What is a Country of Legal Residence?
Your country of legal residence is where you are authorized to reside by law. Your legal residence will typically be the same as your country of physical residence, but not always. Some examples of this include the following:
• When you move out of your home country but remain a citizen of that country.
• When a company temporarily transfers you to another country for employment, the country of legal residence is often that country .
• When you are no longer a citizen of your home country, but the country where you are at that time allows you to stay there legally.
The laws of the country of legal residence dictate how long you can remain there and whether you can work or engage in business while there. As a result, it is important to be certain as to what is the country of legal residence if the country is not the same as either citizenship or the physical residence.
How to Determine Your Country of Legal Residence
The starting point for determining your country of legal residence is to look at where you spend most of your time. Beyond that, other factors can be considered as well. You must also consider your intent. It is also important to identify the country from where you earn the majority of your income because that could affect your taxes and prudential obligations.
Length of Stay
You should consider where you spend most of your time. This is typically done by counting the number of days spent in each jurisdiction in a year. The shorter period of time a person spends in a particular jurisdiction, the less likely it is that such person would be considered a resident for legal purposes. For persons who are very mobile or who travel a lot for work, this simple analysis usually is insufficient. For example, a person who works half of the time on the road and half in a single country may not likely be considered a resident in any one country. For persons who travel a lot on business but still spend a considerable amount of time in a single country, it necessary to conduct an additional inquiry.
Intent to Return
When looking closely at determining a country of legal residence, we look at where you intend to be (or have to be) after you leave your current country. If you can show that you intend to return to your country of origin, that may suffice to establish that you are still a resident of that country for legal purposes. If you know which state you will be attending university, where you will be retiring, where you will be getting your next promotion etc., that may suffice to show the intent to return to that country.
Ties to the Country of Legal Residence
Looking at the country of legal residence, we also then need to determine if you have established particular and unique ties to that country. Some of the factors considered are where your family resides and holds citizenship, where you own property, where you hold passports or any other resident permits, where you vote, drive and maintain bank accounts etc. If you consider the relevant factors and see that it may be difficult to choose your country of legal residence, we can also examine alternatives, such as how to transfer assets upon death, if need be.
Legal Implications and Considerations
Legal rights and responsibilities that come with legal residence in a country vary from country to country and can include tax obligations, criminal responsibilities, residency requirements, voting rights, ability to work, ability to access social services, military service, and eligibility for various governmental programs.
Royalties or other fees that are received for the exploitation of intellectual property may be taxed. Countries may impose income tax on a variety of sources of income which may include capital gains, dividends, interest, wages, and other sources of income. There may also be tax treaty benefits so that where there are overreaching federal, state, and local income taxes they may be reduced. There could also be estate, gift, and other succession tax implications as there are those that tax estates and gifts at the federal and some states at very low amounts compared to what it may be in the United States. In some countries, there could also be what is known as an exit tax which is imposed on persons who are given resident status for a certain number of years.
There could also be responsibilities to participate in the governmental and political process. For example, in some jurisdictions, persons obtain the right to vote and run for office at various levels of government. Other responsibilities might include military service obligations. For example, Israel is known for its compulsory military service. Voting, service, and other responsibilities of residents can also cause problems at the individual level as well.
Changing your Country of Legal Residence
It is possible to change your country of legal residence though, in most cases, it is not as simple as just clicking on a button or changing your address on a form. Each country has its own procedures for determining legal residence. Often, but not exclusively, those procedures involve having lived at least one year, or even three years, in the country you want to declare as your new residence.
Some countries provide special immigration categories with relatively low requirements such as: Canada’s Startup visa or UK’s Innovator visa, and, if you qualify for a program like those, it may permit you to call that country your new home. While most countries will eventually agree to consider you a resident for immigration purposes, it will take longer and cost more than it would to establish legal residence in a country that offers immigration opportunities.
Another way to improve your prospects of qualifying for long-stay visas is to obtain a second passport. Some second citizenship programs grant passports. If, for example, you were a Canadian citizen, and able to get a second passport from a Caribbean country, it might open the doors to obtaining residence in some countries.
Regardless of how you choose to move, you will need to complete paperwork in the country you wish to claim as your new legal residence, and possibly in your home country as well. In some circumstances, you may even wish to obtain legal assistance from a lawyer who specializes in legal residence matters.
Effects on Taxes and Legal Procedures
A person’s country of legal residence – where that person is considered treaty-resident under the relevant US tax treaties – directly affects the country where taxes will need to be filed. Not to repeat myself too many times, but if a person is a US citizen or green card holder then US taxes will always be filed regardless of the count of legal residence. However, a person may be both a tax or legal resident of the US (the foreign national who lives and works in the US and has never expatriated) or merely a legal resident of the US (the foreign national who has merely perfected residency under a US tax treaty and has not yet been here long enough to be deemed tax resident). For the foreign national who may be a legal resident of the US but not a tax resident, taxes will need to be filed in their country of legal residence and probably not in the US (there are many exceptions). For the foreign national who is a tax resident (whether foreign national who may have some kind of US legal presence allowing for treaty residency; or the foreign national who has perfected residency in the US under the applicable rules) , the country of legal residence doesn’t change the amount of taxes owed, perhaps just the timing of when the taxes are dealt with. Under US tax law, the foreign nationals will owe US taxes (on income sourced in the US) when they file a US tax return, so under no circumstance will they pay more than their pro-rata share of their total US taxes. The tax provisions of tax treaties can also provide some relief to foreign nationals who have competing claims for legal residency (US citizens, green card holders, and those foreign nationals who are usually legal residents of their home country). Estate taxes can often be avoided under treaty provisions particularly for a foreign national whose estate planning is done in their home country and leaves all or substantially all of their estate to persons who are also residents of the home country.
