In this weeks live Wednesday Webinar we took a deep dive into how dual residency affects expats.

What is Dual Residency?

If a British expat spends any time in the UK during a tax year there is potential to be taxed in UK as dual tax resident.

This means that worldwide income is open to scrutiny potentially at the highest UK tax rate.

Tax residence or non-tax residence is determined by the existence of a double taxation agreement (DTA) between the two countries the Expat is from and that they are living & working abroad in.

Relief from UK home country taxation is dependent upon the existence of a double taxation treaty with the second country.

What are the issues for expats?

If an expat is resident for part of the year in the UK they are potentially liable to UK taxation on worldwide income unless a DTA exists.

If a DTA does not exist then it is possible that with a UK tax return you could claim a tax credit against any tax at source in the Expats country of tax residence even where no DTA exists.

The complication is that any assessment to UK tax of an expat’s worldwide income is then subject to the highest rate of UK tax or that of the second country.

If the UK expat wants to ensure that they have the most tax efficient arrangement then having their tax assessed in one single jurisdiction could offer the highest tax saving possible.

The DTA allows for this but also contains other criteria which lead to tax complications based upon your expat lifestyle.

When Dual Residency Arises - What are the international rules for deciding?

If an expat is defined as being taxed on a dual residency basis in two jurisdictions then the DTA provides rules to settle where the tax is paid.

Worldwide Tax could be paid all in one jurisdiction or dual residency rules may apply with assessments in two or more countries.

Only the types of income or gain defined as exempt under double taxation treaty can tax be avoided in the second country.

If tax is paid in one country a tax credit is received in the 2nd under double taxation treaty rules.

If no DTA exists then it still may be possible, but harder, for a UK Expat to claim a tax credit against the UK tax on overseas income

Dual, Non or Tax Resident

A DTA allows for a decision making process to determine if the expat has a tax liability on a single or dual tax residency basis in one or more jurisdiction.

This can also determine income or gains that may be exempt under the expat tax status.

DTA’s are drafted under international rules laid down by the OECD with a new standard DTA coming into force around five years ago.

A DTA includes tiebreaker rules to determine whether an income or gain is taxed in one jurisdiction or on a dual residency basis or whether it’s exempt.

The tiebreaker decision making tree is series of steps to consider the principles of essence in determining an expat’s tax resident or non-resident status.

These tiebreakers can also determine whether your tax residency applies to the any year or period of a tax year or for any specific income or gains types.

These 4 key factors are looked at in sequence to determine an expats tax residency.

Permanent Home

Where is the expats permanent home and continuous residence.

If it is unclear which is a main home or holiday home because of travel and movement then the decision making process moves on to point B

Vital Interest

What is the Expats centre of vital interests for family & business.

Where are the family based, where is the business based, where is the economic activity and income and wealth generated?

This decision step allows for Expats to consider nomad working or retaining a tax residence in another jurisdiction to where they spend time living in residence - as long as care is taken to follow the non residence rules.

If vital interests are unable to determine tax residency then point C is considered.

Habits & Lifestyle

Where is the Expat habitually resident, what is the habit of travel and movement.

An Expat travelling frequently to undertake work in a another jurisdiction could be interpreted with an intention to be tax resident in the country where work activity is done, rather than a claimed place of residence.

Similarly it could also be true that a UK expat living and working abroad but returning home to the UK regularly could be deemed to be UK tax dual resident despite spending large chunks of the year abroad.

If tax residency is still not clear then d applies.

Nationality

If the permanent home, centre of family and business, and habits and lifestyle still leave doubt as to tax residency the next step is nationality.

A definition by nationality if made can easily lead to dual residency taxation and assessment.

This means that UK expats spending any time in the UK are always open to potential UK tax assessment on part or all of their worldwide income.

Government Service Pensions

Under the most recent OECD draft DTA government service pensions can be taxed in the home country where they paid from.

