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Expatriate Briefing

Sponsored by World Offshore Banks
13 February, 2012



Life for the average expat can be challenging enough, what with acclimatising to a new culture, overcoming language barriers, dealing with foreign bureaucracies, worrying if your money is safe in the local bank, fretting about whether the kids will settle into their new school – the list could go on for quite some length. However, there is one very important factor that we haven’t mentioned – and one which could bring even the most savvy expat into a cold sweat at the mere thought of - and that is the dreaded ‘t’ word. Yes, you’ve guessed it, tax.

If you are, for example, working for a multinational company and are posted for a stint working in one of your employer’s regional offices or foreign subsidiaries, there is a fair chance that much of the administrative hassle, such as registering with the local tax authority, will be sorted out for you. Even so, it does of course pay to be aware of the tax implications of working in your destination country: if you are not careful you could end up paying significantly more than you need to, and could also add to your tax liabilities back home.

Generally speaking, one becomes ‘tax resident’ in a country after having spent more than six months there in any one year. During this period, you would typically only owe tax to the host country on any income that you had earned there, as opposed to your worldwide income. It is usually the case that a stay of more than six months in a country means that you become tax resident, and will therefore pay tax on the same basis as other taxpayers who live there permanently. However, there are a number of other factors which may come into play which could greatly affect your liability to tax. For example, some countries use a ‘territorial’ system of taxation, meaning that you would still only pay tax on income earned within the country’s borders. Unfortunately, territorial tax systems are relatively few and far between these days, with governments keen to grab a slice of an increasingly globalised economy. So, when you do become tax resident it is much more likely that you would have to pay tax on your worldwide income. This however may give rise to a situation where your host country and the place from where you have expatriated may both have a claim to tax the same piece of income, so the existence of a double taxation avoidance treaty between the two countries, by which you can receive a credit in one country for tax paid in the other, is important if you intend to stick around in your new home for any length of time.

Expatriates originating from certain countries face additional complications, however, and we’re talking those which employ the concept of ‘domicile’ as well as ‘residence’ when working out who must pay what and where. Domicile is a notion unique to the English-speaking common law jurisdictions, the United Kingdom being a notable example. In the UK, domicile attaches to a person's original home country, and cannot be changed unless the person moves their whole life, family and base to another country, with the intention of remaining there permanently. Few 'visiting' residents will therefore have a UK domicile, but Brits have to just about completely sever ties with the UK in order to rid themselves of UK domicile, and even then HM Revenue and Customs is unlikely to be totally convinced! Americans find themselves in an even more horrible situation, in that they are taxable by the US no matter where they are on the planet, unless they take the rather drastic step of renouncing their citizenship altogether (see the US section below).

If you run your own business, perhaps as an adviser or consultant, meaning that you spend time working in one or more foreign country for extended periods then it is obviously all the more crucial that you are aware of the tax implications of this. Working in a country which taxes worldwide income and then returning home to another world-wide tax regime could ultimately be very bad for your financial health and you risk having a fair chunk of that income you worked so hard to accumulate wrenched away by one tax authority or another. Therefore, it is not just sensible to structure your financial affairs appropriately so that you are not unnecessarily over-taxed, it is essential.

One option to consider if you are a globe-trotting career expat is to form an offshore company, the interpolation of which can sometimes distance you from your income sufficiently to avoid taxation. A holding company for example can be used to hold investment portfolios, and is useful in providing enhanced privacy. If the income of a holding company is used to make further investments, it may be that you won't be taxed on it even when you return to a high-tax domicile. Another possibility is to form a personal service company which may allow you to contract to supply your services regardless of residence, and let the fees earned accumulate in a low-tax country while you work for a low salary in the country where you are taxed.

In some countries there are plenty of rules to prevent this; but not in all, by any means. And while the world of ‘offshore’ often attracts negative headlines these days, we should stress that sensible tax planning and tax minimisation is still legal in most countries as long as you play by the rules. Overstepping these boundaries, which, admittedly, are sometimes blurred, is not advisable, for wilful tax evasion is very likely to get you into a lot of trouble. Again this is a complex area and the route you take will depend very much on your personal circumstances, so there is not room in this feature to explore every possible avenue. Sound, independent financial advice is a must, therefore.

