Financial News

Double taxation tie breaker can trump the residency test

Expats waiting for the statutory residence test to start are leaving their tax planning too late.

Planning says what it means – thinking ahead – and waiting until April 2013 for the details of the residency test leaves no time to rearrange finances to take advantage of the new rules.

Expats who have swapped the UK for another country to live and work are easily covered by the new residence rules.

However, expats with a more flexible lifestyle that takes in two or more overseas countries need to look under the bonnet at double taxation treaties and how they influence their finances.

The specific clause is the tie-breaker written in to most modern treaties.

This rule will decide where an individual pays tax on income and capital gains when valid arguments can be made for tax residence in more than one country.

Under the tie breaker, tax authorities will apply a test that indicates primary residence for tax.

The test varies between treaties, but includes looking at:

  • Where does the individual live?
  • Where are the individual’s lifestyle and financial links?
  • Where do they spend most of their time?
  • What is their nationality?

One of the key issues that triggers so many financial problems for expats is that tax law is not clearly written down and explained in many countries.

The result is someone bases their tax and financial planning on their understanding of the rules and then this belief is undermined by retrospective action by a tax authority.

Double taxation treaties and clearer residency rules in the UK and elsewhere aim to clear up these ambiguities and leave less room for tax cases to go before the courts for decision.

Looking at residence issues now instead of waiting until the statutory residence test is introduced can iron out some tax problems that might arise after April 2013.

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