Where to pay taxes? Three different types of tax residency systems: nationality, territory, residency

International taxation is one of our favorite topics as it concerns everyone who wants to grow their businesses beyond previously given borders. Also, those who live abroad must have a clear understanding of where to pay taxes, and we highly recommend setting up the structure with an international tax advisor. In the meantime, we share this piece on the three basic types of tax residency that every expat should know.

Understanding tax law from a holistic perspective

If you want to understand tax law, you need to keep in mind the relationship that you have with every country where you have meaningful ties. One may think that, if he/she moves to a new country, he/she becomes exempt in the previous territory. Others may assume that by living in a territorial taxation jurisdiction, they are automatically free of taxes in other places where they may engage in activities or have personal connections. 

First of all, it’s imperative to note the importance of seeking reliable expat tax advice and, hence, to discuss these matters with an international tax consultant. If one can’t reach a good one, he/she should at least consult with a tax advisor for every country where he/she keeps an economic or personal relationship.

Speaking of which, one can become a taxpayer only by visiting a boyfriend or girlfriend in a foreign country, like the case with Shakira and her legal dispute with the Spanish Hacienda. 

Can an international tax consultant promise me no taxes?

What if I don’t pay taxes? If I don’t live in country X anymore, why should I worry about tax returns?

Mundo would like to clarify one thing: avoiding tax is never an option. A smart financial plan is aimed, among other things, at reducing the tax burden as low as it’s legally possible, the key word being “legally”. Avoiding tax is not only illegal but also costly as it can end in high fines or in the necessity of bailing yourself out of jail. 

In the same way, if you live in a certain country and have businesses elsewhere, it’s your responsibility to comply with the tax law there too. Even if you are exempted, you may be obliged to present tax returns or to declare income or tax payments from abroad. In many cases, you may receive an exemption but only if you present a legal document stating that you are a tax resident someplace else. 

All in all, international taxation should not be taken lightly and should be managed with the support of an international tax advisor or at least a tax attorney who is familiar with the country in question. 

Where to pay taxes? Three ways to assess tax residency

Tax law and tax liability depending on nationality

These are the countries that require tax payment for people who hold a passport, no matter where they live. Thus, if the individual lives abroad, they will have to pay taxes on their country of origin, even if they haven't set foot there for years. They may also be taxpayers in the place where they live, have businesses, or have spent at least 6 months a year. It’s important to know that the fact that they pay nationality-based taxes doesn’t exempt them from paying taxes in other jurisdictions unless there is a bilateral agreement or non-double taxation treaty. Countries with passport-based taxation are rare and we can name only two: the US and Eritrea. 

Find out more

Tax law and tax liability depending on residency

This is the most common type of tax residency and it’s based on where the person resides. By spending most of your time in a given country, you become a taxpayer, and “most of your time” is usually measured with at least 6 months a year. However, under this framework, a person is due to pay tax on all of his/her income, no matter where it is. Readers should keep in mind that being a tax resident in a certain country doesn’t exempt them from paying taxes in another. Residency-based tax residency is found in most nations. 

Tax law and tax liability depending on territory (territorial tax residency)

Territorial tax residency has been a common subject in many of Mundo’s articles and the reason is simple: it’s an attractive option, especially for those interested in global finances. While with residency-based taxation the individual pays tax on the territory for all their income (worldwide), in this case, they pay tax in the country but only for the income generated in the territory. This opens up a world of possibilities as it allows the person to organize affairs so that a large part of the assets is tax-free. Naturally, this can result in huge savings for the person or company. 

Surely this is the best type of tax residency, nonetheless, there are three vital points to consider:

• It’s not a zero-tax option because all local income (including the one generated abroad but received in the country) is taxed. 
• It doesn’t automatically exempt you from paying taxes elsewhere. In each case and each country involved a tax residency certificate must be presented and must be accepted by the corresponding authorities. 
• It requires commitment as the individual must be really living in the country in question at least for 6 months a year and this must be proven with receipts, invoices, transactions, and other relevant proof. 

In our article Demystifying Panama's Tax Residency: unraveling the Myth from the Truth we explain territorial tax residency further. Some of the countries with this type of taxation include Panama, Paraguay, and others. 

Disclaimer: This article presents general information on international taxation and types of tax residencies, however, the purpose of the article is to provide an overview. Hence, this article should not be taken as professional financial or tax advice. Before making any relevant decisions about your finances or your taxes, make sure to consult with a certified international tax advisor. 

Explore international taxation with Mundo 

Are you juggling with different jurisdictions and wondering where to pay taxes? A great way to understand international taxation is through an international tax consultant. The topic is too broad to be taken lightly and the details depend on each case. Everything that a person does can be used to link the individual to a given country, and this can be used both ways. Having personal relationships like children, a boyfriend or girlfriend, or having assets like real estate or a company may be enough ground to make someone a taxpayer. If there is any doubt about it, it helps to remember the case of Shakira, who was accused of tax evasion because she visited Spain often to see her boyfriend at the time. Finally, she ended up paying a million-dollar figure to Hacienda.

Mundo is not taking sides on this story, but we do want to stress the importance of contacting an international tax advisor (or a local one) for each territory with which one keeps ties of any kind. 

Furthermore, we help those who want to establish a territorial tax residency, and in this regard, Panama is our star jurisdiction. From acquiring legal residency to opening a bank account and getting your tax residency certificate, we help you every step of the way. Contact your tax attorney at the Mundo team.

Contact the team