Tax Residency

Intro to Tax Residency?

Tax residency is a foundational concept in international taxation that determines which country has the primary right to tax an individual’s or entity’s income. Unlike citizenship or nationality, which are relatively fixed statuses, tax residency can change based on physical presence, economic ties, and other factors established by each jurisdiction’s tax laws. Understanding tax residency has become increasingly critical in our globalized economy where remote work, international assignments, and cross-border business activities are commonplace.

Definition of Tax Residency

Tax residency is a legal status that determines which country has the primary right to tax an individual’s or entity’s worldwide income. Each country establishes its own criteria for determining tax residency through domestic legislation, although these rules are often influenced by international tax treaties designed to prevent double taxation.

For individuals, tax residency is typically based on factors such as:

• Physical Presence: Many countries apply day-counting tests (e.g., 183 days in a tax year) to determine residency
• Permanent Home: The location of an individual’s primary residence or domicile
• Center of Vital Interests: Where personal and economic ties are strongest
• Habitual Abode: Where an individual typically lives over time
• Citizenship or Immigration Status: Some countries (notably the United States) include citizenship as a criterion

For businesses, tax residency may be determined by:

• Place of Incorporation: Where the entity is legally registered
• Place of Effective Management: Where key management decisions are made
• Location of Headquarters: Where central management is physically based

It’s important to note that an individual or entity can be considered a tax resident of multiple countries simultaneously, which is where tax treaties become essential to resolve conflicts and prevent double taxation.

Importance of Tax Residency in HR

For international companies hiring remote employees, understanding tax residency laws is essential for compliance.

• It determines where payroll taxes and social security must be withheld.

• It affects employee net pay and potential tax treaty reliefs.

• It helps avoid double taxation, penalties, or legal disputes.

Partnering with a trusted Employer of Record (EOR) like Asanify ensures your organization manages global payroll and tax compliance accurately—whether your employees are local or remote.

Tax Resident vs. Non-Resident

The distinction between being a tax resident and a non-resident has significant financial and compliance implications.

For global employees, residency determines not just tax liability but also eligibility for deductions, social contributions, and treaty benefits.

Does Tax Residency Apply to Companies?

Yes. Tax residency also applies to businesses under the concept of a permanent establishment (PE).

A permanent establishment occurs when a foreign company maintains a significant presence—such as a local office, sales branch, or management activity—within another country.
In such cases, that jurisdiction may treat the company as a corporate tax resident and levy taxes on locally generated profits.

Companies expanding internationally should consult with payroll and tax experts—or partner with a global Employer of Record (EOR) to ensure compliance with local tax laws and avoid unintended PE risks.

What Is a Tax Residence Certificate?

A tax residence certificate (TRC) is an official document issued by a government’s tax authority confirming an individual’s or business’s tax resident status.

It serves as proof of residency for tax purposes and is often required to:

• Access double taxation treaty benefits

• Reduce withholding taxes on cross-border payments

• Comply with foreign investment regulations

• Prove residency when opening international accounts or filing foreign income

When Do You Need a Tax Residence Certificate?

You may need a TRC if you:

• Earn income from a foreign country and want to avoid double taxation.

• Operate a business across multiple jurisdictions.

• Need to demonstrate residency for investment or compliance purposes.

Employers with remote or global teams may also request TRCs to verify employee tax obligations in their home countries.

How to Obtain a Tax Residency Certificate

The application process for a TRC varies by country but generally involves:

1. Filing an application with the national tax authority.

2. Providing supporting documents, such as proof of address, income, or local registration.

3. Verification and approval, after which the TRC is issued for a specific period—often one tax year.

Applicants must meet the country’s definition of a tax resident before a certificate can be granted.

Examples of Tax Residency

• International Assignments and Dual Residency: A Canadian software engineer on a two-year assignment in the UK maintains her home in Canada (retaining Canadian tax residency) while triggering UK tax residency after 183 days. HR partners with tax experts to apply a tax equalization policy and ensure compliance with the Canada–UK tax treaty, avoiding double taxation.

• Remote Work and Changing Residency: A US marketing director working remotely from Portugal becomes a tax resident there after 183 days, while still subject to US taxes based on citizenship. HR’s remote work policy requires pre-approval for international work, coordinates with tax specialists, and educates employees about Portugal’s Non-Habitual Resident regime.

• Business Travelers and Tax Thresholds: A Singapore-based consultant frequently traveling to Australia risks becoming a tax resident after 183 days. HR uses a travel tracking system to monitor day counts and adjust assignments, preventing unintended Australian tax obligations and global income taxation.

• Corporate Tax Residency Shift: When an Irish tech company relocates senior management to Germany, the firm’s place of effective management moves, potentially changing its corporate tax residency. HR collaborates with finance and legal teams to align contracts, compensation, and governance with German law while assisting executives with personal tax transitions.

How HRMS platforms like Asanify support Tax Residency Management

Modern HRMS systems streamline tax residency management through automation and global compliance tools:

• Global Employee Records: Centralize tax residency, citizenship, and assignment data for accurate reporting.

• Multi-Country Payroll Compliance: Apply correct tax rates and contributions automatically across jurisdictions.

• Work Location & Travel Tracking: Monitor day counts to prevent accidental tax residency triggers.

• Tax Treaty Logic: Automate treaty-based rules to prevent double taxation.

• Document Management: Securely store and renew tax certificates and compliance records.

• Reporting & Compliance: Generate multi-jurisdiction tax reports and expatriate filings.

• Policy Automation: Manage tax equalization or protection policies for international staff.

• Integration with Tax Providers: Sync securely with external tax services for seamless compliance.

FAQs about Tax Residency

1. What makes someone a tax resident?

A person becomes a tax resident when they meet criteria such as staying in a country for 183 days or having a permanent home or economic ties there.

2. Can you be a tax resident in more than one country?

Yes. Dual tax residency can occur, but double taxation treaties usually determine which country has primary taxation rights.

3. What income does a tax resident have to declare?

A tax resident typically declares and pays taxes on worldwide income, including foreign earnings.

4. What is a non-resident taxpayer?

A non-resident taxpayer is someone who earns income in a country but does not meet its residency requirements. They usually pay tax only on locally sourced income.

5. How long do I need to stay in a country to become a tax resident?

The threshold varies—most countries use 183 days, but some require shorter or longer periods based on national laws.

6. Why is a tax residence certificate important?

It proves your tax residency status and enables you to claim benefits under double taxation agreements, ensuring you don’t pay taxes twice on the same income.