The same considerations about tax apply to those who are intending to live abroad permanently for lifestyle reasons, or retire to a place in the sun - otherwise, you could find that your dream of owning a vineyard in Australia or an idyllic small-holding in Provence could well turn into a nightmare!

For retirees especially, (and indeed, anyone working abroad for an extended period of time), the perennial problem of pensions can also be a real headache. Although pension investment is usually tax-privileged in high-tax countries, as an expat, you face additional problems, namely that while non-resident, you will probably not be able to continue taking advantage of the tax incentives 'at home', even if you want to retire there. If you are employed by a company in your home country (and are part of an in-house pension scheme), and you are moving abroad to work for that same company, then in some countries you may be able to continue contributing to that plan; in the UK for instance you can continue to contribute for a maximum of 10 years, but in many other countries the regime is nowhere near as permissive. If you are moving abroad to work for a company with no ties to your home country, then you may be allowed to join their local pension scheme. Only in a few cases will you be able to transfer the pension rights back to your country of residence when you return, unless you continue to work for the same company; and usually the terms of transfer are highly unattractive. If however you are going abroad for an extended period, and especially if there is a good chance that you will retire to some other part of the world, there may be an argument for transferring your home pension assets offshore straightaway, even though that may (probably will) entail a tax penalty if your contributions have been tax-privileged.

Other options to consider include: a designated pension or retirement scheme, which usually accepts payment in a wider range of currencies, and generally require less maintenance on your part; or the ‘DIY’ approach which will allow you to build a more diverse portfolio made up of different types of investment, allowing more flexibility but with greater risk. Again, this is a highly complex area, and there is no space here for an extended examination of expat pension options.

It is often the case though, that governments, particularly in countries which have very high rates of personal income tax, have legislated special expat regimes in order to attract workers with particular skills or senior management experience, which will minimise exposure to tax to some extent. Brief descriptions of some of some of these special expat tax regimes are provided below, along with the general tax and residency rules in some other popular destinations for international assignees and other classes of expat.

Countries With Specific Expat Tax Regimes

Denmark

In Denmark personal tax rates are notoriously high, with a further levy for social insurance contributions. A person is subject to Danish tax if she is resident there and is presumed to be resident there if she spends more than 6 months in the country in the tax year. These tax rates are a great disincentive and provide a very real problem to employers who require foreign skilled labour.

Accordingly the government introduced a special expatriate tax regime, under which the personal income tax rate is fixed at 26% for up to five years and applies to all kinds of cash remuneration and reimbursement of private expenses, including relocation allowance and school fees, the taxable value of a company car and use of a telephone. All other income, including benefits-in-kind, are taxed at ordinary rates.

Social contributions of 8% of salary must also be paid on gross income in addition to the 26% income tax, regardless of whether the employee is covered by a foreign social security scheme, meaning that the effective tax rate paid by an expat employee is 32% (as against 51.5% normally).

After the expiration of the five-year period, the employee will be taxed at normal Danish income tax rates. If the employee has been utilising the tax scheme for a shorter period than 60 months and he leaves Denmark, he can return to Denmark at a later point and continue to utilize the 26% tax scheme for a total up to 60 months.

To qualify for the special tax regime, following conditions must be met:

  • The expat’s monthly salary must be at least DKK69,300 (2011) after deduction of pension contributions and Danish social security contributions. If the employee’s salary falls below the minimum monthly threshold, the salary requirement can be achieved by means of an annual bonus payment.
  • The employee must not have held 25% or more of the shares of the employing company, or had any active role in its management, in the five years prior to the start of the employment.
  • The employee must not have worked for the company, or for any group-related companies, in the three years prior to moving to Denmark or one year after the end of a previous period with tax liability to Denmark.
  • The employee must not have been a tax resident in Denmark or have been taxed in the 10 years prior to the taking up of employment.

However, many of these requirements do not apply to scientists or those in similar professions.

There is no requirement to file a tax return with regards income subject to the 26% rule. However, if there is income that falls out of the scope of the scheme and which is taxed at ordinary rates of Danish tax will mean that a tax return will have to be filed.

