comply with conditions such as being a citizen of that country or being a tax resident. On the other hand, by fulfilling the latter condition, some companies are subject to exemptions to reduce their tax burden, stimulating their growth.
Taking into account all these possibilities, knowing your tax residency is not only a fact to comply with your tax obligations, but also to reduce them, receive benefits and access financial services. In this regard, one of the advantages of having your Blackcatcard account is that you can receive in it the income you generate globally, as an individual or business, and have the information you require to meet your tax obligations in any of the jurisdictions that require it.
If I live in a country for several months do I become a tax resident?
That depends on the rules of each jurisdiction. There may be criteria of time, work, national belonging, family ties, among others.
Do I have to pay taxes on my income in different countries?
In some scenarios, it is possible that you may have to pay taxes more than once on the same income you generate as an individual or company in several countries. To avoid this situation, some governments subscribe double taxation treaties with each other; or, unilaterally, offer discounts on the national income tax for income taxes paid abroad.