Common Pitfalls and Misunderstandings
The first difficulty that people face in determining their country of residence is actually knowing what that means. Many people have multiple residences, and people may think "where I live" is where you live most of the time, but that’s not the key question. The key question is "where you are legally a resident". This can be where your spouse or children live, where you work, where your citizenship is, where you spend most of the time… many places, regardless of your immigration status – every country has laws about who is and who isn’t a citizen, and not every country believes that anyone can just become a citizen or resident of their country just because they have lived there for a set period of time.
The second problem is that different countries have different rules governing what it means to be a resident. Some places it’s where you have your primary home, some places it’s where you have your business. For some places, being a tourist or visiting even on a visa or green card doesn’t stop you from being a resident.
The third problem is that different countries require you to demonstrate residency in different ways. Some countries require a visa or a residency card, but many do not. If you will be residing in a country for a set period of time (varies from place to place), then you may be required to obtain a visa, but many countries don’t have that requirement. Countries like Thailand and Cambodia for example, view tourists and residents alike as people who are present in their country, and their requirements are based on what is shown in your passport (i.e., your entry and exit stamps) rather than on visas or residency cards.
The biggest problem we have is when people haven’t thought about this, and they are only trying to determine where they are a resident because they have been told by some government agency "you owe us taxes here because you are a resident of our country". Now it is even more difficult because not only do you have to figure out where you are a resident, but to prove you were one at the time when the authorities are looking at – many governments have a timeframe where they believe you are a tax resident, even if you didn’t think that at the time. We will get a call from a country once someone has received a notice that they owe taxes in their country of citizenship, but they try to avoid that tax by saying "I only reside where my business is, where I spend most of the year…too bad I didn’t think of this before!"
A common error for people moving in and out of countries is to ignore residence for a period, just because it does involve more work to figure out. Simple tools like Expat ROI are a simple checklist of all the things someone should do when moving (or moving back). Why is it important? What if you are moving away from a highly taxed country like your birth country, or a leisure location that requires a certain number of days in country to qualify as a resident? If you don’t make a plan now, you could end up having a great time here, but suddenly owe the country taxes!
Examples and Case Studies
To better understand the above issues, the following examples based on real-life case studies are provided.
Key Takeaways: You Need a Plan
John, who was born in the USA, has been living in Nicaragua for seven years, working remotely as a software engineer. He has a temporary visa that allows him to work locally and travel freely throughout Central America. Even though John has applied for permanent resident status so he can stay in Nicaragua long-term, he has not yet received approval.
Sarah is an international tax attorney living in Buenos Aires, Argentina. She has worked with John on his application for permanent residence, and she believes that John is a resident of Argentina for tax purposes, based on the facts as they stand today. That said, Sarah recommends that John meet with her and the expatriate tax expert in her office before his application for permanent residency is approved. Sarah cautions John that his tax residency may change if he gets permanent resident status in Nicaragua, and that there is no guarantee the Argentine government will accept his residence as determined by the government of Nicaragua.
Mike and Julie are U.S. citizens living in France. They have obtained French permanent residence by meeting the requirements for "talent passports" based on their employment and Julie’s Ph.D. Julie does not intend to work in France, and Mike doesn’t need the residence to work. They have moved their permanent home to France and have given up their lease on their apartment in Florida.
Mike works remotely for a California-based technology company, which allows him to live his dream of residing in Europe . The couple has been very busy exploring France and learning the language, and they have not visited the U.S. for many months.
Sara is a well-known tax attorney in Spain, and has consulted Mike and Julie over the years. In this case, Sara finds that they are likely Argentine residents for tax purposes because they live in France, even though their permanent residence is registered in the Latin American country.
Beth and Jess are U.S. citizens from Colorado who have lived in Ukraine for several years. They own a home and are raising two small children there. Beth works remotely as an accountant. Jess works at the American embassy in a non-diplomatic capacity. They have filed their taxes in the U.S., but now they fear that they are exposed to double taxation because of their various locations and connections.
Paul and Christine are U.S. citizens who have lived in Tokyo for several years. Christine works as a hospital administrator and Paul works from home on his self-published comic book series. They are considering sending their daughter to New York so she can start kindergarten this fall. Paul works remotely, but says he will visit his daughter and wife often. Christine is adamant that she does not want to relocate for the time being.
Sarah finds that Paul and Christine might be U.S. tax residents, depending on whether or not they can demonstrate to the IRS that they have closer connections to Japan and have not relied on the U.S. for their "tax home." They will likely become U.S. residents again when they return to the U.S. for good.