Gibraltar

Given the importance of the offshore sector to Gibraltar's economy, but with its very limited local labour pool, the government has traditionally offered tax schemes to attract highly-qualified expat workers and high-net-worth individuals to fill senior management roles or to invest in the jurisdiction. The government currently offers two such schemes, outlined below:

Qualifying (Category Two) Individuals are liable to income tax on the first GIP80,000 (GBP80,000) of assessable income only. However, the minimum amount of tax payable by an HNWI in any one year of assessment under this scheme is GIP22,000. Applicants must have available for their exclusive use approved residential accommodation in Gibraltar. The Government would also be looking to ensure that the individual has sufficient means to maintain himself and his family. The applicant will therefore need to provide certain evidence of wealth, although it is not necessary for the individual to declare his worldwide wealth or earnings. The individual would also need to show that he or she has private medical insurance to cover both him/herself and or his/her family whilst residing in Gibraltar. Additionally, an applicant must not have been resident in Gibraltar in the previous five years.

A new category called the ‘High Executive Possessing Specialist Skills’ (HEPSS) scheme was established for existing Category Three (since abolished) holders who earn more than GBP120,000 per annum and for new applicants who possess skills not available in Gibraltar and, in the Government’s opinion, are of particular economic value to Gibraltar, who will occupy a high executive or senior management position. Under the HAPSS scheme, tax is payable only on the first GIP120,000 of assessable income under the Gross Income Based System. HEPSS applicants must also satisfy residential accommodation and residency conditions.

Qualifying Categories 3 and 4 were open to expatriate individuals of Exempt or Qualifying Companies and set the tax payable by the individual at GBP15,000, irrespective of their taxable income, but were abolished in 2007.

Luxembourg

In Luxembourg the taxation of individuals is based entirely on the concept of residence, regardless of nationality. Generally, individuals are considered to be resident when they maintain a residence in Luxembourg with the intention of remaining other than temporarily. A stay of six months is deemed to be residence. Most types of compensation and benefit paid to employees are taxable.

Traditionally, there have been no special privileges or exemptions for expatriate workers, although an expatriate tax regime for highly skilled employees detailed in Circular LIR n°95/2 issued on December 31, 2010, came into force on January 1, 2011, and provides for significant tax savings for both employer and employee. In order to qualify for the scheme, the employee must:

  • not have been resident or subject to Luxembourg income tax on professional income in the previous five years;
  • be a Luxembourg tax resident during the application of the expatriate regime;
  • hold a university degree or equivalent and be a technical expert, or have professional experience of at least five years in the sector of activity which the Luxembourg company aims to expand;
  • contribute to the development or creation of economic activities with high added value in Luxembourg;
  • not replace any employee which is not covered by the Circular.

When the criteria have been met, the following expenses qualify for tax-exempt status:

  • One-off moving costs and house fit-out expenses for the transfer of the household of the expatriate to Luxembourg and for his/her final return at the end of the assignment;
  • Travel expenses for emergencies;
  • Regular housing costs up to EUR50,000 per annum (increased to EUR80,000 when shared with life partner) and 30% of the annual fixed remuneration of expatriate;
  • School fees;
  • Specific cost of living allowance capped at EUR1,500 per annum.

Malta

It is necessary to consider both domicile and residence to establish the exact tax situation of individuals in Malta.

Maltese domicile is established on the basis of UK case law principles. Broadly speaking, an individual's domicile of origin (where he was born) can be changed if he establishes a permanent home elsewhere. He can only have one domicile.

Residence is defined as habitual presence in the country; ordinary residence means that an individual is present in Malta in the ordinary or regular course of his life.

Individuals who are domiciled and ordinarily resident in Malta pay income tax on their world-wide income.

Individuals who are domiciled elsewhere, and who are resident but not ordinarily resident in Malta pay tax on their income arising in Malta, or remitted there (but not capital gains, whether remitted or not). The six-month test is likely to be definitive in establishing residence.

Non-resident individuals pay tax on their Malta-source income only; but local interest and royalty income are exempt from tax, as are capital gains on holdings in collective investment schemes or on securities as long as the underlying asset is not Maltese immovable property.

'Returned migrants' are offered a special tax regime: a person born in Malta who returns can elect to pay 15% income tax on local income only; there are various conditions.

In April 2011, the Maltese government published the Highly Qualified Persons Rules, 2011, bringing into force tax incentives that were introduced to encourage non-resident highly-skilled workers to the island, and clarifying the parameters of the scheme.

