With over 30 years of experience and expertise in international taxation, trustee, corporate and the fiduciary services industry, Simon Denton, the founding Managing Director of Sovereign’s UK subsidiaries provides key explanations and the differences of overseas tax for remote workers moving abroad.
Many countries are looking to attract higher rate taxpayers, successful entrepreneurs, business owners and their families to relocate within their borders. But beware of the tax traps!
Given that almost all countries have been affected by financial repercussions caused by the Covid-19 pandemic, it is not surprising that they are now keen to attract economic catalysts like investors, C-suite executives, and business owners.
In addition, the internet has made individuals and businesses extremely mobile. Now that coronavirus restrictions restrict undertaking meetings in person, there is no particular reason why executives cannot work from anywhere. Places of work were previously governed by the location of offices, colleagues, and connection with clients but now these factors do not seem so essential.
An increasing number of individuals are debating lockdown bases as they look to spend lockdown somewhere remote, possibly overseas and no doubt in a superior climate, with inducements of sun, sea, and a lesser cost of living. In many cases, alternative domiciles promote low and zero tax regimes. Individuals are unlikely to pay as much Income Tax in temporary overseas nations but they will contribute to the economy by paying accommodation costs, shopping, and a contribution towards certain taxes.
However, there are tax traps to be aware of. Firstly, leaving the place where you are currently tax resident will not necessarily end your tax commitment. An individual should not assume that their tax liability ceases as soon as they leave their country of normal residence.
To illustrate, let us look at the UK Statutory Residence Test. Anyone who falls within one of the three automatic overseas tests will be viewed as being a non-UK resident. If they do not meet the criteria, they need to avoid being caught by the Automatic Residence and Sufficient Ties tests.
1: Automatic Overseas Test
You will be a non-UK resident for the tax year if you meet any of the following conditions (a day spent in the UK means being present in the UK at midnight):
- If you were resident in the UK for one or more of the three tax years before the current tax year but spend fewer than 16 days in the UK in the current tax year
- If you were resident in the UK for none of the three tax years before the current tax year, and spend fewer than 46 days in the UK in the current tax year
Or
- If you work full-time (at least 35 hours per week) overseas over the tax year and spend fewer than 91 days in the UK in the current tax year. Plus, the number of days on which you work for more than three hours in the UK, is less than 31 and there is no significant break from your overseas work.
2: Automatic Residence test
You are/will be a UK resident for the tax year if you meet any of the following conditions/tests:
- If you spend 183 days or more in the UK in the tax year
- If there is (or was) at least one period of 91 consecutive days when you had a home in the UK, and at least 30 of these 91 days fall into the tax year. Plus, if you were present in that home for at least 30 days at any time during the year (but, importantly, if you had an overseas home and were present in it for more than 30 days in the tax year you will not trigger this test)
- Work full-time in the UK for any period of 365 days, which falls in the tax year, with no significant break of 31 days or more (subject to certain conditions)
3: Sufficient Ties test
If your residence position has not been determined under the first two tests, the third step is to apply the Sufficient Ties Test. In this case, you will need to consider your connections to the UK, to work out if taken together with the number of days you spend in the UK, will make you a resident in the UK for that particular tax year. These are as follows:
- Family tie – spouse or civil partner, and/or minor children resident in the UK
- Accommodation tie – this includes any property that you own and use when in the UK, but it can extend to a family member or even a friend’s property that you stay in when you return to the UK
- Work tie – working in the UK for at least 40 days in the year (it does not matter whether the days are continuous or intermittent)
- 90-day tie – if you have spent more than 90 days in the UK in either or both previous two tax years immediately before the year under consideration
- Country tie – spending more days in the UK than any other single country (this only applies to ‘leavers’)
The number of days that you can spend in the UK without becoming a resident depends firstly on whether you were a UK resident in one of the three previous tax years, and secondly, the number of ties you have with the UK in the tax year in question. For example, if you were a UK resident in one of the three previous tax years and have two ties, you can spend up to 90 days in the UK and not be a UK resident for that tax year. But, if you were a non-UK resident for all three previous tax years and have two ties, you can spend up to 120 days in the UK and not be a UK resident for that tax year.
