Tax Dual Resident : being tax resident in two places at the same time

It is becoming more and more common for expat workers to commute from their home country to another country where they spend their working week.

This blog post focuses on how to manage this dual resident situation where the two countries in question have a Double Tax Agreement (‘DTA’) in place.

We have a lot of clients, for example, who are resident in the UK and Switzerland, Spain, Germany or the Netherlands. All of whom have a comprehensive DTA in place with the U.K.

Where do they pay their tax and how do they avoid being double taxed?

The purpose of a tax treaty is to dictate which country has a taxing right over certain income; the treaty divides the taxing rights over an individual’s income and gains between the two countries.

For a dual resident, it is necessary to establish the individual’s “treaty residence” position.

It is the country of treaty residence which generally assumes the primary taxing rights over all income, allowing a credit for tax paid in the second country – but only if the treaty allows the second country to tax the income.

How do we determine where you are treaty resident?

Most DTAs has a tie-breaker clause which determines a country of tax residence for this purpose.

Through the application of a series of “tie-breaker” tests the treaty determines an individual’s residence position for the purpose of the treaty (his “treaty residence”).

The following tests are worked through in order until one of them clearly indicates the other country is where you are treaty resident.

· Permanent home
· Personal and economic relations i.e. which country is your ‘centre of vital interests’
· Habitual abode
· Nationality

As these are tiebreaker tests, if you are deemed treaty resident in a country by virtue of having a Permanent Home in that country only, you do not need to consider the later tests.

If tax treaty resident outside of the U.K., despite being dual resident, the UK will continue to tax you as a non-resident and will only tax income in accordance with the appropriate DTA.

This means that an expat worker commuting to the UK to work for a UK employer, that is treaty resident outside of the UK will usually be subject to tax in the UK on UK workdays only, no other income is declared in the UK.

We are experts in the taxation of dual residents, the application of the tie breaker tests and can advise on the required steps to help establish a robust treaty residence position. We can also complete dual resident tax returns to support your position.

Please contact us for information on how we can help you.