Announced on April 19, 2011, the government said Legal Notice 106 - Highly Qualified Persons Rules, 2011, would serve to create a scheme to attract highly qualified persons to occupy

'eligible office' with companies licensed and/or recognized by the Malta Financial Services Authority.

'Eligible office' comprises employment in one of the following positions:


  • Actuarial Professional;
  • Chief Executive Officer;
  • Chief Financial Officer;
  • Chief Insurance Technical Officer;
  • Chief Investment Officer;
  • Chief Operations Officer;
  • Chief Risk Officer;
  • Chief Technology Officer;
  • Chief Underwriting Officer;
  • Head of Investor Relations;
  • Head of Marketing;
  • Portfolio Manager;
  • Senior Analyst (including Structuring Professional); and,
  • Senior Trader/Trader.

The rules for the scheme came into force with effect from January 1, 2010, and apply to income which is brought to charge in year of assessment 2011 (basis year 2010) and apply to individuals not domiciled in Malta.

Under the scheme, individual income from a qualifying contract of employment in an “eligible office” with a company licensed and/or recognised by the Malta Financial Services Authority is subject to tax at a flat rate of 15% provided that the income amounts to at least EUR75,000, adjusted annually in line with the Retail Price Index. The 15% flat rate is imposed up to a maximum income of EUR5m; the excess is exempt from tax. The 15% tax rate applies for a consecutive period of five years for the European Economic Area (ie EU countries plus Norway, Iceland and Liechtenstein) and Swiss nationals and for a consecutive period of four years for third country nationals. Individuals who already have a qualifying contract of employment in an “eligible office” two years before the entry into force of the scheme may benefit from the 15% tax rate for the remaining years of the scheme. This means that a national of the EEA and Switzerland who has a qualifying contract of employment in an “eligible office” starting in 2008 (basis year) will benefit for three years from the scheme, ie basis years 2010, 2011 and 2012, while a third country national will benefit from one fewer.

The Netherlands

The Dutch income tax law does not define the term 'resident' and therefore resident or non-resident status is decided on a case by case basis. The most important factor in determining residency status is an individual's economic tie with The Netherlands; this includes the family home, employment in the country and entry into the local authority register.

There is, however, a special regime for expatriate workers in the Netherlands, although changes have recently been introduced which has watered down its attractiveness somewhat. Under this scheme, an expatriate can apply for a 30% tax-exempt allowance. From January 1, 2012, a minimum salary of EUR50,000 is required to benefit from the 30% exemption rule. Those classed as ‘academics’, which include scientists and researchers at educational institutions, are exempt from the salary threshold, which is index-linked and will be revised annually.

The chief condition which the employee must satisfy is that he has some specific expertise which is not readily available in Holland.

If the application is successful the employee can elect to be treated preferentially for a period of up eight years (reduced from a period of 10 years prior to January 1, 2012). This period will be reduced if the applicant has had previous spells of residence and employment in the Netherlands in the previous 25 years. Periods of employment outside of the Netherlands, but for a Dutch company, will also fall under the scope of the 25 year ‘look back’ period. An employee is generally no longer eligible to continue benefitting from the 30% scheme after the employment period has ended.

Initially, the Dutch government announced plans to tighten the 30% tax break within the framework of the government’s 2012 tax plan, to ensure that only expats with income in excess of EUR70,000 would benefit from the provision and to ensure that employees from neighbouring Belgium and Germany (those less than 150km from the Dutch border) would also no longer qualify. These provisions were amended in subsequent versions of the bill as it progressed through parliament in response to protest from companies with a high demand for expat workers. In the latter case, prior to their employment in the Netherlands, an employee now must have resided outside the 150km boundary for two-thirds of a 24 month period.

Other Countries

Australia

An individual is subject to a residence test in determining if he or she is Australian resident for tax purposes. Generally, that entails having either always lived in Australia; having moved to Australia and now living there permanently; or having been in Australia continuously for 183 days or more in a fiscal year.

However, if the test is inconclusive, the intention or purpose of a person’s presence in Australia can be taken into account, as can family and business/employment ties, the maintenance and location of assets, and social and living arrangements.

Liability to tax is determined on a year-by-year basis. Events after the year of income may assist in determining an individual's residency status.