So a UK expat Living and Working Abroad with any government service pension from the UK will remain taxed on that government service pension in the UK. This is even if they have a tax resident for the rest of their worldwide income overseas.

Such expats have dual tax residency for their government service pension and the rest of their worldwide income.

The same dual rule would apply for fixed incomes and gains like UK property rental.

Government service pensions include civil service, local authority, health service, military, and anything else arising from government paid Pensions.

Cyprus and the UK signed an updated DTA agreement in 2018 coming into force in 2019. This means that UK expats living and working abroad in Cyprus have the UK pensions government service pensions taxed in the UK giving them the use of a £12570 tax free personal allowance in the UK.

Under the DTA these pensions are not reportable in Cyprus on a Cyprus tax return. This allows an additional £17,000 of personal allowance in Cyprus against any other income from pension or earnings overseas or in Cyprus.

UK expats living and working abroad in Cyprus with pension income could get a maximum of almost £30,000 of personal allowance against income before paying tax as a Cyprus tax resident.

Of course this depends upon how your income is made up.

Private pensions are not affected by this rule.

If you have a large government service pension even UK expats will still pay UK tax up to 45% while Living and Working Abroad.

This offers tax saving opportunities for expats to manage their income and pensions and maximise tax savings as a UK expat in Cyprus.

Cyprus foreign income

Expat tax residents can work abroad in mysterious tax saving ways.

UK expats that meet the requirements to be Cyprus sole tax residence can then enjoy the tax rules for income and gains in Cyprus.

As long as the expat is spending 90 days outside Cyprus in each year any overseas (to Cyprus) earnings as a contractor or on short-term assignment or as digital nomad work is not taxed in Cyprus.

Only income and gains arising in Cyprus would be taxable to these expats.

This offers potentially large tax savings for UK expats living and working as a Cyprus based sole tax resident for any offshore working abroad as a nomad or work short contractor in Africa Asia and the Middle East.

Tax Savings Available

Not all DTA’s are the same and not all tax rules in different jurisdictions are the same.

This creates potential complexity to be considered on a case-by-case basis for expats.

Considering where their income is arising, where they are tax resident, where they do the work and the local tax rules.

Some countries will tax at source, if DTA exemption tax relief is not available, tax credits need to be claimed for best tax savings.

Where a full double taxation treaty exists for the incomes and gains the UK expat then completes non-resident tax returns to the UK to be exempt from UK taxes in a year.

Not all DTs are the same in the treatment of earnings, dividends, interest, royalties, gains, profits and property rental income.

The different treatment by country of these incomes may or may not lead to exemption or to taxable income on a dual residency basis.

We saw in the example above government service pensions are now taxed at source no matter where the expat lives and works abroad giving automatic dual residence.

Other incomes like dividends and bank interest are deemed in law to be movable income hence are always taxed in the country of where tax resident.

If an expat can establish non-residence then dividends and interest are always taxed in the country of tax residence, not the UK.

Some incomes and gains are fixed. For example property rental income is always taxed in the UK or the country of origin.

In the same way property capital gains and other capital gains from investment assets based in the UK will always be taxed in in the home country.

Tax savings exemptions may exist and it’s important that an expat considers the options and liabilities in any tax year.

It’s important an expat considers the potential liabilities for any gains or income before the tax liability arises in order to manage the process going forward.

ProACT offer a free review all new enquiries from expats living and working abroad or relocating overseas.

ProACT offer a Retained Client Service for year round tax advice and guidance on residency, non-residency status and assessments.

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July’s Webinar Schedule

We host our weekly webinar ‘s every Wednesday at 9am.

6 July - Tax Residency After 183 Days

13 July - Dual Residency Tax Implications

20 July - Get Non-Residency Tax Status THIS Year

27 July - Split Year Tax Benefits

Retained Clients Service

Retained clients get a more in depth Q&A in the private expat community on Facebook after the public live stream.

Become a retained client