On arrival, it is unclear if you will become a tax resident immediately. This will depend upon the country’s tax rules. If you intend to stay there permanently, the chances are that you will become a tax resident from the day you arrive. Although you are a tax resident in that country, it does not mean that you are not still regarded as a tax resident in the country you have left as well. Many people are tax residents in more than one place at the same time. For example, a person who spends 90 days a year in Hong Kong, UK, Portugal, and Spain with a property in one country or more, can be a tax resident in all four countries.
Tax residency in Hong Kong has little effect because it charges tax only on Hong Kong-sourced income. However, all other countries in the example charge tax on a worldwide income. So, in theory, income earned in Hong Kong would be taxable in all four places at the same time. Tax treaties between the various countries may help to decide who has the taxing right. If there are no tax treaties, it could be that credit is given for tax paid in one country against tax due on the same income in another.
Theoretically, it is possible to be liable for tax on the same income in several different places and have a tax bill more than the income earned. However, after moving overseas, a person will become a tax resident in both the new place of residence and the country departed. Article 4 of tax treaties frequently contains a ‘tie-breaker clause’ that decides which of the two countries has the taxing right.
For example, a UK resident who has lived in the UK for the last 45 days decides to move to Portugal and work from there, however, they will have a double tax agreement that will decide which country has the taxing right. The legislation is as follows:
Where an individual is a resident of both Contracting States, their status shall be determined in accordance with the following rules:
1) He shall be deemed to be a resident of the Contracting State in which he has a permanent home. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closest (centre of vital interests)
2) If the Contracting State in which he has his centre of vital interests cannot be determined, or he does not have a permanent home available in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has a long-term residence
3) If he has a long-term residence in both Contracting States or in neither, he shall be deemed to be a resident of the Contracting State of which he is a national
4) If he is a national of both Contracting States or neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement
Therefore, a temporary absence from the UK is unlikely to result in any reduction in UK tax liability for as long as the taxpayer has a permanent home in the UK. However, if the UK resident has a permanent home in Portugal, he could well be taxable there as well.
Portugal offers a special tax status, known as the Non-Habitual Residency (NHR) regime, which may allow the individual to organise affairs exempt from Portuguese tax. UK residents who are looking to relocate should cut ties in the UK to lose UK tax residency and establish themselves in Portugal.
In terms of employment, if a UK employer continues to pay an employee who moves overseas, the UK employer may still be subject to Employers National Insurance. Employers can agree to alternative terms with the overseas employee if the employee is looking to no longer be a UK resident and is working in the new country for over 30 hours per week and for the immediate future. This means the expat is following the UK Statutory Residence Test governing non-UK residence. However, these options will depend on the country and its tax laws.
Such arrangements may bring challenges for employers as the tax authority may question if the company is operating and managing a new overseas branch. However, if a director or shareholder of a UK company moves overseas to become a non-UK resident, the UK company will still be obliged to file accounts to HMRC. If the UK company remains controlled from the UK and generates profits, it will still be subject to UK Corporation Tax.
Remuneration paid to the expat, subject to them being a non-UK resident and following the Statutory Residence Test about sustaining non-UK residence, should not be subject to UK personal taxation especially if remuneration is paid to them by way of a consultancy services fee, or an agreed commercial payment is paid to their overseas special purpose vehicle conditional to the expat performing all services externally to the UK. It is advised that professional advice should be taken prior to any decision to relocate whilst working for a current UK company, especially if the expat wants to remain an officer and/or a shareholder.
Thus, if moving to a new country is motivated to save on tax, then great care must be taken. Not only because losing your current tax residency is not a simple process, but also because there is a significant danger that a tax burden may increase if tax is payable in both the country you are residing in and the country you move from.
As you can see, this is a highly complex area and great care is needed. For more advice on the best solutions for a potential overseas move, please contact Sovereign Group by visiting: www.sovereigngroup.com.