Resident individuals are taxed on their worldwide income.

Non-residents are taxed on their Australian income that would be taxable in Australia. This excludes any income from which non-resident withholding tax has already been deducted. Examples of income that may be subject to non-resident withholding tax are bank interest, royalties and unfranked dividends. Capital gains are not subject to a separate tax – they form part of taxable income.

Resident and non-resident taxpayers pay tax at different rates, with the latter paying slightly more, as follows:

Resident taxpayers:

  • 0 - AUD6,000 0%
  • AUD6,001 - AUD37,000 15% for each AUD1 over AUD6,000
  • AUD37,001 - AUD80,000 AUD4,650 plus 30% for each AUD1 over AUD37,000
  • AUD80,001 - AUD180,000 AUD17,550 plus 37% for each AUD1 over AUD80,000
  • AUD180,001 and over AUD54,550 plus 45% for each AUD1 over AUD180,000

Non-resident taxpayers:

  • 0 - AUD37,000 29% for each AUD1;
  • AUD37,001 - AUD80,000 AUD10,730 plus 30% for each AUD1 over AUD37,000
  • AUD80,001 - AUD180,000 AUD23,630 plus 37% for each AUD1 over AUD80,000
  • AUD180,001 and over AUD60,630 plus 45% for each AUD1 over AUD180,000

Canada

An individual is resident for tax purposes if he or she is present in Canada for 183 days or more (referred to as “deemed” residence), or has close connections with Canada (such as a permanent home (or other personal property such as a car or furniture), bank accounts, a spouse or common-law partner, or family, economic and/or social ties).

A Canadian-resident individual is taxed on his or her worldwide income; a non-resident individual is generally taxed on his or her Canada-source income only. Interest that is paid by an “arm’s length” (i.e. unrelated) payer is exempt from withholding tax.

If an individual spends a part of the tax year in the United States for health reasons, on vacation or for other reasons, but maintains close connections with Canada, the person is considered to be a “factual resident” for tax purposes, and remains fully liable for taxation as if he or she had never left Canada.

The taxation year of immigration is divided into two parts: the non-resident part in which only Canadian-source income is taxed, and resident part, which is fully taxed.

Non-Canadian property owned at the time of immigration is deemed to have a fair market value on the date that Canadian residency is obtained.

Traditionally, one of the most commonly used planning techniques for immigrants to Canada who have significant wealth is the formation of an "immigrant trust" in a foreign jurisdiction. If properly structured, this will allow investment income earned during the first 60 months of Canadian residency to be exempt from Canadian taxation.

Canadian foreign reporting requirements, in force since 1997, require Canadian residents including expatriates to report if they own foreign property with a cost that exceeds CAD100,000 (including contingent property rights in stock options) in total; transfer or loan money or property to a foreign trust or closely held foreign company; or receive distributions from, or borrow from, foreign trusts in which they are beneficially interested.

'Immigrant trusts' therefore need to be reported, but their tax status has not (yet) been attacked.

There are some exceptions to the reporting requirements for expatriates:

  • property used in an active business conducted by the expatriate;
  • an interest in a non-resident trust that was not acquired for consideration by the expatriate (eg a family trust of which the expatriate is a beneficiary but not a settlor);
  • an interest in a retirement plan which is a qualified plan in the foreign jurisdiction and therefore qualifies for tax exempt status;
  • personal use property of the expatriate, including automobiles, boats and vacation homes used solely for personal use.

For reporting purposes, the assets are measured at their cost amount, but for expatriates it will be fair market value on arrival that matters.

Ireland

In Ireland, the taxation of individuals is based on a mixture of the concepts of residence and domicile. As in many countries, residence is consequent on presence in Ireland for more than half of a tax year, or a substantial cumulative total of days from previous years. An individual's domicile is in the country where he maintains his permanent home, in the country where he regards himself as belonging. Domicile in Ireland is acquired from an Irish-domiciled father, but can be changed to another country by establishing a life there. Resident foreign employees will thus not normally be domiciled in Ireland.

An individual resident and domiciled in Ireland pays tax on his world-wide income; an individual resident but not domiciled pays tax on his foreign income only if it is remitted to Ireland. A non-resident individual pays income tax only on Irish-sourced income, and is liable to capital gains tax only on gains arising in Ireland or remitted to Ireland, unless he is domiciled in Ireland in which case he is liable on all capital gains. Non-residents are generally not entitled to allowances, deductions, reliefs or reductions.

In his budget speech in December 2009, Finance Minister Brian Lenihan announced that the government would introduce an ‘Irish domicile levy’ of EUR200,000 on Irish nationals and domiciled individuals whose worldwide income exceeds EUR1m and whose Irish-located capital is greater than EUR5m, regardless of where they are tax resident.

From 1st January 2001, non-resident individuals paid the new 'exit tax' of 23% (increased to 26% in the Finance Act 2009) imposed on gains on encashment or maturity of Irish-resident investment fund holdings (previously they would have been liable on an annual basis for tax of 20% on gains). As a result of the 2012 budget, announced on December 6, 2011, this exit tax will be charged at the same rate as deposit interest retention tax plus 3%, or 33%.

It was also announced In the 2012 budget that the Irish citizenship condition for the payment of the domicile levy will be abolished for tax years from 2012 onwards. This means it will not be possible for an individual to avoid the levy by renouncing Irish citizenship, if he or she meets the other criteria for paying the levy.

United Kingdom

An individual is deemed to be tax resident when he or she spends a total of more than 183 days of the tax year in the UK; this period includes days travelling to or from the UK. An individual who visits the UK on a regular basis and spends an average of 91 days per year in the UK, calculated over a four-year period, is also deemed to be resident in the UK for tax purposes. Further, close ties to the UK, such as a permanent home there, or where a person’s lifestyle indicates, for example, business, family and/or social connections with the UK, can also be taken into account when deciding his or her tax residence status (referred to as “ordinary residence”).

A person’s domicile may also affect tax liability where he or she receives foreign-source income or gains. The rules are complex, however. Double tax agreements between the UK and a non-UK domiciled individual’s country of origin will help reduce or remove tax liability.

Individuals who are non-domiciled or non-ordinarily resident in the UK can opt to be taxed under the remittance basis, whereby only foreign income and gains remitted to the UK are liable for UK taxation.

Long-term resident non-domiciles are subject to an annual levy of GBP30,000 if they have resided in the UK for more than seven years. However, at Budget 2011 the government proposed that it would reform the taxation of non-domiciled individuals by increasing the annual charge to GBP50,000 for non-domiciles who claim remittance basis in a tax year and who have been UK resident for 12 or more of the 14 years prior to the year of claim. Under these reforms, non-domiciles would be able to remit overseas income and capital gains tax-free to the UK for the purpose of commercial investment in UK businesses. These changes were included in the 2012 Finance Bill, which as of February 2012 is progressing through parliament.

There are also plans for a shake-up of the UK’s residency rule which aims to bring much-needed clarity to the current situation, in the form of a statutory residency test (SRT). Under the current regime, there is no full legal definition of tax residence, which makes the rules unclear, complicated and subjective, and creates uncertainty for individuals about their residence status, thus deterring businesses and individuals considering investing in the UK. A proposed framework for the SRT has been set out, under which both the amount of time the individual spends in the UK and the other connections they have with the UK would be taken into account. This was initially to be in place from April 2012, but has been postponed by one year.

United States

Last but not least, the United States. Generally speaking, the US is not an attractive location for resident expatriate executives seeking to limit taxation. There are, however, some particular features of the US tax system which are attractive for certain individuals in certain situations.

For tax purposes, an alien is an individual who is not a US citizen. Aliens are classified as non-resident aliens and resident aliens. Resident aliens generally are taxed on their worldwide income, in the same way as US citizens. Non-resident aliens are subject to different tax laws than those that apply to US citizens; for example, many non-resident aliens working temporarily in the US can claim treaty benefits. In general, non-resident aliens are taxed only on their income from sources within the US and on certain income connected with the conduct of a trade or business in the US.

An individual is considered a non-resident alien for any period that he or she is neither a US citizen nor a US resident alien. He or she is considered a resident alien if meeting one of two tests for the calendar year.

The first test is the green card test. If at any time during the calendar year an individual was a lawful permanent resident of the US, according to the immigration laws, and this status has not been rescinded, or administratively or judicially determined to have been abandoned, he or she is considered to have met the green card test.

The second test is the substantial presence test. To meet this test, an individual must have been physically present in the US on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the two years immediately before. To satisfy the 183 days requirement, an individual must count all of the days he or she was present in the current year, and one-third of the days he or she was present in the first year before the current year, and one-sixth of the days he or she was present in the second year before the current year.

An individual need not count any day he or she was present in the US as an exempt individual.

An exempt individual may be anyone in the following categories:

  • A foreign government-related individual;
  • A teacher or trainee with a J or Q visa who substantially complies with the requirements of the visa;
  • A student, with an F, J, M, or Q visa who substantially complies with the requirements of the visa; or
  • A professional athlete temporarily present to compete in a charitable sports event (although the IRS recently launched an Issue Management Team focused on improving US income reporting and tax payment compliance by foreign athletes and entertainers who work in the United States).

Also, any day where an individual is present in the US because of a medical condition need not be counted.

Even if a person meets the substantial presence test, he or she can be treated as a non-resident alien if he or she is present in the US for fewer than 183 days during the current calendar year, and maintains a tax home in a foreign country during the year, and has a closer connection to that country than to the US. This does not apply if a person has applied for status as a lawful permanent resident of the US, or has an application pending for adjustment of status.

Sometimes, a tax treaty between the United States and another country will provide special rules for determining residency. An alien whose status changes during the year from resident to non-resident, or vice versa, generally has a dual status for that year, and is taxed on the income for the two periods under the provisions of the law that apply to each period.

Tax-resident foreign nationals in the US are taxed just about on the same basis as a US national that is to say, on their world-wide income, comprehensively defined. There are tax credits under double tax treaties for some foreign tax deductions.

The situation for US citizens either assigned overseas or expatriating is just as unappealing from a tax perspective.

Because the US taxes its citizens on the basis of their nationality and not on the basis of their residence, the concept of 'offshore' is not very useful to a US national from a residence point of view. There is an income tax concession available during non-residence, but beyond that the only real option for a US citizen is to change nationality. In all other respects the international tax situation of an individual citizen is about the same whether they are in or out of the US.

US expatriates who meet the Physical Presence Test or meet the Bona Fide Resident Test may be able to take advantage of the Foreign Earned Income Exclusion and or the Foreign Housing Exclusion.

You are considered physically present in a foreign country (or countries) if you reside in that country (or countries) for at least 330 full days in a 12-month period. You can live and work in any number of foreign countries, but you must be physically present in those countries for at least 330 full days. The qualifying period can be any consecutive 12-month period of time. A "full day" is 24 hours; days of arrival and departure are generally not counted in the physical presence test.

A person is considered a "bona fide resident" of a foreign country if they reside in that country for "an uninterrupted period that includes an entire tax year." A tax year is January 1 through December 31. Brief trips or vacations outside the foreign country will not jeopardize status as a bona fide resident. If the foreign government concerned has determined that a person is not subject to their tax laws as a resident, the Exclusions will not be available.

In 2012, the maximum income exclusion is USD91,500. The housing exclusion is equal to 30% of maximum income exclusion, and includes such expenses as rent, repairs, utilities (other than telephone), property insurance, property taxes, security deposits, furniture rentals and parking fees which may be paid by the employer.

US citizens and resident aliens who are outside the United States (and its possessions) have the same requirements to file tax returns as anyone living in the United States. Income from worldwide sources must be considered when determining if a federal tax return must be filed. In general, foreign earned income is income received for services performed in a foreign country.

If you pay foreign taxes, it may be possible to offset these against US taxes if there is a double tax treaty with the country in which you are resident.

The concept of 'tax home' is used in connection with foreign residence. Generally, a person's tax home is the general area of her main place of business, employment, or post of duty where she is permanently or indefinitely engaged to work. A person is not considered to have a tax home in a foreign country for any period during which their abode (the place where they regularly live) is in the United States.

A person who claims the Exclusion cannot claim any credits or deductions that are related to the excluded income, for instance a foreign tax credit or deduction for any foreign income tax paid on the excluded income. The earned income credit is also unavailable. Furthermore, for IRS purposes, the excluded income is not considered compensation and, for figuring deductible contributions in an employer retirement plan, is included in modified adjusted gross income.




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